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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 000-21673
AUTOBOND ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2487218
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
301 CONGRESS AVENUE, AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 435-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of class which registered
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COMMON STOCK, NO PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
15% SERIES A CUMULATIVE PREFERRED STOCK NO PAR AMERICAN STOCK EXCHANGE
VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 30, 1998, 1998 (based on the closing price on such
date as reported on the American Stock Exchange) was $7,275,777.(1)
As of March 30, 1998, there were 6,531,311 shares of the registrant's
Common Stock, no par value, and 1,125,000 of the registrant's 15% Series A
Cumulative Preferred Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the registrant's definitive Proxy Statement with respect
to the registrant's 1998 Annual Meeting of Shareholders, to be filed not later
that 120 days after the close of the registrant's fiscal year.
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(1) Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers, directors and five percent, shareholders of the
registrant, without conceding that all such persons are "affiliates" of the
registrant for purposes of the Federal securities laws.
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TABLE OF CONTENTS
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PART I..........................................................................1
ITEM 1. BUSINESS.............................................................1
ITEM 2. PROPERTIES..........................................................16
ITEM 3. LEGAL PROCEEDINGS...................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17
PART II........................................................................17
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................17
ITEM 6. SELECTED FINANCIAL DATA.............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .............................32
PART III.......................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............32
ITEM 11. EXECUTIVE COMPENSATION...........................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................33
PART IV........................................................................33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K...33
SIGNATURES.....................................................................35
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PART I
ITEM 1. BUSINESS
GENERAL
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 ("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 December 31, 1997, the Company
acquired 23,386 finance contracts with an aggregate outstanding principal
balance of $270 million. Since inception, the Company has completed eight
securitizations pursuant to which it privately placed $204 million in finance
contract-backed securities.
RECENT DEVELOPMENTS
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. In February 1998, the Company was informed
by Fitch that the two securitizations had been downgraded and Fitch's ratings
withdrawn. 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. On March 5, 1998, after the Company terminated its
engagement of Fitch, Fitch withdrew its ratings on all securitizations of the
Company. The Company has sued Progressive for declaratory relief. On March 23,
1998, Moody's announced that it had downgraded the senior securities in each of
the Company's eight outstanding securitizations to investment grade levels of
Baa2 (except for the 1997-B and 1997-C transactions, where due to uncertainties
about the supporting insurance policy, the ratings were downgraded to Baa3).
Moody's rested its actions upon its view that current net losses were projected
to be higher than originally expected, along with what Moody's termed as "the
unanticipated allocation of transaction cash flows" reducing available credit
enhancement to the senior securities, as well as "discrepancies in trigger
calculations, inaccuracies in reported delinquencies, concerns with the handling
of prepaid insurance claims, and errors in cash distributions." In December
1997, the Company assumed contractual responsibility for servicing the
securitizations from Loan Servicing Enterprise and is
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optimistic that the complex task of cash flow allocation and reporting can be
better handled going forward. Moody's has indicated that the securitizations
remain on review with direction uncertain due to the current " increased
uncertainty in projecting future deal performance."
The Company entered into an employment agreement, dated as of January 1,
1998, with Manuel A. Gonzalez, a former outside director to serve as a
consultant to the Company until February 1, 1998, whereupon he agreed to become
President of the Company for a period of three years. On March 3, 1998, Robert
Shuey was appointed to fill the vacancy left by Mr. Gonzalez' departure from the
Board.
During January 1998, the Company privately placed $7,500,000 in
aggregate principal amount of senior subordinated notes (the "subordinated
notes") to an affiliate of BankBoston, N.A. The subordinated notes bear interest
at 15% per annum, mature on February 1, 2001 and $1,215,925 in principal amount
are convertible into up to 368,462 shares of the Company's common stock at a
price of $3.30 per share (subject to adjustment). Although the subordinated
notes contain customary restrictive covenants, they do not prohibit the Company
from paying dividends on the preferred stock out of earnings legally available
therefor. In addition, the Company issued to the purchaser a warrant to purchase
such shares to the extent the notes have not been converted prior to maturity.
Net proceeds from the sale of the subordinated notes were used (i) to pay
short-term liabilities, (ii) to repay the Company's 18% convertible notes and
(iii) for working capital purposes.
On February 20, 1998, the Company sold 1,000,000 of shares of it 15%
Series A Cumulative Preferred Stock (the "Preferred Stock") in a public offering
at a price of $10 per share. The net proceeds from the issuance and sale of
preferred stock amounted to approximately $9,000,000 after deducting underwriter
discounts and issuer expenses. Portions of the net proceeds were used (i) for
the acquisition and financing of finance contracts, including the funding of
reserves and other credit enhancements and (ii) for working capital and general
corporate purposes. The underwriters of the Company's public offering purchased
an additional 125,000 shares of the Preferred Stock at $10 per share by
exercising their over-allotment option on February 27, 1998. The net proceeds
from the issuance and sale of these over-allotment shares amounted to
approximately $1,125,000.
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 December 31,
1997, new vehicles and used vehicles represented 6.8% and 93.2%,
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 net effect of the Company's funding
and securitization program is to provide more proceeds than the
Company's acquisition costs,
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resulting in positive revenue cash flow and 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 underwriting criteria which are uniformly
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. In 1997 the difficulties experienced by several competitors
provided an opportunity to attract experienced personnel to work for the
Company. Hiring in 1998 is not expected to be as rapid but will continue
selectively.
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 December 31, 1997, a total of $32,426,203 or 15.32%,
of the Company's finance contract portfolio were between 30 and 89 days
past due and $8,368,493, or approximately 4.0%, of the Company's finance
contracts outstanding were 90 days past due or greater. The
aforementioned percentages and amounts include finance contracts in the
Company's portfolio where the Company has discontinued collection
efforts, such as where the underlying vehicle has been repossessed, the
borrower is in bankruptcy, the dealer is to buy back the loan, or an
insurance claim has been filed. From inception through December 31,
1997, the Company repossessed 2,936 (approximately 13%) of its financed
vehicles, and the Company had completed the disposal of 1,351 vehicles,
resulting in an average loss per repossession of approximately $2,419
per vehicle. See "Management's Discussion and Analysis of Financial
Condition and 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 certain of the
Company's warehouse financing and securitizations through December 31,
1997, 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 20.9%
(excluding repossession costs) of the principal balance outstanding on
disposed repossessed vehicles for which the liquidation process has been
completed as of December 31, 1997. For its 1997-B and 1997-C
securitizations, the Company purchased credit default insurance from
Progressive
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Northern Insurance Company. See "Recent Developments," "Insurance" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Net Loss per Repossession."
As discussed, the Company's business strategy depends on its ability to
increase the rate of revenue growth more rapidly than the rate of expenses,
which would involve a reversal of an adverse trend experienced through much of
1997. Thus, continued growth in revenues is important for the Company to succeed
in its business strategy.
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 December 31, 1997, the Company acquired 23,386 finance
contracts with an aggregate initial principal balance of $269,922,491. Of the
finance contracts acquired, approximately 6.8% have related to the sale of new
automobiles and approximately 93.2% 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 $12,228; a weighted average APR of 19.8%;
and a weighted average contractual maturity of 52.5 months. As of December 31,
1997, the finance contracts in the finance contract portfolio had a weighted
average remaining maturity of 43.6 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 December 31,
1997, the Company was licensed or qualified to do business in 40 states. Over
the near term, the Company intends to focus its proposed geographic expansion on
states in the midwest and mid-Atlantic regions.
Location of Dealers. Approximately 30% 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
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(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 December 31, 1997, the Company utilized
43 marketing representatives, 36 of whom were individuals employed by the
Company and seven of whom were marketing organizations serving as independent
representatives. The Company also maintained one loan production office. 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 that relationship with the
objective of maximizing the volume of applications received from the dealer that
meet the Company's underwriting standards. Due to the non-exclusive nature of
the Company's relationships with dealers, the dealers retain discretion to
determine whether to seek financing from the Company or another financing
source. Each representative submits a weekly call report describing contacts
with prospective and existing dealers during the preceding week and a monthly
competitive survey relating to the competitive situation and possible
opportunities in the region. The Company provides each representative with 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 expense
and administrative burden of such offices are generally unjustified. The Company
has concluded that the ability to closely monitor the critical functions of
finance contract approval and contract administration and collection are best
performed and controlled on a centralized basis from its Austin facility.
Dealer Agreements. Each dealer with which the Company establishes a
financing relationship enters into a non-exclusive written dealer agreement (a
"Dealer Agreement") with the Company, governing the Company's acquisition of
finance contacts from such dealer. A Dealer Agreement generally
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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 of the (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.
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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, 1997, 133,039 credit applications were
submitted to the Company. Of these 133,039 applications, approximately 23.4%
were approved and 7.9%, or 10,554 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. 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 uniformly 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 of experience 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
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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 within a commercially reasonable time 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.
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
$14.8 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 $12.8 million in
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ("CSFB")
which were originated by Jefferson Capital Corporation. During the third quarter
of 1997, the Company acquired a total of $7.9 million in finance contracts from
three originators. During the fourth quarter of 1997, the Company acquired a
total of $7.4 million in finance contracts from third party originators and,
from CSFB, approximately $12.5 million in finance contracts, which were
originated by several third parties. CSFB also provided acquisition financing
for the purchase.
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 servicing and collection. Prior to December
1997, the Company engaged CSC Logic/MSA L.L.P. (a Texas limited liability
partnership doing business as "Loan Servicing Enterprise") ("LSE") to provide
contract administration for its warehouse arrangements and securitizations.
Contract Administration. The Company, as servicer, performs certain
contract administration functions in connection with finance contracts
warehoused or sold to securitization trusts, including payment processing,
statement rendering, insurance tracking, data reporting and customer service for
finance contracts. The Company inputs newly originated finance contracts on the
contract system daily. 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. All borrower remittances are directed
to a lock box. Remittances received are then posted to the proper account on the
system. The Company also handles account inquiries from borrowers, performs
insurance tracking
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services and 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 December 31, 1997, the Company employed 191 people full-time,
including 81 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 December 31, 1997, there
were 236 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.
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 documentation.
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, any deficiency balance policy 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
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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 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. Certain finance contracts
acquired by the Company after December 31, 1996 are covered 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
vehicle. The Company 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 applicable VSI Policy, by reason of the
inability of the Company to locate the borrower or 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 provide
coverage for losses sustained on the value of the financed vehicle securing a
contract, but in no event is the coverage to exceed: (i) the cost to repair or
replace the financed vehicle with material of like kind and quality; (ii) the
actual cash value of the financed vehicle at the date of loss, less its salvage
value; (iii) the unpaid balance of the contract; (iv) $40,000 per financed
vehicle (or, in the case of losses or damage sustained on repossessed financed
vehicles, $25,000 per occurrence), or $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 (as defined below)
less the sum of (I) the Actual Cash Value (as defined below) 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
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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 or 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 enhance the Company's competitive position. Significant infrastructure
development was completed throughout 1997 to accommodate the servicing functions
which were assumed from LSE. Such development of both personnel and technology
increased expenses in 1997. The Company hopes to realize the benefits of such
investment in 1998 and thereafter.
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, 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.
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 (the "Sentry Facility")
provides for a $10.0 million 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 Sentry Facility 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 Sentry Facility is
collateralized by the finance contracts acquired with the outstanding
borrowings. Interest is payable monthly and accrues at a rate of prime plus
1.75% (10.25% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth, and cash and cash equivalent balances. The Company pays a utilization fee
of up to 0.21% per month on the average outstanding balance of the Sentry
Facility. The Sentry Facility also requires the Company to pay up to 0.62% per
quarter on the average unused balance. At December 31, 1997, $10,000,000 was
available for borrowing under the credit line as there were no amounts
outstanding at that date.
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
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("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 finance
contracts 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% (6.87% at December 31, 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 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. While no
new advances will be made under the Daiwa Facility after March 31, 1998, the
maturity date for existing advances has been extended to April 30, 1998, with
interest therein accruing at LIBOR plus 4.00% per annum. At December 31, 1997,
advances under the Daiwa Facility totaled $7,639,201 and remaining availability
was $15,759,792. The Company incurred interest expense under the Daiwa Facility
of approximately $1,118,883 during the year ended December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable funding warehouse notes (beneficial interests) which
are convertible into term notes at the option of the holder of such notes.
Transfers of finance contracts to the special purpose entities have been
recognized as sales under Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125").
On December 31, 1997, the Company purchased approximately $12.5 million
of finance contracts from Credit Suisse First Boston Mortgage Capital LLC
("CSFB"), at a purchase price of 93.5% of the outstanding principal balance of
the finance contracts. The Company financed its purchase through a warehouse
securitization facility with CSFB pursuant to which the finance contracts were
transferred to a bankruptcy remote, special purpose corporation, AutoBond Master
Funding Corporation II and variable beneficial interests were issued to CSFB.
Pursuant to the structure, the Company agreed to maintain sufficient
over-collateralization such that CSFB's investment in the special purpose
corporation is collateralized by assets having a value equal to or greater than
117% of such investment. Recourse to the Company is limited to 10% of the
original unpaid balance of the finance contracts, and the variable beneficial
interests accrue interest at LIBOR plus 3% per annum. The variable beneficial
interests matures at 120 days and are convertible at CSFB's option into a term
securitization. The transfer of finance contracts to the special purpose entity
has been recognized as a sale under SFAS No. 125. As of March 31, 1998, the
Company is currently in active discussions with several potential warehouse
providers. 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 would have to curtail its finance contract acquisition activities, which
would have a material adverse effect on operations and cash position. The
Company 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 warehouse credit 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."
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 nine securitizations involving approximately $246 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
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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 also funded 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 certificate holders. 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 followed the provisions of SFAS 125. In these securitizations the
Company sold pools of finance contracts to a special purpose subsidiary, which
then issued 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 also funded a cash
reserve account that provides credit support to the senior notes. The Company's
securitization subsidiaries also have retained an interest in the finance
contracts that is subordinate to the interest of the note holders. 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 in two
primary 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
December 31, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $17.2 million, a portion of which had been pledged to
secure notes payable of $9.9 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. The Company is currently
negotiating a $200 million revolving purchase securitization facility and hopes
to secure such a facility in the short term.
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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
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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
related 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 loan associations, 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 loan associations 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.
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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 recent negative
developments 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 December 31,
1997, the Company was licensed to conduct business operations with dealers
located in 41 states, and, accordingly, the laws and regulations of such states
govern the Company's operations. Most states where the Company operates (i)
limit the interest rates, fees and other charges that may be imposed by, or
prescribe certain other terms of, the finance contracts that the Company
purchases and (ii) define the Company's rights to repossess and sell collateral.
In addition, the Company is required to be licensed or registered to conduct its
finance operations in certain states in which the Company purchases finance
contracts. As the Company expands its operations into other states, it will be
required to comply with the laws of such states.
Numerous federal and state consumer protection laws and related
regulations impose substantive disclosure requirements upon lenders and
servicers involved in automobile financing. Some of the federal laws and
regulations include the Truth-in-Lending Act, the Equal Credit Opportunity Act,
the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Credit
Billing Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty
Act, the Federal Reserve Board's Regulations B and Z and the Soldiers' and
Sailors' Civil Relief Act.
In addition, the Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the unclear application of various truth-in-lending laws
and regulations to certain products offered by companies in the industry,
industry participants are sometimes named as defendants in litigation involving
alleged violations of federal and state consumer lending or other similar laws
and 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.
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In most jurisdictions, the UCC and other state laws require a secured
party to provide an obligor with reasonable notice of the date, time and place
of any public sale or the date after which any private sale of collateral may be
held. Unless the obligor waives his rights after default, the obligor in most
circumstances has a right to redeem the collateral prior to actual sale (i) by
paying the secured party all unpaid installments on the obligation, plus
reasonable expenses for repossessing, holding and preparing the collateral for
disposition and arranging for its sale, plus in some jurisdictions, reasonable
attorneys' fees or (ii) in some states, by paying the secured party past-due
installments. Repossessed vehicles are generally resold by the Company through
wholesale auctions which are attended principally by dealers.
EMPLOYEES
As of December 31, 1997, the Company employed 191 persons, none of whom
was covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
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 $18,390. The lease for such facility expires in June 1998. Thereafter, it
plans to relocate to 100 Congress Avenue, Austin, Texas. Accordingly, the
Company has leased approximately 40,530 square feet of office space at a monthly
rent of $46,863 for a term of seven years following the initial commencement
date (projected on June 1, 1998). The Company's headquarters contain the
Company's executive offices as well as those related to automobile finance
contract acquisition. The Company does not maintain any regional office
facilities, although its securitization subsidiaries are incorporated and
maintain an office in Nevada.
ITEM 3. 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.
In March 1998, after Progressive Northern Insurance purported to cancel
the VSI and deficiency balance insurance policies issued in favor of the
Company, the Company sued Progressive, its affiliate United Financial Casualty
Co. and their agent in Texas, Technical Risks, Inc. in the district court of
Harris County, Texas. The action seeks declaratory relief confirming the
Company's interpretation of the policies, as discussed under "Business -- Recent
Developments", as well as claims for damages based upon breach of contract, bad
faith and fraud. The Company has not yet received the defendants' answers. Also
in March 1998, the Company commenced an action in Travis County, Texas, against
Loan Servicing Enterprise, alleging LSE's contractual breach of its servicing
obligations on a continuing basis. LSE has commenced an action against AutoBond
in Texas state court seeking recovery from the Company of putative
termination fees in connection with LSE's termination as servicer. The Company
expects the two actions to be consolidated.
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 Interstate's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a
16
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<PAGE>
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. While settlement discussions are ongoing,
Interstate 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 premiums having been demanded or paid, and the
claims-paying process having been streamlined. In particular, in order to speed
the claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate destination for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.
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 that 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOHLDER 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.
<TABLE>
<CAPTION>
HIGH AND LOW SALE PRICES BY PERIOD
QUARTER ENDED HIGH LOW
- -----------------------------------------------------
<S> <C> <C>
December 31, 1996 $11 $9 1/4
March 31, 1997 $10 3/8 $4
June 30, 1997 $ 4 3/4 $2 1/4
September 30, 1997 $5 1/8 $3 13/16
December 31, 1997 $ 4 1/2 $2 5/8
</TABLE>
On February 27, 1998, the Company's common stock listing was transferred
to the American Stock Exchange and began trading under the symbol "ABD". The
transfer agent and registrar for the Common Stock is American Stock Transfer &
Trust Company. As of March 26, 1998, the Company had approximately 16
stockholders of record, exclusive of holders who own their shares in "street" or
nominee names.
The Company has not paid and does not presently intend to pay cash
dividends on its common stock. The Company anticipates that its earnings for the
foreseeable future will be retained for use in operation and expansion of
business. Payment of cash dividends, if any, in the future will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's financial condition, earnings, current and anticipated capital
requirements, terms of indebtedness and other factors deemed relevant by the
Company's Board of Directors.
17
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<PAGE>
ITEM 6. 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 financial data were derived from the financial statements and
accounting records of the Company. 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) to Year Ended
December 31, December 31,
1994(2) 1995 1996 1997
(Dollars in thousands, except for pershare amounts)
<S> <C> <C> <C> <C>
Statement of operations data:
Interest income $ 38 $2,881 $2,520 $4,341
Gain on sale of finance contracts - - 658 18,944
Servicing fee income - 4,086 12,820 1,131
Other income (loss) - - 388 (1,485)
------------------------------ -----------------------
Total revenues 38 6,967 16,386 22,931
------------------------------ -----------------------
Provision for credit losses 45 49 412 613
Interest expense 19 2,100 2,383 3,880
Salaries and benefits 226 1,320 4,529 7,357
General and administrative 245 1,463 2,331 6,202
Other operating expenses 48 963 1,120 2,005
------------------------------ -----------------------
Total expenses 543 5,895 10,775 20,057
------------------------------ -----------------------
Income before income taxes and
extraordinary loss (545) 1,072 5,611 2,874
Provision for income taxes - 199 1,926 1,015
Extraordinary loss, net of tax benefit - - (100) -
------------------------------ -----------------------
Net income $ (545) $873 $3,585 $ 1,859
------------------------------ -----------------------
Earnings per share before extraordinary item $(0.11) $0.17 $0.64 $0.29
Earnings per share-basic $(0.11) $0.17 $0.62 $0.29
Earnings per share-diluted $(0.11) $0.17 $0.62 $0.28
Weighted average shares outstanding 5,118,753 5,190,159 5,791,189 6,516,056
Cash flow data:
Cash used in operating activities (2,514) (3,913) (2,726) (3,135)
Cash used in investing activities (16) (1,987) (2,582) (10,807)
Cash provided by financing activities 2,530 5,992 9,337 9,980
Asset quality data:
Delinquencies as a percentage of principal
balance of finance contract portfolio
serviced (end of period)(1)
30-59 days past due 4.69% 7.55% 10.15%
60+ days past due 2.32% 4.63% 9.12%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997
------------------------------ -----------------------
Balance sheet data:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ - $ 93 $ 4,121 $ 159
Restricted funds - 1,683 2,982 6,904
Finance contracts held for sale, net 2,361 3,355 228 1,366
Interest-only strip receivable - 847 4,247 9,353
Total assets 2,500 11,065 26,133 42,853
Revolving credit agreement 2,055 1,150 - 7,639
Notes payable - 2,675 10,175 9,841
Repurchase agreement - 1,061 - -
Total debt 2,055 4,886 10,175 17,480
Shareholders' equity (109) 3,026 12,142 15,418
</TABLE>
- -----------------------------------------------------
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Includes finance contracts where underlying vehicle
is repossessed (but subject to redemption), the borrower is in bankruptcy, the
dealer is to buy back the loan, or insurance claims have been filed and are
pending.
(2) The Company was incorporated on June 15, 1993 and commenced
operations on August 1994.
18
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<PAGE>
ITEM 7. 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. Certain of 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 Form
10-K.
The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
("finance contracts") originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ("sub-prime
consumers"). Sub-prime consumers generally are borrowers unable to qualify for
traditional financing due to one or more of the following reasons: negative
credit history (which may include late payments, charge-offs, bankruptcies,
repossessions or unpaid judgments); insufficient credit; employment or residence
histories; or high debt-to-income or payment-to-income ratios (which may
indicate payment or economic risk).
The Company acquires finance contracts generally from franchised
automobile dealers, makes credit decisions using its own underwriting guidelines
and credit personnel and performs the collection function for finance contracts
using its own collections department. The Company also acquires finance
contracts from third parties other than dealers, for which the Company
reunderwrites and collects such finance contracts in accordance with the
Company's standard guidelines. The Company securitizes portfolios of these
retail automobile installment contracts to efficiently utilize limited capital
to allow continued growth and to achieve sufficient finance contract volume to
allow profitability. The Company markets a single finance contract acquisition
program to automobile dealers which adheres to consistent underwriting
guidelines involving the purchase of primarily late-model used vehicles. The
Company has experienced significant growth in its finance contract portfolio
since it commenced operations in August 1994.
The continued acquisition and servicing of subprime finance contracts
by an independent finance company under current market conditions is a capital
and labor intensive enterprise. Capital is needed to fund the acquisition of
finance contracts and to effectively securitize them so that additional
capital is made available for acquisition activity. While a portion of the
Company's capital has been obtained with investment grade ratings at relatively
low interest rates, the remainder is difficult to obtain and requires the
Company to pay high coupons, fees and other issuance expenses, with a negative
impact on earnings. The underwriting and servicing of a growing subprime
finance contract portfolio requires a higher level of experienced personnel
than that required for a portfolio of higher credit-quality consumer loans.
Accordingly, the Company's growth in finance contract volume since inception
has corresponded with a significant increase in expenses related to building
the infrastructure necessary for effective underwriting and servicing,
resulting in a decrease in net income for 1997 fiscal year as compared with
1996. Although the Company's assumption of all servicing functions in late
1997 is expected to increase servicing income, it is uncertain when the
Company will begin to realize overall improvements in net income as the
growth in acquisition volume continues, especially in view of the high cost
of capital. See "--Results of Operations" and "--Liquidity and Capital
Resources;" and Note 1 to the Notes to the Consolidated Financial Statements.
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 and (ii) interest income earned on Class B certificates. 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
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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 receivables." 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 a portion of the discounted excess spread cash flows. The remainder
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 an estimated market rate, currently 15%. 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 $1,312,234 during the
year ended December 31, 1997 as a result of the impairment review .
The Company's cost basis in finance contracts sold has varied from
approximately 97.5% to 103% of the value of the principal balance of such
finance contracts. 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):
20
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<TABLE>
<CAPTION>
Remaining Weighted
Balance at Average
December 31, Contract Certificate Gross
Securitization Balance(1) 1997 Rate Rate Ratings(2) Spread(3)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A $26,261,009 $ 11,429,768 18.9% 7.23% Baa2 11.7%
AutoBond Receivables
Trust 1996-A 16,563,366 9,119,507 19.7% 7.15% Baa2 12.5%
AutoBond Receivables
Trust 1996-B 17,832,885 10,529,943 19.7% 7.73% Baa2 12.0%
AutoBond Receivables
Trust 1996-C 22,296,719 16,759,706 19.7% 7.45% Baa2 12.3%
AutoBond Receivables
Trust 1996-D 25,000,000 19,346,258 19.5% 7.37% Baa2 12.1%
AutoBond Receivables
Trust 1997-A(4) 27,196,052 22,130,875 20.8% 7.82% Baa2 13.0%
AutoBond Receivables
Trust 1997-B 34,725,196 32,523,526 19.9% 7.66% Baa3 12.3%
AutoBond Receivables
Trust 1997-C 34,430,079 33,289,098 20.0% 7.56% Baa3 12.5%
AutoBond Master Funding
Corporation(5) 26,601,006 26,601,006 19.7% 7.09% - 12.5%
AutoBond Master Funding
Corporation II(5) 11,285,431 11,285,431 18.6% 8.73% - 9.9%
=============================
Total $242,191,743 $193,015,118
=============================
</TABLE>
- ---------------------------
(1) Refers only to balances on senior investor certificates.
(2)Indicates ratings by Moody's Investors Service, Inc.
(3) Difference between weighted average contract rate and senior certificate
rate.
(4) Includes Class A and Class B Notes.
(5) Includes Variable Rate Funding Notes.
See "Business -- Recent Developments" for a discussion of recent actions taken
by Fitch and Moody's
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) contractual servicing fees received through securitizations, equal to $8.00
per month per contract included in each trust; and (iii) fee income earned as
servicer for such items as late charges and documentation fees, which are earned
whether or not a securitization has occurred.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition activity (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
------------------------------
<S> <C> <C>
Number of finance contracts acquired 7,331 13,189
Principal balance of finance contracts acquired $86,522,631 $148,931,331
Number of active dealerships(1) 654 1,060
Number of enrolled dealerships 715 1,621
</TABLE>
- ------------
(1) Dealers who have sold at least one finance contract to the Company during
the period.
21
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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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET INCOME
In the year ended December 31, 1997, net income decreased $1,725,422 to
from $3,584,886 for the year ended December 31, 1996. The decrease in net income
was primarily attributable to an increase in infrastructure costs to support
higher finance contract acquisition and servicing volumes and impairment charges
on interest-only strip receivables. The principal balance of finance contracts
acquired increased $62.4 million to $148.9 million for the year ended December
31, 1997 from $86.5 million for the year ended December 31, 1996. Due to
weakened competitors, the Company more aggressively added qualified personnel as
they became available in the year ended December 31, 1997, and this added to the
growth in salary and benefit expenses.
TOTAL REVENUES
Total revenues increased $6,544,761 to $22,931,301 for the year ended
December 31, 1997 from $16,386,540 for the year ended December 31, 1996 due to
expansion of the Company's finance contract acquisition and securitization
activities.
Interest Income. Interest income increased $1,821,685 to $4,341,297 for
the year ended December 31, 1997 from $2,519,612 for the year ended December 31,
1996 due the growth and timing of finance contract acquisitions. The Company
acquired finance contracts totaling $148.9 million during the year ended
December 31, 1997 compared to $86.5 million in the comparable 1996 period.
Accretion on interest-only strip receivables increased $392,478 from the
respective 1996 period to $546,507 during the year ended December 31, 1997.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling on finance contracts carried at $136.4 million (13.9%) during the year
ended December 31, 1997. Gain on sale amounted to $12,820,700 on finance
contracts carried at $85.0 million (15.1%) in the comparable 1996 period.
Accordingly, gain on sale of finance contracts rose $6,123,541 during the year
ended December 31, 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 year ended December
31, 1997, servicing fee income was $1,131,142, primarily collection agent fees.
Servicing fee income increased by $473,192 from the year ended December 31, 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 1.0% for the year ended December 31, 1996 to .7%
during the year ended December 31, 1997, as the Company waived $149,415 in
servicing fees during the later period. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
1997, increasing the rate of repayment of non-recourse notes. The result of such
waiver is the deferral and subordination of the Company's ultimate receipt of
such waived fees.
Other Income (Loss). For year ended December 31, 1997, other income
(loss) amounted to ($1,485,379), compared with $388,278 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
$1,312,234 during the year ended December 31, 1997. Additionally, unrealized
loss on the Company's Class B certificates totaled $293,188 during the year
ended December 31, 1997.
22
<PAGE>
<PAGE>
TOTAL EXPENSES
Total expenses of the Company increased $9,281,626 to $20,056,727 for
year ended December 31, 1997 from $10,775,101 for the year ended December 31,
1996. The ratio of total expenses to the average principal balance of finance
contracts outstanding declined from 16.9% for the year ended December 31, 1996
to 13.1% for year ended December 31, 1997 on an annualized basis. As of December
1, 1997 the Company completed the transfer of certain servicing functions from
LSE to in-house personnel and equipment. The Company incurred significant
expenses in the hiring and training of personnel as well as the acquisition and
leasing of equipment primarily to facilitate the servicing transfer during the
year ended December 31, 1997. For example, the incremental equipment expense for
the period was approximately $441,366.
Provision for Credit Losses. Provision for credit losses on finance
contracts increased $200,328to $612,715 for the year ended December 31, 1997
from $412,387 for the year ended December 31, 1996.
Interest Expense. Interest expense rose to $3,879,543 for the year ended
December 31, 1997 from $2,382,818 for the year ended December 31, 1996. Interest
expense increased by $1,496,725 due to higher borrowing volumes outstanding
under the revolving credit facilities, along with increased debt issuance costs
amortization of $320,985.
Salaries and Benefits. Salaries and benefits increased $2,828,278 to
$7,357,284 for the year ended December 31, 1997 from $4,529,006 the year ended
December 31, 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. As of December 1, 1997 the Company completed the transfer of
certain servicing functions from LSE to in-house personnel and equipment. The
Company incurred significant expenses in the hiring and training of personnel as
well as the acquisition and leasing of equipment to facilitate the servicing
transfer during the year ended December 31, 1997. The number of employees of the
Company increased by 75 to 191 employees at December 31, 1997, compared to 116
employees at December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased $3,870,702 to $6,201,948 for the year ended December 31, 1997 from
$2,331,246 the year ended December 31, 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
$885,593 to $2,005,237 for the year ended December 31, 1997 from $1,119,644 for
the year ended December 31, 1996. This increase was due to increased finance
contract acquisition volume.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
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.
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.
23
<PAGE>
<PAGE>
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 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 $402,016 was collection
agent fees, $154,029 resulted from discount accretion on the excess servicing
receivable, $50,000 was management fees from an affiliated company, and $51,904
arose from other sources. The Company had completed only one securitization in
1995, which was completed at December 31, 1995, and had no servicing fee income
for such period.
TOTAL EXPENSES
Total expenses of the Company increased $4.6 million to $8.4 million for
the year ended December 31, 1996 from $3.8 million for the year ended December
31, 1995. Although operating expenses increased during the year ended December
31, 1996, the Company's finance contract portfolio grew at a faster rate than
the rate of increase in operating expenses. Total expenses as a percentage of
total percentage balance of finance contracts acquired in the period decreased
slightly to 10.1% during the year ended December 31, 1996 from 12.0% for the
year ended December 31, 1995, reflecting improved efficiency in the Company's
operations.
Salaries and Benefits. Salaries and benefits increased $3.2 million to
$4.5 million for the year ended December 31, 1996 from $1.3 million for the year
ended December 31, 1995. This increase was due primarily to an increase in the
number of the Company's employees necessary to handle the increased contract
acquisition volume and the collection activities on a growing portfolio of
loansfinance contracts, and due to compensation of the Company's Chief Executive
Officer, which the Company began paying in May 1996. See Note 11 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.
FINANCIAL CONDITION
Restricted Cash. Restricted cash increased $3.9 million to $6.9 million
at December 31, 1997 from $3.0 million at December 31, 1996. In accordance with
the Company's revolving credit facilities,
24
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<PAGE>
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 $6.6 million of funds advanced
for the purchase of finance contracts at December 31, 1997. The Company is also
required to maintain a cash reserve with its lenders up to 11% 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 $1.2 million to $1.4 million at
December 31, 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 Receivables. The following table provides historical
data regarding the interest-only strip receivable:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
-------------------------
<S> <C> <C>
Beginning balance $846,526 $4,247,274
Unrealized appreciation - 1,589,782
Additions from securitization 3,246,719 4,281,313
transactions
Accretion of discount 154,029 546,507
Impairment charge - (1,312,233)
===========================
Ending balance $4,247,274 $9,352,641
===========================
</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) Deosit Percent
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AutoBond Receivables Trust 1995-A $26,261,009 $25,220 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 34,430,079 860,752 2.5%
AutoBond Master Funding Corporation(3) 26,601,006 4,285,855 16.1%
AutoBond Master Funding Corporation II(3) 11,285,431 790,342 7.0%
</TABLE>
- ----------
(1) Refers only to balances on senior Investor certificates upon issuance.
(2) Includes Class A, Class B and Class C-1 Notes.
(3) Includes Variable Rate Funding Notes (beneficial interests).
A portion of excess spread cash flows will increase such reserves until
they reach a target reserve level (initially 6%) of the outstanding balance of
the senior investor certificates.
25
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<PAGE>
Other Assets. The Company carried $1.4 million in assets as of December
31, 1997 primarily related to the Company's retained interest in amounts sold to
a special purpose subsidiary which issued variable rate funding notes.
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts $104,889,892 $211,727,750
outstanding
Delinquent finance contracts(1):
30-59 days past due 7,916,425 7.55% 21,484,450 10.15%
60-89 days past due 2,102,014 2.00% 10,941,753 5.17%
90 days past due and over 2,763,300 2.63% 8,368,493 3.95%
==============================================
Total $12,781,739 12.18% $40,794,696 19.27%
==============================================
</TABLE>
- ------------
(1) Percentage based upon outstanding balance. Includes finance contracts where
the underlying vehicle is repossessed (but subject to redemption), the borrower
is in bankruptcy, a dealer buy back is expected or where insurance claims are
filed and pending.
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 .
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 1997 versus 1996 delinquency percentages since
the portfolio is tangibly more seasoned as of December 31, 1997. 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.
26
<PAGE>
<PAGE>
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
December 31, 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 few repossessions because properly underwritten finance
contracts to sub-prime 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 the finance contracts generally amortize more quickly than
the collateral depreciates, and therefore losses and/or repossessions will
decline over time.
<TABLE>
<CAPTION>
Repossession Frequency
------------------------------------------------------------------
Principal
Principal Balance of Balance
Year and Quarter of Repossessions by of Contracts
Acquisition Quarter Acquired Cumulative(1) Annualized(2) Acquired
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Q3 $ 21,148 20.91% 5.97% $ 101,161
Q4 558,044 22.89% 7.04% 2,437,674
1995
Q1 1,570,799 24.89% 8.30% 6,310,421
Q2 1,556,086 25.14% 9.14% 6,190,596
Q3 1,753,861 24.23% 9.69% 7,239,813
Q4 2,050,507 16.82% 7.48% 12,188,863
1996
Q1 4,721,783 30.54% 15.27% 15,460,823
Q2 4,288,468 23.16% 13.23% 18,520,410
Q3 4,036,155 14.36% 9.58% 28,098,899
Q4 3,833,759 15.68% 12.55% 24,442,500
1997
Q1 3,948,029 11.32% 11.32% 34,875,869
Q2 2,610,105 7.39% 9.86% 35,305,817
Q3 409,489 1.18% 2.36% 34,629,616
Q4 19,474 0.04% 0.18% 44,120,029
</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 $558,044 in repossessions
divided by principal balance of $2,437,674 in contracts acquired, divided by 13
quarters outstanding times four equals an annual repossession frequency of
7.04%).
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)
27
<PAGE>
<PAGE>
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 December 31, 1997
--------------------
<S> <C>
Number of finance contracts acquired 23,386
Number of vehicles repossessed 2,936
Repossessed units disposed of 1,351
Repossessed units awaiting disposition(1) 1,585
Cumulative gross charge-offs(2) $14,520,631
Costs of repossession(2) 225,003
Proceeds from auction, physical damage insurance and refunds(2) (8,035,075)
--------------------
Net loss 6,710,560
Deficiency insurance settlement received(2) (3,438,798)
====================
Net charge-offs(2) $3,271,762
====================
Net charge-offs per unit disposed $2,422
Net loss as a percentage of cumulative gross charge-offs 53.79%
Recoveries as a percentage of cumulative gross charge-offs(3)(4) 79.02%
</TABLE>
- ------------
(1) The vehicles may have been sold at auction; however AutoBond might not have
received all insurance proceeds as of December 31, 1997.
(2) 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
December 31, 1997.
(3) Not including the costs of repossession which are reimbursed by the
securitization trusts.
(4) Includes the effect of certain loans included in term securitization
97-A which did not have credit default insurance coverage.
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 $3.1 million during the year ended
December 31, 1997. The Company used $140.4 million to purchase finance contracts
and $136.4 million was received from sales of finance contracts, primarily
through securitizations during the year ended December 31, 1997.
Significant activities comprising cash flows from investing activities
include net advances to AutoBond Receivables Trusts of $7.4 million for the year
ended December 31, 1997. Cash flows from financing activities include net
borrowings under revolving credit facilities of $7.6 million for the year ended
December 31, 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.
28
<PAGE>
<PAGE>
At December 31, 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 December 31, 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 $420,674 for the year ended December 31,
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 finance contracts 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% (6.87% at December 31,
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
December 31, 1997, advances under the Daiwa Facility totaled $7,639,201 and
remaining availability was $15,759,792. The Company incurred interest expense
under the Daiwa Facility of approximately $1,118,883 during the year ended
December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue 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 entities 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 on the Convertible Notes was payable
quarterly at a rate of 18% per annum. The Convertible Notes were redeemed by the
Company in February 1998.
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 $5.8 million of subordinated asset-backed securities.
In January 1998, the Company privately placed with BancBoston
Investments, Inc. ("BancBoston") $7,500,000 in aggregate principal amount of its
15% senior subordinated convertible notes (the "Subordinated Notes"). Interest
on the Subordinated Notes is payable quarterly until maturity on February 1,
2001. The Subordinated Notes are convertible at the option of the holder for up
to 368,462 shares of Common Stock, at a conversion price of $3.30 per share,
subject to adjustment under standard anti-dilution provisions. In the event of a
change of control transaction, the holder of the Subordinated Notes may require
the Company to repurchase the Subordinated Notes at 100% of the principal amount
plus accrued interest. The Subordinated Notes are redeemable at the option of
the Company on or after July 1, 1999 at redemption prices starting at 105% of
the principal amount, with such premium reducing to par on and after November 1,
2000, plus accrued interest. The Subordinated Notes were issued
29
<PAGE>
<PAGE>
pursuant to an Indenture, dated as of January 30, 1998 (the "Indenture") between
the Company and BankBoston, N.A., as agent. The Indenture contains certain
restrictive covenants including (i) a consolidated leveraged ratio not to exceed
2 to 1 (excluding nonrecourse warehouse debt and securitization debt), (ii)
limitations on restricted payments such as dividends (but excluding, so long as
no event of default has occurred under the Indenture, dividends or distributions
on the Preferred Stock), (iii) limitations on sales of assets other than in the
ordinary course of business and (iv) certain financial covenants, including a
minimum consolidated net worth test of $12 million (plus proceeds from equity
offerings), a minimum ratio of earnings to interest of 1.5 to 1, and a maximum
cumulative repossession ratio of 27%.
Events of default under the Indenture include failure to pay, breach of
covenants, cross-defaults in excess of $1 million, or material breach of
representations or covenants under the purchase agreement with BankBoston.
Net proceeds from the sale of the subordinated notes were used to pay
short-term liabilities, with the remainder available to provide for the
repayment of the Company's 18% Convertible Secured Notes and for working
capital.
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 year ended December 31, 1997, the
Company securitized approximately $270 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
December 31, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $17.2 million, substantially all of which had been pledged
to collateralize notes payable of $9.8 million.
The Company relies significantly on a strategy of periodically selling
finance contracts through asset-backed securitizations. 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, the recent
withdrawal of ratings by Fitch and downgrade by Moody's, the requirements
for large cash contributions by the Company into securitizations, conditions
in the securities markets in general, conditions in the asset-backed securities
market and investor demand for subprime auto paper. Additionally, gain on sale
of finance contracts represents a significant portion of the
30
<PAGE>
<PAGE>
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."
Equity Offerings. In February 1998, the Company completed the
underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative
Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10
per share. The price to public was $10 per share, with net proceeds to the
Company of approximately $10,150,000. Such net proceeds have been utilized for
working capital purposes, including the funding of finance contracts. Dividends
on the Preferred Stock are cumulative and payable quarterly on the last day of
March, June, September and December of each year, commencing on June 30, 1998,
at the rate of 15% per annum. After three years from the date of issuance, the
Company may, at its option, redeem one-sixth of the Preferred Stock each year,
in cash at the liquidation price per share (plus accrued and unpaid dividends),
or, if in Common Stock, that number of shares equal to $10 per share of
Preferred Stock to be redeemed, divided by 85% of the average closing sale price
per share for the Common Stock for the 5 trading days prior to the redemption
date. The Preferred Stock is not redeemable at the option of the holder and has
no stated maturity.
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 could materially affect the
holders of Preferred Stock, such as a merger of the Company, cannot be made
without the affirmative vote of the holders of two-thirds of the shares of
Preferred Stock, voting as a separate class. The Preferred Stock ranks senior to
the Common Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up.
On November 14, 1996, the Company completed the initial public offering
of its common stock. The closing comprised 825,000 shares sold by the Company
(including 75,000 shares issued pursuant to the exercise of the underwriters,
overallotment option) and 250,000 shares sold by the Selling Shareholders. With
a price to the public of $10 per share and an underwriting discount at $.70 per
share, the Company received gross proceeds of $7,492,500 from the offering, from
which it paid offering expenses of approximately $1.8 million. The net proceeds
were utilized for working capital, repayment of subordinated debt of $300,000
and investment in finance contracts.
Management recognizes that the ability to monetize residual cash flows
from securitizations in 1998 is uncertain and that both warehousing and
securitization of the Company's finance contracts will require greater levels of
cash outlays by the Company. Accordingly the Company intends to tap the equity
markets, initially in the context of the Preferred Stock Offering, as well as
the debt markets (initially in connection with the Company's placement of Senior
Subordinated Notes), in order to meet its cash needs during 1998 and 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 documents filed by the Company with the Securities and Exchange
Commission.
31
<PAGE>
<PAGE>
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 June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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 the recent
accounting pronouncements will have a material effect on its consolidated
financial statements, since the Company operates in one business segment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[Financial statements are set forth in this report beginning at
page F-1.]
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated above reference
thereto.
No person who, at any time during the fiscal year ended December 31,
1997, was a director, officer, beneficial owner of more than ten percent of any
class of equity securities of the Company registered pursuant to Section 12 of
the Exchange Act, or any other person subject to Section 16 of the Exchange Act
with respect to the Company because of the requirements of Section 30 of the
Investment Company Act ("reporting person") has failed to file or is delinquent
in filing the forms and reports required by Section 16(a) of the Exchange Act
during the fiscal year ended December 31, 1997 or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
32
<PAGE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
1. Financial Statements
Report of Independent Accountants - Coopers & Lybrand L.L.P.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive
Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II; Valuation and Qualifying Accounts
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ------------------------
<S> <C>
3.1(1) Restated Articles of Incorporation of the Company
3.2(1) Amended and restated Bylaws of the Company
3.3 Certificate of Designation for the Company's 15% Series A
Cumulative Preferred Stock
4.1(1) Specimen Common Stock Certificate
4.2(5) Specimen Preferred Stock Certificate
10.1(1) Amended and Restated Loan Origination, Sale and Contribution
Agreement dated as of December 15, 1995 by and between the Company
and AutoBond Funding Corporation I
10.2(1) Security Agreement dated as of May 21, 1996 among AutoBond Funding
Corporation II, the Company and Norwest Bank Minnesota, National
Association
10.3(1) 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(1) 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(1) Loan Acquisition Sale and Contribution Agreement dated as of May 21,
1996 by and between the Company and AutoBond Funding Corporation II
10.6(1) Second Amended and Restated Secured Revolving Credit Agreement dated
as of July 31, 1995 between Sentry Financial Corporation and the
Company
10.7(1) Management Administration and Services Agreement dated as of January
1, 1996 between the Company and AutoBond, Inc.
</TABLE>
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------ ------------------------
<S> <C>
10.8(1) Employment Agreement dated November 15, 1995 between Adrian Katz and
the Company
10.9(1) Employment Agreement effective as of May 1, 1996 between William O.
Winsauer and the Company
10.10(1) Vender's Comprehensive Single Interest Insurance Policy and
Endorsements, issued by Interstate Fire & Casualty Company
10.11(1) Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12(1) Employee Stock Option Plan
10.13(1) Dealer Agreement dated November 9, 1994, between the Company and
Charlie Thomas Ford, Inc.
10.14(1) 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(2) Servicing Agreement, dated as of January 29, 1997, between CSC
LOGIC/MSA L.P.P., doing business as "Loan Servicing Enterprise" and
the Company
10.16(2) Credit Agreement, dated as of February 1, 1997, among AutoBond
Funding Corporation II, the Company and Daiwa Finance Corporation
10.17(2) Security Agreement, dated as of February 1, 1997, by and
among AutoBond Funding Corporation II, the Company and Norwest Bank
Minnesota, National Association
10.18(2) 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
10.19(3) Automobile Loan Sale Agreement, dated as of March 26, 1997, by and
between Credit Suisse First Boston Mortgage Capital L.L.C., a
Delaware limited liability company, and the Company
10.20(4) Credit Agreement, dated as of June 30, 1997, by and among AutoBond
Master Funding Corporation, the Company and Daiwa Finance Corporation
10.21(4) 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(4) Securities Purchase Agreement, dated as of June 30, 1997, by and
among the Company, Lion Capital Partners, L.P. and Infinity Emerging
Opportunities Limited.
10.23(5) Credit Agreement, dated as of December 31, 1997, by and among
AutoBond Master Funding Corporation II, the Company and Credit Suisse
First Boston Mortgage Capital L.L.C
10.24(5) Trust Indenture, dated as of December 31, 1997, among AutoBond Master
Funding Corporation II, the Company and Manufacturers & Traders Trust
Company
10.25(5) Receivables Purchase Agreement, dated as of December 31, 1997,
between Credit Suisse First Boston Mortgage Capital L.L.C and the
Company
10.26(5) Servicing Agreement, dated as of December 31, 1997, among the
Company, AutoBond Master Funding Corporation II and Manufacturers &
Traders Trust Company
10.27(5) Indenture and Note, dated January 30, 1998, between the company and
Bank Boston, N.A.
10.28(5) Warrant, dated January 30, 1998, issued to BancBoston Investments,
Inc.
10.29(5) Purchase Agreement, dated January 30, 1998, between the Company and
BancBoston Investments, Inc.
10.30 Warrant, dated February 2, 1998, issued to Dresner Investments
Services, Inc.
10.31 Warrant Agreement and Warrant, dated February 20, 1998, issued to Tejas
Securities Group, Inc.
10.32(5) Consulting and Employment Agreement, dated as of January 1, 1998
between Manuel A. Gonzalez and the Company
10.33(5) Severance Agreement, dated as of February 1, 1998 between Manuel A.
Gonzalez and the Company
21.1 Subsidiaries of the Company
21.2(5) Additional Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
- --------------
(1) Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-05359).
(2) Incorporated by reference to the Company's 1996 annual report
on Form 10-K for the year ended December 31, 1996.
34
<PAGE>
<PAGE>
(3) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1997.
(4) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1997.
(5) Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-41257).
(b) Reports of Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William O. Winsauer
--------------------------------
William O. Winsauer,
Chairman of the Board
and Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ William O. Winsauer Chairman of the Board and March 31, 1998
- ----------------------- Chief Executive Officer
William O. Winsauer
/s/ Adrian Katz Vice Chairman of the Board March 31, 1998
- --------------- and Chief Operating Officer
Adrian Katz
/s/ R. T. Pigott, Jr. Vice President and Chief March 31, 1998
- --------------------- Financial Officer
R. T. Pigott, Jr.
/s/ John S. Winsauer Secretary and Director March 31, 1998
- --------------------
John S. Winsauer
/s/ Thomas Blinten Director March 31, 1998
- --------------------
Thomas Blinten
</TABLE>
35
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Income and Comprehensive Income for the Years Ended F-4
December 31, 1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, F-5
1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 F-6
and 1997
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements, related notes, or other schedules.
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Autobond Acceptance Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the years ended December 31, 1995, 1996
and 1997. 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.
As discussed in Note 1, the Company's most significant warehouse and
securitization facility, which expires March 31, 1998, has been extended to
April 30, 1998. The Company is currently in negotiations with other parties for
additional warehouse and securitzation facilities.
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, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the years ended December 31, 1995, 1996 and 1997, in conformity with
generally accepted accounting principles.
As described in Note 1, the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" as of January 1, 1997 and
SFAS No. 130, "Reporting Comprehensive Income," for the period ended
December 31, 1997.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 30, 1998
F-2
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
--------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,121,342 $159,293
Restricted funds 2,981,449 6,904,264
Finance contracts held for sale, net 228,429 1,366,114
Collateral acquired, net 152,580 150,908
Class B certificates 10,465,294 7,878,306
Retained interest in beneficial interest of trust - 5,083,213
Interest-only strip receivables 4,247,274 9,352,641
Debt issuance cost 997,338 605,847
Trust receivable 2,230,003 9,627,144
Due from affiliates 25,300 21,285
Other assets 683,955 1,703,587
-----------------------------
Total assets $26,132,964 $42,852,602
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facilities $ - $ 7,639,201
Notes payable 10,174,633 9,841,043
Accounts payable and accrued liabilities 1,474,586 3,386,685
Bank overdraft - 2,936,883
Payable to affiliates 265,998 -
Deferred income taxes 2,075,553 3,631,188
-----------------------------
Total liabilities 13,990,770 27,435,000
-----------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued
Common stock, no par value; 25,000,000 shares authorized, 1,000 1,000
6,512,500 and 6,531,311 shares issued and outstanding
Additional paid-in capital 8,617,466 8,781,669
Deferred compensation (11,422) -
Due from shareholders (378,618) (187,555)
Unrealized appreciation on interest-only strip receivables - 1,049,256
Retained earnings 3,913,768 5,773,232
------------------------------
Total shareholders' equity 12,142,194 15,417,602
------------------------------
Total liabilities and shareholders' equity $26,132,964 $42,852,602
==============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income $ 2,880,961 $ 2,519,612 $ 4,341,297
Gain on sale of finance contracts 4,085,952 12,820,700 18,944,241
Servicing fee income - 657,950 1,131,142
Other income (loss) - 388,278 (1,485,379)
---------------------------------------
Total revenues 6,966,913 16,386,540 22,931,301
---------------------------------------
Expenses:
Provision for credit losses 48,702 412,387 612,715
Interest expense 2,099,867 2,382,818 3,879,543
Salaries and benefits 1,320,100 4,529,006 7,357,284
General and administrative 1,462,740 2,331,246 6,201,948
Other operating expenses 963,017 1,119,644 2,005,237
---------------------------------------
Total expenses 5,894,426 10,775,101 20,056,727
---------------------------------------
Income before income taxes and extraordinary loss 1,072,487 5,611,439 2,874,574
Provision for income taxes 199,000 1,926,553 1,015,110
---------------------------------------
Income before extraordinary loss 873,487 3,684,886 1,859,464
Extraordinary loss, net of tax - (100,000) -
---------------------------------------
Net income 873,487 3,584,886 1,859,464
Other comprehensive income, net of tax:
Unrealized appreciation on interest-only strip
receivables - - 1,049,256
---------------------------------------
Other comprehensive income - - 1,049,256
=======================================
Comprehensive income $ 873,487 $ 3,584,886 $2,908,720
=======================================
Earnings per common share basic:
Income before extraordinary loss $0.17 $0.64 $0.29
Extraordinary loss, net of tax - (0.02) -
=======================================
Net income $0.17 $0.62 $0.29
=======================================
Earnings per common share diluted
Income before extraordinary loss $0.17 $0.63 $0.28
Extraordinary loss, net of tax - 0.01 -
=======================================
Net income $0.17 $0.62 $0.28
=======================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
------------------------------------
<S> <C> <C> <C>
Common stock shares:
Beginning of year 5,118,753 5,118,753 6,512,500
Stock issued pursuant to employee contract - 568,747 -
Issuance of common stock in public offering - 825,000 -
Exercise of common stock warrants - - 18,811
====================================
End of year 5,118,753 6,512,500 6,531,311
====================================
Common stock:
Beginning balance $ 1,000 $1,000 $1,000
------------------------------------
Ending balance 1,000 1,000 1,000
------------------------------------
Additional paid-in capital:
Beginning balance 451,000 2,912,603 8,617,466
Capital contributions 2,323,103 - -
Deferred compensation pursuant to employee contract 138,500 - -
Issuance of common stock in public offering - 5,704,863 -
Issuance/exercise of common stock warrants - - 164,203
------------------------------------
Ending balance 2,912,603 8,617,466 8,781,669
------------------------------------
Deferred compensation:
Beginning balance - (62,758) (11,422)
Deferred compensation pursuant to employee contract (138,500) - -
Amortization of deferred compensation 75,742 51,336 11,422
------------------------------------
Ending balance (62,758) (11,422) -
------------------------------------
Due from shareholders:
Beginning balance (16,000) (153,359) (378,618)
Payments from (to) shareholders (137,359) (225,259) 191,063
------------------------------------
Ending balance (153,359) (378,618) (187,555)
------------------------------------
Unrealized appreciation on interest-only strip receivables:
Beginning balance - - -
Increase in unrealized appreciation on interest-only - - 1,049,256
strip receivables
------------------------------------
Ending balance - - 1,049,256
------------------------------------
Retained earnings:
Beginning balance (544,605) 328,882 3,913,768
Net income 873,487 3,584,886 1,859,464
------------------------------------
Ending balance 328,882 3,913,768 5,773,232
====================================
Total shareholders' equity $ 3,026,368 $12,142,194 $15,417,602
====================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 873,487 $ 3,584,886 $ 1,859,464
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization of finance contract acquisition (795,579) (358,949) (11,472)
discount and insurance
Amortization of deferred compensation 75,742 51,336 11,422
Amortization of debt issuance costs 497,496 818,481
Provision for credit losses 48,702 412,387 612,715
Depreciation and amortization - - 288,878
Deferred income taxes 199,000 1,876,553 1,015,110
Accretion of interest-only strip receivables - (154,029) (546,507)
Impairment of interest-only strip receivables - - 1,312,234
Unrealized (gain) loss on Class B certificates - (388,278) 293,188
Changes in operating assets and liabilities:
Other assets (354,208) (329,747) (1,308,511)
Class B certificates (2,834,502) (7,242,514) 2,293,800
Retained interest in beneficial interest of trust - - (5,083,213)
Interest-only strip receivables (846,526) (3,246,719) (4,281,311)
Accounts payable and accrued liabilities 1,110,446 (361,496) 1,912,099
Due to/due from affiliates (248,937) (14,899) (261,983)
Purchases of finance contracts (31,200,131) (83,672,335) (140,364,193)
Sales of finance contracts 27,399,543 85,014,394 136,389,461
Repayments of finance contracts 2,660,018 1,605,461 1,915,606
-----------------------------------------
Net cash used in operating activities (3,912,945) (2,726,453) (3,134,732)
-----------------------------------------
Cash flows from investing activities:
Increase in restricted funds (1,544,661) (1,298,612) (3,922,815)
Advances to AutoBond Receivables Trusts (525,220) (1,704,783) (7,397,141)
Decrease (increase) in due from (137,359) (225,259) 191,063
shareholders
Disposal proceeds from collateral acquired 220,359 646,600 321,870
-----------------------------------------
Net cash used in investing activities (1,986,881) (2,582,054) (10,807,023)
-----------------------------------------
Cash flows from financing activities:
Net borrowings (payments) on revolving
credit facilities (904,355) (1,150,421) 7,639,201
Debt issuance costs - (794,834) (426,991)
Proceeds (payments) from borrowings on 1,061,392 (1,061,392) -
repurchase agreement
Proceeds from notes payable 2,674,597 12,575,248 2,015,150
Payments on notes payable - (5,075,212) (2,348,740)
Shareholder contributions 2,323,103 - -
Increase (decrease) in bank overdraft 837,749 (861,063) 2,936,883
Proceeds from public offering of common stock, net - 5,704,863 -
Issuance/exercise of common stock warrants - - 164,203
-----------------------------------------
Net cash provided by financing activities 5,992,486 9,337,189 9,979,706
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 92,660 4,028,682 (3,962,049)
Cash and cash equivalents at beginning of period - 92,660 4,121,342
=========================================
Cash and cash equivalents at end of period $ 92,660 $ 4,121,342 $159,293
=========================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("finance contracts") originated by franchised
automobile dealers. 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.
Principals 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.
Risks and Uncertainties
The Company records the present value of estimated future cash flows in
connection with its determination of the carrying value of its interest-only
strip receivables. Such estimation considers significant assumptions about the
future performance of finance contracts, including prepayments, default rates,
collections on repossessions of automobiles, delinquencies and timing of cash
receipts. Since such assumptions may not predict actual performance, it is at
least reasonably possible that the carrying value of the interest-only strip
receivables will be adjusted in the near term and the change could be material
to the results of operations.
The Company and its credit loss deficiency insurance provider on two of
its securtizations disagree over the cancellability of coverages and the
aggregate limitation of liability under such policies. The Company has filed
suit to seek a declaratory judgment to affirm their interpretation of the
insurance policies. Should the Company's interpretation be incorrect, the
Company would need to reassess its carrying value of its interest-only strip
receivables under new assumptions and the result of this reevaluation could be
material. The Company's estimated future cash flow at December 31, 1997 exceed
the aggregate limitations asserted by the insurance provider by approximately
.5 million.
Included in the Company's finance contracts held for sale are certain
finance contracts which were otherwise ineligible to be part of a securitzation
transaction. Such finance contracts have inherently higher risk than performing
finance contracts acquired in the normal course of business. The Company's
reserve on such finance contracts is determined based upon an estimate of the
historical default rates, the liquidation value of the underlying collateral and
recoveries of insurance proceeds. Actual results from the ultimate liquidation
of the loan will differ from the net recorded amount and the differences could
be material.
F-7
<PAGE>
<PAGE>
Liquidity Risk
The Company's warehousing and securitization facility agreement with
Daiwa expires on March 31, 1998. Daiwa has extended the current maturities of
the facilities to April 30, 1998. The Company's availability under the Daiwa and
Sentry warehouse facilities totals $2.7 million and $7.6 million at March 30,
1998, respectively. The Company is currently in the process of securing new
warehouse and securitization facilities. Signed term sheets for a $50 million
warehouse facility and a $200 million revolving asset purchase funding facility
have been received in March of 1998. Such term sheets do not obligate the
Company or the lender to extend credit. Extension of credit under the term
sheets are contingent upon processes such as due diligence procedures of the
lenders, approvals of lending committees or board of directors, and drafting and
signing of final agreements. In addition, the Company has an agreement for an
additional warehouse facility of $10 million, which is expected to close March
31, 1998. Failure to obtain a suitable warehousing and securitization facility
could have a material adverse effect on the Company's financial operations and
would result in the Company significantly curtailing its operations. Rating
agencies have taken certain recent actions on the Company's prior term
securitizations. Fitch has withdrawn its ratings on all securitzations of the
Company. Moody's has downgraded the senior securities in each of the Company's
term securitizations to Baa2 and Baa3 (97B and 97C securitizations). These
actions may limit the Company's ability to do similar securitization structures
in the near term. Future downgrades are possible as such securitizations
continue to be on review by Moody's. Management plans to obtain bond insurance
and has a term sheet from FSA, in order to complete future term securitizations.
The Company believes that it will be successful in obtaining the appropriate
warehousing and securitization facilities.
The Company's cash position at March 26, 1998 is approximately $1
million. The Company has funded loans out of its own account for approximately
$4.3 million since March 1, 1998 and believes net cash outflows will be $2 to $3
million per quarter. Given the cash position, the Company may need to secure
additional equity or debt to fund operations by the end of the year. Management
believes additional cash may be generated if a term securitization structure
with subordinated traunches is successfully implemented.. The Company continues
to pursue equity or debt infusions and currently a term sheet which covers the
issuance of convertible debt of up to $5 million has been received. Similar to
the warehouse agreement, the term sheet does not represent a binding commitment
to extend credit. The Company believes it will be successful in obtaining
necessary equity or debt and believes it has a history of raising sufficient
debt or equity for the Company. Without additional debt or equity, including
obtaining additional warehousing and securitization financing, the Company
may not be able to generate the necessary cash inflows to cover its operating
costs through the end of the year.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities
of less than three months to be cash equivalents.
Restricted Cash
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 Company is also required to maintain a cash reserve
with its lenders up to 11% 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.
Trust Receivable
At the close of a securitization, 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 initial cash reserve deposits for the Company's securitizations totaled
$525,220, $1.6 million and $7.4 million for the years ended December 31, 1995,
1996 and 1997, respectively. These amounts represented 2.0%, 2.0% and 3.9% of
the senior investor certificates issued by the trusts during the
F-8
<PAGE>
<PAGE>
respective periods. 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 as 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 finance contracts. 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
collateral acquired.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments, interest-only strip
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 during the years ended December 31, 1995, 1996 and 1997.
Collateral Acquired
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 underlying fair value of the assets. Subsequent increases and decreases
in fair value result in an 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.
Class B Certificates
Pursuant to certain 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 interest-only strip receivables 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 No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). 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
F-9
<PAGE>
<PAGE>
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. The Company recorded unrealized gain
(loss) on the Class B certificates of $388,278 and ($293,188) during the years
ended December 31, 1996 and 1997, respectively. The Class B certificates accrue
interest at 15%.
Interest-Only Strip Receivables and Adoption of New Accounting Standard
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125"), as amended by Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125--An Amendment of FASB Statement No. 125"
("SFAS No. 127"), on January 1, 1997. SFAS No. 125 applies a control-oriented,
financial-components approach to financial-asset-transfer transactions whereby
the Company (1) recognizes the financial and servicing assets it controls and
the liabilities it has incurred, (2) derecognizes financial assets when control
has been surrendered, and (3) derecognizes liabilities once they are
extinquished. Under SFAS No. 125, control is considered to have been surrendered
only if: (i) the transferee assets have been isolated from the transferor and
its creditors, even in bankruptcy or other receivership (ii) the transferee has
the right to pledge or exchange the transferred assets, or, is a qualifying
special-purpose entity (as defined) and the holders of beneficial interests in
that entity have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement which both entitles and obligates it to repurchase or
redeem those assets prior to maturity, or through an agreement which both
entitles and obligates it to repurchase or redeem those assets if they were not
readily obtainable elsewhere. If any of these conditions are not met, the
Company accounts for the transfer as a secured borrowing.
As a result of adopting SFAS No. 125, the excess servicing receivables
previously shown on the consolidated balance sheet as of December 31, 1996 have
been reclassified as interest-only strip receivables, and accounted for as an
investment security classified similar to those classified as "available for
sale" under 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 receivables 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 Company accretes income for its interest-only strip receivable on
the interest method based upon the expected rate of return of such assets.
Bank Overdraft
Bank overdrafts result from checks prepared but not sent to the related
creditor.
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.
Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Expenditures for additions and improvements are capitalized while
minor replacements, maintenance and repairs which do not improve or extend the
life of such assets are charged to expense. Gains of losses on disposal of fixed
assets are reflected in operations. Depreciation is computed using the
straight-line method over the
F-10
<PAGE>
<PAGE>
estimated useful lives of the depreciable assets, ranging from 3 to 5 years.
Leasehold improvements are depreciated over the term of the lease.
Advertising
Advertising costs are expensed as incurred.
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
During the year ended December 31, 1996, the Company recorded an
extraordinary loss related to a $150,000 prepayment fee on a $2,684,000 term
loan that was repaid during 1996.
Earnings per Share
The Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities of other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
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 finance contracts past due for more than 90 days. The Company
accrues interest income on the Class B certificates monthly at 15% using the
interest method
Comprehensive Income
Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes disclosure standards for
reporting comprehensive income, which is the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income
reconciles net income to retained earnings on the face of the statement of
income.
Concentration of Credit Risk
The Company generally acquires finance contracts from a network of
automobile dealers located in forty states. Finance contracts acquired with
borrowers in Texas totaled 64% and 38% of the portfolio at December 31, 1996 and
1997, respectively. Finance contracts acquired with borrowers in Florida totaled
25% at December 31, 1997. The Company had no dealer concentrations which
accounted for more than 10% of the portfolio at December 31, 1996 and 1997.
F-11
<PAGE>
<PAGE>
2. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in finance contracts held for sale as
of:
<TABLE>
<CAPTION>
December 31,
1996 1997
--------------------------
<S> <C> <C>
Unpaid principal balance $266,450 $1,946,135
Prepaid insurance 18,733 -
Contract acquisition (31,554) (129,899)
discounts
Allowance for credit losses (25,200) (450,122)
==========================
$228,429 $1,366,114
==========================
</TABLE>
3. INTEREST-ONLY STRIP RECEIVABLES AND GAIN ON SALE
The changes in interest-only strip receivables follow:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
-------------------------
<S> <C> <C>
Beginning balance $846,526 $4,247,274
Unrealized appreciation - 1,589,782
Additions from securitization 3,246,719 4,281,313
transactions
Accretion of discount 154,029 546,507
Impairment charge - (1,312,233)
=========================
Ending balance $4,247,274 $9,352,641
=========================
</TABLE>
The Company periodically reviews the fair value of the interest-only
strip receivables. The difference in the fair value of securities available for
sale and the historical carrying value on a disaggregated basis, where any
reduction in value does not result in a permanent impairment, is recognized as
an adjustment to stockholders' equity. The cumulative adjustment amounted to a
net unrealized gain of $1,589,782, net of related tax effect of $540,526, on the
valuation of the interest-only strip receivables for the year ended December 31,
1997. Additionally, the Company recorded a charge against earnings for permanent
impairment of interest-only strip receivables, determined on a disaggregated
basis, of $1,312,233 for the year ended December 31, 1997.
During the fourth quarter of 1997, the Company revised its estimate of
future cash flows related to its interest-only strip receivables. Significant
assumptions utilized in the estimation of future cash flows include:
F-12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Variable Assumptions
- --------- -------------
<S> <C>
Discount rate 15%
Default rates Variable curve based upon historical
experience, varies from 5% to 17%
Lag in sale of collateral and insurance receipts 5 months and 7 months
Collections on defaulted loans 76% of base wholesale collateral value
reduced over time to give effect to
estimated changes in such wholesale
automobile values plus insurance proceeds
Prepayment rates 1% in first month, reducing to .4% per month
over the loan term
</TABLE>
As a result, the Company adjusted its carrying value of the
interest-only strip receivables by $1,312,233, which was recognized as a
permanent impairment in accordance with EITF 89-4 on a disaggregated basis. In
addition, the Company utilized these same assumptions to estimate its gain on
sale of the fourth quarter transfers to AutoBond Master Funding Corporation and
AutoBond Master Funding Corporation II. Under the transfer, the variable
beneficiary holder has an option to redeem such certificates for term
certificates. The gain on sale calculation assumes that the variable rate
holders do not exercise such option and the facility pays out under a turbo
arrangement.
4. REVOLVING CREDIT FACILITIES
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 (the "Sentry Facility")
provides for a $10.0 million 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 Sentry Facility 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 Sentry Facility is
collateralized by the finance contracts acquired with the outstanding
borrowings. Interest is payable monthly and accrues at a rate of prime plus
1.75% (10.25% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth, and cash and cash equivalent balances. Under the Sentry Facility, the
Company paid interest of $411,915, $220,674 and $420,674 for the years ended
December 31, 1995, 1996 and 1997, respectively. Pursuant to the Sentry Facility,
the Company was 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 Sentry Facility. The Company pays a utilization fee of
up to 0.21% per month on the average outstanding balance of the Sentry Facility.
The Sentry Facility also requires the Company to pay up to 0.62% per quarter on
the average unused balance. At December 31, 1997, $10,000,000 was available for
borrowing under the credit line as there were no amounts outstanding at that
date.
Effective May 21, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20 million revolving warehouse
facility (the "Providian 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 Providian Facility were
used to acquire
F-13
<PAGE>
<PAGE>
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 Providian Facility also required the Company to pay a monthly
fee on the average unused balance of 0.25% per annum. The Providian Facility was
collateralized by the finance contracts acquired with the outstanding
borrowings.
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 finance contracts 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% (6.87% at December 31,
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. The
Company had credit availability under the Diawa Facility of $15,759,792 at
December 31, 1997.
The Company incurred interest expense
under the Daiwa Facility of approximately $1,118,883 during the year ended
December 31, 1997.
The interest rate on borrowings under revolving credit agreements ranged
from 6% to 11% for the year ended December 31, 1997. The weighted average
interest rate on revolving credit agreements was 7.10% at December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable beneficial interests which are convertible into term
beneficial interests at the option of the holder of such notes. Transfers of
finance contracts to the special purpose entities have been recognized as sales
under SFAS No. 125 .
6. NOTES PAYABLE
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
December 31,
1996 1997
--------------------------
<S> <C> <C>
Notes payable, collateralized by Class B $10,050,781 $ 7,783,219
certificates
Convertible notes payable - 2,000,000
Other notes payable 123,852 57,824
==========================
$10,174,633 $9,841,043
==========================
</TABLE>
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 interest-only strip
receivables from the cash flows of the related trust. The loan accrued interest
at 20% per annum payable monthly and principal payments were made based on
principal payments received on the Class B certificates.
Effective April 8, 1996, the outstanding balance of $2,585,757 was
refinanced through a non-recourse term loan entered into with a new finance
company. The term loan is collateralized by the
F-14
<PAGE>
<PAGE>
Company's Class B certificates, and matures April 8, 2002. The term loan bears
interest at 15% per annum payable monthly. Principal and interest payments on
the term loan are paid directly by the trustee to the finance company and are
based on payments required to be made to the Class B certificate holders
pursuant to the trust. The Company can prepay the term loan in whole or part at
any time if the holder seeks to transfer such loan to a third party.
Effective March 28, 1996, the Company obtained another non-recourse term
loan in the amount of $2,059,214 from an institutional investor under similar
terms as described in the preceding paragraph. The loan is collateralized by the
Class B certificates issued to the Company pursuant to the March 29, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to March 28, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of March 28, 2002 or the date that all
outstanding principal and accrued interest has been paid by the trustee or the
Company. The term loan bears interest at 15% per annum payably monthly.
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. The term loan bears interest at 15% per annum payable monthly.
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. The term loan bear
interest at 15% per annum payable monthly.
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 are being amortized
as interest expense on a straight line basis through June 30, 2000. The Company
paid off this debt in February 1998.
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 $5,800,000 of subordinated asset-backed securities. The total value
assigned to these warrants was approximately $154,000.
F-15
<PAGE>
<PAGE>
6. INITIAL PUBLIC OFFERING
On November 14, 1996, the Company and selling shareholders sold 750,000
and 250,000, respectively, of shares of common stock in an initial public
offering at a price of $10 per share. The net proceeds from the issuance and
sale of common stock amounted to approximately $5,000,000 after deducting
underwriter discounts and issuer expenses. Portions of the net proceeds were
used (i) to prepay outstanding subordinated debt of approximately $300,000 plus
accrued interest, (ii) to repay advances under revolving credit facilities and
(iii) for general corporate and working capital purposes.
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.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995,
1996 and 1997 consisted of a provision for deferred taxes and the Company had no
current liability. 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>
Year Ended December 31,
1995 1996 1997
------------------------------------
<S> <C> <C> <C>
Federal tax at statutory rate of 34% $ 364,646 $ 1,907,889 $ 977,355
Other 17,354 18,664 37,755
Change in valuation allowance (183,000) - -
----------------------------------------
Provision for income taxes $ 199,000 $ 1,926,553 $1,015,110
========================================
</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,
1996 1997
-------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 16,728 $ 244,489
Cost related to securitizations 491,935 727,443
Other 3,883 61,769
Net operating loss carryforwards 2,792,067 8,023,325
-------------------------
Gross deferred tax assets 3,304,613 9,057,025
-------------------------
Deferred tax liabilities:
Gain on securitizations 5,242,372 11,849,562
Other 137,794 298,126
-------------------------
Gross deferred tax liabilities 5,380,166 12,147,688
-------------------------
2,075,553 3,090,663
Unrealized appreciation on - 540,525
interest-only strip receivables
-------------------------
Net deferred tax liabilities $2,075,553 $3,631,188
=========================
</TABLE>
At December 31, 1997, the Company had tax net operating loss
carryforwards of approximately $23,598,000 expiring in fiscal years 2009 through
2012.
F-16
<PAGE>
<PAGE>
8. STOCKHOLDERS' EQUITY
Effective May 30, 1996, the Board of Directors adopted restated articles
of incorporation, which authorized 25,000,000 shares of no par value common
stock and 5,000,000 shares of no par value preferred stock.
Stock Based Compensation Plan
The Company grants stock options under a stock-based incentive
compensation plan (the "Option Plan"). The Company applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for the Option 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 Option 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 are required by
SFAS 123 and are presented below.
Under the Option 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 and 1997 under the
Option Plan in the form of non-qualified stock options.
Stock Options
The Company has granted stock options to employees and directors. The
stock options granted in 1996 and 1997 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 vest
33.33% per year, beginning on the first anniversary of the date of grant. In
accordance with APB 25, the Company has not recognized any compensation cost for
the stock options granted.
A summary of the status of the Company's stock options for the years
ended December 31, 1996 and 1997 is presented below:
<TABLE>
<CAPTION>
# Shares of Average
Underlying Options Exercise Price
--------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 - -
Granted 297,500 $10.11
--------------------------------------
Outstanding at December 31, 1996 297,500 10.12
Granted 93,000 5.67
Exercised - -
Forfeited -119,500 9.50
--------------------------------------
Outstanding at December 31, 1997 271,000 $ 8.85
======================================
Options exercisable at end of
period 64,329 $10.17
======================================
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted
# Shares of Average Average
Range of Exercise Prices Underlying Options Remaining Life Exercise Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2.00 to $2.99 11,000 9.4 $ 2.48
$3.00 to $3.99 14,000 9.6 3.59
$4.00 to $4.99 29,000 9.4 4.38
$8.00 to $8.99 3,000 9.1 8.88
$9.00 to $9.99 112,000 9.0 9.82
$10.00 to $10.99 102,000 8.9 10.48
--------------------------------------------------------
Total 271,000 9.0 $8.85
========================================================
</TABLE>
F-17
<PAGE>
<PAGE>
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 1997: dividend yield of
0.00%; risk-free interest rates of 6.36%, the expected lives of options of 5
years; and a volatility of 63.51% for all grants.
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's Option Plan been determined
consistent with SFAS 123, the Company's net income and net income per common
share for 1996 and 1997 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
-------------------------
<S> <C> <C>
SFAS 123 charge, pre-tax:
As reported $ - $ -
Pro Forma 33,343 375,086
APB 25 charge:
As reported - -
Pro Forma - -
Net income:
As reported 3,584,886 1,859,464
Pro Forma 3,562,991 1,616,833
Net income per common share (basic):
As reported $ 0.62 $0.29
Pro Forma 0.62 0.25
Net income per common share (diluted):
As reported .62 .28
Pro Forma .61 .23
</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.
Management has determined that the fair value of the warrant at its issuance
date was de minimus. This warrant was excercised during 1997.
In addition to senior secured convertible notes issued June 30, 1997,
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 $5.8 million of subordinated asset-backed securities.
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.
F-18
<PAGE>
<PAGE>
There were no shares of preferred stock issued or outstanding during the years
ended December 31, 1996 and 1997.
Earnings Per Share
Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS, which excludes dilution. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Basic earnings per share were
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share differs
from basic earnings per share due to the assumed conversions of dilutive
options, warrants and convertible debt that were outstanding during the period.
EPS for periods ended prior to December 31, 1997 has been restated to conform
with the requirements of SFAS No. 128.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1995:
Net income $873,487
--------------
Basic EPS:
Income available to common shareholders 873,487 5,190,159 $0.17
============
Effect of dilutive securities
Warrants
Incentive stock options
Diluted EPS:
Income available to common shareholders +
------------- --------------- ------------
assumed conversions $873,487 5,190,159 $0.17
============== =============== ============
Year Ended December 31,1996:
Net income $3,584,886
--------------
Basic EPS:
Income available to common shareholders 3,584,886 5,791,189 $0.62
============
Effect of dilutive securities
Warrants 16,470
Incentive stock options 1,498
Diluted EPS:
Income available to common shareholders +
-------------- ---------------
assumed conversions $3,684,886 5,809,157 $0.62
============== =============== ============
Year Ended December 31,1997:
Net income $1,859,464
--------------
Basic EPS:
Income available to common shareholders 1,859,464 6,516,056 $0.29
============
Effect of dilutive securities
Warrants 16,590
Incentive stock options 4,994
18% convertible notes payable 119,460 428,238
Diluted EPS:
Income available to common shareholders +
-------------- ---------------
assumed conversions $1,978,924 6,965,877 $0.28
============== =============== ============
</TABLE>
F-19
<PAGE>
<PAGE>
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.
9. 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
55.9% of the Company. Each entity was allocated expenses based on a proportional
cost method, whereby payroll costs were allocated based on management's review
of each individual's responsibilities, and costs related to office space and
equipment rentals were based on management's best estimate of usage during the
year. Miscellaneous expenses were allocated based on the specific purposes for
which each expense related. Management believes the methods used to allocate the
general and administrative expenses shared with ABI were reasonable, and that
the expenses reported in the financial statements after the ABI allocations
approximate the expenses that would have been incurred on a stand-alone entity
basis. Total expenses allocated to the Company from ABI amounted to
approximately $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 1995; however, management of the Company commenced compensation
payments to the CEO during the latter half of 1996 (see Note 11). The Company
estimated that a reasonable amount of compensation to pay the CEO on a
stand-alone entity basis would approximate $100,000 for the year ended December
31, 1995.
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.
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 totaling 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.
Certain executive officers received (repaid) advances from the Company
totaling $137,359, $81,712 and ($224,479) during the years ended December 31,
1995, 1996, and 1997. The outstanding advances, provided on a
non-interest-bearing basis without repayment terms, are shown as a reduction of
shareholders' equity.
10. EMPLOYMENT AGREEMENTS
The Company and its chief operating officer ("COO") entered into an
employment agreement dated November 15, 1995 and 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
F-20
<PAGE>
<PAGE>
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 COO. Half of such issued shares were not subject to forfeiture whereas
the remaining 50% were subject to forfeiture until November 15, 1997. 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, $51,336 and $11,422 for the years ended December 31, 1995,
1996 and 1997, respectively.
The Company and its chief executive officer ("CEO") also entered into an
employment agreement dated May 31, 1996, and 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 CEO 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 CEO with certain additional benefits. The agreement automatically
terminates upon (i) the death of the CEO, (ii) disability of the CEO for six
continuous months together with the likelihood that the CEO will be unable to
perform his duties for the following continuous six months, as determined by the
Board of Directors, (iii) termination of the CEO "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 CEO may terminate his employment for "good reason" as defined in the
agreement. In the event of the CEO's termination for cause, the agreement
provides that the Company shall pay the CEO his base salary through the date of
termination and the vested portion of any incentive compensation plan to which
the CEO may be entitled. Other than following a change in control, if the
Company terminates the CEO in breach of the agreement, or if the CEO terminates
his employment for good reason, the Company must pay the CEO: (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 CEO may be entitled as a result of such breach, including lost
benefits under retirement and incentive plans. In the event of the CEO's
termination following a change in control, the Company is required to pay the
CEO 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 CEO for any
costs or liabilities incurred by the CEO in connection with his employment.
11. LEASES
The Company leases property under capital leases as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
--------------------------
<S> <C> <C>
Furniture $ - $49,606
-
Equipment - 515,891
Less: Accumulated
depreciation - (92,941)
--------------------------
$ - $472,556
==========================
</TABLE>
Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1997 follow:
<TABLE>
<CAPTION>
Year ending December 31,
- -------------------------
<S> <C>
1998 $ 226,385
</TABLE>
F-21
<PAGE>
<PAGE>
<TABLE>
<S> <C>
1999 217,329
2000 129,173
-----------
Total minimum lease payments 572,887
Less: amounts representing interest (71,872)
-----------
Present value of net minimum lease
payments $ 501,015
===========
</TABLE>
Future minimum lease payments under operating leases (which reflect
leases having noncancelable lease terms in excess of one year) as of December
31, 1997 follow:
<TABLE>
<CAPTION>
Year ending December 31,
- --------------------------
<S> <C>
1998 $610,926
1999 743,838
2000 716,583
2001 623,488
2002 562,356
Later years 1,312,163
-------------
Total $4,569,354
=============
</TABLE>
Rental expense under operating leases for the years ended December 31,
1995, 1996 and 1997 were approximately $351,000, $524,000 and $371,555,
respectively.
12. 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 1997. Of the total amount of
these finance contracts, $190,320 was 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.
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.
The Company is taking actions to provide that their computer systems are
capable of processing for the periods in the year 2000 and beyond. The costs
associated with this are not expected to significantly affect operating cash
flow; however, the nature of their business requires that they rely on external
vendors and services who may not be year 2000 compliant. Therefore, there is no
assurance that the Company's actions in this regard will be successful.
13. 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
F-22
<PAGE>
<PAGE>
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.
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.
Interest-Only Strip Receivables
The fair value of interest-only strip receivables is 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.
Revolving Credit Borrowings, Notes Payable and Repurchase Agreement
The fair value of the Company's debt is 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, 1997.
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $4,121,342 $ 4,121,342 $ 159,293 $ 159,293
Finance contracts held for sale 228,429 228,429 1,366,114 1,366,114
Class B certificates 10,465,294 10,465,294 7,878,306 7,878,306
Interest-Only Strip Receivables 4,247,274 4,247,274 9,352,641 9,352,641
Revolving credit facilities - - 7,639,201 7,639,201
Notes payable 10,174,633 10,174,633 9,841,043 9,841,043
</TABLE>
14. Supplemental Cash Flow Disclosures
Supplemental cash flow information with respect to payments of interest
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
-----------------------------------
<S> <C> <C> <C>
Interest paid $2,099,867 $1,885,322 $3,771,566
</TABLE>
No income taxes were paid during fiscal 1995, 1995 or 1997. The Company
entered into capital leases totaling $565,497 during the year ended December 31,
1997.
15. SUBSEQUENT EVENTS
The Company entered into an employment agreement, dated as of January 1,
1998, with a former outside director to serve as a consultant to the Company
until February 1, 1998, whereupon he agreed to become President of the Company
for a period of three years. The agreement provides for compensation at a base
salary of $200,000 per annum, with a one time signing bonus of $100,000 and
additional
F-23
<PAGE>
<PAGE>
performance bonuses of up to $25,000 per quarter, as approved by the CEO and the
Compensation Committee. In addition, the President received options under the
Option Plan to purchase 100,000 shares of the Company's common stock, along with
an agreement to grant additional options to purchase 50,000 of the Company's
common stock on December 1, 1998. The agreement automatically terminates upon
(i) the death of the President, (ii) the disability of the President, which
continues for a period of six months, (iii) "for cause," (iv) at the President's
option, or (v) at the Company's option. Upon such termination, the Company is
obligated to pay the President his accrued base pay through the date of such
termination, unless terminated by the Company without cause, whereupon he would
be entitled to his base pay for the remainder of the year in which such
termination occurred. Pursuant to a separate Severance Agreement, dated as of
February 1, 1998, upon the occurrence of a "change in control" the Company must
pay the President a lump sum payment equal to the sum of the base pay plus any
incentive pay for that year, plus the Company will arrange to provide, for a
period of twelve months following the termination date, such employee benefits
as are substantially similar to those that he was receiving or entitled to
receive immediately prior to such termination date.
During January 1998, the Company privately placed $7,500,000 in
aggregate principal amount of senior subordinated notes (the "subordinated
notes") to an affiliate of BankBoston, N.A. The subordinated notes bear interest
at 15% per annum, mature on February 1, 2001 and are convertible into up to
368,462 shares of the Company's common stock at a price of $3.30 per share
(subject to adjustment). Although the subordinated notes contain customary
restrictive covenants, they do not prohibit the Company from paying dividends on
the preferred stock out of earnings legally available therefor. In addition, the
Company issued to the purchaser a warrant to purchase such shares to the extent
the notes have not been converted prior to maturity. Net proceeds from the sale
of the subordinated notes were used (i) to pay short-term liabilities, (ii) to
repay the Company's 18% convertible notes and (iii) for working capital
purposes.
On February 20, 1998, the Company issued 1,000,000 shares of preferred
stock in a public offering at a price of $10 per share. The net proceeds from
the issuance and sale of preferred stock amounted to approximately $9,000,000
after deducting underwriter discounts and issuer expenses. Portions of the net
proceeds will be used (i) for the acquisition and financing of finance
contracts, including the funding of reserves and other credit enhancements and
(ii) for working capital and general corporate purposes. The underwriters of the
Company's public offering purchased an additional 125,000 shares of the
Company's preferred stock at $10 per share by exercising their entire
over-allotment option on February 27, 1998. The net proceeds from the issuance
and sale of the over-allotment of shares amounted to approximately $1,125,000.
16. Selected Quarterly Data (unaudited)
The following financial data summarizes quarterly results for the
Company for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
March 31 June 30 September 30 December 30
<S> <C> <C> <C> <C>
Fiscal 1997
Total revenues $4,228,664 $6,110,826 $6,370,219 $6,161,592
Net income 179,028 966,869 511,814 201,753
Earnings per common share
basic and diluted .03 .15 .08 .03
</TABLE>
F-24
<PAGE>
<PAGE>
SCHEDULE II
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance Charged Balance
at Beginning Cost and at End
Description of Period Expenses Deductions(1) of Period
- ----------- --------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for credit losses:
Year ended December 31, 1995 $ 45,000 $ 48,702 $ - $ 93,702
Year ended December 31, 1996 93,702 412,387 (480,889) 25,200
Year ended December 31, 1997 25,200 612,715 (187,793) 450,122
</TABLE>
- -----------
(1) Deductions were write-offs of uncollectible finance contracts
F-25
<PAGE>
<PAGE>
EXHIBIT 3.3
AUTOBOND ACCEPTANCE CORPORATION
---------------------
CERTIFICATE OF DESIGNATION OF
15% SERIES A CUMULATIVE PREFERRED STOCK
AND FIXING DISTRIBUTIONS AND
OTHER PREFERENCES AND RIGHTS OF SUCH SERIES
----------------------
AutoBond Acceptance Corporation, a Texas corporation, having its
principal office in Austin, Texas (the "Corporation"), hereby certifies to the
Secretary of State of the State of Texas that:
Pursuant to authority expressly vested in the Board of Directors of the
Corporation by the Articles of Incorporation of the Corporation (the "Articles
of Incorporation"), the Board of Directors has duly adopted resolutions
authorizing the creation and issuance of up to One Million One Hundred Fifty
Thousand (1,150,000) shares of 15% Series A Cumulative Preferred Stock, no par
value, with a liquidation preference of Ten Dollars ($10.00) per share, and
determining the preferences, rights, powers, limitations, qualifications and
restrictions, as follows:
Section 1. Number of Shares and Designation. This series of Preferred
Stock, no par value, shall be designated as 15% Series A Cumulative Preferred
Stock (the "Series A Preferred Stock"), and the number of shares which shall
constitute such series shall be 1,150,000 shares.
Section 2. Definitions. For purposes of the Series A Preferred Stock,
the following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series A
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a day
on which state or federally chartered banking institutions in New York,
New York are not required to be open.
"Call Date" shall have the meaning set forth in paragraph (b) of Section
5 hereof.
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"Common Stock" shall mean the common stock, no par value, of the
Corporation or such shares of the Corporation's capital stock into which
such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the
Corporation or of any similar security of any other issuer for any day
shall mean the last reported sale price, regular way on such day, or, if
no sale takes place on such day, the reported closing bid price, regular
way on such day, in either case as reported on the American Stock
Exchange ("AMEX") or, if such security is not listed or admitted for
trading on the AMEX, on the principal national securities exchange on
which such security is listed or admitted for trading or, if not listed
or admitted for trading on any national securities exchange, on the
Nasdaq National Market of the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") or, if such security
is not quoted on the Nasdaq National Market, the closing bid price on
such day in the over-the-counter market as reported by NASDAQ, or, if
the bid price for such security on such day shall not have been reported
through NASDAQ, the bid price on such day as furnished by any AMEX
member firm regularly making a market in such security selected for such
purpose by the Chief Executive Officer or the Board of Directors or if
any class or series of securities are not publicly traded, the fair
value of the shares of such class as determined reasonably and in good
faith by the Board of Directors of the Corporation.
"Dividend Payment Date" shall mean, with respect to each Dividend
Period, the last day of March, June, September and December, in each
year, commencing on June 30, 1998; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period, which shall
commence on the Issue Date and end on and include June 30, 1998).
"Fair Market Value" shall mean the average of the daily Current Market
Price of a share of Common Stock during five (5) consecutive Trading
Days ending not later than the day in question.
"Funds Available for Distribution" shall mean funds from operations (net
income, computed in accordance with generally accepted accounting
principles excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization) minus non-revenue
generated capital expenditures and debt principal amortization, as
determined by the Board of Directors on a basis consistent with the
policies and practices adopted by the Corporation for reporting publicly
its results of operations and financial condition.
"Issue Date" shall mean February 23, 1998.
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"Junior Stock" shall mean the Common Stock and any other class or series
of capital stock of the Corporation over which the shares of Series A
Preferred Stock have preference or priority in the payment of dividends
or in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
"Parity Stock" shall have the meaning set forth in paragraph (b) of
Section 7 hereof.
"Permitted Common Stock Cash Distributions" means cash dividends and
cash distributions paid on Common Stock after December 31, 1997 not in
excess of the sum of the Corporation's cumulative undistributed net
earnings at December 31, 1997, plus the cumulative amount of Funds
Available for Distribution after December 31, 1997, minus the cumulative
amount of dividends accumulated, accrued or paid on the Series A
Preferred Stock or any other class of Preferred Stock after January 1,
1998.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Series A Preferred Stock" shall have the meaning set forth in Section 1
hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of capital stock of the Corporation; provided, however,
that if any funds for any class or series of Junior Stock or any class
or series of Parity Stock are placed in a separate account of the
Corporation or delivered to a disbursing, paying or other similar agent,
then "set apart for payment" with respect to the Series A Preferred
Stock shall mean placing such funds in a separate account or delivering
such funds to a disbursing, paying or other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the AMEX or, if such securities are not listed
or admitted for trading on the AMEX, on the principal national
securities exchange on which such securities are listed or admitted or,
if such securities are not listed or admitted for trading on any
national securities exchange, on the Nasdaq National Market or, if such
securities are not quoted on the Nasdaq National Market, in the
securities market in which such securities are traded.
"Transfer Agent" means American Stock Transfer and Trust Company or such
other U.S. bank or trust company with aggregate capital, surplus and
undivided profits, as shown on its last published report, of at least
$25,000,000 as may be designated by the Board of Directors or their
designee as the transfer agent for the Series A Preferred Stock.
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Section 3. Dividends.
(a) The holders of Series A Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Series A Preferred Stock equal to $1.50 per annum. Such dividends
shall be cumulative from the Issue Date, whether or not in any Dividend Period
or Periods such dividends shall be declared or there shall be funds of the
Corporation legally available for the payment of such dividends, and shall be
payable quarterly on the Dividend Payment Dates, commencing on the first
Dividend Payment Date after the Issue Date. Each such dividend shall be payable
to the holders of record of the Series A Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on a record date which
shall be not more than sixty (60) days prior to the applicable Dividend Payment
Date. Accumulated, accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to holders of record on such date, which date shall not precede by
more than forty-five (45) days the payment date thereof, as may be fixed by the
Board of Directors. The amount of accumulated, accrued and unpaid dividends on
any share of Series A Preferred Stock, or fraction thereof, at any date shall be
the amount of any dividends thereon calculated at the applicable rate to and
including such date, whether or not earned or declared, which have not been paid
in cash.
(b) The amount of dividends payable per share of Series A
Preferred Stock for each Dividend Period shall be computed by dividing the
annual dividend by four (4). The amount of dividends payable per share of Series
A Preferred Stock for the initial Dividend Period, or any other period shorter
or longer than a full Dividend Period, shall be computed ratably on the basis of
twelve (12) 30-day months and a 360-day year. Holders of Series A Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or stock, in excess of cumulative dividends, as herein provided on the Series A
Preferred Stock. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock that may be in arrears.
(c) So long as any of the shares of Series A Preferred Stock are
outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set apart for payment by the Corporation,
or other distribution of cash or other property declared or made directly or
indirectly by the Corporation or any affiliate or any person acting on behalf of
the Corporation or any of its affiliates with respect to any class or series of
Parity Stock for any period unless dividends equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof have
been or contemporaneously are set apart for such payment on the Series A
Preferred Stock for all Dividend Periods terminating on or prior to the Dividend
Payment Date with respect to such class or series of Parity Stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, all dividends declared upon the Series A Preferred Stock
and all dividends declared upon any other class or series of Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated,
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<PAGE>
accrued and unpaid on the Series A Preferred Stock and accumulated, accrued and
unpaid on such Parity Stock.
(d) So long as any of the shares of Series A Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Stock) shall be declared or paid or set apart for payment by the
Corporation, or other distribution of cash or other property declared or made
directly or indirectly by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates with respect to any shares
of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition of
Common Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be paid to
or made available for a sinking-fund for the redemption of any shares of any
such stock) directly or indirectly by the Corporation or any affiliate or any
person acting on behalf of the Corporation or any of its affiliates (except by
conversion into or exchange for Junior Stock), nor shall any other cash or other
property otherwise be paid or distributed to or for the benefit of any holder of
shares of Junior Stock in respect thereof, directly or indirectly, by the
Corporation or any affiliate or any person acting on behalf of the Corporation
or any of its affiliates unless in each case (i) the full cumulative dividends
(including all accumulated, accrued and unpaid dividends) on all outstanding
shares of Series A Preferred Stock and any other Parity Stock of the Corporation
shall have been paid or such dividends have been declared and set apart for
payment for all past Dividend Periods with respect to the Series A Preferred
Stock and all past Dividend Periods with respect to such Parity Stock, and (ii)
sufficient funds shall have been paid or set apart for the payment of the full
dividend for the current Dividend Period with respect to the Series A Preferred
Stock and the current Dividend Period with respect to such Parity Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Stock, the holders of shares
of Series A Preferred Stock shall be entitled to receive Ten Dollars ($10.00)
per share of Series A Preferred Stock, plus an amount equal to all dividends
(whether or not earned or declared) accumulated, accrued and unpaid thereon to
the date of final distribution to such holders; but such holders shall not be
entitled to any further payment. Until the holders of the Series A Preferred
Stock have been paid the liquidation preference in full, no payment will be made
to any holder of Junior Stock upon the liquidation, dissolution or winding up of
the Corporation. If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof, distributable
among the holders of Series A Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid and liquidating payments on any other
shares of any class or series of Parity Stock, then such assets, or the proceeds
thereof, shall be distributed among the holders of Series A Preferred Stock and
any such other Parity Stock ratably in the same proportion as the respective
amounts that would be payable on such Series A Preferred Stock and any such
other Parity Stock if all amounts payable thereon were paid in full. For the
purposes of this Section 4, (i) a consolidation or merger of the Corporation
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with one or more corporations, (ii) a sale or transfer of all or substantially
all of the Corporation's assets, or (iii) a statutory share exchange shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(b) Subject to the rights of the holders of any shares of Parity
Stock, upon any liquidation, dissolution or winding up of the Corporation, after
payment shall have been made in full to the holders of Series A Preferred Stock
and any Parity Stock, as provided in this Section 4, any other series or class
or classes of Junior Stock shall, subject to the respective terms thereof, be
entitled to receive any and all assets remaining to be paid or distributed, and
the holders of the Series A Preferred Stock and any Parity Stock shall not be
entitled to share therein.
Section 5. Redemption at the Option of the Corporation.
(a) Shares of Series A Preferred Stock shall not be redeemable by
the Corporation prior to February 23, 2001. On or after February 23, 2001, the
Corporation, at its option, may redeem one-sixth (1/6) of the shares of Series A
Preferred Stock each year:
(i) in such number (X) of authorized but previously
unissued shares of Common Stock such that
$10/Series A Preferred share
X = ----------------------------
.85 ($Y/Common share),
where Y equals the average of the closing sale prices per share of the
Common Stock on AMEX for the five (5) Trading Days prior to the Call
Date; or
(ii) out of funds legally available therefor, in cash at a
redemption price equal to Ten Dollars ($10.00) per share of Series A
Preferred Stock, plus an amount equal to all accumulated, accrued and
unpaid dividends, if any, to the Call Date, whether or not earned or
declared.
(b) Shares of Series A Preferred Stock shall be redeemed by the
Corporation on the date specified in the notice to holders required under
paragraph (d) of this Section 5 (the "Call Date"). The Call Date shall be
selected by the Corporation, shall be specified in the notice of redemption and
shall be thirty (30) days after the date notice of redemption is sent by the
Corporation. Immediately prior to authorizing any redemption of the Series A
Preferred Stock, and as a condition precedent for such redemption, the
Corporation, by resolution of its Board of Directors, shall declare a mandatory
dividend on the Series A Preferred Stock payable in cash on the Call Date in an
amount equal to all accumulated, accrued and unpaid dividends as of the Call
Date on the Series A Preferred Stock to be redeemed, which amount shall be added
to the redemption price. If the Call Date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder of
Series A Preferred Stock at the close of business on such dividend payment
record date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares prior to such Dividend Payment Date. Except as provided above, the
Corporation shall
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make no payment or allowance for accumulated or accrued dividends on shares of
Series A Preferred Stock called for redemption or on the shares of Common Stock
issued upon such redemption.
(c) If full cumulative dividends on all outstanding shares of
Series A Preferred Stock have not been paid or declared and set apart for
payment, no shares of Series A Preferred Stock may be redeemed unless all
outstanding shares of Series A Preferred Stock are simultaneously redeemed and
neither the Corporation nor any affiliate of the Corporation may purchase or
acquire shares of Series A Preferred Stock, otherwise than pursuant to a
purchase or exchange offer made on the same terms to all holders of shares of
Series A Preferred Stock.
(d) If the Corporation shall redeem shares of Series A Preferred
Stock pursuant to paragraph (a) of this Section 5, notice of such redemption
shall be given to each holder of record of the shares to be redeemed. Such
notice shall be provided by first class mail, postage prepaid, at such holder's
address as the same appears on the stock records of the Corporation, or by
publication in The Wall Street Journal or The New York Times, or, if neither
such newspaper is then being published, any other daily newspaper of national
circulation, thirty (30) days prior to the Call Date. If the Corporation elects
to provide such notices by publication, it shall also promptly mail notice of
such redemption to the holders of the shares of Series A Preferred Stock to be
redeemed. Neither the failure to mail any notice required by this paragraph (d),
nor any defect therein or in the mailing thereof, to any particular holder,
shall affect the sufficiency of the notice or the validity of the proceedings
for redemption with respect to the other holders. Any notice which was mailed in
the manner herein provided shall be conclusively presumed to have been duly
given on the date mailed whether or not the holder receives the notice. Each
such mailed or published notice shall state, as appropriate: (1) the Call Date;
(2) the number of shares of Series A Preferred Stock to be redeemed and, if
fewer than all such shares held by such holder are to be redeemed, the number of
such shares to be redeemed from such holder; (3) whether redemption will be for
shares of Common Stock pursuant to paragraph (a)(i) of this Section 5 or for
cash pursuant to paragraph (a)(ii) of this Section 5, and, if redemption will be
for Common Stock, the number of shares of Common Stock to be issued with respect
to each share of Series A Preferred Stock to be redeemed; (4) the place or
places at which certificates for such shares are to be surrendered for
certificates representing shares of Common Stock; and (5) that dividends on the
shares of Series A Preferred Stock to be redeemed shall cease to accrue on such
Call Date except as otherwise provided herein. Notice having been published or
mailed as aforesaid, from and after the Call Date (unless the Corporation shall
fail to issue and make available at the office of the Transfer Agent the number
of shares of Common Stock and/or amount of cash necessary to effect such
redemption, including all accumulated, accrued and unpaid dividends to the Call
Date, whether or not earned or declared), (i) except as otherwise provided
herein, dividends on the shares of Series A Preferred Stock so called for
redemption shall cease to accumulate or accrue on the shares of Series A
Preferred Stock called for redemption (except that, in the case of a Call Date
after a dividend record date and prior to the related Dividend Payment Date,
holders of Series A Preferred Stock on the dividend record date will be entitled
on such Dividend Payment Date to receive the dividend payable on such shares),
(ii) said shares shall no longer be deemed to be outstanding, and (iii) all
rights of the holders thereof as holders of Series A Preferred Stock of the
Corporation shall cease (except the rights to
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receive the shares of Common Stock and/or cash payable upon such redemption,
without interest thereon, upon surrender and endorsement of their certificates
if so required and to receive any dividends payable thereon). The Corporation's
obligation to provide shares of Common Stock and/or cash in accordance with the
preceding sentence shall be deemed fulfilled if, on or before the Call Date, the
Corporation shall deposit with a bank or trust company (which may be an
affiliate of the Corporation) that has an office in the Borough of Manhattan,
the City of New York, or in Dallas, Texas, and that has, or is an affiliate of a
bank or trust company that has, a capital and surplus of at least $25,000,000,
such number of shares of Common Stock and such amount of cash as is necessary
for such redemption, in trust, with irrevocable instructions that such shares of
Common Stock and/or cash be applied to the redemption of the shares of Series A
Preferred Stock so called for redemption. In the case of any redemption pursuant
to paragraph (a)(i) of this Section 5, at the close of business on the Call
Date, each holder of shares of Series A Preferred Stock to be redeemed (unless
the Corporation defaults in the delivery of the shares of Common Stock or cash
payable on such Call Date) shall be deemed to be the record holder of the number
of shares of Common Stock into which such shares of Series A Preferred Stock are
to be converted at redemption, regardless of whether such holder has surrendered
the certificates representing the shares of Series A Preferred Stock to be so
redeemed. No interest shall accrue for the benefit of the holders of shares of
Series A Preferred Stock to be redeemed on any cash so set aside by the
Corporation. Subject to applicable escheat laws, any such cash unclaimed at the
end of two (2) years from the Call Date shall revert to the general funds of the
Corporation, after which reversion the holders of shares of Series A Preferred
Stock so called for redemption shall look only to the general funds of the
Corporation for the payment of such cash.
As promptly as practicable after the surrender in accordance with
said notice of the certificates for any such shares so redeemed (properly
endorsed or assigned for transfer, if the Corporation shall so require and if
the notice shall so state), such certificates shall be exchanged for
certificates representing shares of Common Stock and/or any cash (without
interest thereon) for which such shares have been redeemed in accordance with
such notice. If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series A Preferred Stock not previously
called for redemption by lot or, with respect to the number of shares of Series
A Preferred Stock held of record by each holder of such shares, pro rata (as
nearly as may be) or by any other method as may be determined by the Board of
Directors in its discretion to be equitable. If fewer than all the shares of
Series A Preferred Stock represented by any certificate are redeemed, then a new
certificate representing the unredeemed shares shall be issued without cost to
the holders thereof.
(e) In the case of any redemption pursuant to paragraph (a)(i) of
this Section 5, no fractional shares of Common Stock or scrip representing
fractions of shares of Common Stock shall be issued upon redemption of the
shares of Series A Preferred Stock. Instead of any fractional interest in a
share of Common Stock that would otherwise be deliverable upon redemption of
shares of Series A Preferred Stock, the Corporation shall pay to the holder of
such share an amount in cash (computed to the nearest cent) based upon the
Current Market Price of the Common Stock on the Trading Day immediately
preceding the Call Date. If more than one share shall be surrendered for
redemption at one time by the same holder, the number of full
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shares of Common Stock issuable upon redemption thereof shall be computed on the
basis of the aggregate number of shares of Series A Preferred Stock so
surrendered.
(f) In the case of any redemption pursuant to paragraph (a)(i) of
this Section 5, the Corporation covenants that any shares of Common Stock issued
upon redemption of shares of Series A Preferred Stock shall be validly issued,
fully paid and non-assessable. The Corporation shall use its best efforts to
list, subject to official notice of issuance, the shares of Common Stock
required to be delivered upon any such redemption of shares of Series A
Preferred Stock, prior to such redemption, upon each national securities
exchange or automated quotation system, if any, upon which the outstanding
shares of Common Stock are listed or quoted at the time of such delivery.
The Corporation shall take any action necessary to ensure that
any shares of Common Stock issued upon the redemption of Series A Preferred
Stock are freely transferable and not subject to any resale restrictions under
the Act, or any applicable state securities or blue sky laws (other than any
shares of Common Stock issued upon redemption of any Series A Preferred Stock
which are held by an "affiliate" (as defined in Rule 144 under the Act) of the
Corporation).
Section 6. Series A Preferred Stock To Be Retired. All shares of Series
A Preferred Stock which shall have been issued and reacquired in any manner by
the Corporation shall be restored to the status of authorized, but unissued
shares of Preferred Stock, without designation as to series. The Corporation may
also retire any unissued shares of Series A Preferred Stock, and such shares
shall then be restored to the status of authorized but unissued shares of
Preferred Stock, without designation as to series.
Section 7. Ranking. Any class or series of capital stock of the
Corporation shall be deemed to rank:
(a) prior or senior to the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series A Preferred Stock;
(b) on a parity with the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share thereof be different from
those of the Series A Preferred Stock, if the holders of such class of stock or
series and the Series A Preferred Stock shall be entitled to the receipt of
dividends and of amounts distributable upon liquidation, dissolution or winding
up in proportion to their respective amounts of accrued and unpaid dividends per
share or liquidation preferences, without preference or priority of one over the
other ("Parity Stock"); and
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(c) junior to the Series A Preferred Stock, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Common Stock or if the holder of
Series A Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of shares of such class or series
("Junior Stock").
Section 8. Voting.
(a) The affirmative vote of the holders of two-thirds (2/3) of
the votes entitled to be cast by holders of the Series A Preferred Stock then
outstanding, voting as a single class, in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, 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 Series A Preferred Stock or to authorize, create or increase the
authorized amount of, any class of stock having rights prior or senior to the
Series A Preferred Stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up or change 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
Corporation or a sale of all or substantially all of the assets of the
Corporation. However, the Corporation may create additional classes, shares or
series of Parity Stock with the consent of the holders of a majority of the
outstanding shares of Series A Preferred Stock, and may create classes of Junior
Stock, increase the authorized number of shares of Junior Stock and issue
additional series of Junior Stock without the consent of any holder of Series A
Preferred Stock.
(b) If and whenever two (2) quarterly dividends (whether or not
consecutive) payable on the Series A Preferred Stock or any series or class of
Parity Stock shall be in arrears (which shall, with respect to any such
quarterly dividend, mean that any such dividend has not been paid in full),
whether or not earned or declared, the number of directors then constituting the
Board of Directors shall be increased by three (3), and the holders of shares of
Series A Preferred Stock shall be entitled to elect the three (3) additional
directors to serve on the Board of Directors, by the vote of a plurality of the
votes cast by the holders of the Series A Preferred Stock at an annual meeting
of stockholders or special meeting held in place thereof, or at a special
meeting of the holders of the Series A Preferred Stock called as hereinafter
provided. Whenever all arrears in dividends on the Series A Preferred Stock then
outstanding shall have been paid and dividends thereon for the current quarterly
dividend period shall have been paid or declared and set apart for payment, then
the right of the holders of the Series A Preferred Stock to elect such
additional three (3) directors shall cease (but subject always to the same
provision of the vesting of such voting rights in the case of any similar future
arrearages in two (2) quarterly dividends), and the terms of office of all
persons elected as directors by the holders of the Series A Preferred Stock
shall forthwith terminate and the number of the Board of Directors shall be
reduced accordingly. At any time after such voting power shall have been so
vested in the holders of Series A Preferred Stock, the Secretary of the
Corporation shall, and upon the written request of any holder of Series A
Preferred Stock (addressed to the Secretary at the principal office of the
Corporation), call a special meeting of the holders of the Series A Preferred
Stock for the election of the three (3) directors to be elected by them as
herein provided, such call to be made by notice
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similar to that provided in the Bylaws of the Corporation for a special meeting
of the stockholders or as required by law. If any such special meeting required
to be called, as above provided, shall not be called by the Secretary within
twenty (20) days after receipt of any such request, then any holder of Series A
Preferred Stock may call such meeting, upon the notice above provided, and for
that purpose shall have access to the stock books of the Corporation. The
directors elected at any such special meeting shall hold office until the next
annual meeting of the stockholders or special meeting held in lieu thereof if
such office shall not have previously terminated as above provided. If any
vacancy shall occur among the directors elected by the holders of the Series A
Preferred Stock, a successor shall be elected by the Board of Directors, upon
the nomination of the then remaining directors elected by the holders of the
Series A Preferred Stock or the successors of such remaining directors, to serve
until the next annual meeting of the stockholders or special meeting held in
place thereof if such office shall not have previously terminated as above
provided. Notwithstanding the foregoing, the total number of directors elected
by the holders of Series A Preferred Stock and the Representative (as defined in
the Underwriting Agreement relating to the Series A Preferred Stock) shall not
exceed three (3).
So long as any shares of Series A Preferred Stock are
outstanding, the number of directors of the Corporation shall at all times be
such that the exercise by the holders of shares of Series A Preferred Stock of
the right to elect directors under the circumstance provided in this Section
8(b) will not contravene any provisions of the Texas Business Corporation Act or
the Articles of Incorporation.
For purposes of the foregoing provisions of this Section 8, each
share of Series A Preferred Stock shall have one (1) vote per share. Except as
otherwise required by applicable law or as set forth herein, the holders of the
Series A Preferred Stock shall not have any voting rights and powers, and the
approval or consent of the holders thereof shall not be required for the taking
of any corporate action.
Section 9. Record Holders. The Corporation and the Transfer Agent may
deem and treat the record holder of any share of Series A Preferred Stock as the
true and lawful owner thereof for all purposes, and neither the Corporation nor
the Transfer Agent shall be affected by any notice to the contrary.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed as of February 17, 1998.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ Adrian Katz
-------------------------------------
Title: Chief Operating Officer
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EXHIBIT 10.30
Neither this Warrant nor the shares of Common Stock to be issued upon exercise
hereof have been registered under the Securities Act (as defined below), and
this Warrant has been, and the shares of Common Stock to be issued upon exercise
hereof will be, acquired for investment and not with a view to, or for release
in connection with, any distribution thereof. No such sale or other disposition
may be made without an effective registration statement under the Securities Act
or unless an exemption from such a registration is available.
Warrant No. 98-C
WARRANT
to Purchase
Common Stock
of
AUTOBOND ACCEPTANCE CORPORATION
THIS IS TO CERTIFY THAT Dresner Investments Services, Inc.
("Warrantholder"), is entitled, at any time and from time to time from (and
including) the Start Date (as defined below) until 5:00 P.M., New York City
time, on the Warrant Expiration Date (as defined below), to purchase from
AUTOBOND ACCEPTANCE CORPORATION, a Texas corporation (the "Company"), 65,313
Shares, each one of which represents initially one share of Common Stock
(adjusted as provided below), in whole or in part, at the Purchase Price Per
Share set forth herein, all on the terms and conditions and pursuant to the
provisions hereinafter provided.
SECTION 1. DEFINITIONS. The terms defined in this Section 1,
whenever used in this Warrant, shall, unless the context otherwise requires,
have the respective meanings hereinafter specified.
"Additional Shares of Nonpreferred Stock" means all shares of
Nonpreferred Stock issued by the Company after the date hereof, other than the
Warrant Stock.
"Affiliate" has the meaning attributed to it under the Securities
Act.
"Board" means the Board of Directors of the Company.
"Business Day" means a day other than a Saturday, a Sunday or a
day on which commercial banks in the State of Texas or Commonwealth of
Massachusetts are permitted or required by law to close.
"Commission" means the Securities and Exchange Commission or any
other governmental body then administering the Securities Act.
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"Common Stock" means the Company's authorized voting Common
Stock, no par value, as constituted on the date of original issuance of this
Warrant, or at the Warrantholder's option, the Company's nonvoting Common Stock,
and any shares of stock into which such class of Common Stock may thereafter be
changed, or that may be issued in respect of, in exchange for, or in
substitution for, such Common Stock by reason of any stock splits, stock
dividends, distributions, mergers, consolidations or other like events and shall
also include stock of the Company of any other class issued to the holders of
shares of Common Stock upon any reclassification thereof.
"Company" means AutoBond Acceptance Corporation., a Texas
corporation, and any successor corporation whether by merger or otherwise.
"Convertible Securities" means evidences of indebtedness, shares
of stock or other securities which are convertible into or exchangeable for
Additional Shares of Nonpreferred Stock, either immediately or upon the arrival
of a specified date or the happening of a specified event.
"Current Market Price" per share of Common Stock for the purposes
of any provision of this Agreement at the date herein specified shall mean, for
any date after the initial public offering of the Company's Common Stock:
(i) if the Common Stock is listed on a domestic exchange or
quoted on NASDAQ, the average of the daily market prices of the Common
Stock over a period of 5 consecutive trading days prior to the day on
which Current Market Price is being determined.
As used in this clause (i), "market price" for each such Business
Day shall be the average of the closing prices on such day of the Common
Stock on all domestic primary national securities exchanges on which the
Common Stock is then listed, or, if there shall have been no sales on
any such exchange on such day, the average of the highest bid and lowest
asked prices on all such exchanges at the end of such day, or if the
Common Stock shall not be so listed, the average of the representative
bid and asked prices at the end of such Business Day as reported by
NASDAQ; or
(ii) if the Common Stock shall not be listed on any domestic
exchange or quoted on NASDAQ, then the Current Market Price shall be
Fair Market Value (of the Company as a whole) divided by the number of
shares of Common Stock (on a fully diluted basis) outstanding;
provided, however, that in the case of (i) a primary underwritten public
offering at a price in excess of the then current exercise price, the
Current Market Price shall be deemed the price to the underwriter set
forth in the prospectus, and (ii) stock options issued to employees and
directors pursuant to a plan adopted by the Company's Board of
Directors, the Current Market Price shall be the exercise price of such
options.
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"Current Warrant Price" per share of Common Stock for the purpose
of any provision of this Warrant at the date herein specified, shall mean the
product of (i) the Purchase Price Per Share in effect on such date, and (ii) the
number of Shares for which this Warrant is exercisable on such date.
"date hereof", "date of original issuance of this Warrant" and
similar references mean the date identified at the foot of this Warrant beside
the name of the Company.
"Exchange Act" means the Securities Exchange Act of 1934
(including any rules and regulations promulgated thereunder), as the same shall
be amended and in effect from time to time.
"Fair Market Value" means the highest price for which the Company
and its subsidiaries could be sold as a going concern in an arm's length
transaction to an independent third party within 12 months after the Valuation
Date (as defined below), as determined by agreement or appraisal in accordance
with the procedures described below.
Within ten (10) calendar days after the date of the occurrence of
any event requiring the determination of Fair Market Value pursuant to this
Warrant (a "Valuation Date"), the Company on the one hand, and the Majority
Holders on the other hand, shall each designate a representative and such two
(2) representatives will meet and use their best efforts to reach an agreement
on the Company's Fair Market Value. If such representatives have been unable to
reach such agreement, the Company on the one hand, and the Majority Holders on
the other hand, will use their best efforts to agree within 20 calendar days
after the Valuation Date upon the selection of an independent appraiser
experienced in valuing businesses of this type. Such appraiser will have 20
calendar days in which to determine the Company's Fair Market Value, and its
determination thereof will be final and binding on all parties concerned. If the
Company and the Majority Holders are unable to reach an agreement as to an
independent appraiser within 20 calendar days after the Valuation Date, the
Company on the one hand, and the Majority Holders on the other hand, will each
within five (5) calendar days thereafter select one independent appraiser
experienced in valuing businesses of this type. The Company, and the Majority
Holders, will each cause the appraiser selected by them respectively to
determine independently the Company's Fair Market Value within 20 calendar days
after their appointment. If the lesser of the two (2) appraised values (the "Low
Value") exceeds or is equal to 90% of the greater of the two (2) appraised
values (the "High Value"), the Company's Fair Market Value will be the average
of the two (2) appraisals. If the Low Value is less than 90% of the High Value,
the two (2) appraisers will themselves appoint a third independent appraiser
experienced in valuing businesses of this type within five (5) calendar days
after the two (2) appraisals have been rendered. Such third appraiser will have
20 calendar days in which to determine independently the Company's Fair Market
Value. The Company's Fair Market Value in such case will be the mean of the two
(2) appraised values which are closest to each other; provided, however, that in
the event the high and the low appraised values are equidistant from the middle
such value, the middle such value shall be deemed the Fair Market Value. The
Company will provide each appraiser with all information about the Company and
its Subsidiaries which any
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such appraiser reasonably deems necessary for determining the Fair Market Value.
The expenses of the appraisal process will be paid by the Company.
"Financial Statement" means the annual audited financial
statements, prepared in accordance with GAAP, which the Company provides to its
shareholders.
"GAAP" means generally accepted accounting principles.
"Holder" means a holder of this Warrant.
"Majority Holders" means the holders of Warrants entitling the
holders thereof to exercise a majority of the Warrant Stock.
"NASDAQ" means, the National Association of Securities Dealers
Automated Quotation System.
"Nonpreferred Stock" means the Common Stock and shall also
include all stock of the Company of any other class unless senior in respect of
the right to participate in dividends and distributions of assets.
"Permitted Transferee" means (a) an "accredited investor" within
the meaning of Rule 501 under the Securities Act, (b) a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act, or (c) up to
thirty-five employees (or their spouses and immediate relatives) of Dresner
Investments Services, Inc., who may hold directly or through a partnership or
trust.
"Person" means any individual, corporation, partnership,
association, trust, joint venture or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Purchase Price Per Share" means the price at which the Holder is
entitled to purchase a Share from the Company pursuant to this Warrant, such
price being $6.30 per Share, subject to adjustment as provided for herein.
"Redemption Date" has the meaning set forth in Section 8.1.
"Securities Act" means the Securities Act of 1933 (including any
rules and regulations promulgated thereunder), as the same shall be amended and
in effect from time to time.
"Share" means one share of Common Stock, as such stock was
constituted on the date of original issuance of this Warrant, and thereafter
shall mean such number of shares (including any fractional share) of Common
Stock and other securities, cash or property as shall result from the
adjustments provided for herein, to such one share, specified in Section 4.
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"Start Date" means July 31, 1998.
"Warrant" means this warrant and each warrant issued in
replacement of or substitution herefor or therefor in accordance herewith or
therewith, whether as a result of transfer, division or combination.
"Warrant Expiration Date" means January 30, 2005.
"Warrant Shares" means the Common Stock issuable, from time to
time, upon exercise of the Warrants.
"Warrant Stock" means the shares of Common Stock purchasable by
the Holder upon the exercise of this Warrant.
SECTION 2. EXERCISE OF WARRANT.
A. Manner of Exercise. This Warrant may be exercised at any time
or from time to time from the Start Date until 5:00 P.M., New York City time, on
the Warrant Expiration Date for all or any part of the Shares. In order to
exercise this Warrant, in whole or in part, the Holder shall deliver to the
Company at its office or agency maintained for this purpose pursuant to Section
11: (i) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Shares to be purchased, (ii) either (a)
a certified or official bank check or checks drawn on a New York Clearing House
bank payable to the order of the Company or (b) an electronic funds transfer of
immediately available funds in an amount equal to the aggregate Purchase Price
Per Share for all Shares as to which this Warrant is exercised. Such notice
shall be in the form of Exhibit A. Upon any exercise of this Warrant, in whole
or in part, the Holder may (instead of the payment described in the preceding
sentence) elect to pay the aggregate Purchase Price Per Share for the number of
Shares to be purchased (collectively, the "Exercise Shares") by surrendering its
rights to a number of Exercise Shares having a Current Market Price immediately
prior to the exercise of this Warrant (based upon the number of shares of Common
Stock for which such Exercise Shares are then exercisable) equal to or greater
than the required aggregate Purchase Price Per Share, in which case the holder
hereof would receive the number of Exercise Shares to which it would otherwise
be entitled upon such exercise, less the surrendered Shares. Upon receipt
thereof, the Company shall, as promptly as practicable, and in any event within
five (5) Business Days thereafter, execute or cause to be executed, and deliver
to the Holder a certificate or certificates representing the aggregate number of
shares of Warrant Stock issuable upon such exercise (i.e., the number of shares
of Common Stock then represented by one Share multiplied by the number of Shares
than being exercised). The stock certificate or certificates so delivered shall
be registered in the name of the Holder or, such other name as shall be
designated in such notice. Unless otherwise specified in such notice, one
certificate representing the aggregate number of shares of Warrant Stock issued
upon such exercise shall be so delivered. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed to have been
issued, and the Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date such notice, together with such check or checks or
other
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form of payment, and this Warrant are received by the Company as aforesaid. If
this Warrant shall have been exercised and/or surrendered in part, the Company
shall, at the time of delivery of the certificate or certificates representing
Warrant Stock issuable upon such exercise, deliver to or on the order of
the Holder a new Warrant evidencing the right of the Holder to purchase the
unpurchased and/or unsurrendered Shares called for by this Warrant, which new
Warrant shall in all other respects be identical with this Warrant, or, at the
request of the Holder, appropriate notation may be made on this Warrant and the
same returned to the Holder.
B. Payment of Taxes, etc. All shares of Warrant Stock shall be
validly issued, fully paid and non-assessable, and the Company shall pay all
expenses (including any stamp or like taxes) in connection with, or that may be
imposed in respect of, the issue or delivery thereof; provided, however, that
the Holder shall pay all income, franchise and transfer taxes in connection with
such issue and delivery. The Company shall not be required to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for shares of Warrant Stock in any name other than that of the
registered Holder of this Warrant (or any Affiliate thereof), and in such case
the Company shall not be required to issue or deliver any stock certificate
until such tax or other charge has been paid or it has been established to the
Company's reasonable satisfaction that no such tax or other charge is due.
SECTION 3. TRANSFER, DIVISION AND COMBINATION. This Warrant
and all rights hereunder are transferable (i) only to Permitted Transferees,
(ii) in whole or in part, and (iii) on the books of the Company to be maintained
for such purpose, upon surrender of this Warrant at the office or agency of the
Company maintained for the purpose pursuant to Section 11, together with a
written assignment (in whole or in part) of this Warrant duly executed by the
Holder or its agent or attorney. Upon surrender the Company shall execute and
deliver a new warrant or warrants in the name of the assignee or assignees
(including, if such assignment is only a partial assignment by the Holder, in
the name of the Holder), and each such warrant shall be identical in form and
substance (including its date) to this Warrant except for the warrant number
(which shall be as determined by the Company), the name of the named holder of
the warrant (if an assignee of the Holder), and the actual number of Shares
(each of which shall be as specified by the Holder), and this Warrant shall
promptly be canceled.
This Warrant may be divided or combined with other Warrants upon
presentation hereof (and thereof, in the case of combination) at the aforesaid
office or agency of the Company, together with a written notice specifying the
names and denominations in which new warrants are to be issued, signed by the
Holder or its agent or attorney. Subject to compliance with the preceding
paragraph as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new warrant or warrants in
exchange for the warrant or warrants to be divided or combined in accordance
with such notice.
The Company shall pay all expenses and other charges payable in
connection with the preparation, issuance and delivery of Warrants under this
Section 3. The holder of a Warrant shall pay all taxes (other than any stamp or
like taxes, which shall be paid by the Company) in connection with such issuance
and delivery.
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The Company agrees to maintain, at the office or agency of the
Company maintained for the purpose pursuant to Section 11, books for the
registration and transfer of the Warrant.
SECTION 4. ADJUSTMENT OF SHARES. The number of shares of
Common Stock comprising a Share shall be subject to adjustment from time to time
as set forth in this Section 4.
A. Stock Dividends, Subdivisions and Combinations. In case at any
time or from time to time the Company shall:
(1) take a record of the holders of its Nonpreferred Stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, Nonpreferred Stock, or
(2) subdivide its outstanding shares of Nonpreferred Stock into a
larger number of shares of Nonpreferred Stock, or
(3) combine its outstanding shares of Nonpreferred Stock into a
smaller number of shares of Nonpreferred Stock,
then the number of shares of Common Stock comprising a Share immediately after
the happening of any such event shall be adjusted so as to consist of the number
of shares of Common Stock which a record holder of the number of shares of
Common Stock comprising a Share immediately prior to the happening of such event
would own or be entitled to receive after the happening of such event; provided,
however, that in no event shall the Company take any action referred to in
Section 4.A(3) if the effect would be that a share after giving effect thereto
and to any corresponding adjustment of Shares would collectively constitute less
than one share of Common Stock.
B. Issuance of Additional Shares of Nonpreferred Stock. In case
at any time or from time to time the Company shall (except as hereinafter
provided) issue any Additional Shares of Nonpreferred Stock at a price per share
that is lower than the Current Market Price per share of Common Stock on the
date of such issuance, then the number of shares of Common Stock thereafter
comprising a Share shall be adjusted to that number determined by multiplying
the number of shares of Common Stock comprising a Share immediately prior to
such adjustment by a fraction (i) the numerator of which shall be the number of
shares of Nonpreferred Stock outstanding immediately after such issuance of such
shares of Additional Shares of Nonpreferred Stock, and (ii) the denominator of
which shall be an amount equal to the sum of (x) the number of shares of
Nonpreferred Stock outstanding immediately prior to the issuance of such shares
of Additional Shares of Nonpreferred Stock plus (y) the number of shares of
Nonpreferred Stock which the aggregate consideration received by the Company for
the total number of such Additional Shares of Nonpreferred Stock (as determined
in accordance with Section 4.F) so issued would then purchase at the Current
Market Price per share of Common Stock. No adjustment to the number of shares of
Common Stock comprising a Share shall be
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made under this Section 4.B upon the issuance of any Additional Shares of
Nonpreferred Stock which are issued pursuant to the exercise of any warrants or
other subscription or purchase rights or pursuant to the exercise of any
conversion or exchange rights in any Convertible Securities, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights or upon the issuance of such Convertible Securities (or upon the
issuance of any warrant or other rights therefor) pursuant to Sections 4.C or D.
C. Issuance of Warrants or Other Rights. In case at any time or
from time to time the Company shall issue any warrants or other rights to
subscribe for or purchase (i) any Additional Shares of Nonpreferred Stock or
(ii) any Convertible Securities and the consideration per share for which
Additional Shares of Nonpreferred Stock may at any time thereafter be issuable
pursuant to such warrants or other rights or pursuant to the terms of such
Convertible Securities shall be less than the Current Market Price per share of
Common Stock, then the number of shares of Common Stock thereafter comprising a
Share shall be adjusted (as at the applicable date specified in the last
sentence of this Section 4.C) as provided in Section 4.B on the basis that (i)
the maximum number of Additional Shares of Nonpreferred Stock issuable pursuant
to all such warrants or other rights or necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the date for the determination of the Current Market Price per share of
Common Stock as hereinafter provided, and (ii) the aggregate consideration for
such maximum number of Additional Shares of Nonpreferred Stock shall be deemed
to be the minimum consideration received and receivable by the Company for the
issuance of such Additional Shares of Nonpreferred Stock pursuant to such
warrants or other rights or pursuant to the terms of such Convertible
Securities. For purposes of this Section 4.C, the date as of which the Current
Market Price per share of Common Stock shall be computed shall be the earlier of
(a) the date on which the Company shall enter into a firm contract for the
issuance of such warrants or other rights or (b) the date of actual issuance of
such warrants or other rights.
D. Issuance of Convertible Securities. In case at any time or
from time to time the Company shall issue any Convertible Securities and the
consideration per share for which Additional Shares of Nonpreferred Stock may at
any time thereafter be issuable pursuant to such Convertible Securities shall be
less than the Current Market Price per share of Common Stock, then the number of
shares of Common Stock thereafter comprising a Share shall be adjusted (as at
the applicable date specified in the penultimate sentence of this Section 4.D)
as provided in Section 4.B on the basis that (i) the maximum number of
Additional Shares of Nonpreferred Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the date for the determination of the Current Market Price per share of
Common Stock as hereinafter provided, and (ii) the aggregate consideration for
such maximum number of Additional Shares of Nonpreferred Stock shall be deemed
to be the minimum consideration received and receivable by the Company for the
issuance of such Additional Shares of Nonpreferred Stock pursuant to the terms
of such Convertible Securities. For purposes of this Section 4.D, the date as of
which the Current Market Price per share of Common Stock shall be computed shall
be the earlier of (a) the date on which the Company shall enter into a firm
contract for the issuance of such Convertible Securities, or (b) the date of
actual issuance of such Convertible Securities. No adjustment of the number of
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shares of Common Stock comprising a Share shall be made under this Section 4.D
upon the issuance of any Convertible Securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any such adjustment shall previously have been made upon the issuance of such
warrants or other rights pursuant to Section 4.C.
E. Superseding Adjustment of Shares. If, any time after any
adjustment of the number of shares comprising a Share shall have been made
pursuant to Section 4.C or Section 4.D on the basis of the issuance of warrants
or other rights or the issuance of other Convertible Securities, or after any
new adjustment of the number of shares comprising a Share shall have been made
pursuant to this Section 4.D (but before the Warrant has been exercised), such
warrants or rights or the right of conversion or exchange in such other
Convertible Securities shall expire, and a portion of such warrants or rights,
or the rights of conversion or exchange in respect of a portion of such other
Convertible Securities, as the case may be, shall not have been exercised, such
previous adjustment shall be rescinded and annulled and the Additional Shares of
Nonpreferred Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the basis of
(1) treating the number of Additional Shares of Nonpreferred
Stock, if any, theretofore actually issued or issuable pursuant to the
previous exercise of such warrants or rights or such right of conversion
or exchange, as having been issued on the date or dates of such
exercise, and
(2) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of the last date of such
exercise,
and, if and to the extent called for by the foregoing provisions of this Section
4 on the basis of the aforesaid, a new adjustment of the number of shares
comprising a Share shall be made, which new adjustment shall supersede the
previous adjustment so rescinded and annulled.
If the exercise price provided for in any warrant or right, or
the rate at which any Convertible Securities referred to in Section 4.C or
Section 4.D are convertible into or exchangeable for Additional Shares of
Nonpreferred Stock, shall change or a different exercise price or rate shall
become effective at any time or from time to time (other than under or by reason
of provisions designed to protect against dilution) then, upon such change
becoming effective, the number of shares comprising a Share shall forthwith be
increased or decreased to such number as would have obtained had the adjustments
made and required to be made upon the issuance of such rights or options or
Convertible Securities been made upon the basis of (a) the issuance of the
number of Additional Shares of Nonpreferred Stock theretofore actually delivered
upon the exercise of such options or rights or upon the conversion or exchange
of such Convertible Securities and (b) the original issuance at the time of such
change of any such options, rights and Convertible Securities then still
outstanding. If the exercise price provided
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for in any right or option, or the rate at which any Convertible Securities
referred to in Section 4.C or Section 4.D are convertible into or exchangeable
for Additional Shares of Nonpreferred Stock, shall decrease at any time under or
by reason of provisions with respect thereto designed to protect against
dilution, then in the case of the delivery of Additional Shares of Nonpreferred
Stock upon the exercise of any such right or option or upon the conversion or
exchange of any Convertible Securities, the number of shares comprising a Share
shall forthwith be increased to such number as would have obtained had the
adjustments made upon issuance of such right or option or such Convertible
Securities been made upon the basis of the issuance of (and with respect to
total consideration received for) the Additional Shares of Nonpreferred Stock
delivered as aforesaid. In no event shall any adjustment provided for in this
Section 4.E have retroactive effect relative to Shares as to which the Warrant
has been previously exercised.
F. Other Provisions Applicable to Adjustments Under this Section 4. The
following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Share provided for in this
Section 4:
(1) Treasury or Company Stock. The sale or other disposition of
any issued shares of Nonpreferred Stock owned or held by or for the
account of the Company shall be deemed an issuance thereof for purposes
of this Section 4.
(2) Computation of Consideration. To the extent that any
Additional Shares of Nonpreferred Stock or any Convertible Securities
shall be issued for a cash consideration, the consideration received by
the Company therefor shall be deemed to be the amount of the cash
received by the Company therefor, or, if such Additional Shares of
Nonpreferred Stock or Convertible Securities are offered by the Company
for subscription, the subscription price, or, if such Additional Shares
of Nonpreferred Stock or Convertible Securities are sold to underwriters
or dealers for public offering without a subscription offering, the
initial public offering price, in any such case excluding any amounts
paid or receivable for accrued interest or accrued dividends and without
deduction of any compensation, discounts or expenses paid or incurred by
the Company for and in the underwriting of, or otherwise in connection
with, the issuance thereof. To the extent that such issuance shall be
for a consideration other than cash, then, except as herein otherwise
expressly provided, the amount of such consideration shall be deemed to
be the fair value of such consideration at the time of such issuance as
determined in good faith by the Board. The consideration for any
Additional Shares of Nonpreferred Stock issuable pursuant to any
warrants or other rights to subscribe for or purchase the same shall be
the consideration received or receivable by the Company for issuing such
warrants or other rights, plus the additional consideration payable to
the Company upon the exercise of such warrants or other rights. The
consideration for any Additional Shares of Nonpreferred Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by the Company for issuing any
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to the Company in
respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Company upon the exercise of the right of conversion or exchange in such
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Convertible Securities. In case of the issuance at any time of any
Additional Shares of Nonpreferred Stock or Convertible Securities in
payment or satisfaction of any dividend upon any class of stock other
than Nonpreferred Stock, the Company shall be deemed to have received
for such Additional Shares of Nonpreferred Stock or Convertible
Securities a consideration equal to the amount of such dividend so paid
or satisfied.
(3) When Adjustments to be Made. The adjustments required by
Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall have occurred. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.
(4) When Adjustments Not Required. If the Company shall take a
record of the holders of its Nonpreferred Stock for the purpose of
entitling them to receive a dividend or distribution or subscription or
purchase rights and shall, thereafter and before the distribution
thereof to shareholders, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then thereafter
no adjustment shall be required by reason of the taking of such record
and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
G. Merger, Consolidation or Disposition of Assets. The Company
shall not consolidate or merge with another Person, or sell, transfer or
otherwise dispose of all or substantially all of its assets to another Person
unless the Company shall have notified the Holder no less than 20 days prior to
the effective date of such consolidation, merger, sale, transfer or disposal,
and shall have given the Holder the right to exercise all its rights under this
Warrant and participate fully in such transaction as a holder of shares of
Common Stock. Such notice may disclose nonpublic information. Alternatively, if
at the Company's option, such transaction shall be effected in such a way that
all holders of Nonpreferred Stock shall be entitled to receive stock, securities
or assets with respect to or in exchange for Nonpreferred Stock, then, as a
condition of such consolidation, merger or sale, the Company or such successor
or purchasing corporation, as the case may be, shall assume the obligations of
the Company under this Warrant and execute an agreement providing that the
Holder shall have the right thereafter and until the expiration hereof to
exercise this Warrant for the kind and amount of stock, securities or assets
receivable upon such consolidation, merger or sale by a holder of the number of
shares of Common Stock for which this Warrant might have been exercised
immediately prior to such consolidation, merger or sale, subject to adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4.
H. Other Action Affecting Common Stock. If the Company takes any
action affecting its Common Stock after the date hereof, other than an action
described in any of Sections 4.A through 4.G, inclusive, which would have an
adverse effect upon the rights of the holder of this Warrant hereunder, then the
number of shares of Common Stock comprising a Share shall be adjusted in such
manner and at such time as the Board shall in good faith determine to be
equitable under the circumstances.
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SECTION 5. NOTICES TO WARRANT HOLDERS.
A. Notice of Adjustment of Share. Whenever the composition of a
Share shall be adjusted pursuant to Section 4, the Company shall forthwith
obtain a certificate signed by the Company's chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board determined the Current Market Price pursuant to Sections 4.B, C
or D or the fair value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in Section 4.F) and specifying the number of shares of Common Stock
comprising a Share and (if such adjustment was made pursuant to Section 4.G or
Section 4.H) describing the number and kind of any other indebtedness, shares of
stock or other securities or property or warrants or other subscription or
purchase rights comprising a Share, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly, and in any case within 10 calendar days after the making of such
adjustment, cause a signed copy of such certificate to be delivered to the
Holder in accordance with Section 12. The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 11, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by the Holder or any prospective purchaser of all
or part of this Warrant designated by the Holder.
B. Notice of Certain Corporate Action. In case the Company shall
propose (a) to pay any dividend payable in stock of any class to the holders of
its Nonpreferred Stock or to make any other distribution to the holders of its
Nonpreferred Stock, or (b) to offer to the holders of its Nonpreferred Stock
rights to subscribe for or to purchase any Additional Shares of Nonpreferred
Stock or shares of stock of any class or any other securities, rights or
options, or (c) to effect any reclassification of its Nonpreferred Stock (other
than a reclassification involving only the subdivision, or combination, of
outstanding shares of Nonpreferred Stock), or (d) to effect any capital
reorganization, or (e) to effect any consolidation, merger or sale, transfer or
other disposition of all or substantially all of its property, assets or
business, or (f) to effect the liquidation, dissolution or winding up of the
Company, then in each such case, the Company shall give to each holder of a
Warrant, in accordance with Section 12, a notice of such proposed action, which
shall specify the date on which a record is to be taken for purposes of such
stock dividend, distribution or offer of rights, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer,
disposition, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of Nonpreferred Stock, if any such
date is to be fixed, and shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action on the
Nonpreferred Stock and the number and kind of any other property which will
comprise a Share, and the purchase price or prices thereof, after giving effect
to any adjustment which will be required as a result of such action. Such notice
shall be so given in the case of any action covered by clause (a) or (b) above
at least 20 calendar days prior to the record date for determining holders of
the Nonpreferred Stock for purposes of such action, and in the case of any other
such action, at least 20 calendar days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of
Nonpreferred Stock, whichever shall be the earlier.
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SECTION 6. RESERVATION AND AUTHORIZATION OF NONPREFERRED STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY. The Company shall
at all times reserve and keep available for issuance upon the exercise of the
Warrant such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of the Warrant. All shares of
Common Stock which shall be so issuable, when issued upon exercise of this
Warrant, shall be duly authorized, validly issued, fully paid and nonassessable,
free and clear of all liens, security interests, charges and other encumbrances
or restrictions (other than encumbrances or restrictions imposed by this Warrant
or the Warrant Agreement).
Before taking any action which would cause an adjustment reducing
the Purchase Price Per Share below the then par value, if any, of the shares of
Common Stock issuable upon exercise of this Warrant, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares, free and clear of all liens, security interests, charges and other
encumbrances or restrictions (other than encumbrances or restrictions imposed by
this Warrant or the Warrant Agreement), of such Common Stock at such adjusted
Current Warrant Price.
Before taking any action which would result in an adjustment in
the number of shares of Common Stock comprising a Share or in the Current
Warrant Price per share of Common Stock, the Company shall obtain all such
authorizations or exceptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.
SECTION 7. REGISTRATION RIGHTS.
7.1 Demand Registration. (a) Any Warrantholder may, in writing,
request that the Company effect the registration under the Securities Act of all
(but not less than all) of such holder's Warrant Shares and specifying the
number of Warrant Shares to be registered and the intended method of disposition
thereof (a "Registration Request"). The Company will promptly, and in no event
more than 10 Business Days after receipt of such Registration request, give
written notice (a "Notice of Requested Registration") of such request to all
other holders of Warrant Shares, and thereupon will use its best efforts to
effect the registration (a "Demand Registration") under the Securities Act of:
(i) the Warrant Shares which the Company has been so
requested to register by such Holder; and
(ii) all other Warrant Shares the holders of which have
made written requests to the Company for registration thereof within 20
days after the giving of the Notice of Requested Registration (which
requests shall specify the intended method of disposition thereof) (the
"Other Holders"), all to the extent requisite to permit the disposition
(in accordance with the intended methods thereof) of the Warrant Shares
so to be registered. If requested by the Majority Holders requested to
be included in any Demand Registration, the method of disposition of all
Warrant Shares included in such
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registration shall be an underwritten offering effected in accordance
with Section 7.3 hereof. Subject to Section 7.1(d) hereof, the Company
may include in such registration other securities for sale for its own
account or for the account of any other Person. If any security holders
of the Company (other than the holders of Warrant Shares in such
capacity) register securities of the Company in a Requested Registration
in accordance with this Section 7.1, such holders shall pay the fees and
expenses of their counsel and their pro rata share, on the basis of the
respective amounts of the securities included in such registration on
behalf of each such holder, of the Registration Expenses if the
Registration Expenses for such registration are not paid by the Issuer
for any reason.
(b) Notwithstanding anything herein to the contrary, the
Warrantholder shall have the right to make one such Demand Registration
for an underwritten offering on Form S-1, unless the Warrantholder could
not register all of its Warrant Shares following such a demand by reason
of the managing underwriter's written opinion that inclusion of all such
Warrant Shares in such Demand Registration would materially and
adversely affect the marketing of the securities to be sold therein, in
which case the Warrantholder shall be able to make one such additional
Demand Registration. The Warrantholder shall have the right to make
unlimited Demand Registrations on Form S-3 (or any successor short-form
registration statement).
(c) Demand registrations shall be on such appropriate
registration form promulgated by the Commission as shall be selected by
the Company, shall be reasonably acceptable to the Majority Holders, and
shall permit the disposition of such Warrant Shares in accordance with
the intended method or methods specified in their request for such
registration.
(d) If the number of Warrant Shares included in a Demand
Registration is reduced pursuant to Section 7.1(b), the Company will
include in any such registration, to the extent of the number which the
Managing Underwriter advises the Company can be sold in such offering,
first, the Warrant Shares requested to be included in such registration
by the Warrantholder, second, not less than 50% of any shares registered
in such registration (other than Warrant Shares of the Warrantholder)
shall be Warrant Shares of Other Holders requested to be included in
such registration (which shall be included pro rata according to the
number of Warrant Shares requested by such other Holders to be included
in such registration), and third, other securities of the Company
proposed to be included in such registration, allocated among the
holders thereof in accordance with the priorities then existing among
the Company and the holders of such other securities; and any securities
so excluded shall be withdrawn from and shall not be included in such
Demand Registration.
7.2 Incidental Registration. (a) If the Company at any time
proposes to register any of its Common Stock under the Securities Act for sale
to the public (other than with respect to the initial public offering of its
Common Stock), whether for its own account or for the account of security
holders or both (excluding any registration statement on Form S-4, S-8 or
another form not available for registering the Warrant Shares for sale to the
public), each such time it will give written notice to all Incidental Rights
Holders (as defined below) of its intention
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so to do. For purposes of this Section 7, the term "Warrant Shares" shall not
include any shares which have been (x) effectively registered under the
Securities Act and disposed of in accordance with any registration statement
covering such shares or (y) sold pursuant to Rule 144 (or any similar provision
then in force) and may be further sold without limitation and an "Incidental
Rights Holder" shall mean any Holder in connection with the registration
statement giving rise to the benefits of this Section 7.1. Upon the written
request of any such Incidental Rights Holder, received by the Company within 20
days after the giving of any such notice by the Company, to register any of its
Warrant Shares and/or Warrant Shares issuable upon exercise of a Warrant held by
such Holder, the Company will use its best efforts to cause the Warrant Shares
as to which registration shall have been so requested to be included in the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by the Incidental Rights
Holder (in accordance with its written request) of such Warrant Shares.
Alternatively, the Company may include the Warrant Shares as to which
registration shall have been requested by an Incidental Rights Holder under this
subsection (a) in a separate registration statement to be filed concurrently
with the registration statement proposed to be filed by the Company. In the
event that any registration statement filed pursuant to this Section 7.2 shall
be in whole or in part, in connection with an underwritten public offering, the
number of Warrant Shares to be included in such registration statement may be
reduced or no Incidental Rights Holders may be included in such registration,
subject to and in accordance with subsection (b) below, if and to the extent
that the managing underwriter(s) shall give their written opinion that such
inclusion would materially and adversely affect the marketing of the securities
to be sold therein by the Company. Except as set forth above, there shall be no
limit to the number of registrations that may be requested pursuant to this
Section 7.2.
(b) Any reduction in the number of Warrant Shares owned by
Incidental Rights Holders requested to be included in a registration statement
pursuant to subsection (a) above, or the exclusion of such shares therefrom,
shall be subject to the following conditions:
(i) No such reduction or exclusion shall be made if any
securities are to be included in such registration
statement for the account of any person other than the
Company or the Holders.
(ii) Any such reduction in the number of Warrant Shares owned
by Incidental Rights Holders otherwise permitted under
this subsection (b) shall be made pro rata among the
requesting Incidental Rights Holders based upon the number
of Warrant Shares requested to be registered by such
remaining Incidental Rights Holders in accordance with
this Section 7.2.
(c) In the event that a distribution of Common Shares covered by
a registration statement referred to in subsection (a) above is to be
underwritten, then the distribution of Warrant Shares for the account of the
Incidental Rights Holders shall be underwritten by the same underwriters who are
underwriting the distribution of the securities for the account of the Company
and/or any other persons whose securities are covered by such registration
statement, and the Holders that are selling Warrant Shares pursuant to such
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registration statement shall enter into the agreement with such underwriters
contemplated under Section 7.3.
7.3 Registration Procedures. If and whenever the Company is
required by the provisions of this Section 7 to use its best efforts to effect
the registration of any Warrant Shares under the Securities Act, the Company
will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
which, in the case of an underwritten public offering, shall be on such form of
general applicability satisfactory to the managing underwriter selected as
herein provided and shall include the Warrant Shares and use its best efforts to
cause such registration statement to become and remain effective for the period
of the distribution contemplated thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Warrant Shares covered
by such registration statement in accordance with the Holder's intended method
of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Warrant Shares and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Warrant Shares covered by such registration statement;
(d) use its best efforts to register or qualify the Warrant
Shares covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as each seller of Warrant Shares or, in the case of
an underwritten public offering, the managing underwriter shall reasonably
request, and do any and all other acts and things which may be necessary under
such securities or blue sky laws to enable such seller to consummate the public
sale or other distribution in such jurisdiction to be sold by such seller,
except that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process or
subject itself to taxation in any such jurisdiction;
(e) use its best efforts to list the Warrant Shares covered by
such registration statement with any securities exchange or automated quotation
system on which any security of the Company is then listed;
For purposes of Section 7.3(a) and 7.3(b), the period of
distribution of Warrant Shares in a firm commitment underwritten public offering
shall be deemed to extend until each underwriter has completed the distribution
of all securities purchased by it, and the period of distribution of Warrant
Shares in any other registration shall be deemed to extend until the earlier of
the sale of all Warrant Shares covered thereby or 120 days after the effective
date thereof.
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In connection with each registration pursuant to this Section 7,
the sellers of Warrant Shares will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them as
reasonably shall be necessary and shall be requested by the Company in order to
assure compliance with federal and applicable state securities laws.
In connection with each registration pursuant to Sections 7.1
covering an underwritten public offering, if such underwriting agreement
contains restrictions upon the sale of securities of the Company, other than the
securities which are to be included in the proposed distribution, then such
restrictions shall be binding upon the sellers of Warrant Shares for a period
not exceeding 120 days (or such longer time as is customary and required) from
the effective date of the registration statement and, if requested by the
Company, such sellers shall enter into a written agreement to that effect. In
the event of the Company's initial public offering, if requested by the
Company's underwriters, the holders of Warrants and Warrant Shares agree not to
sell, pledge or otherwise transfer their Warrants or Warrant Shares for a period
not exceeding 120 days (or such longer time as is customary and required).
7.4 Expenses. All expenses incurred by the Company in complying
with Sections 7.1 and 7.2, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., fees of a national securities exchange or the Nasdaq National
Market, transfer taxes, fees of transfer agents and registrants, costs of
insurance and but excluding any Selling Expenses, are called "Registration
Expenses." "Selling Expenses" as used herein means all underwriting discounts
and selling commissions applicable to the sale of Warrant Shares. The Company
will pay all Registration Expenses and the sellers of Warrant Shares will pay
all Selling Expenses in connection with each registration statement prepared or
filed under Sections 7.1 or 7.2.
7.5 Indemnification and Contribution. (a) In the event of a
registration of any Warrant Shares under the Securities Act pursuant to Section
7.1 or 7.2, the Company shall indemnify and hold harmless, to the full extent
permitted by law, each seller of such Warrant Shares thereunder and each
partner, officer, trustee, director, employee, agent or Affiliate of such seller
(collectively, for purposes of this Section 7.5, a "seller"), against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such seller may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
Warrant Shares were registered under the Securities Act pursuant to Sections
7.1, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
pay or reimburse each such seller for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action;
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provided, however, that the Company shall not be liable in any such case to a
seller, if and to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
information pertaining to such seller furnished in writing to the Company by
such seller specifically for use in such registration statement, prospectus,
amendment or supplement.
7.6 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Warrant Shares to the public without registration,
on and after the completion of the Company's initial public offering, the
Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each Holder forthwith upon request a written
statement by the Company as to its compliance with the reporting requirements of
such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed by the Company as such Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing such Holder
to sell and Warrant Shares without registration.
SECTION 8. NO IMPAIRMENT. The Company shall not take any action,
including, without limitation, by amendment of its certificate of incorporation
or by-laws or through any consolidation, merger or arrangement, reorganization,
transfer of assets, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate to protect the rights of the holder of this Warrant
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company (a) will take such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Warrant Stock on the exercise of this Warrant, (b)
will not take any action which results in any adjustment pursuant to Section 4
of this Warrant if the total number of shares of Common Stock issuable after
such action would exceed the total number of shares of Common Stock then
authorized by the Company's certificate of incorporation and available for the
purpose of issue upon such exercise, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
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SECTION 9. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS.
(a) In case of all dividends or other distributions by the Company to the
holders of its Nonpreferred Stock with respect to which provisions of Section 4
refers to the taking of a record of such holders, the Company will in each such
case take such a record and will take such record as of the close of business on
a Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up of the Company, close its stock transfer books or
warrant transfer books so as to result in preventing or delaying the exercise or
transfer of this Warrant.
(b) If this Warrant is divided between or among more than one
Holder, any time any action, waiver or consent of the Holder of this Warrant is
called for, such action, waiver or consent shall be binding if taken or given by
the Majority Holders (provided that any Warrants owned by the Company or any of
its Affiliates shall not be counted).
SECTION 10. LOSS OR MUTILATION. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of reasonable discretion) of the
ownership of and the loss, theft, destruction or mutilation of this Warrant and
(in case of loss, theft or destruction) of indemnity satisfactory to it, and in
case of mutilation, upon surrender and cancellation hereof, the Company will
execute and deliver in lieu hereof a new warrant of like tenor and date.
SECTION 11. OFFICE OF THE COMPANY. As long as this Warrant
remains outstanding, the Company shall maintain an office or agent at Austin,
Texas, where this Warrant may be presented for exercise, registration, transfer,
division or combination as in this Warrant provided. Such office or agent shall
be maintained at said address unless and until the Company shall designate and
maintain another office or agent for such purposes and give written notice
thereof to the Holder.
SECTION 12. NOTICES GENERALLY. No notice or other communication
shall be deemed given hereunder unless sent in any of the manners, and to the
persons, specified in this Section 12. All notices and other communications
hereunder will be in writing and will be deemed given (a) upon receipt if
delivered personally, mailed by registered or certified mail, or sent by
overnight courier or (b) upon dispatch if transmitted by telex, telegraph,
telecopy or other means of facsimile, in any case to the Holder at the Holder's
last known address appearing on the books of the Company or to the Company at
its address (or at such other address for a party as will be specified by like
notice).
SECTION 13. LIMITATION OF LIABILITY. No provision hereof, in the
absence of affirmative action by the Holder to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the purchase price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company or by anyone else.
SECTION 14. SURVIVAL. All covenants and agreements of the
Company, and all rights and duties of the Holder from time to time of this
Warrant or any Common Stock issued pursuant to exercise of this Warrant, shall
be deemed to survive any surrender hereof to the
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Company upon exercise hereof by the Holder as contemplated by Section 2 or
expiration of the right of the Holder to exercise any unexercised balance hereof
on the Warrant Expiration Date.
SECTION 15. CERTAIN WARRANTS DEEMED NOT OUTSTANDING. For the
purposes of determining whether the Holder entitled to purchase a requisite
number of Shares at any time has taken any action, any Warrants owned by the
Company or any Affiliate of the Company, shall be deemed not to be outstanding.
SECTION 16. AUTHORITY; EXECUTION AND DELIVERY. The Company hereby
represents and warrants that the Company has full corporate power and authority
to enter into this Agreement and to issue the Warrants and the Warrant Shares in
accordance with the terms hereof. The execution, delivery and performance of
this Agreement by the Company have been duly and effectively authorized by the
Company. This Agreement has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
SECTION 17. REGULATORY RESTRICTIONS.
(a) No Warrantholder which is a bank holding company or a
subsidiary of a bank holding company (a "Bank Affiliate") as defined in the Bank
Holding Company Act of 1956, as amended, or other applicable banking laws of the
United States of America and the rules and regulations promulgated thereunder
(the "Bank Holding Company Act") shall acquire voting Common Stock, if, after
giving effect to such acquisition, the Bank Affiliate, together with its
Affiliates, would own more than five percent (5%) of the outstanding voting
securities of the Company. Notwithstanding the foregoing, shares of Common Stock
may otherwise be acquired or held by the Initial Purchaser or any other Bank
Affiliate which is a Small Business Investment Company consistent with and
subject to the limitations contained in the Small Business Act and, to the
extent not inconsistent with the Bank Holding Company Act, shares of Common
Stock may be acquired in the event that:
(i) the Company shall vote to merge or consolidate with or into
any other Person and after giving effect to such merger or consolidation
the Bank Affiliate would not own more than five percent (5%) of the
outstanding voting securities of the surviving corporation; or
(ii) the Common Stock issuable upon exercise of this Warrant is
covered by an effective registration statement.
(b) Small Business Act. No person which is a Small Business
Investment Company, as defined in the Small Business Act, shall exercise "put"
rights as a holder of Warrants or Warrant Stock, hereunder if the exercise
thereof shall violate any of the rules or regulations of the Small Business Act.
(c) Statement of Compliance. For purposes of this Warrant, a
written statement of the Holder or any of its Affiliates acquiring Common Stock,
or exercising "put" or
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conversion rights with respect to this Warrant, delivered to the Company upon
acquisition of any shares of Common Stock or delivery of any Exercise Notice, to
the effect that Bank or its Affiliate, as the case may be, is legally entitled
to exercise its rights to purchase securities of the Company and that such
exercise will not violate or contravene any law or regulation or any judgment,
decree or order of any governmental authority then applicable to the Holder or
such Affiliate, as the case may be, shall be conclusive and binding upon the
Company and shall absolutely obligate and bind the Company to deliver, in
accordance with the other terms and provisions hereof, certificates or other
appropriate instruments representing the securities so purchased.
SECTION 18. GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the conflict of laws rules therein.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed.
Dated as of February 2, 1998 AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William S. Winsauer
-----------------------------
Title: Chairman and CEO
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EXHIBIT 10.31
WARRANT AGREEMENT
February 17, 1998
TEJAS SECURITIES GROUP, INC.
As a Representative of the Several Underwriters
c/o Tejas Securities Group, Inc.
1250 Capital of Texas Hwy., South Building Two
Suite 500
Austin, Texas 78746
Gentlemen:
AutoBond Acceptance Corporation, a Texas corporation (the "Company"),
hereby agrees to sell to you, and you hereby agree to purchase from the Company
at an aggregate purchase price of $100, stock purchase warrants (the
"Underwriter Warrants") covering 100,000 shares of the Company's Common Stock,
no par value. The Underwriter Warrants will be exercisable by you as to all or
any lesser number of shares of the Company's Common Stock, no par value, covered
thereby, at the Purchase Price per share as defined below, at any time and from
time to time on and after the first anniversary of the date hereof and ending at
5:00 p.m. on the fifth anniversary of the date hereof.
1. DEFINITIONS.
As used herein, the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
The term "Act" refers to the Securities Act of 1933, as amended.
The term "Affiliate" of any Person refers to any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.
The term "Commission" refers to the Securities and Exchange Commission.
The term "Common Stock" refers to all stock of any class or classes
(however designated) of the Company, now or hereafter authorized, the holders of
which shall have the right without limitation as to amount, either to all or to
a part of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to preference, and
the holders of which shall ordinarily, in the absence of contingency, be
entitled to vote for the election of a majority of the directors of the Company
(even though the right so to vote has been suspended by the occurrence of such a
contingency).
The term "Current Market Price" on any date refers to the average of the
daily Market Price per share for the 30 consecutive Trading Days commencing 45
Trading Days before the date in question.
The term "Exchange Act" refers to the Securities Exchange Act of 1934,
as amended.
The term "Market Price" refers to the closing sale price on the American
Stock Exchange ("AMEX") or, if no closing sale price is reported, the closing
bid price of the Common Stock, as quoted on the Nasdaq National Market, or, if
the Common Stock is not quoted on the Nasdaq National Market, as reported by the
National Quotation Bureau Incorporated. If Market Price cannot be established as
described above, market price shall be the fair market value of the Common Stock
as determined in good faith by the Board of Directors whose determination shall
be conclusive.
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The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holders of the Underwriter Warrants at any time shall be
entitled to receive, or shall have received, upon the exercise of the
Underwriter Warrants, in lieu of or in addition to Common Stock, or which at any
time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 6 below or
otherwise.
The term "Person" refers to an individual, a partnership, a corporation,
a trust, a joint venture, an unincorporated organization and a government or any
department or agency thereof.
The term "Purchase Price" refers to the purchase price, per share, of
the shares of Common Stock subject to this Agreement. The Purchase Price shall
equal $7.75, subject to adjustment as provided in Section 6 below.
The term "Registration Statement" refers to a Registration Statement
filed with the Commission pursuant to the Rules and Regulations of the
Commission promulgated under the Act.
The term "Trading Day" shall mean a day on which the Nasdaq National
Market or the principal national securities exchange on which the Common Stock
is listed or admitted to trading is open for the transaction of business.
The term "Underlying Stock" refers to the shares of Common Stock (or
Other Securities) issuable under this Warrant Agreement pursuant to the
exercise, in whole or in part, of the Underwriter Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and
the purchase price therefore shall be paid by delivery of your check,
simultaneously with the purchase of and payment for any shares of 15% Series A
Cumulative Preferred Stock as provided in that certain Underwriting Agreement
dated February 17, 1998, relating to the public offering of shares of the 15%
Series A Cumulative Preferred Stock pursuant to a Registration Statement filed
under the Act.
2. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power and
authority, and has taken all necessary corporate action, to execute and deliver
this Agreement, to issue and deliver the Underwriter Warrants and certificates
evidencing same, and to authorize and reserve for issuance, and upon payment
from time to time of the Purchase Price to issue and deliver, the Shares.
(b) No Violation. Neither the execution nor delivery of this Agreement,
the consummation of the actions herein contemplated nor compliance with the
terms and provisions hereof will conflict with, or result in a breach of, or
constitute a default or an event permitting acceleration under, any of the
terms, provisions or conditions of the Articles of Incorporation or Bylaws of
the Company or any indenture, mortgage, deed of trust, note, bank loan, credit
agreement, franchise, license, lease, permit, judgment, decree, order, statute,
rule or regulation or any other agreement, understanding or instrument to which
the Company is a party or by which it is bound.
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3. COMPLIANCE WITH THE ACT.
(a) Transferability of Underwriter Warrants. You agree that the
Underwriter Warrants may not be transferred, sold, assigned or hypothecated for
a period of one (1) year from the date hereof, except to (i) persons who are
officers of you; (ii) a successor to you in a merger or consolidation; (iii) a
purchaser of all or substantially all of your assets; (iv) your shareholders in
the event you are liquidated or dissolved; and (v) persons who are officers of
participating broker-dealers.
(b) Registration of Underlying Stock. The Underlying Stock issuable upon
the exercise of the Underwriter Warrants have not been registered under the Act.
You agree not to make any sale or other disposition of the Underlying Stock
except pursuant to a Registration Statement which has become effective under the
Act, setting forth the terms of such offering, the underwriting discount and the
commissions and any other pertinent data with respect thereto, unless you have
provided the Company with an opinion of counsel reasonably acceptable to the
Company that such registration is not required.
(c) Demand Registration. At any time and from time to time after the
effective date hereof but prior to the fifth anniversary of the effective date
hereof, the holders of Underwriter Warrants shall have the right to make written
request of the Company on one occasion to register under the Act at least fifty
percent (50%) of the Underlying Stock which would be issuable upon exercise of
the Underwriter Warrants pursuant to the terms and conditions hereof. The
Underlying Stock specified in such request or a request pursuant to Section 3(d)
hereof is referred to herein as the "Subject Stock." Promptly upon receipt of
such request, the Company shall file with the Commission a Registration
Statement on the applicable form for the registration of the Subject Stock and
use its best efforts to cause such Registration Statement to become effective
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws and
appropriate compliance with the Act and the Rules and Regulations promulgated
thereunder) as soon as practicable to permit or facilitate the sale and
distribution of the Subject Stock. Immediately upon receipt of a request for
registration pursuant to this Section 3(c), the Company shall notify each of the
holders of Underwriter Warrants of such request.
Notwithstanding the provisions of this Section 3(c), if the
Company shall furnish to the holders of Underwriter Warrants a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its stockholders for such a Registration
Statement to be filed and it is therefore essential to defer a filing of such
Registration Statement, the Company shall have the right to defer such filing
for a period of not more than one hundred twenty (120) days after receipt of the
request from the holders of Underwriter Warrants to effect such a registration;
provided, however, that the Company may not utilize the right more than once in
any twenty-four (24) month period; and, provided further, that the holders of
Underwriter Warrants may, at any time in writing, withdraw such request for such
registration and therefore preserve the right provided in this Section 3(c) for
the holders of Underwriter Warrants to request such registration.
(d) Inclusion in Registration of Other Securities. If at any time after
the effective date hereof but prior to the fifth anniversary of the effective
date hereof, the Company shall propose the registration on an appropriate form
under the Act of any shares of Common Stock or Other Securities, the Company
shall at least 30 days prior to the filing of such Registration Statement give
you written notice, or telegraphic or telephonic notice followed as soon as
practicable by written confirmation thereof, of such proposed registration and,
upon written notice, or telegraphic or telephonic notice followed as soon as
practicable by written confirmation thereof, given to the Company within five
business days after the giving of such notice by the Company, shall include or
cause to be included in any such Registration Statement all or such portion of
the Underlying Stock as you may request,
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provided, however, that the Company may at any time withdraw or cease proceeding
with any such registration if it shall at the same time withdraw or cease
proceeding with the registration of such Common Stock or such Other Securities
originally proposed to be registered.
Notwithstanding any provision of this Agreement to the contrary,
if any holder of Underwriter Warrants exercises such Underwriter Warrants but
shall not have included all the Underlying Stock in a Registration Statement
which complies with Section 10(a)(3) of the Act, which has been effective for at
least 30 calendar days following the exercise of the Underwriter Warrants, the
registration rights set forth in this Section 3(d) shall be extended until such
time as (i) such a Registration Statement including such Underlying Stock has
been effective for at least 30 calendar days or (ii) in the opinion of counsel
satisfactory to you and the Company, registration is not required under the Act
or under applicable state laws for resale of the Underlying Stock in the manner
proposed.
(e) Company's Obligations in Registration. In connection with any
offering of Subject Stock pursuant to Section 3(c) or 3(d) above, the Company
shall:
(i) Notify you as to the filing thereof and of all amendments
or supplements thereto filed prior to the effective date
thereof;
(ii) Comply with all applicable rules and regulations of the
Commission;
(iii) Notify you immediately, and confirm the notice in writing,
(1) when the Registration Statement becomes effective, (2)
of the issuance by the Commission of any stop order or of
the initiation, or the threatening, of any proceedings for
that purpose, (3) of the receipt by the Company of any
notification with respect to the suspension of
qualification of the Subject Stock for sale in any
jurisdiction or of the initiation, or the threatening, of
any proceedings for that purpose and (4) of the receipt of
any comments, or requests for additional information, from
the Commission or any state regulatory authority. If the
Commission or any state regulatory authority shall enter
such a stop order or order suspending qualification at any
time, the Company will make every reasonable effort to
obtain the lifting of such order as promptly as
practicable.
(iv) During the time when a Prospectus is required to be
delivered under the Act during the period required for the
distribution of the Subject Stock, comply so far as it is
able with all requirements imposed upon it by the Act, as
hereafter amended, and by the Rules and Regulations
promulgated thereunder, as from time to time in force, so
far as necessary to permit the continuance of sales of or
dealings in the Subject Stock. If at any time when a
Prospectus relating to the Subject Stock is required to be
delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company
or your counsel, the Prospectus relating to the Subject
Stock as then amended or supplemented includes an untrue
statement of a material fact or omits to state any
material fact required to be stated therein or necessary
to make the statements therein, in the light of the
circumstances under which they were made, not misleading,
or if it is necessary at any time to amend such Prospectus
to comply with the Act, the Company will promptly prepare
and file with the Commission an appropriate amendment or
supplement (in form satisfactory to you).
(v) Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes
effective, to qualify the Subject Stock for offering and
sale under the securities laws relating to the offering or
sale of the Subject Stock of such jurisdictions
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as you may reasonably designate and to continue the
qualifications in effect so long as required for purposes
of the sale of the Subject Stock; provided that no such
qualification shall be required in any jurisdiction where,
as a result thereof, the Company would be subject to
service of general process, or to taxation as a foreign
corporation doing business in such jurisdiction. In each
jurisdiction where such qualification shall be effected,
the Company will, unless you agree that such action is not
at the time necessary or advisable, file and make such
statements or reports at such times as are or may
reasonably be required by the laws of such jurisdiction.
For the purposes of this paragraph, "good faith" is
defined as the same standard of care and degree of effort
as the Company will use to qualify its securities other
than the Subject Stock.
(vi) Make generally available to its security holders as soon
as practicable, but not later than the first day of the
eighteenth full calendar month following the effective
date of the Registration Statement, an earnings statement
(which need not be certified by independent public or
independent certified public accountants unless required
by the Act or the rules and regulations promulgated
thereunder, but which shall satisfy the provisions of
Section 11(a) of the Act) covering a period of at least
twelve months beginning after the effective date of the
Registration Statement.
(vii) After the effective date of such Registration Statement,
prepare, and promptly notify you of the proposed filing
of, and promptly file with the Commission, each and every
amendment or supplement thereto or to any Prospectus
forming a part thereof as may be necessary to make any
statements therein not misleading; provided that no such
amendment or supplement shall be filed if you shall object
thereto in writing promptly after being furnished a copy
thereof.
(viii) Furnish to you, as soon as available, copies of any such
Registration Statement and each preliminary or final
Prospectus, or supplement or amendment prepared pursuant
thereto, all in such quantities as you may from time to
time reasonably request;
(ix) Make such representations and warranties to any
underwriter of the Subject Stock, and use your best
efforts to cause Company counsel to render such opinions
to such underwriter, as such underwriter may reasonably
request; and
(x) Pay all costs and expenses incident to the performance of
the Company's obligations under Section 3(c) or 3(d) above
and under this Section 3(e), including without limitation
the fees and disbursements of the Company's auditors and
legal counsel, of legal counsel for you and of legal
counsel responsible for qualifying the Subject Stock under
blue sky laws, all filing fees and printing expenses, all
expenses in connection with the transfer and delivery of
the Underlying Stock, and all expenses in connection with
the qualification of the Subject Stock under blue sky
laws; provided, however, that the Company shall not be
responsible for compensation and reimbursement of expenses
to underwriters or selling agents for the included Subject
Stock.
(f) Agreements by Warrant Holder. In connection with the filing of a
Registration Statement pursuant to Section 3(c) or 3(d) above, if you
participate in the offering of the Subject Stock by including shares owned by
you, you agree:
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(i) To furnish the Company all material information requested
by the Company concerning yourself and your holdings of
securities of the Company and the proposed method of sale
or other disposition of the Subject Stock and such other
information and undertakings as shall be reasonably
required in connection with the preparation and filing of
any such Registration Statement covering all or a part of
the Subject Stock and in order to ensure full compliance
with the Act; and
(ii) To cooperate in good faith with the Company and its
underwriters, if any, in connection with such
registration, including placing the shares of Subject
Stock to be included in such Registration Statement in
escrow or custody to facilitate the sale and distribution
thereof.
(g) Indemnification. The Company shall indemnify and hold harmless you
and any underwriter (as defined in the Act) for you, and each person, if any,
who respectively controls you or such underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
expense whatsoever reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever), joint
or several, to which any of you or such underwriter or such controlling person
becomes subject, under the Act or otherwise, insofar as such loss, liability,
claim, damage and expense (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in (i) a Registration Statement covering the Subject Stock, in the
prospectus contained therein, or in an amendment or supplement thereto or (ii)
in any application or other document or communication (in this Section
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Subject Stock under the securities laws
thereof or filed with the Commission, or arise out of or based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company shall not be obligated to indemnify in any such case
to the extent that any such loss, claim, damage, expense or liability arises out
of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon, and in conformity with, written
information respectively furnished by you or such underwriter or such
controlling person for use in the Registration Statement, or any amendment or
supplement thereto, or any application, as the case may be.
If any action is brought against a person in respect of which
indemnity may be sought against, the Company pursuant to the foregoing
paragraph, such person shall promptly notify the Company in writing of the
institution of such action and the Company shall assume the defense of the
action, including the employment of counsel (satisfactory to the indemnified
person in its reasonable judgment) and payment of expenses. The indemnified
person shall have the right to employ its or their own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense of such
indemnified person or unless the employment of such counsel shall have been
authorized in writing by the Company in connection with the defense of the
action or the Company shall not have employed counsel to have charge of the
defense of the action or the indemnified person shall have reasonably concluded
that there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of the action on behalf of the
indemnified person), in any of which events these fees and expenses shall be
borne by the Company. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any claim
or action effected without its written consent. The Company's indemnity
agreements contained in this Section shall remain in full force and effect
regardless of any investigation made by or on behalf of any indemnified person,
and shall survive any termination of this Agreement. The Company agrees
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promptly to notify you of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in connection with the
Registration Statement pursuant to Section 3(c) or 3(d) above.
If you choose to include any Subject Stock in a public offering
pursuant to Section 3(c) or 3(d) above, then you agree to indemnify and hold
harmless the Company and each of its directors and officers who have signed any
such Registration Statement, and any underwriter for the Company (as defined in
the Act), and each person, if any, who controls the Company or such underwriter
within the meaning of the Act, to the same extent as the indemnity by the
Company in this Section 3(g) but only with respect to statements or omissions,
if any, made in such Registration Statement, or any amendment or supplement
thereto, or in any application in reliance upon, and in conformity with, written
information furnished by you to the Company for use in the Registration
Statement, or any amendment or supplement thereto, or any application, as the
case may be. In case any action shall be brought in respect of which indemnity
may be sought against you, you shall have the rights and duties given to the
Company, and the persons so indemnified shall have the rights and duties given
to you by the provisions of the first paragraph of this Section.
The Company further agrees that, if the indemnity provisions of
the foregoing paragraphs are held to be unenforceable, any holder of an
Underwriter Warrant or controlling person of such a holder may recover
contribution from the Company in an amount which, when added to contributions
such holder or controlling person has theretofore received or concurrently
receives from officers and directors of the Company or controlling persons of
the Company, will reimburse such holder or controlling person for all losses,
claims, damages or liabilities and legal or other expenses; provided, however,
that if the full amount of the contribution specified in this Section 3(g) is
not permitted by law, then such holder or controlling person shall be entitled
to contribution from the Company and its officers, directors and controlling
persons to the full extent permitted by law.
4. EXERCISE OF UNDERWRITER WARRANTS.
(a) Cash Exercise. Each Underwriter Warrant may be exercised in full or
in part (but not as to a fractional share of Common Stock) by the holder thereof
by surrender of the Warrant Certificate, with the form of subscription at the
end thereof duly executed by such holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or bank cashiers' check
payable to the order of the Company, in the respective amount obtained by
multiplying the number of shares of the Underlying Stock to be purchased by the
Purchase Price per share.
(b) Net Exercise. Notwithstanding anything to the contrary contained in
Section 4(a), any holder of an Underwriter Warrant may elect to exercise the
Underwriter Warrant and receive shares on a "net exercise" basis in an amount
equal to the value of the Underwriter Warrant by delivery of the form of
subscription attached to the Warrant Certificate and surrender of the
Underwriter Warrant at the principal office of the Company, in which event the
Company shall issue to the holder a number of shares computed using the
following formula:
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(P)(Y)(A-B)
X= -----------
A
Where: X= the number of shares of Common Stock to be issued
to holder.
P= the portion of the Underwriter Warrant being
exercised (expressed as a fraction).
Y= the total number of shares of Common Stock issuable
upon exercise of the Underwriter Warrant.
A= the Current Market Price of one share of Common
Stock.
B= Purchase Price.
(c) Partial Exercise. Prior to the expiration of the Underwriter
Warrants, upon any partial exercise, the Company at its expense will forthwith
issue and deliver to or upon the order of the purchasing holder, a new Warrant
Certificate or Certificates of like tenor, in the name of the holder thereof or
as such holder (upon payment by such holder of any applicable transfer taxes)
may request calling in the aggregate for the purchase of the number of shares of
the Underlying Stock equal to the number of such shares called for on the face
of the Warrant Certificate (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such shares (after giving
effect to such adjustment) designated by the holder in the aforementioned form
of subscription.
(d) Company to Reaffirm Obligations. The Company will, at the time of
any exercise of any Underwriter Warrant, upon the request of the holder thereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including without limitation any right to registration of the shares of
the Underlying Stock issued upon such exercise) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions of
this Agreement; provided, however, that if the holder of an Underwriter Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such holder any such rights.
5. DELIVERY OF CERTIFICATES, ETC, ON EXERCISE.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of fully paid and
nonassessable shares of the Underlying Stock to which such holder shall be
entitled upon such exercise, plus in lieu of any fractional share to which such
holder would otherwise be entitled, cash in an amount determined pursuant to
Section 7(g), together with any other stock or other securities and property
(including cash, where applicable) to which such holder is entitled upon such
exercise pursuant to Section 6 below or otherwise.
6. ANTI-DILUTION PROVISIONS.
The Underwriter Warrants are subject to the following terms and
conditions during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding shares
of Common Stock (or Other Securities) shall be subdivided into a greater number
of shares or (ii) a dividend in Common Stock (or Other Securities) shall be paid
in respect of Common Stock (or Other Securities), the Purchase Price per share
in effect
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immediately prior to such subdivision or at the record date of such dividend or
distribution shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend or distribution be
proportionately reduced; and if outstanding shares of Common Stock (or Other
Securities) shall be combined into a smaller number of shares thereof, the
Purchase Price per share in effect immediately prior to such combination shall
simultaneously with the effectiveness of such combination be proportionately
increased. Any dividend paid or distributed on the Common Stock (or Other
Securities) in stock or any other securities convertible into shares of Common
Stock (or Other Securities) shall be treated as a dividend paid in Common Stock
(or Other Securities) to the extent that shares of Common Stock (or Other
Securities) are issuable upon the conversion thereof.
(b) Adjustments. Whenever the Purchase Price per share is adjusted as
provided in Section 6(a) above, the number of shares of the Underlying Stock
purchasable upon exercise of the Underwriter Warrants immediately prior to such
Purchase Price adjustment shall be adjusted, effective simultaneously with such
Purchase Price adjustment, to equal the product obtained (calculated to the
nearest full share) by multiplying such number of shares of the Underlying Stock
by a fraction, the numerator of which is the Purchase Price per share in effect
immediately prior to such Purchase Price adjustment and the denominator of which
is the Purchase Price per share in effect upon such Purchase Price adjustment,
which adjusted number of shares of the Underlying Stock shall thereupon be the
number of shares of the Underlying Stock purchasable upon exercise of the
Underwriter Warrants until further adjusted as provided herein.
(c) Reorganizations. In case the Company shall be recapitalized by
reclassifying its outstanding Common Stock (or Other Securities) into a stock
with a different par value or by changing its outstanding Common Stock (or Other
Securities) with par value to stock without par value, then, as a condition of
such reorganization, lawful and adequate provision shall be made whereby each
holder of an Underwriter Warrant shall thereafter have the right to purchase,
upon the terms and conditions specified herein, in lieu of the shares of Common
Stock (or Other Securities) theretofore purchasable upon the exercise of the
Underwriter Warrants, the kind and amount of shares of stock and other
securities receivable upon such recapitalization by a holder of the number of
shares of Common Stock (or Other Securities) which the holder of an Underwriter
Warrant might have purchased immediately prior to such recapitalization. If any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation, shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant Agreement and in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such consolidation, merger or sale not taken
place, and in any such case, appropriate provision shall be made with respect to
the rights and interests of the holders of Underwriter Warrants to the end that
the provisions hereof (including without limitation provisions for adjustments
of the Purchase Price and of the number of shares purchasable and receivable
upon the exercise of the Underwriter Warrants) shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof (including an immediate
adjustment, by reason of such consolidation or merger, of the Purchase Price to
the value for the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Purchase Price in effect
immediately prior to such consolidation or merger). In the event of a merger or
consolidation of the Company with or into another corporation as a result of
which a number of shares of Common Stock of the surviving corporation greater or
lesser than the number of shares of Common Stock of the Company outstanding
immediately prior to such merger or consolidation are issuable to holders of
Common Stock of the Company, then the Purchase Price in effect immediately prior
to such merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock of the Company. The Company will not
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effect any such consolidation, merger or sale, unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase. If a purchase, tender or exchange offer is
made to and accepted by the holders of more than of the outstanding shares of
Common Stock of the Company, the Company shall not effect any consolidation,
merger or sale with the Person having made such offer or with any Affiliate of
such Person, unless prior to the consummation of such consolidation, merger or
sale the holders of Underwriter Warrants shall have been given a reasonable
opportunity to then elect to receive upon the exercise of Underwriter Warrants
either the stock, securities or assets then issuable with respect to the Common
Stock of the Company or the stock, securities or assets, or the equivalent
issued to previous holders of the Common Stock in accordance with such offer.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all rights under
this Agreement shall terminate as of the date upon which a certificate of
dissolution or liquidation shall be filed with the Secretary of the State of
Texas (or, if the Company theretofore shall have been merged or consolidated
with a corporation incorporated under the laws of another state, the date upon
which action of equivalent effect shall have been taken); provided, however,
that (i) no dissolution or liquidation shall affect the rights under Section
6(c) of any holder of an Underwriter Warrant and (ii) if the Company's Board of
Directors shall propose to dissolve or liquidate the Company, each holder of an
Underwriter Warrant shall be given written notice of such proposal at the
earlier of (x) the time when the Company's shareholders are first given notice
of the proposal or (y) the time when notice to the Company's shareholders is
first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price per
share or the kind or amount of securities purchasable under the Underwriter
Warrants shall be adjusted pursuant to any of the provisions of this Agreement,
the Company shall forthwith thereafter cause to be sent to each holder of an
Underwriter Warrant, a certificate setting forth the adjustments in the Purchase
Price per share and/or in such number of shares, and also setting forth in
detail the facts requiring, such adjustments, including without limitation a
statement of the consideration received or deemed to have been received by the
Company for any additional shares of stock issued by it requiring such
adjustment. In addition, the Company at its expense shall within 90 days
following the end of each of its fiscal years during the term of this Agreement,
and promptly upon the reasonable request of any holder of an Underwriter Warrant
in connection with the exercise from time to time of all or any portion of any
Underwriter Warrant, cause independent certified public accountants of
recognized standing selected by the Company to compute any such adjustment in
accordance with the terms of the Underwriter Warrants and prepare a certificate
setting forth such adjustment and showing in detail the facts upon which such
adjustment is based.
10
<PAGE>
<PAGE>
(f) Notice of a Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend payable out of earned surplus of the Company) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, (ii) any capital reorganization of the Company, or any
reclassification or recapitalization of the capital stock of the Company, or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other person or (iii)
any voluntary or involuntary dissolution or liquidation of the Company, then and
in each such event the Company will mail or cause to be mailed to each holder of
an Underwriter Warrant a notice specifying not only the date on which any such
record is to be taken for the purpose of such dividend, distribution or right
and stating the amount and character of such dividend, distribution or right,
but also the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or other Securities) for securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 days prior to the proposed record date
therein specified.
7. FURTHER COVENANTS OF THE COMPANY.
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Underwriter Warrants, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants and shall take all
necessary actions to ensure that the par value per share, if any, of the
Underlying Stock is, at all times equal to or less than the then effective
Purchase Price per share.
(b) Title to Shares. All shares of the Underlying Stock delivered upon
the exercise of the Underwriter Warrants shall be validly issued, fully paid and
nonassessable; each holder of an Underwriter Warrant shall receive good and
marketable title to the Underlying Stock, free and clear of all voting and other
trust arrangements, liens, encumbrances, equities and claims whatsoever; and the
Company shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at any
time shall list any Common Stock on any national securities exchange, the
Company will, at its expense, simultaneously list on such exchange, upon
official notice of issuance upon the exercise of the Underwriter Warrants, and
maintain such listing of, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants; and the Company will so
list on any national securities exchange, will so register and will maintain
such listing of, any Other Securities if and at the time that any securities of
like class or similar type shall be listed on such national securities exchange
by the Company.
(d) Exchange of Underwriter Warrants. Subject to Section 3(a) hereof,
upon surrender for exchange of any Warrant Certificate to the Company, the
Company at its expense will promptly issue and deliver to or upon the order of
the holder thereof a new Warrant Certificate or certificates of like tenor, in
the name of such holder or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate for the purchase
of the number of shares of the Underlying Stock called for on the face or faces
of the Warrant Certificate or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant Certificate and, in the case of any such loss,
11
<PAGE>
<PAGE>
theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant Certificate, the
Company, at the expense of the warrant holder will execute and deliver, in lieu
thereof, a new Warrant Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that, if it files a
Registration Statement during the term of the Underwriter Warrants, it will use
its best efforts to keep current in the filing of all forms and other materials
which it may be required to file with the appropriate regulatory authority
pursuant to the Exchange Act, and all other forms and reports required to be
filed with any regulatory authority having jurisdiction over the Company.
(g) Fractional Shares. No fractional shares of Underlying Stock are to
be issued upon the exercise of any Underwriter Warrant, but the Company shall
pay a cash adjustment in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the highest
market price per share of Underlying Stock on the day of exercise, as determined
by the Company.
8. OTHER HOLDERS.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Section 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Warrant Agreement shall be deemed to apply with equal
effect to any person to whom a Warrant Certificate or Certificates have been
transferred in accordance with the terms hereof, and where appropriate, to any
person holding shares of the Underlying Stock.
9. MISCELLANEOUS.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be mailed
by first class, registered or certified mail, postage prepaid, to such address
as may have been furnished to the Company in writing by such holder, or, until
an address is so furnished, to the address of the last holder of such
Underwriter Warrant who has so furnished an address to the Company, except as
otherwise provided herein. This Agreement and any of the terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for reference only and shall not limit or otherwise affect
any of the terms hereof. This Agreement, together with the forms of instruments
annexed hereto as Schedule I, constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
12
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed on this 17th day of February, 1998, in Austin, Texas, by its proper
corporate officers thereunto duly authorized.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William O. Winsauer
-------------------------------------
Chairman of the Board and
Chief Executive Officer
The above Warrant Agreement is confirmed this 17th day of February, 1998.
TEJAS SECURITIES GROUP, INC.
By: /s/ Robert A. Shuey, III
------------------------------------
13
<PAGE>
<PAGE>
SCHEDULE I
AUTOBOND ACCEPTANCE CORPORATION
STOCK PURCHASE WARRANT
CERTIFICATE EVIDENCING RIGHT TO PURCHASE 100,000 SHARES OF COMMON STOCK
This is to certify that Tejas Securities Group, Inc. ("TSG") or assigns,
is entitled to purchase at any time or from time to time after 9 A.M., Austin,
Texas time, on February 17, 1999 and until 9 A.M., Austin, Texas time, on
February 17, 2003 up to the above referenced number of shares of Common Stock,
no par value, of AutoBond Acceptance Corporation, a Texas corporation (the
"Company"), for the consideration specified in Section 4 of the Warrant
Agreement dated February 17, 1998 between the Company and TSG (the "Warrant
Agreement"), pursuant to which this Warrant is issued. All rights of the holder
of this Warrant Certificate are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection at the office of
the Company.
The shares of Common Stock issuable upon the exercise of this Warrant
have not been registered under the Securities Act of 1933, as amended (the
"Act"), and no distribution of such shares may be made until the effectiveness
of a Registration Statement under the Act covering such Shares. Transfer of this
Warrant Certificate is restricted as provided in Section 3(a) of the Warrant
Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any applicable
state and federal securities laws, rules and regulations. This Warrant may not
be sold, transferred, or assigned unless, in the opinion of the Company and its
legal counsel, such sale, transfer or assignment will not be in violation of the
Act, applicable rules and regulations of the Securities and Exchange Commission,
and any applicable state securities laws.
Subject to the provisions of the Act and of such Warrant Agreement, this
Warrant Certificate and all rights hereunder are transferable, in whole or in
part, at the offices of the Company, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant Certificate, together with
the Assignment hereof duly endorsed. Until transfer of this Warrant Certificate
on the books of the Company, the Company may treat the registered holder hereof
as the owner hereof for all purposes.
Any shares of Common Stock (or other securities) which are acquired
pursuant to the exercise of this Warrant shall be acquired in accordance with
the Warrant Agreement and certificates representing all securities so acquired
shall bear a restrictive legend reading substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION
OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT
REQUIRED.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed on this 17th day of February, 1998, in Austin, Texas, by its proper
corporate officer's thereunto duly authorized.
AUTOBOND ACCEPTANCE CORPORATION
By: ____________________________ Attest:_____________________________
William O. Winsauer
Chairman of the Board and
Chief Executive Officer
<PAGE>
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: AutoBond Acceptance Corporation
The undersigned, the holder of the enclosed Warrant Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
Certificate for, and to purchase thereunder, _________________ shares of Common
Stock, no par value, of AutoBond Acceptance Corporation and either tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $______________ therefor or,
if the undersigned elects pursuant to Section 4(b) of the Warrant Agreement to
convert the Warrant into Common Stock by net issuance, the undersigned exercises
the Warrant by exchange under the terms of said Section 4(b), and requests that
the certificate or certificates for such shares be issued in the name of and
delivered to the undersigned.
Date: ______________________________
------------------------------
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate)
------------------------------
------------------------------
(Address)
Please indicate in the space below the number of shares called for on
the face of the Warrant Certificate (or, in the case of a partial exercise, the
portion thereof as to which the Warrant is being exercised), in either case
without making any adjustment for additional shares or other securities or
property or cash which, pursuant to the adjustment provisions of the Warrant,
may be deliverable upon exercise and whether the exercise is a cash exercise
pursuant to Section 4(a) of the Warrant Agreement or a net issuance exercise
pursuant to Section 4(b) of the Warrant Agreement.
Number of Shares:__________
Cash:____________________
Net issuance:______________
<PAGE>
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________ the right represented by the enclosed Warrant
Certificate to purchase ________ shares of Common Stock, no par value, of
AutoBond Acceptance Corporation with full power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in
or in part, of such right to purchase represented by the enclosed Warrant
Certificate is permitted by the terms of the Warrant Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant Agreement and agrees to be bound by the terms thereof
with the same force and effect as if a signatory thereto.
Date:___________________
------------------------------
(Signature must conform
in all respects to name of
holder as specified on
the face of the Warrant
Certificate)
------------------------------
(Address)
Signed in the presence of:
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 7,102,791
<SECURITIES> 14,712,568
<RECEIVABLES> 253,629
<ALLOWANCES> 25,200
<INVENTORY> 152,580
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,132,964
<CURRENT-LIABILITIES> 0
<BONDS> 10,174,633
0
0
<COMMON> 1,000
<OTHER-SE> 12,141,194
<TOTAL-LIABILITY-AND-EQUITY> 26,132,964
<SALES> 0
<TOTAL-REVENUES> 16,386,540
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 412,387
<INTEREST-EXPENSE> 2,382,818
<INCOME-PRETAX> 5,611,439
<INCOME-TAX> 1,926,553
<INCOME-CONTINUING> 3,684,886
<DISCONTINUED> 0
<EXTRAORDINARY> 100,000
<CHANGES> 0
<NET-INCOME> 3,584,886
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 7,063,557
<SECURITIES> 17,230,947
<RECEIVABLES> 1,816,236
<ALLOWANCES> 450,122
<INVENTORY> 150,908
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,852,602
<CURRENT-LIABILITIES> 0
<BONDS> 9,841,043
0
0
<COMMON> 1,000
<OTHER-SE> 15,416,602
<TOTAL-LIABILITY-AND-EQUITY> 42,852,602
<SALES> 0
<TOTAL-REVENUES> 22,931,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 612,715
<INTEREST-EXPENSE> 3,879,543
<INCOME-PRETAX> 2,874,574
<INCOME-TAX> 1,015,110
<INCOME-CONTINUING> 1,859,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,859,464
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
