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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
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)
(512) 435-7000
Registrant's telephone number, including area code
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
------ ------
AS OF MAY 12, 1998, THERE WERE 6,531,311 SHARES OF THE REGISTRANT'S COMMON
STOCK, NO PAR VALUE, OUTSTANDING.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION........................................................3
ITEM 1. FINANCIAL STATEMENTS.........................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...........................................................................11
PART II. OTHER INFORMATION..........................................................28
ITEM 1. LEGAL PROCEEDINGS............................................................28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................30
ITEM 5. OTHER INFORMATION............................................................30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................30
EXHIBIT 27.1.........................................................................33
SIGNATURES...........................................................................34
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------------------------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 159,293 $ 60,873
Restricted funds 6,904,264 12,539,071
Finance contracts held for sale, net 1,366,114 3,084,818
Collateral acquired, net 150,908 244,406
Class B certificates 7,878,306 7,899,649
Retained interest in beneficial interest of trust 5,083,213 8,789,925
Interest-only strip receivables 9,427,986 10,092,548
Debt issuance cost 605,847 2,522,025
Trust receivable 9,627,144 8,861,634
Other assets 1,830,410 2,978,144
-------------------------------------
Total assets $43,033,485 $57,073,093
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Revolving credit facilities $ 7,639,201 $ 4,679,740
Notes payable 9,841,043 15,237,728
Accounts payable and accrued liabilities 3,386,685 1,509,271
Bank overdraft 2,936,883 3,168,151
Payable to affiliates 554,233 2,452,175
Deferred income taxes 3,504,249 3,435,284
-------------------------------------
Total liabilities $27,862,294 $30,482,349
-------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares and 1,125,000 shares of
15% Series A cumulative preferred stock, $10
liquidation preference, issued and outstanding,
respectively $ - $11,250,000
Common stock, no par value; 25,000,000 shares
authorized, 6,531,311 shares issued and outstanding 1,000 1,000
Additional paid-in capital 8,781,669 9,133,241
Due from shareholders (187,555) (210,055)
Unrealized appreciation on interest-only strip
receivables 1,049,256 1,010,875
Retained earnings 5,526,821 5,405,683
-------------------------------------
Total shareholders' equity 15,171,191 26,590,744
-------------------------------------
Total liabilities and shareholders' equity $43,033,485 $57,073,093
=====================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
-----------------------------
<S> <C> <C>
Revenues:
Interest income $ 514,092 $1,138,498
Gain on sale of finance contracts 3,575,747 3,867,941
Servicing fee income 191,819 506,593
Other income (loss) 6,913 (161,874)
------------------------------
Total revenues 4,288,571 5,351,158
------------------------------
Expenses:
Provision for credit losses - 100,000
Interest expense 872,625 1,290,405
Salaries and benefits 1,539,654 2,397,765
General and administrative 1,216,024 1,084,264
Other operating expenses 389,014 649,054
------------------------------
Total expenses 4,017,317 5,521,488
------------------------------
Income before income taxes 271,254 (170,330)
Provision for income taxes 92,226 (49,192)
------------------------------
Net income (loss) 179,028 (121,138)
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) on interest-only strip
receivables 203,409 (38,381)
------------------------------
Other comprehensive income (loss) 203,409 (38,381)
------------------------------
Comprehensive income (loss) $ 382,437 $(159,519)
==============================
Earnings per common share basic:
Net income (loss) $0.03 $(0.05)
==============================
Earnings per common share diluted:
Net income (loss) $0.03 $(0.05)
==============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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- --------------------------------------------------------------------------------
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
<S> <C> <C>
Common stock shares:
Beginning of period 6,512,500 6,531,000
End of period 6,512,500 6,531,000
============================
Preferred stock
Beginning balance $ - $ -
Issuance of preferred stock in public offering - 11,250,000
Ending balance - 11,250,000
Common stock:
Beginning balance 1,000 1,000
Ending balance 1,000 1,000
Additional paid-in capital:
Beginning balance 8,617,466 8,781,669
Issuance of preferred stock in public offering - (1,566,559)
Issuance/exercise of common stock warrants - 1,981,131
Ending balance 8,617,466 9,133,241
Deferred compensation:
Beginning balance (11,422) -
Amortization of deferred compensation 3,427 -
Ending balance (7,995) -
Due from shareholders:
Beginning balance (378,618) (187,555)
Payments from (to) shareholders 232,738 (22,500)
Ending balance (145,880) (210,055)
Unrealized appreciation on interest-only strip receivables:
Beginning balance - 1,049,256
Increase (decrease) in unrealized appreciation 203,409 (38,381)
Ending balance 203,409 1,010,875
Retained earnings:
Beginning balance 3,913,768 5,526,821
Net income (loss) 179,028 (121,138)
Ending balance 4,092,796 5,405,683
============================
Total shareholders' equity $12,760,796 $26,590,744
============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- -------------------------------------------------------------------------
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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 179,028 $ (121,138)
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of finance contract acquisition discount (11,472) -
and insurance
Amortization of deferred compensation 3,427 -
Amortization of debt issuance costs 211,120 347,651
Provision for credit losses - 100,000
Depreciation and amortization 46,305 117,368
Deferred income taxes 92,225 (49,192)
Accretion of interest-only strip receivables - (127,980)
Impairment of interest-only strip receivables - 288,023
Unrealized (gain) loss on Class B certificates (6,913) (116,076)
Changes in operating assets and liabilities:
Other assets (2,900,541) (1,265,102)
Class B certificates 786,134 94,733
Retained interest in beneficial interest of trust - 3,706,712
Interest-only strip receivables (1,964,764) (882,759)
Accounts payable and accrued liabilities (425,183) (1,877,414)
Due to/due from affiliates (54,998) 1,897,942
Purchases of finance contracts (32,968,892) (26,908,321)
Sales of finance contracts 27,092,951 24,455,666
Repayments of finance contracts 204,481 526,936
-----------------------------
Net cash used in operating activities (9,717,092) (7,226,375)
-----------------------------
Cash flows from investing activities:
Increase in restricted funds (2,712,832) (5,634,807)
Advances to AutoBond Receivables Trusts (659,338) 765,510
Decrease (increase) in due from shareholders 258,038 (22,500)
Disposal proceeds from collateral acquired 67,020 13,517
-----------------------------
Net cash used in investing activities (3,047,112) (4,878,280)
-----------------------------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facilities 9,530,904 (2,959,461)
Debt issuance costs (362,974) (2,263,829)
Proceeds from notes payable 15,150 7,650,000
Payments on notes payable (765,160) (2,253,315)
Increase (decrease) in bank overdraft 830,998 231,268
Proceeds from public offering of preferred stock, net - 9,683,441
Issuance/exercise of common stock warrants - 1,918,131
-----------------------------
Net cash provided by financing activities 9,248,918 12,006,235
-----------------------------
Net increase (decrease) in cash and cash equivalents 3,515,286 (98,420)
Cash and cash equivalents at beginning of period 4,121,342 159,293
-----------------------------
Cash and cash equivalents at end of period $ 606,056 $ 60,873
=============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of AutoBond Acceptance Corporation
("the Company") included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Results for interim periods
are not necessarily indicative of the results for a full year. For further
information, refer to the audited financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31, 1997 (SEC
File Number 000-21673). Certain data from the prior year has been reclassified
to conform to 1998 presentation.
2. ADJUSTMENT OF FINANCIAL STATEMENTS FOR PRIOR PERIOD
The Company has accounted for and reported as a prior period adjustment
an item of profit and loss related to the correction of a mistake in the
consolidated financial statements during the fourth quarter for the year ended
December 31, 1997. The error involved the misidentification of funds collected
on finance contracts as allocable to an on-balance sheet warehouse facility
rather than a securitization trust, resulting in an overstatement of revenues
recorded by the Company. This mistake occurred in connection with the transfer
of servicing from a third party servicer to in-house personnel and technology.
This accounting mistake was identified by the Company's accounting personnel.
The effect of this prior period adjustment is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
Previously Prior Period Restated
Reported Adjustment Balance
---------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Income before income taxes $2,874,574 $(373,351) $2,501,223
Provision for income taxes 1,015,110 (126,940) 888,170
---------------------------------------------
Net income (loss) $1,859,464 $(246,411) $1,613,053
=============================================
Earnings (loss) per common
share:
Basic $0.29 $(0.04) $0.25
Diluted 0.28 (0.03) 0.25
=============================================
Retained earnings $5,773,232 $(246,411) $5,526,821
=============================================
</TABLE>
3. 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
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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.
4. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in finance contracts held for sale as
of:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
-----------------------------------
(Unaudited)
<S> <C> <C>
Unpaid principal balance $1,946,135 $3,657,367
Contract acquisition discounts (129,899) (330,447)
Allowance for credit losses (450,122) (242,102)
-----------------------------------
$1,366,114 $3,084,818
===================================
</TABLE>
5. INTEREST-ONLY STRIP RECEIVABLE
The changes in the interest-only strip receivable follow:
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1998
------------------
(Unaudited)
<S> <C>
Beginning balance $ 9,427,986
Unrealized appreciation (58,153)
Additions from securitization
transactions 882,758
Accretion of discount 127,980
Impairment charge (288,023)
-----------
Ending balance $10,092,548
===========
</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 $1,531,629, net of related tax effect of $520,754, on the
valuation of the interest-only strip receivables as of March 31, 1998.
Additionally, the Company recorded a charge against earnings for permanent
impairment of interest-only strip receivables, determined on a disaggregated
basis, of $288,023 for the three months ended March 31, 1998.
6. REVOLVING CREDIT FACILITIES
At March 31, 1998, the Company had an outstanding balance of $2,452,202
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 March 31, 1998).
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The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. Under the Sentry Facility, the
Company incurred interest expense of $84,960 for the three months ended March
31, 1998. The Sentry Facility was amended in May 1998 to add additional
representations, covenants, a general release of Sentry, the guarantee of
William O. Winsauer, and the right of Sentry to refuse future advances at its
discretion.
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 matured 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 were 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 was payable at the lesser of (x) 30 day
LIBOR plus 1.15% 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 was 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 March 31, 1998, advances under the Daiwa Facility totaled
$47,000,000, all of which but $2,227,538 had been securitized through AutoBond
Master Funding Corporation as described in the next paragraph. The Company
incurred interest expense under the Daiwa Facility of approximately $200,979
during the three months ended March 31, 1998. The Company had no credit
availability under the Daiwa Facility at March 31, 1998 (its expiration date).
Daiwa has extended the maturity of the current advances outstanding to May 31,
1998 and in consideration thereof, the Company agreed to pay interest at the
lesser of (x) 30 day LIBOR plus 4.00% (9.69% at March 31, 1998) or (y) 11% per
annum.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into a qualified unconsolidated special
purpose subsidiary, AutoBond Master Funding Corporation. In conjunction with
these transfers, 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.
On December 31, 1997, the Company entered into a similar
warehouse/securitization arrangement with Credit Suisse First Boston Mortgage
Capital L.L.C. ("CSFB"), whereby $12.5 million of finance contracts were sold to
a qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation II. These finance contracts secured variable funding notes in the
initial amount of $11.3 million ($9.8 million at March 31, 1998). Unless
converted into a term securitization, these notes were scheduled to mature on
April 30, 1998. The Company is currently negotiating with CSFB an extension of
such maturity to May 29, 1998. If such an extension is not granted, CSFB could
declare an event of default and foreclose on the underlying pool of finance
contracts, thereby impairing the Company's interest-only strip receivable, as
well as servicing fees, in respect of such pool. These variable funding notes
bear interest at LIBOR plus 3.00% per annum. Pursuant to its agreement with
CSFB, on January 30, 1998, the Company paid down the variable funding notes in
the amount of $730,000.
On March 31, 1998, the Company entered into a similar
warehouse/securitization arrangement with Infinity Investors Limited
("Infinity"), whereby $7.156 million of finance contracts were sold to a
qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation IV. These finance contracts secured variable funding notes in the
initial amount of $6.455 million, increasing up to $10 million. Unless converted
into a term securitization, these notes are scheduled to mature on June 30,
1998. These variable funding notes bear interest at 10% per annum through May
31, 1998 and thereafter at 17% per annum. In connection with the transaction
with Infinity, the Company issued a warrant to purchase up to 100,000 shares of
Common Stock, at an exercise price of $8.73 per share.
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7. NOTES PAYABLE
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
-----------------------------------
(Unaudited)
<S> <C> <C>
Notes payable,collateralized
by Class B Certificates $7,783,219 $ 7,688,486
Subordinated notes payable - 7,500,000
Convertible notes payable 2,000,000 -
Other notes payable 57,824 49,242
--------------------------------
$9,841,043 $15,237,728
================================
</TABLE>
Pursuant to the an agreement (the "Securities Purchase Agreement")
entered into on June 30, 1997, the Company issued by private placement
$2,000,000 in aggregate principal amount of senior secured convertible notes
("convertible notes"). Interest is payable quarterly at a rate of 18% per annum
until maturity on June 30, 2000. If the Company pays down the convertible notes
in full prior to June 30, 1998, the holders will have no conversion rights. The
convertible notes, collateralized by the interest-only strip receivables from
the Company's first four securitizations, are convertible into shares of common
stock of the Company upon the earlier to occur of (x) an event of default on the
convertible notes and (y) 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.
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 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 non-recourse 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
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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. The Company capitalized debt issuance costs of
$2,026,483, including the value of all warrants issued, in conjunction with this
transaction. The debt issuance cost is being amortized as interest expense on a
straight line basis through February 2001.
8. COMMITMENTS AND CONTINGENCIES
The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the securitization 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 securitization
trusts at a price equal to the remaining principal plus accrued interest. The
Company repurchased finance contracts totaling $619,520 from a securitization
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included herein. The financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. Results for interim periods are not necessarily
indicative of the results for a full year. For further information, refer to the
audited financial statements and footnotes thereto included in the Company's
Form 10-K for the year ended December 31, 1997 (SEC File Number 000-21673).
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
re-underwrites 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
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experienced significant growth in its finance contract portfolio since it
commenced operations in August 1994.
The continued acquisition and servicing of sub-prime 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 sub-prime 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.
ADJUSTMENT OF FINANCIAL STATEMENTS FOR PRIOR PERIOD
The Company has accounted for and reported as a prior period adjustment
an item of profit and loss related to the correction of an error in the
consolidated financial statements during the fourth quarter for the year ended
December 31, 1997. The error involved commingling of funds collected on finance
contracts belonging to the Company and to a securitization trust resulting in
(1) an overstatement of revenues recorded by the Company and (2) a failure to
remit trust collections in a timely manner. The effect of this restatement
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
Previously Prior Period Restated
Reported Adjustment Balance
---------------------------------------
(Unaudited)
<S> <C> <C> <C>
Income before income taxes $2,874,574 $(373,351) $2,501,223
Provision for income taxes 1,015,110 (126,940) 888,170
---------------------------------------
Net income $1,859,464 $(246,411) $1,613,053
=======================================
Earnings per common share:
Basic $0.29 $(0.04) $0.25
Diluted 0.28 (0.03) 0.25
---------------------------------------
Retained earnings $5,773,232 $(246,411) $5,526,821
=======================================
</TABLE>
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 two 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
Page 12
<PAGE>
<PAGE>
acquired and funded through the Company's warehouse and other credit facilities
prior to securitization, and (c) the length of time such contracts are funded by
the warehouse and other credit facilities. Finance contract acquisition growth
has had a significant impact on the amount of interest income earned by the
Company.
Gain on Sale of Finance Contracts. Upon completion of a securitization
prior to 1997, the Company recognized a gain on sale of finance contracts equal
to the present value of future excess spread cash flows from the securitization
trust, and the difference between the net proceeds from the securitization and
the net carrying cost (including the cost of insurance premiums, if any) to the
Company of the finance contracts sold. Excess spread cash flows represent the
difference between the weighted average contract rate earned and the rate paid
on multiple class certificates issued to investors in the securitization, taking
into account certain assumptions regarding prepayments, defaults, proceeds from
disposal of repossessed assets, and servicing and other costs, over the life of
the securitization.
The Company implemented Statement of Financial Accounting Standards No.
125 "Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS No. 125") as of January 1, 1997. SFAS No. 125 provides new
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings and requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value. For transfers that result
in the recognition of a sale, SFAS No. 125 requires that the newly created
assets obtained and liabilities incurred by the transferors as a part of a
transfer of financial assets be initially measured at fair value. Interests in
the assets that are retained are measured by allocating the previous carrying
amount of the assets (e.g. finance contracts) between the interests sold (e.g.
investor certificates) and interests retained (e.g. interest-only strip
receivable) based on their relative fair values at the date of the transfer. The
amounts initially assigned to these financial components is a determinant of the
gain or loss from a securitization transaction under SFAS No. 125.
The discounted excess spread cash flows are reported on the consolidated
balance sheet as "interest-only strip 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 ($288,023) during the
three months ended March 31, 1998 as a result of the impairment review.
Impairment would also occur if an event of default occurred under a
securitization and the underlying finance contracts were liquidated, resulting
in insufficient proceeds to pay off the interest-only strip receivable.
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
Page 13
<PAGE>
<PAGE>
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. following table illustrates the gross interest:
Page 14
<PAGE>
<PAGE>
spread for each of the Company's securitizations (dollars in thousands):
<TABLE>
<CAPTION>
Remaining Weighted
Balance at Average
Original March 31, Contract Certificate Gross
Securitization Balance(1) 1998 Rate Rate Ratings(2) Spread(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A $26,261,009 $ 8,989,592 18.9% 7.23% Baa2 11.7%
AutoBond Receivables
Trust 1996-A 16,563,366 7,397,239 19.7% 7.15% Baa2 12.5%
AutoBond Receivables
Trust 1996-B 17,832,885 8,976,471 19.7% 7.73% Baa2 12.0%
AutoBond Receivables
Trust 1996-C 22,296,719 14,005,713 19.7% 7.45% Baa2 12.3%
AutoBond Receivables
Trust 1996-D 25,000,000 16,522,353 19.5% 7.37% Baa2 12.1%
AutoBond Receivables
Trust 1997-A(4) 27,196,052 18,814,317 20.8% 7.82% Baa2 13.0%
AutoBond Receivables
Trust 1997-B 34,725,196 28,513,561 19.9% 7.66% Baa3 12.3%
AutoBond Receivables
Trust 1997-C 34,430,079 34,430,079 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 9,759,958 18.6% 8.73% - 9.9%
AutoBond Master Funding
Corporation(5) 18,411,664 18,411,664 20.3% 9.69% - 10.6%
AutoBond Master Funding
Corporation IV(5) 6,455,894 6,455,894 20.5% 10.00% - 10.5%
--------------------------
Total $267,059,301 $198,877,847
==========================
</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.
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.
Page 15
<PAGE>
<PAGE>
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition activity:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
----------------------------
<S> <C> <C>
Number of finance contracts acquired 3,175 2,637
Principal balance of finance contracts acquired $34,875,869 $29,775,406
Number of active dealerships(1) 336 578
Number of enrolled dealerships 890 1,789
</TABLE>
- ---------------------------------------------------------------
(1) Dealers who have sold at least one finance contract to the Company during
the period.
RESULTS OF OPERATIONS
Period-to-period comparisons of operating results may not be meaningful,
and results of operations from prior periods may not be indicative of future
results. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET INCOME
In the three months ended March 31, 1998, net income (loss) decreased
$300,166 to $(121,138) from $179,028 for the three months ended March 31, 1997.
The decrease in net income was primarily attributable to an increase in
infrastructure costs to support higher non-bulk finance contract acquisition and
servicing volumes and impairment charges on interest-only strip receivables. The
principal balance of finance contracts acquired decreased $5.1 million to $29.8
million for the three months ended March 31, 1998 from $34.9 million for the
three months ended March 31, 1997. The Company acquired a bulk portfolio of
$12.8 million from Credit Suisse First Boston Mortgage Capital LLC during the
three months ended March 31, 1997. Due to weakened competitors, the Company more
aggressively added qualified personnel as they became available during the past
year, and this added to the growth in salary and benefit expenses for the three
months ended March 31, 1998.
TOTAL REVENUES
Total revenues increased $1,062,587 to $5,351,158 for the three months
ended March 31, 1998 from $4,288,571 for the three months ended March 31, 1997
due to expansion of the Company's finance contract acquisition and
securitization activities.
Interest Income. Interest income increased $624,406 to $1,138,498 for
the three months ended March 31, 1998 from $514,092 for the three months ended
March 31, 1997 due the growth and timing of finance contract acquisitions. The
Company acquired finance contracts totaling $29.8 million during the three
months ended March 31, 1998 compared to $34.9 million in the comparable 1997
period. The Company acquired a bulk portfolio of $12.8 million from Credit
Suisse First Boston Mortgage Capital Corporation during the three months ended
March 31, 1997. Accretion on interest-only strip receivables increased $127,980
from the respective 1997 period to $127,980 during the three months ended March
31, 1997.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $3,867,941 on finance contracts carried at $24.5 million (15.8%) during
the three months ended March 31, 1998. Gain on sale amounted to $3,575,747 on
finance contracts carried at $27.1 million (13.2%) in the comparable 1997
Page 16
<PAGE>
<PAGE>
period. Accordingly, gain on sale of finance contracts rose $292,194 during
three months ended March 31, 1998 over the comparable 1997 period.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the three months ended
March 31, 1998, servicing fee income was $506,593, primarily contractual
administrative fees. Servicing fee income increased by $314,774 from the three
months ended March 31, 1997 as a result of the Company's assumption of servicing
responsibilities in December 1997. Contractual servicing fees contributed
$270,239 to the increase over the past period. The ratio of servicing fee income
to the average principal balance of finance contracts outstanding increased from
.6% for the three months ended March 31, 1997 to 1.1% during the three months
ended March 31, 1998. The Company also waived $224,640 in servicing fees during
the three months ended March 31, 1998. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
1998, 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 the three months ended March 31, 1998, other
income (loss) amounted to ($161,074), compared with $6,913 for the comparable
1997 period. The Company recorded a charge against earnings for permanent
impairment of the interest-only strip receivable, determined on a disaggregated
basis, of $288,023 during the three months ended March 31, 1998. Additionally,
unrealized gain on the Company's Class B certificates totaled $116,075 during
the three months ended March 31, 1998.
TOTAL EXPENSES
Total expenses of the Company increased $1,504,171 to $5,521,488 for the
three months ended March 31, 1998 from $4,017,317 for the three months ended
March 31, 1997. The ratio of total expenses to the average principal balance of
finance contracts outstanding declined from 16.9% for the three months ended
March 31, 1997 to 10.8% for the three months ended March 31, 1998 on an
annualized basis.
Provision for Credit Losses. Provision for credit losses on finance
contracts rose to $100,000 for the three months ended March 31, 1998 compared to
none for the three months ended March 31, 1997. The Company charged off loans,
net, totaling $398,020 to the allowance for credit losses during three months
ended March 31, 1998.
Interest Expense. Interest expense rose to $1,290,405 for three months
ended March 31, 1998 from $872,625 for three months ended March 31, 1997.
Interest expense increased by $417,780 due to higher borrowing volumes
outstanding under the revolving credit facilities, along with increased debt
issuance costs amortization of $136,531.
Salaries and Benefits. Salaries and benefits increased $858,111 to
$2,397,765 for the three months ended March 31, 1998 from $1,539,654 for the
three months ended March 31, 1997. 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 number of employees of the Company increased by 64 to 193
employees at March 31, 1998, compared to 129 employees at March 31, 1997.
General and Administrative Expenses. General and administrative expenses
decreased $131,760 to $1,084,264 for the three months ended March 31, 1998 from
$1,216,024 for the three months ended March 31, 1997. This decrease was due
primarily to a reduction in professional fees. 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.
Page 17
<PAGE>
<PAGE>
Other Operating Expenses. Other operating expenses (consisting
principally of servicer fees, credit bureau reports and insurance) increased
$260,040 to $649,054 for the three months ended March 31, 1998 from $389,014 for
the three months ended March 31, 1997. This increase was due to increased
finance contract acquisition volume.
FINANCIAL CONDITION
Restricted Cash. Restricted cash increased $5.6 million to $12.5 million
at March 31, 1998 from $6.9 million at December 31, 1997. 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
trustees held $7.3 million of funds advanced for the purchase of finance
contracts at March 31, 1998. The Company is also required to maintain a cash
reserve with its lenders up to 10% 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 $1.7 million to $3.1 million at
March 31, 1998, from $1.4 million at December 31, 1997. The number and principal
balance of contracts held for sale are largely dependent upon the timing and
size of the Company's securitizations. The Company plans to securitize finance
contracts on a regular basis.
Interest-Only Strip Receivable. The following table provides historical
data regarding the interest-only strip receivable:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
------------------
(Unaudited)
<S> <C>
Beginning balance $ 9,427,986
Unrealized appreciation (58,153)
Additions from securitization 882,758
transactions
Accretion of discount 127,980
Impairment charge (288,023)
-----------------
Ending balance $10,092,548
=================
</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
Page 18
<PAGE>
<PAGE>
consolidated statements of cash flows. The initial cash reserve deposits for the
Company's securitizations follow:
<TABLE>
<CAPTION>
Senior Investor Initial
Certificate Reserve
Securitization Amount(1) Deposit Percent
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
AutoBond Receivables Trust 1995-A(4) $26,261,009 $ 525,220 2.0%
AutoBond Receivables Trust 1996-A(4) 16,563,366 331,267 2.0%
AutoBond Receivables Trust 1996-B(4) 17,832,885 356,658 2.0%
AutoBond Receivables Trust 1996-C(4) 22,296,719 445,934 2.0%
AutoBond Receivables Trust 1996-D(4) 25,000,000 500,000 2.0%
AutoBond Receivables Trust 1997-A(2,4) 27,196,052 560,744 2.0%
AutoBond Receivables Trust 1997-B(4) 34,725,196 868,130 2.5%
AutoBond Receivables Trust 1997-C(4) 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 - 0.0%
AutoBond Master Funding Corporation(3) 18,411,664 - 0.0%
AutoBond Master Funding Corporation IV(3) 6,455,894 - 0.0%
</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).
(4) A portion of excess spread cash flows will increase such reserves until
they reach 6%.
Retained Interest in Beneficial Interest of Trusts. The Company's
retained interest in beneficial interests of trusts increased $3.7 million to
$8.8 million at March 31, 1998, from $5.1 million at December 31, 1997. These
amounts relate to retained interest in amounts sold to special purpose
subsidiaries which issue variable funding notes of short-term maturities of
three to six months. If such variable funding notes are not converted into term
notes or paid-off in full at maturity, then the holder could foreclose on the
underlying finance contracts, which could impair the Company's retained
interest.
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
--------------------------------------------------
<S> <C> <C>
Principal balance of finance contracts outstanding $187,098,957 $195,458,519
Delinquent finance contracts(1):
30-59 days past due 21,484,450 11.48% 21,547,374 11.02%
60-89 days past due 10,941,753 5.85% 6,587,571 3.37%
90 days past due and over 8,368,493 4.47% 10,057,559 5.15%
--------------------------------------------------
Total $40,794,696 21.80% $38,192,804 19.54%
==================================================
</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
Page 19
<PAGE>
<PAGE>
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 1998 versus 1997 delinquency percentages since
the portfolio is tangibly more seasoned as of March 31, 1998. Accordingly,
delinquency and charge-off rates in the portfolio may not fully reflect the
rates that may apply when the average holding period for finance contracts in
the portfolio is longer. Increases in the delinquency and/or charge-off rates in
the portfolio would adversely affect the Company's ability to obtain credit or
securitize its receivables.
REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS
Because the Company's finance contract portfolio is continuing to grow
rapidly, management does not manage losses on the basis of a percentage of the
Company's finance contract portfolio, because percentages can be favorably
affected by large balances of recently acquired finance contracts. Management
monitors actual dollar levels of delinquencies and charge-offs and analyzes the
data on a "static pool" basis.
The following table provides static pool repossession frequency analysis
in dollars of the Company's portfolio performance from inception through March
31, 1998. 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
Page 20
<PAGE>
<PAGE>
than the collateral depreciates, and therefore losses and/or repossessions will
decline over time.
<TABLE>
<CAPTION>
Repossession Frequency
----------------------------------------------------
Principal Balance of Principal Balance
Year and Quarter of Repossessions by of Contracts
Acquisition Quarter Acquired Cumulative(1) Annualized(2) Acquired
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Q3 $ 22,046 21.79% 5.81% $ 101,161
Q4 595,429 24.43% 6.98% 2,437,674
1995
Q1 1,715,862 27.19% 8.37% 6,310,421
Q2 1,661,098 26.83% 8.94% 6,190,596
Q3 1,904,431 26.30% 9.57% 7,239,813
Q4 3,467,265 28.45% 11.38% 12,188,863
1996
Q1 3,992,695 25.82% 11.48% 15,460,823
Q2 4,975,988 26.87% 13.43% 18,520,410
Q3 5,107,393 18.18% 10.39% 28,098,899
Q4 5,150,395 21.07% 14.05% 24,442,500
1997
Q1 6,256,486 17.94% 14.35% 34,875,869
Q2 5,018,535 14.21% 14.21% 35,305,817
Q3 2,757,864 7.96% 10.62% 34,629,616
Q4 644,753 1.46% 2.92% 44,120,029
1998
Q1 126,683 0.43% 1.70% 29,775,406
</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 $595,429 in
repossessions divided by principal balance of $2,437,674 in contracts acquired,
divided by 14 quarters outstanding times four equals an annual repossession
frequency of 6.98%).
NET LOSS PER REPOSSESSION
Upon initiation of the repossession process, it is the Company's intent
to complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. As less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
Page 21
<PAGE>
<PAGE>
table demonstrates the net charge-off per repossessed automobile since
inception.
<TABLE>
<CAPTION>
From August 1,
1994 (Inception)
to March 31, 1998
------------------
<S> <C>
Number of finance contracts acquired 26,023
Number of vehicles repossessed 4,125
Repossessed units disposed of 1,762
Repossessed units awaiting disposition(1) 2,363
Cumulative gross charge-offs(2) $18,906,287
Costs of repossession(2) 881,075
Proceeds from auction, physical damage insurance and refunds(2) (10,332,360)
------------------
Net loss 9,455,002
Deficiency insurance settlements received(2) (5,488,289)
------------------
Net charge-offs(2) $3,966,713
==================
Net charge-offs per unit disposed $2,251
Net loss as a percentage of cumulative gross charge-offs 50.01%
Recoveries as a percentage of cumulative gross charge-offs(3,4) 83.68%
</TABLE>
- ----------------------------------------------------------------------
(1) The vehicles may have been sold at auction; however the Company might not
have received all insurance proceeds as of March 31, 1998.
(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 March 31, 1998.
(3) Not including the costs of repossessionwhich are reimbursed by the
securitization trusts.
(4) Includes the effect of certain loans included in term securitization
1997-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 $7.2 million during the three months
ended March 31, 1998. The Company used $26.9 million to purchase finance
contracts and $24.5 million was received from sales of finance contracts,
primarily through securitizations during the three months ended March 31, 1998.
Significant activities comprising cash flows from investing activities
include net increases in restricted cash of $5.6 million for the three months
ended March 31, 1998. Cash flows from financing activities include proceeds from
notes payable of $7.7 million for the three months ended March 31, 1998.
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.
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At March 31, 1998, the Company had an outstanding balance of $2,452,202
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 (i) cable 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 March 31, 1998).
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 $84,960 for the three months ended March
31, 1998. The Sentry Facility was amended in May 1998 to add additional
representations, covenants, a general release of Sentry, the guarantee of
William O. Winsauer, and the right of Sentry to refuse future advances at its
discretion.
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 matured 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 were 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 was payable at the lesser
of (x) 30 day LIBOR plus 1.15% 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 was 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 March 31, 1998, advances under the Daiwa Facility totaled
$47,000,000, of which all but $2,227,538 had been securitized through AutoBond
Master Funding Corporation as described in the next paragraph. The Company
incurred interest expense under the Daiwa Facility of approximately $200,979
during the three months ended March 31, 1998. The Company had no credit
availability under the Daiwa Facility at March 31, 1998 (its expiration date).
Daiwa has extended the maturity of the current advances outstanding to May 31,
1998 and in consideration thereof, the Company agreed to pay interest at the
lesser of (x) 30 day LIBOR plus 4.00% (9.69% at March 31, 1998) or (y) 11% per
annum.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into a qualified unconsolidated special
purpose subsidiary. 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.
On December 31, 1997, the Company entered into a similar
warehouse/securitization arrangement with Credit Suisse First Boston Mortgage
Capital L.L.C. ("CSFB"), whereby $12.5 million of finance contracts were sold to
a qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation II. These finance contracts secured variable funding notes in the
initial amount of $11.3 million ($9.8 million at March 31, 1998). Unless
converted into a term securitization, these notes were scheduled to mature on
April 30, 1998. The Company is currently negotiating with CSFB an extension of
such maturity to May 29, 1998. If such an extension is not granted, CSFB could
declare an event of default and foreclose on the underlying pool of finance
contracts, thereby impairing the Company's interest-only strip receivable, as
well as servicing fees, in respect of such pool. These variable funding notes
bear
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interest at LIBOR plus 3.00% per annum. Pursuant to its agreement with CSFB, on
January 30, 1998, the Company paid down the variable funding notes in the amount
of $730,000.
On March 31, 1998, the Company entered into a similar
warehouse/securitization arrangement with Infinity Investors Limited
("Infinity"), whereby $7.156 million of finance contracts were sold to a
qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation IV. These finance contracts secured variable funding notes in the
initial amount of $6.455 million, increasing up to $10 million. Unless converted
into a term securitization, these notes are scheduled to mature on June 30,
1998. These variable funding notes bear interest at 10% per annum through May
31, 1998 and thereafter at 17% per annum. In connection with the transaction
with Infinity, the Company issued a warrant to purchase up to 100,000 shares of
Common Stock, at an exercise price of $8.73 per share.
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 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 non-recourse 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%. The Company capitalized debt issuance
costs of $2,292,793, including the value of all warrants issued, in conjunction
with this transaction. The debt issuance cost is being amortized as interest
expense on a straight line basis through February 2001. 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
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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
March 31, 1998, the Company held interest-only strip receivables and Class B
Certificates totaling $18.0 million, substantially all of which had been pledged
to collateralize notes payable of $15.2 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 sub-prime auto paper. Additionally, gain on sale of
finance contracts represents a significant portion of the Company's total
revenues and, accordingly, net income. If the Company were unable to securitize
finance contracts or account for any securitization as a sale transaction in a
financial reporting period, the Company would likely incur a significant decline
in total revenues and net income or report a loss for such period. Moreover, the
Company's ability to 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.
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
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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.
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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. 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 well as claims for damages based
upon breach of contract, bad faith and fraud. The Company has received the
defendants' answers, denying the Company's claims. 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
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. Both suits have been voluntarily dismissed, and
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.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
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per share. While any shares of the Preferred Stock are outstanding, neither the
Company nor any affiliate nor any person acting on behalf of the Company or any
of its affiliates will (i) declare, pay or set apart funds for the payment of
any dividend or other distribution of cash or other property declared or made
directly or indirectly by the Company or any such affiliate or person with
respect to any Common Stock or (ii) redeem, purchase or otherwise acquire for
consideration any Common Stock through a sinking fund or otherwise (other than a
redemption or purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan of the Company or any
subsidiary) or (iii) pay or distribute any cash or other property for the
benefit of any holder of Common Stock in respect thereof, directly or
indirectly, unless (A) all cumulative dividends with respect to the Preferred
Stock at the time such dividends are payable have been paid or such dividends
have been declared and funds have been set apart for payment of such dividends
and (B) sufficient funds have been paid or set apart for the payment of the
dividend for the current dividend period with respect to the Preferred Stock.
In the event of any liquidation, dissolution or winding up or the
Company, holders of shares of Preferred Stock are entitled to receive, out of
legally available assets, a liquidation preference of $10.00 per share, plus an
amount equal to any accrued and unpaid dividends to the payment date, and no
more, before any payment or distribution is made to the holders of Common Stock
or any series or class of the Company's stock hereafter issued that ranks junior
as to the liquidation rights to the Preferred Stock, but the holders of the
shares of the Preferred Stock will not be entitled to receive the liquidation
preference on such shares until the liquidation preference of any other series
or class of the Company's stock previously or hereafter issued that ranks senior
as to liquidation rights to the Preferred Stock has been paid in full.
If two quarterly dividends payable on the Preferred Stock are in
arrears, whether or not earned or declared, the number of directors then
constituting the Board will be increased by three and the holders of Preferred
Stock will have the right to elect three additional directors to serve on the
Board at an annual meeting of stockholders or special meeting held in place
thereof, or at a properly called special meeting of the holders of the Preferred
Stock and at each subsequent annual meeting of stockholders or special meeting
held in place thereof, until all such dividends in arrears and dividends for the
current quarterly period on the Preferred Stock have been paid or declared and
set aside for payment. Notwithstanding the foregoing, the total number of
directors elected by the holders of the Preferred Stock and the preferred
stockholders' representative will not exceed three.
The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to amend the Articles of Incorporation
or Bylaws to affect materially and adversely the rights, preferences or voting
power of the holders of the Preferred Stock or to authorize, create, or increase
the authorized amount of, any class of stock having rights prior or senior to
the Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up or change any provision of the Articles
or Incorporation or Bylaws that relate to the Board of Directors or the election
of directors or approve any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company. However, the
Company may create additional classes, shares or series of preferred stock which
rank on a parity with the Preferred Stock with respect, in each case, to the
payment of dividends and amounts upon liquidation, dissolution or winding up of
the Company, with the consent of the holders of a majority of the outstanding
shares of Preferred Stock, and may create classes of Common Stock, increase the
authorized number of shares of Common Stock and issue additional series of
Common Stock without the consent of any holder of Preferred Stock.
Notes Payable. 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"). The Subordinated Notes were issued 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
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). Under the Indenture, the Company is prohibited from
paying dividends or redeeming its Common Stock if a default has occurred or if,
after giving effect to such restricted payment, the Company's debt/equity ratio
would exceed 2:1.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
After the Company's Annual Meeting of Shareholders on May 12, 1998, the
Company was notified by its independent auditors, Coopers & Lybrand LLP
("Coopers"), that Coopers would no longer serve as the Company's
independent auditors. Thereafter, the Company's audit committee approved
Coopers' decision. Coopers' report on the Company's financial statements
included in the Company's 1997 Annual Report on Form 10-K contained statements
emphasizing that the Company's most significant warehouse facility, which
expired on March 31, 1998 had been extended to April 30, 1998 and that
the Company was in negotiations with other parties for additional
warehouse and securitizations facilities.
There were no disagreements between the Company and Coopers as to
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the 1997 audit or any interim period
hereafter. With respect to the 1996 audit the Company and Coopers did disagree
over the treatment of premiums paid by the Company to procure physical damage
and deficiency balance insurance for certain finance contracts included in
securitization trusts. The additional credit enhancement provided by such
insurance allowed the Company's subsidiary to issue rated debt secured by excess
spread cash flows from the trusts, and the Company believed that the appropriate
accounting treatment was to capitalize at least part of the premiums paid over
the expected life of the debt. Coopers disagreed and required the current
expensing of all such premiums. The disagreement was discussed by the Company's
board of directors with Coopers and was resolved to Coopers' satisfaction, and
such premiums have been expensed in the period incurred. The Company has
authorized Coopers to respond fully to the inquiries of the Company's successor
auditors as to the nature of the disagreement. During 1996 and prior
to the Company's initial public offering in November 1996, Coopers did advise
the Company as to the Company's need to improve the internal accounting controls
necessary to develop reliable financial statements. In its 1996 and 1997 Reports
to Management, Coopers also advised the Company of certain matters involving the
internal control structure and its operation that Coopers considered to be
"reportable conditions" that could adversely affect the ability to report
financial data consistent with the assertions of management in the financial
statements, none of which conditions were deemed material to the point of
requiring financial statement disclosure.
The Company and Coopers are currently in discussions as to certain
limited engagements by Coopers on behalf of the Company, including the rendering
of Coopers' report on the financial statements to be included in the Company's
upcoming amendment to its 1997 Annual Report on Form 10-K. The Company has
commenced discussions with another accounting firm with respect to such firm's
engagement as auditors for the Company.
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 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."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------
<C> <S>
3.1 * Restated Articles of Incorporation of the Company
3.2 * Amended and restated Bylaws of the Company
3.3 ++ Certificate of Designation for the Company's 15% Series A Cumulative
Preferred Stock
4.1 * Specimen Common Stock Certificate
4.2 xx Specimen Preferred Stock Certificate
10.1* Amended and Restated Loan Origination, Sale and Contribution
Agreement dated as of December 15, 1995 by and between the Company
and AutoBond Funding Corporation I
10.2* Security Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, the Company and Norwest Bank Minnesota,
National Association
10.3* Credit Agreement and Side Agreement, dated as of May 21, 1996
among AutoBond
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------
<C> <S>
Funding Corporation II, the Company and Peoples Life Insurance
Company
10.4 * Servicing Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, CSC Logic/MSA L.L.P., doing business as
"Loan Servicing Enterprise", the Company and Norwest Bank
Minnesota, National Association
10.5 * Loan Acquisition Sale and Contribution Agreement dated as of May
21, 1996 by and between the Company and AutoBond Funding
Corporation II
10.6 * Second Amended and Restated Secured Revolving Credit Agreement dated as
of July 31, 1995 between Sentry Financial Corporation and the Company
10.7 * Management Administration and Services Agreement dated as of
January 1, 1996 between the Company and AutoBond, Inc.
10.8 * Employment Agreement dated November 15, 1995 between Adrian Katz and the
Company
10.9 * Employment Agreement effective as of May 1, 1996 between William O.
Winsauer and the Company
10.10 * Vender's Comprehensive Single Interest Insurance Policy and Endorsements,
issued by Interstate Fire & Casualty Company
10.11 * Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12 * Employee Stock Option Plan
10.13 * Dealer Agreement dated November 9, 1994, between the Company and
Charlie Thomas Ford, Inc.
10.14 * Automobile Loan Sale Agreement, dated as of September 30, 1996, among the
Company, First Fidelity Acceptance Corp., and Greenwich Capital Financial
Products, Inc.
10.15 + Servicing Agreement, dated as of January 29, 1997, between CSC
LOGIC/MSA L.P.P., doing business as "Loan Servicing Enterprise"
and the Company
10.16 + Credit Agreement, dated as of February 1, 1997, among AutoBond
Funding Corporation II, the Company and Daiwa Finance Corporation
10.17 + Security Agreement, dated as of February 1, 1997, by and among
AutoBond Funding Corporation II, the Company and Norwest Bank
Minnesota, National Association
10.18 + Automobile Loan Sale Agreement, dated as of March 19, 1997, by
and between Credit Suisse First Boston Mortgage Capital L.L.C., a
Delaware limited liability company, and the Company
10.19 x 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 ** Credit Agreement, dated as of June 30, 1997, by and among
AutoBond Master Funding Corporation, the Company and Daiwa Finance
Corporation
10.21 ** Amended and Restated Trust Indenture, dated as of June 30,
1997, among AutoBond Master Funding Corporation, AutoBond
Acceptance Corporation and Norwest Bank Minnesota, National
Association.
10.22 ** Securities Purchase Agreement, dated as of June 30, 1997, by and
among the Company, Lion Capital Partners, L.P. and Infinity
Emerging Opportunities Limited.
10.23 xx 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 xx Trust Indenture, dated as of December 31, 1997, among AutoBond
Master Funding Corporation II, the Company and Manufacturers and
Traders Trust Company
10.25 xx Receivables Purchase Agreement, dated as of December 31, 1997,
between Credit Suisse First Boston Mortgage Capital L.L.C. and
the Company
10.26 xx Servicing Agreement, dated as of December 31, 1997, among the
Company, AutoBond Master Funding Corporation II and Manufacturers
and Traders Trust Company
10.27 xx Indenture and Note, dated January 30, 1998, between the Company
and Bank Boston, N.A.
10.28 xx Warrant, dated January 30, 1998, issued to BancBoston
Investments, Inc.
10.29 xx 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.
</TABLE>
Page 31
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------
<C> <S>
10.31 ++ Warrant Agreement and Warrant, dated February 20, 1998, issued to
Tejas Securities Group, Inc.
10.32 xx Consulting and Employment Agreement, dated as of January 1, 1998
between Manuel A. Gonzalez and the Company
10.33 xx Severance Agreement, dated as of February 1, 1998 between Manuel
A. Gonzalez and the Company
10.34 1998 Stock Option Plan
10.35 Third Amendment to the Secured Revolving Credit Agreement dated
May 5, 1998 between Sentry Financial Corporation and the Company
10.36 Warrant, dated March 31, 1998, issued to Infinity Investors Limited
21.1 ** Subsidiaries of the Company
21.2 xx Additional Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-05359).
+ Incorporated by reference to the Company's 1996 annual report on Form 10-K for
the year ended December 31, 1996.
x Incorporated by reference to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997.
** Incorporated by reference to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997.
++ Incorporated by reference to the Company's 1997 annual report on Form 10-K
for the year ended December 31, 1997.
xx Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-41257)
(B) EXHIBITS
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
Page 32
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 15, 1998.
AUTOBOND ACCEPTANCE CORPORATION
BY: /S/ WILLIAM O. WINSAUER
_______________________________________
WILLIAM O. WINSAUER, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
BY: /S/ ADRIAN KATZ
_______________________________________
ADRIAN KATZ, VICE CHAIRMAN OF THE
BOARD, CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
Page 34
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
1998 STOCK OPTION PLAN
ARTICLE I
PURPOSE
1.1 This AutoBond Acceptance Corporation 1998 Stock Option Plan
is intended to advance the interests of the Company and its stockholders and
subsidiaries by attracting, retaining and motivating the performance of selected
directors, officers and employees of the Company of high caliber and potential
upon whose judgment, initiative and effort the Company is largely dependent for
the successful conduct of its business, and to encourage and enable such
directors, officers and employees to acquire and retain a proprietary interest
in the Company by ownership of its common stock.
ARTICLE II
DEFINITIONS
2.1 "Board" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Common Stock" means the Company's Common Stock, no par
value.
2.4 "Committee" means the Compensation Committee appointed by
the Board or any successor committee appointed by the Board to administer the
Plan pursuant to Article IV hereof.
2.5 "Company" means AutoBond Acceptance Corporation, a Texas
Corporation.
2.6 "Date of Grant" means the date on which an Option becomes
effective in accordance with Section 6.1 hereof.
2.7 "Eligible Person" means any person who is a director,
officer or employee of the Company or any Subsidiary.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.9 "Fair Market Value" means the last reported sales prices of
the Common Stock on the American Stock Exchange, Inc. on the date as of which
fair market value is to be determined or, in the absence of any reported sales
of Common Stock on such date, on the first preceding date on which any such sale
shall have been reported. If Common Stock is not listed on the American
<PAGE>
<PAGE>
Stock Exchange, Inc. on the date as of which fair market value is to be
determined, the Committee shall determine in good faith the fair market value in
whatever manner it considers appropriate.
2.10 "Incentive Stock Option" means a stock option granted under
the Plan that is intended to meet the requirements of Section 422 of the Code
and the regulations promulgated thereunder.
2.11 "Nonqualified Stock Option" means a stock option granted
under the Plan that is not an Incentive Stock Option.
2.12 "Option" means an Incentive Stock Option or a Nonqualified
Stock Option granted under the Plan.
2.13 "Optionee" means an Eligible Person to whom an Option has
been granted, which Option has not expired, under the Plan.
2.14 "Option Price" means the price at which each share of
Common Stock subject to an Option may be purchased, determined in accordance
with Section 6.2 hereof.
2.15 "Plan" means this AutoBond Acceptance Corporation 1998 Stock
Option Plan.
2.16 "Stock Option Agreement" means an agreement between the
Company and an Optionee under which the Optionee may purchase Common Stock under
the Plan.
2.17 "Subsidiary" means a subsidiary corporation of the Company,
within the meaning of Section 424(f) of the Code.
2.18 "Ten-Percent Owner" means an Optionee who, at the time an
Incentive Stock Option is granted, owns stock possessing more than ten percent
of the total combined voting power of all classes of stock of the Company, its
parent, if any, or any Subsidiary, within the meaning of Sections 422(b)(6) and
424(d) of the Code.
ARTICLE III
ELIGIBILITY
All Eligible Persons are eligible to receive a grant of an Option
under the Plan. The Committee shall, in its sole discretion, determine and
designate from time to time those Eligible Persons who are to be granted an
Option.
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<PAGE>
ARTICLE IV
ADMINISTRATION
4.1 Committee Members. The Plan shall be administered by a
Committee comprised of no fewer than two persons selected by the Board. Solely
to the extent necessary or advisable to satisfy the requirements of Rule 16b-3
under the Exchange Act, each Committee member shall meet the definition of a
"Non-Employee Director" for purposes of such Rule 16b-3.
4.2 Committee Authority. Subject to the express provisions of
the Plan, the Committee shall have the authority, in its discretion, to
determine the Eligible Persons to whom an Option shall be granted, the time or
times at which an Option shall be granted, the number of shares of Common Stock
subject to each Option, the Option Price of the shares subject to each Option
and the time or times when each Option shall become exercisable and the duration
of the exercise period.
Subject to the express provisions of the Plan, the Committee
shall also have discretionary authority to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the details
and provisions of each Stock Option Agreement, and to make all the
determinations necessary or advisable in the administration of the Plan. All
such actions and determinations by the Committee shall be conclusively binding
for all purposes and upon all persons.
No Committee member shall be liable for any action or
determination made in good faith with respect to the Plan, any Option or any
Stock Option Agreement entered into hereunder.
4.3 Majority Rule. A majority of the members of the Committee
(or, if less than three, all of the members) shall constitute a quorum, and any
action taken by a majority present at a meeting at which a quorum is present or
any action taken without a meeting evidenced by a writing executed by a majority
of the whole Committee shall constitute the action of the Committee.
4.4 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to Eligible Persons, their
employment with or other service to the Company, their death, disability or
other termination of service, and such other pertinent facts as the Committee
may require. The Company shall furnish the Committee with such clerical and
other assistance as is necessary in the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Number of Shares. Subject to adjustment pursuant to the
provisions of Section 5.2 hereof, the maximum number of shares of Common Stock
which may be issued and sold hereunder to all Eligible Persons in the aggregate
shall be 650,000 shares. Shares of Common Stock issued and sold under the Plan
may be either authorized but unissued shares or shares held in the
3
<PAGE>
<PAGE>
Company's treasury. Shares of Common Stock covered by an Option that shall have
been exercised shall not again be available for an Option grant. If an Option
shall terminate for any reason (including, without limitation, the cancellation
of an Option pursuant to Section 6.6 hereof) without being wholly exercised, the
number of shares to which such Option termination relates shall again be
available for grant hereunder.
5.2 Antidilution. Subject to Article IX hereof, in the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger or consolidation, or the sale, conveyance, or other transfer by
the Company of all or substantially all of its property, or any other change in
the corporate structure or shares of the Company, pursuant to any of which
events the then outstanding shares of Common Stock are split up or combined, or
are changed into, become exchangeable at the holder's election for, or entitle
the holder thereof to, other shares of stock, or in the case of any other
transaction described in Section 424(a) of the Code, the Committee may change
the number and kind of shares (including by substitution of shares of another
corporation) subject to the Options and/or the Option Price of such shares in
the manner that it shall deem to be equitable and appropriate. In no event may
any such change be made to an Incentive Stock Option which would constitute a
"modification" within the meaning of Section 424(h)(3) of the Code.
ARTICLE VI
OPTIONS
6.1 Grant of Option. An Option may be granted to any Eligible
Person selected by the Committee. The grant of an Option shall first be
effective upon the date it is approved by the Committee, except to the extent
the Committee shall specify a later date upon which the grant of an Option shall
first be effective. Each Option shall be designated, at the discretion of the
Committee, as an Incentive Stock Option or a Nonqualified Stock Option, provided
that Incentive Stock Options may only be granted to Eligible Persons who are
considered employees of the Company or any Subsidiary for purposes of Section
422 of the Code. The Company and the Optionee shall execute a Stock Option
Agreement which shall set forth such terms and conditions of the Option as may
be determined by the Committee to be consistent with the Plan, and which may
include additional provisions and restrictions that are not inconsistent with
the Plan.
6.2 Option Price. The Option Price shall be determined by the
Committee: provided, however, that the Option Price shall not be less than 100
percent of the Fair Market Value of a share of Common Stock on the Date of Grant
(subject to Section 7.1 hereof in the case of a Ten-Percent Owner).
6.3 Vesting andTerm of Option. Unless otherwise specified by the
Committee in the Stock Option Agreement for an Optionee, an Option shall vest
and become exercisable in cumulative annual installments, each of which shall
relate to one-third of the number of shares of Common Stock originally covered
thereby (adjusted in accordance with Section 5.2 hereof), on the second, third
and fourth anniversaries of the Date of Grant respectively, provided that the
Optionee
4
<PAGE>
<PAGE>
is an Eligible Person on such anniversary. Notwithstanding the foregoing, the
Committee, in its sole discretion, may accelerate the exercisability of any
Option at any time. An Option may become 100 percent vested and exercisable upon
an Optionee's death or disability to the extent provided in Article VIII hereof.
The period during which a vested Option may be exercised shall be ten years from
the Date of Grant (subject to Section 7.1 hereof in the case of a Ten-Percent
Owner), unless a shorter exercise period is specified by the Committee in the
Stock Option Agreement for an Optionee.
6.4 Option Exercise and Withholding. An Option may be exercised
in whole or in part at any time to the extent such Option is then exercisable
and vested, with respect to whole shares only, within the period permitted for
the exercise thereof, and shall be exercised by written notice of intent to
exercise the Option with respect to a specified number of shares delivered to
the Company at its principal office, and payment in full to the Company at said
office of the amount of the Option Price for the number of shares of the Common
Stock with respect to which the Option is then being exercised. Payment of the
Option Price shall be made (i) in cash, (ii) at the discretion of the Committee,
in Common Stock (not subject to limitations on transfer) valued at the Fair
Market Value of such shares on the trading date immediately preceding the date
of exercise or (iii) at the discretion of the Committee, by a combination of
cash and such Common Stock. In addition to and at the time of payment of the
Option Price, the Optionee shall pay to the Company in cash or, at the
discretion of the Committee, in Common Stock the full amount of all applicable
withholding and other employment taxes resulting from such exercise.
6.5 Nontransferability of Option. No Option shall be transferred
by an Optionee other than by will or the laws of descent and distribution. No
transfer of an Option by the Optionee by will or by laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice thereof and an authenticated copy of the
will and/or such other evidence as the Committee may deem necessary to establish
the validity of the transfer. During the lifetime of an Optionee, the Option
shall be exercisable only by such Optionee, except that, in the case of an
Optionee who is legally incapacitated, the Option shall be exercisable by such
Optionee's guardian or legal representative.
6.6 Cancellation, Substitution and Amendment of Options. The
Committee shall have the authority to effect, at any time and from time to time,
with the consent of the affected Optionees, (i) the cancellation of any or all
outstanding Options and the grant in substitution therefor of new Options
covering the same or different numbers of shares of Common Stock and having an
Option Price which may be the same as or different than the Option Price of the
canceled Options or (ii) the amendment of the terms of any and all outstanding
Options.
ARTICLE VII
INCENTIVE STOCK OPTIONS
5
<PAGE>
<PAGE>
7.1 Ten-Percent Owners. Notwithstanding any other provisions of
this Plan to the contrary, in the case of an Incentive Stock Option granted to a
Ten-Percent Owner, (i) the period during which any such Incentive Stock Option
may be exercised shall not be greater than five years from the Date of Grant and
(ii) the Option Price of such Incentive Stock Option shall not be less than 110
percent of the Fair Market Value of a share of Common Stock on the Date of
Grant.
7.2 Annual Limits. No Incentive Stock Option shall be granted
to an Optionee as a result of which the aggregate fair market value (determined
as of the date of grant) of the stock with respect to which incentive stock
options are exercisable for the first time in any calendar year under the Plan,
and any other stock option plans of the Company, any Subsidiary or any parent
corporation, would exceed $100,000, determined in accordance with Section 422(d)
of the Code. This limitation shall be applied by taking options into account in
the order in which granted.
7.3 Disqualifying Dispositions. If shares of Common Stock
acquired by exercise of an Incentive Stock Option are disposed of within two
years following the Date of Grant or one year following the transfer of such
shares to the Optionee upon exercise, the Optionee shall, within 10 days after
such disposition, notify the Company in writing of the date and terms of such
disposition and provide such other information regarding the disposition as the
Committee may reasonably require.
7.4 Other Terms and Conditions. Any Incentive Stock Option
granted hereunder shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as are deemed necessary or desirable
by the Committee, which terms, together with the terms of this Plan, shall be
intended and interpreted to cause such Incentive Stock Option to qualify as an
"incentive stock option" under Section 422 of the Code.
ARTICLE VIII
TERMINATION OF SERVICE
8.1 Death. If an Optionee shall die at any time after the Date
of Grant and while he or she is an Eligible Person, the executor or
administrator of the estate of the decedent, or the person or persons to whom an
Option shall have been validly transferred in accordance with Section 6.5 hereof
pursuant to will or the laws of descent and distribution, shall have the right,
during the period ending one year after the date of the Optionee's death
(subject to Sections 6.3 and 7.1 hereof concerning the maximum term of an
Option), to exercise the Optionee's Option to the extent that it was exercisable
at the date of the Optionee's death and shall not have been previously
exercised. The Committee may determine at or after grant to make any portion of
an Option that is not exercisable at the date of the Optionee's death
immediately vested and exercisable.
8.2 Disability. If an Optionee's employment or other service
with the Company or any Subsidiary shall be terminated as a result of his or her
permanent and total disability (within the meaning of Section 22(e)(3) of the
Code) at any time after the Date of Grant and while he or she
6
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<PAGE>
is an Eligible Person, the Optionee (or in the case of an Optionee who is
legally incapacitated, his or her guardian or legal representative) shall have
the right, during a period ending one year after the date of his disability
(subject to Sections 6.3 and 7.1 hereof concerning the maximum term of an
Option), to exercise such Option to the extent that it was exercisable at the
date of such termination of employment or other service and shall not have been
exercised. The Committee may determine at or after grant to make any portion of
his or her Option that is not exercisable at the date of termination of
employment or other service due to disability immediately vested and
exercisable.
8.3 Termination for Cause. If an Optionee's employment or
other service with the Company or any Subsidiary shall be terminated for cause,
the Optionee's right to exercise any unexercised portion of his or her Option
shall immediately terminate and all rights thereunder shall cease. For purposes
of this Section 8.3, termination for "cause" shall include, but not be limited
to, embezzlement or misappropriation of corporate funds, any acts of dishonesty
resulting in conviction for a felony, misconduct resulting in material injury to
the Company or any Subsidiary, significant activities harmful to the reputation
of the Company or any Subsidiary, a significant violation of Company or
Subsidiary policy, willful refusal to perform, or substantial disregard of, the
duties properly assigned to the Optionee, or a significant violation of any
contractual, statutory or common law duty of loyalty to the Company or any
Subsidiary. The Committee shall have the power to determine whether the Optionee
has been terminated for cause and the date upon which such termination for cause
occurs. Any such determination shall be final, conclusive and binding upon the
Optionee.
8.4 Other Termination of Service. If an Optionee's employment
or other service with the Company or any Subsidiary shall be terminated for any
reason other than death, permanent and total disability or termination for
cause, the Optionee shall have the right, during the period ending 90 days after
such termination (subject to Sections 6.3 and 7.1 hereof concerning the maximum
term of an Option), to exercise such Option to the extent that it was
exercisable at the date of such termination and shall not have been exercised.
For purposes of this Section 8.4, an Optionee shall not be considered to have
terminated employment or other service with the Company or any Subsidiary until
the expiration of the period of any military, sick leave or other bona fide
leave of absence, up to a maximum period of 90 days (or such greater period
during which the Optionee is guaranteed reemployment either by statute or
contract).
ARTICLE IX
CHANGE IN CONTROL
9.1 Change in Control. Upon a "change in control" of the Company
(as defined below), each outstanding Option, to the extent that it shall not
otherwise have become vested, shall become fully and immediately vested (without
regard to any otherwise applicable vesting requirement under Section 6.3 hereof)
and an Optionee shall surrender his or her Option and receive with respect to
each share of Common Stock issuable under such Option outstanding at such time,
a payment in cash equal to the excess of the Fair Market Value of the Common
Stock at the time of
7
<PAGE>
<PAGE>
the change in control over the Option Price of the Common Stock; provided,
however, that no such vesting and cash payment shall occur if (i) the change in
control has been approved by at least two-thirds of the members of the Board who
were serving as such immediately prior to such transaction and (ii) provision
has been made in connection with such transaction for (a) the continuation of
the Plan and/or the assumption of such Options by a successor corporation (or a
parent or subsidiary thereof) or (b) the substitution for such Options of new
options covering the stock of a successor corporation (or a parent or subsidiary
thereof), with appropriate adjustments as to the number and kinds of shares and
exercise prices. In the event of any such continuation, assumption or
substitution, the Plan and/or such Options shall continue in the manner and
under the terms so provided.
9.2 Definition. For purposes of Section 9.1 hereof, a "change in
control" of the Company shall mean (i) a merger, consolidation, or
reorganization of the Company with one or more other corporations in which the
Company is not the surviving corporation; (ii) a sale or other transfer of
substantially all of the assets of the Company to another corporation; (iii) any
transaction or series of transactions (including, without limitation, a
transaction in which the Company is the surviving corporation) that results in
any person or entity (other than any Subsidiary) becoming owner of more than 50
percent of the combined voting power of all classes of stock of the Company;
(iv) a change or series of changes in the composition of the Board such that a
majority of its members shall cease to consist of "Continuing Directors"
(meaning directors of the Company who either were directors on the date this
Plan is approved by the Board or who subsequently became directors and whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least two-thirds of the then existing directors); or (v) a
dissolution or liquidation of the Company.
ARTICLE X
STOCK CERTIFICATES
10.1 Issuance of Certificates. Subject to Section 10.2 hereof,
the Company shall issue a stock certificate in the name of the Optionee (or
other person exercising the Option in accordance with the provisions of the
Plan) for the shares of Common Stock purchased by exercise of an Option as soon
as practicable after due exercise and payment of the aggregate Option Price for
such shares. A separate stock certificate or separate stock certificates shall
be issued for any shares of Common Stock purchased pursuant to the exercise of
an Option that is an Incentive Stock Option, which certificate or certificates
shall not include any shares of Common Stock that were purchased pursuant to the
exercise of an Option that is a Nonqualified Stock Option.
10.2 Conditions. The Company shall not be required to issue or
deliver any certificate for shares of Common Stock purchased upon the exercise
of any Option granted hereunder or any portion thereof prior to fulfillment of
all of the following conditions:
(a) The completion of any registration or other qualification of
such shares, under any federal or state law or under the rulings or regulations
of the Securities and Exchange
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Commission or any other governmental regulatory body, that the Committee shall
in its sole discretion deem necessary or advisable;
(b) The obtaining of any approval or other clearance from any
federal or state governmental agency which the Committee shall in its sole
discretion determine to be necessary or advisable;
(c) The lapse of such reasonable period of time following the
exercise of the Option as the Committee from time to time may establish for
reasons of administrative convenience;
(d) Satisfaction by the Optionee of all applicable withholding
taxes or other withholding liabilities as provided in Section 6.4 hereof; and
(e) If required by the Committee, in its sole discretion, the
receipt by the Company from an Optionee of (i) a representation in writing that
the shares of Common Stock received upon exercise of an Option are being
acquired for investment and not with a view to distribution and (ii) such other
representations and warranties as are deemed necessary by counsel to the
Company.
10.3 Legends. The Company reserves the right to legend any
certificate for shares of Common Stock, conditioning sales of such shares upon
compliance with applicable federal and state securities laws and regulations.
ARTICLE XI
EFFECTIVE DATE, TERMINATION AND AMENDMENT
11.1 Effective Date. The Plan shall become effective on the date
of its adoption by the Board (the "Effective Date"); provided, however, that no
Option shall be exercisable by an Optionee unless and until the Plan shall have
been approved by the stockholders of the Company, which approval shall be
obtained within 12 months before or after the adoption of the Plan by the Board.
If the stockholders fail to approve the Plan within one year from the Effective
Date, any Options granted hereunder shall be null and void and of no effect.
11.2 Termination. The Plan shall terminate on the date
immediately preceding the tenth anniversary of the earlier of the date the Plan
is adopted by the Board or the date the Plan is approved by the Company's
stockholders. The Board may, in its sole discretion and at any earlier date,
terminate the Plan. Notwithstanding the foregoing, no termination of the Plan
shall in any manner affect any Option theretofore granted without the consent of
the Optionee or the permitted transferee of the Option.
11.3 Amendment. The Board may at any time and from time to time
and in any respect, amend or modify the Plan. Notwithstanding the foregoing, no
amendment or modification
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of the Plan shall in any manner affect any Option theretofore granted without
the consent of the Optionee or the permitted transferee of the Option.
ARTICLE XII
MISCELLANEOUS
12.1 Employment or other Service. Nothing in the Plan, in the
grant of any Option or in any Stock Option Agreement shall confer upon any
Eligible Person the right to continue in the capacity in which he or she is
employed by or otherwise provides services to the Company or any Subsidiary.
Notwithstanding anything contained in the Plan to the contrary, unless otherwise
provided in a Stock Option Agreement, no Option shall be affected by any change
of duties or position of the Optionee (including a transfer to or from the
Company or any Subsidiary), so long as such Optionee continues to be an Eligible
Person.
12.2 Rights as Shareholder. An Optionee or the permitted
transferee of an Option shall have no rights as a shareholder with respect to
any shares subject to such Option prior to the purchase of such shares by
exercise of such Option as provided herein. Nothing contained herein or in the
Stock Option Agreement relating to any Option shall create an obligation on the
part of the Company to repurchase any shares of Common Stock purchased
hereunder.
12.3 Other Compensation and Benefit Plans. The adoption of the
Plan shall not affect any other stock option or incentive or other compensation
plans in effect for the Company or any Subsidiary, nor shall the Plan preclude
the Company from establishing any other forms of incentive or other compensation
for employees of the Company or any Subsidiary. The amount of any compensation
deemed to be received by an Optionee as a result of the exercise of an Option or
the sale of shares received upon such exercise shall not constitute compensation
with respect to which any other employee benefits of such Optionee are
determined, including, without limitation, benefits under any bonus, pension,
profit sharing, life insurance or salary continuation plan, except as otherwise
specifically determined by the Board or the Committee or provided by the terms
of such plan.
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THIRD AMENDMENT
TO
SECURED REVOLVING CREDIT AGREEMENT
THIS THIRD AMENDMENT TO SECURED REVOLVING CREDIT AGREEMENT ("Amendment") is
dated and effective this 5th day of May, 1998 and made among Sentry Financial
Corporation ("Lender"), a Utah corporation, and AutoBond Acceptance Co., a Texas
corporation ("Borrower").
RECITALS
A. Lender and Borrower entered into that certain Secured Revolving Credit
Agreement (the "Agreement") dated August 1, 1994. The Agreement was
amended and restated in its entirety as the Amended and Restated Secured
Revolving Credit Agreement dated as of July 31, 1995 and then again
amended and restated in its entirety as the Second Amended and Restated
Secured Revolving Credit Agreement also dated as of July 31, 1995. All
capitalized terms, unless otherwise provided herein, will have the
meaning ascribed to them in the Agreement, as amended.
B. A genuine dispute has arisen between Lender and Borrower regarding
whether Borrower is able to meet or fulfill the conditions precedent to
an Advance and whether Borrower is in default or breach under the terms
and conditions of the Agreement.
C. In an effort to resolve their dispute, Lender is willing to loan money
to a special purpose corporation wholly owned by Borrower on terms and
conditions mutually agreeable to the parties ("May 1998-SPC Funding").
D. In an effort to resolve their dispute, Lender and Borrower also desire
to amend and modify the Agreement again.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and promises contained
herein and other good and valuable consideration, the receipt, adequacy and
legal sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, voluntarily agree as follows:
A. Article II, Credit Limit; Disbursement and Payment, Section 2.01, Credit
Limit, subsection (a) Commitment to Lend, (i) Line of Credit. This
subsection is amended by adding the following sentence to the end of the
clause: "Any amount of indebtedness, loan or credit Lender has made or
committed to make to any Affiliate of Borrower will reduce the Credit
Limit dollar for dollar and count as principal amount outstanding
hereunder, and such indebtedness, loan or credit will be deemed an
Advance hereunder for purposes of payment of the fees and the Events of
Default. Lender and Borrower further agree that the Credit Limit shall
be reduced by Six
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Million Five Hundred Thousand Dollars ($6,500,000.00) due to the May
1998 SPC Funding."
B. Article II, Credit Limit; Disbursement and Payment, Section 2.01, Credit
Limit, subsection (b) Amount of Credit Limit, (i) Line of Credit. This
subsection is amended by deleting it entirely and replacing it with:
"The amount of the Credit Limit shall be $10,000,000."
C. Article II, Credit Limit; Disbursement and Payment, Section 2.01, Credit
Limit, subsection (d) Early Termination. This subsection is amended
adding the following new sentence at the end of the subsection:
"Borrower agrees that after April 30, 1998 Lender will have the right to
terminate this Agreement by written notice once Borrower has obtained a
commitment from another warehouse lender to fund Receivables."
D. Article III, Security, Section 3.02, Guarantees. This Section is
amended by deleting the subsection and replacing it with: "As additional
security for the payment and performance of the Obligations and the
Guarantor Obligations, Borrower shall cause William O. Winsauer to
execute and deliver the appropriate Guarantee to Lender in accordance
with Section 4.01(a)."
5. Article IV, Conditions, Section 4.02, Conditions Precedent to All
Advances. The first paragraph is deleted entirely and replaced with:
"The obligation of Lender to make any Advance (including the first
Advance) shall be subject to fulfillment of each of the following
conditions to the satisfaction of, and as determined by, Lender on or
prior to the Disbursement Date for such Advance:"
The following new clause is added at the end of Section 4.02:
"(x) Neither Borrower nor any Affiliate of Borrower is in breach
or Default of any term, condition or obligation under any agreement with
Lender."
6. Article V, Representations and Warranties, Section 5.01, Representations
and Warranties of Borrower. The following new clauses are added at the
end of the subsection:
"(bb) The Depository and Lender have entered into a separate
agreement providing, among other things, that Lender has the sole
control of any and all funds deposited into the Lender Accumulation
Account; and all Obligors have, on or before disbursement of the
Advance, been notified to make all payments on the Target Receivables
into the Lender Accumulation Account;
(cc) Borrower has not waived any representation or warranty, or
any of the covenants, terms, conditions or provisions of any Operative
Document or closing documents or any other agreement or document
relating to or affecting the requested Advance or the Target
Receivables, except as disclosed previously in writing to Lender in the
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Draw Down Notice; and
(dd) Borrower's execution, delivery and performance of the Loan
Documents and Insurance Documents does not and will not violate or
conflict with any requirements imposed by other lenders, including
without limitation, Daiwa Finance Corporation or any affiliate thereof,
Credit Suisse First Boston or any affiliate thereof, or any other party
directly or indirectly providing financing to Borrower;"
30. Article V, Representations and Warranties, Section 5.02, Repetition of
Representations and Warranties. This subsection is renumbered as 5.03
and amended to read as: "Each representation and warranty set forth in
Sections 5.01 and 5.02 shall (unless otherwise specifically so
indicated) be deemed to be made as of the first Disbursement Date, and
repeated on each subsequent Disbursement Date and on each Payment Date
as if made on and as of such date."
A new Section 5.02 will be added as follows:
(i) such Target Receivable complies fully with, and has been
acquired by Borrower in accordance with, Borrower's underwriting
guidelines and procedures (a copy of which is attached hereto as
Exhibit A);
(ii) Borrower has conducted each of the procedures set forth in
the Borrower program manual ("Borrower Program Manual") to
evaluate the Obligor's application in accordance with the
criteria set forth in the Borrower Program Manual;
(iii) on and after such Disbursement Date, there shall exist
under each such Target Receivable a valid, subsisting and
enforceable first priority security interest in the Financed
Vehicle securing each Target Receivable and at such time
enforcement of such security interest is sought and at all times
there shall exist a valid, subsisting and enforceable first
priority perfected security interest in such Financed Vehicle in
favor of Borrower (and assigned to Lender under the Security
Agreement);
(iv) such Target Receivable has not been satisfied, subordinated
or rescinded; and no provision of such Target Receivable has
been waived, altered or modified in any respect, except as
identified in the Receivable file and made in accordance with
the Borrower Program Manual and Borrower's credit and collection
policies, approved by Lender;
(v) such Target Receivable is not and will not be subject to any
right of rescission, set-off, recoupment, counterclaim or
defense, whether arising out of transactions concerning such
Target Receivable between the Obligor and the dealer, the dealer
and Borrower, the dealer and an Originator, or otherwise and no
such right has been asserted with respect thereto; the operation
of the terms of such Target Receivable or the exercise of any
right thereunder will not render any such Target Receivable
unenforceable in whole or in part;
(vi) upon assigning such Target Receivable to Borrower, dealer
and/or Originator had full right to transfer such Target
Receivable to Borrower, and dealer and/or Originator conveyed
sole ownership of and good and marketable title to such Target
Receivable to Borrower;
(vii) such Target Receivable is not a Defaulted Receivable on
the date of its transfer and there is no default, breach,
violation, or event permitting acceleration under such Target
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Receivable, and no event has occurred which, with notice and the
expiration of any grace or cure period or both, would constitute
a default, breach, violation, or event permitting acceleration
under such Target Receivable;
(viii) the Receivable file related to such Target Receivable
contains each of the documents required by the Borrower Program
Manual and the contractual documents contained in such Target
Receivable file constitute the entire agreement with respect to
such Target Receivable between the Obligor and the related
dealer and, between the dealer and Borrower;
(ix) the down payment described in the Receivable Documents
relating to such Target Receivable was paid to the related
dealer in the manner stated therein at the time of the
origination of such Target Receivable, the proceeds thereof were
fully disbursed; there is no requirement for further advances
thereunder; and all fees and expenses in connection therewith
have been paid;
(x) the Financed Vehicle securing the Obligor's obligation to
pay under such Target Receivable has been delivered to and
accepted by the Obligor;
(xi) such Target Receivable is denominated and payable in United
States dollars;
(xii) the documents evidencing such Target Receivable contain
customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the
realization of the security afforded by the related collateral;
(xiii) the dealer agreement relating to such Target Receivable
is in effect, whereby the related dealer warrants delivery of
title to such Financed Vehicle, indemnifies Borrower or the
related Originator against fraud and misrepresentation by the
related dealer and its employees and represents and warrants
that such dealer did not accept any side notes as any part of
the down payment portion of the related Obligor's purchase
price, and Borrower's or the Originator's (as the case may be)
rights thereunder with regard to such Target Receivable have
been validly assigned to Borrower, and are enforceable against
the related dealer by Borrower or its assignee, along with any
other rights of recourse which Borrower or the Originator has
against the related dealer;
(xiv) each Target Receivable was acquired by Borrower or an
Originator from an "Eligible Dealer"; and the acquisition by
Borrower or an Originator of any Target Receivable from a dealer
was not an extension of financing to such dealer but was
acquired in a transaction constituting a "true sale" under
applicable state law;
(xv) Borrower has no knowledge of any fact which should have led
it to expect at the time of such Target Receivable, that (A)
such Target Receivable was made by the selling dealer and sold
by such dealer to Borrower with any conduct constituting fraud
or misrepresentation on the part of such dealer, or (B) that
such Target Receivable would not be paid in full when due
because of fraud or misrepresentation on the part of the related
Obligor;
(xvi) such Target Receivable was not originated in any
jurisdiction the laws of which prohibit the selling dealer from
transferring such Target Receivable to Borrower or an
Originator, or the Borrower from assigning such Target
Receivables to Lender; nor is such Target Receivable subject to
the laws of any such jurisdiction;
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(xvii) no Target Receivable has been the subject of any
rejection, reclassification or other adverse selection by
Borrower or by any third party (including but not limited to any
rating agency, financial guaranty insurer or other party
performing any analysis on Receivables originated (or to be
originated) or acquired (or to be acquired) by Borrower,
including but not limited to any valuation analysis, due
diligence analysis, re-underwriting analysis or other
acceptability analysis);
(xviii) such Target Receivable does not (A) contravene in any
material respect any state or federal laws, rules or regulations
applicable thereto in connection with the origination of such
Target Receivable including without limitation, usury,
disclosure, truth-in-lending, equal credit and similar laws, the
Federal Trade Commission Act and applicable state laws governing
motor vehicle installment sale or loan contracts (but
specifically excluding laws, rules or regulations applicable
thereto in connection with post-origination compliance,
including, but not limited to, laws, rules and regulations
applicable thereto in connection with fair credit billing, fair
credit reporting and fair debt collection practices), or (B)
except as required by applicable law, impose any liability or
obligation of the dealer or Borrower on Lender or its assignee
with respect to such Target Receivable;
(xix) there are no proceedings or investigations pending or, to
the best of Borrower's knowledge, threatened before any
Governmental Entity (A) asserting the invalidity of such Target
Receivable or the bankruptcy or insolvency of the related
Obligor, (B) seeking the payment of such Target Receivable, or
(C) seeking any determination or ruling that might materially
and adversely affect the validity or enforceability of such
Target Receivable;
(xx) Borrower has duly fulfilled all obligations on its part to
be fulfilled under or in connection with such Target Receivable
and has done nothing to impair the rights of Lender in such
Target Receivable or in the proceeds with respect thereto;
Borrower has paid in full all taxes and other charges payable in
connection with such Target Receivable and the transfer of such
Target Receivable to Lender which could impair or become a lien
prior to Lender's interest in such Target Receivable; there are
no prior liens for work performed affecting any Financed Vehicle
which are or may become a lien prior to or equal with the
security interest granted in the related Target Receivable;
(xxi) the applicable assignment for security to Lender has been
duly executed and delivered by Borrower and the information
regarding the Target Receivable and such assignment attached
thereto is true and correct as of the Disbursement Date;
(xxii) the residence of the related Obligor is located within
the borders of the United States of America;
(xxiii) there is only one original of the retail installment
sale contract or promissory note and security agreement
evidencing such Target Receivable, such original has been
delivered to the Custodian pursuant to the Custodian Agreement
and there are no custodial agreements in effect that would
adversely affect the ability of the Custodian to maintain
possession thereof pursuant to the Custodian Agreement;
(xxiv) the Obligor is not a Governmental Entity;
(xxv) the retail installment sale contract or promissory note
and security agreement evidencing such Target Receivable
constitute "chattel paper" within the meaning of the UCC in
effect in the States of Texas and Utah and all filings required
to be made and all actions required to be taken or performed by
any Person in any jurisdiction to give Lender a first priority
security interest in such Target Receivable have been made or
performed;
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(xxvi) each such Target Receivable constitutes and shall
continue to constitute a legal, valid and binding obligation of
the Obligor thereunder and is enforceable in accordance with its
terms, except only as such enforcement may be limited by laws
affecting the enforcement of creditors' rights generally;
(xxvii) at the origination date of each such Target Receivable,
the related Financed Vehicle was covered by a comprehensive and
collision insurance policy (a) in an amount at least equal to
the lesser of (1) the actual cash value of the related Financed
Vehicle or (2) the unpaid balance owing on such Target
Receivable and (b) insuring against loss and damage due to fire,
theft, transportation, collision and other risks generally
covered by comprehensive and collision coverage;
(xxviii) the total amount financed by such Target Receivable
does not exceed $28,000;
(xxix) such Target Receivable was not purchased from the related
dealer at a discount greater that 11%;
(xxx) the APR for such Target Receivable is not less that 14.5%
per annum;
(xxxi) no selection procedures believed by Borrower to be
adverse to the interest of the Lender shall have been utilized
in selecting such Target Receivables for inclusion as
Collateral;
(xxxii) such Target Receivable shall have not less than 12
monthly payments annually scheduled at origination;
(xxxiii) such Target Receivable shall not have an original
maturity date not later than 61 months from its origination date
and there have not been any re-write, forbearance of rights,
extension of time limits or other modifications of the Target
Receivable;
(xxxiv) the first scheduled payment on such Target Receivable
was not before 45 days prior to the Disbursement Date and has
been made, or, if the first scheduled payment on a Target
Receivable has not yet been made as of the related Disbursement
Date preceding its transfer, such scheduled payment will be made
on or prior to the 20th day after the due date for such
scheduled payment;
(xxxv) each Target Receivable is eligible for coverage under and
is covered by a VSI Policy acceptable in form and content to
Lender;
(xxxvi) no more that 10% of the aggregate unpaid principal
balance of the Lender Receivables owned by Borrower at any time
shall represent Financed Vehicles purchased from dealers who are
not franchised new car dealers; provided, however, that Borrower
shall not be deemed to have breached this representation if it
cures any violation of the immediately preceding clause within
20 days of the earlier to occur of (A) the first date on which
the requirements specified in the immediately preceding clause
were determined to have been breached ("Determination Date"),
and (B) the date on which Borrower has actual knowledge that the
requirements set forth in the second preceding clause have been
breached;
(xxxvii) the weighted average purchase discount with respect to
all such Lender Receivables owned by Borrower shall not exceed
10% and the weighted average APR shall not be less than 16% per
annum; provided, however, that Borrower shall not be deemed to
have breached this representation if Borrower cures any
violation of the immediately preceding clause within 20 days of
the earlier to occur of (A) the first Determination Date on
which the requirements specified in the immediately preceding
clause was determined to
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have been breached, and (B) the date on which Borrower has
actual knowledge that the requirements set forth in the second
preceding clause have been breached;
(xxxviii) no more than 2% of the aggregate unpaid principal
balance of the Lender Receivables owned by Borrower at any time
shall be in respect of Financed Vehicles with a model year prior
to 1992; provided, however, that Borrower shall not be deemed to
have breached this representation if it cures any violation of
the immediately preceding clause within 20 days of the earlier
to occur of (A) the first Determination Date on which the
requirements specified in the immediately preceding clause was
determined to have been breached, and (B) the date on which the
Borrower has actual knowledge that the requirements set forth in
the second preceding clause have been breached;
(xxxix) no Target Receivable is delinquent 20 or more days and
no Obligor with respect to any Target Receivable failed to make
the first payment (if such due date has passed) within 20 days
of such due date;
(xxxx) [Reserved];
(xxxxi) no more than 15% of the aggregate unpaid principal
balance of the Target Receivables represent Financed Vehicles
purchased from Originators.
(xxxxii) All Target Receivables have been or will be fully
entered into Debtor's computerized loan servicing system within
5 business days of Borrower's payment of the Receivable Purchase
Price with respect to the Target Receivable.
(xxxxiii) The amount funded by Lender with respect to each
Target Receivable has been reduced below the Receivables
Purchase Price by the principal portion of each payment received
prior to the Disbursement Date.
(b) In the event Borrower acts as servicer of the Lender Receivables,
the time period for liquidating repossessed Financed Vehicles will be
90 days from date of repossession.
(c) It is understood and agreed that the representations and warranties
set forth in this Section 5.02 shall survive and shall continue so long
as any such Target Receivable shall remain outstanding until such time
as such Target Receivable is repurchased pursuant to this Subsection
5.02 (c). Borrower agrees that with respect to a breach of the
representations and warranties set forth in Section 5.01 and Section
5.02 (a) which may, or does, materially and adversely affect a
Receivable or the interests of the Lender or Custodian therein, upon
discovering such breach or failure to deliver Borrower shall give
prompt written notice to the other parties. If Borrower does not
correct or cure such breach or failure within 10 days of such notice,
occurrence or discovery, then Borrower shall immediately repurchase the
affected Receivable at a purchase price equal to the then outstanding
balance of the Lender Receivable plus all of Lender's costs and
expenses associated therewith ("Repurchase Price"). Any such repurchase
shall be made without recourse against, or warranty, express or
implied, of Lender or the Custodian. The Repurchase Price shall be paid
to Lender, and upon receipt thereof, Lender, and if necessary the
Custodian, shall execute and deliver an assignment to vest ownership of
such Target Receivable in Borrower or as directed by Borrower. If, at
the time of the discovery of such breach or failure to deliver, a loss
has occurred with respect to the liquidation of such Target Receivable,
then Borrower shall pay to Lender or the Custodian an amount equal to
the amount, if any, by which the Repurchase Price exceeds the net
proceeds from such Target Receivable."
8. Article VI, Covenants, Section 6.01, Affirmative Covenants of Borrower.
Subsection (r) Servicer is amended by adding the following before the first
sentence: "Borrower will have in place a "warm backup" servicer determined
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by lender to be satisfactory and provide such "warm backup" servicer all
information and assistance to enable it to take over servicing of the Target
Receivables within hours of notice from Lender."
A new subsection is added: "(v) Replacement Receivables. Borrower agrees to
repurchase each Target Receivable that becomes sixty (60) days delinquent
or, at its option, to replace such delinquent Target Receivable with another
Target Receivable meeting the requirements of this Agreement and having an
outstanding balance at least equal to the balance of the replaced Target
Receivable."
9. Article VI, Covenants, Section 6.03, Financial Covenants. This section is
deleted and replaced with: "(a) So long as any Advance or any other amount
payable by Borrower under this Agreement or any other Loan Document or
payable by any Affiliate of Borrower under any other loan documents shall
remain unpaid, Borrower will maintain a positive net worth (as determined in
accordance with GAAP) of no less than Twenty Million Dollars ($20,000,000)
and a positive balance in cash and cash equivalents of no less than One
Million Dollars ($1,000,000).
(b) If at the end of a Payment Period the Delinquency Ratio for any
Advance is (i) 20% or higher, but less than 30%, Borrower shall, within
5 days of receipt of notice thereof, cause the Reserve for such Advance
to be increased by an amount equal to 50% of such Reserve; or (ii) 30%
or higher, Borrower shall, within 5 days of receipt of notice thereof,
repay such Advance together with any interest due thereon.
10. Article VII, Events of Default, Section 7.01, Events of Default.
The following new clause is added at the end of Section 7.01:
"(p) Any Affiliate of Borrower shall breach or Default on any obligation
owed to Lender or any representation or warranty of any Affiliate of
Borrower is inaccurate in any material respect when made or deemed made."
The final paragraph of the section is deleted in its entirety and replaced
with:
"THEN, and in any such event, (i) Lender may, at its option, by notice to
Borrower, declare the entire unpaid principal amount of any or all Advances
and Notes, all interest accrued and unpaid thereon and all other amounts
payable under this Agreement and the other Loan Documents to be forthwith
due and payable, whereupon the Loan Amount and the Notes, all such accrued
interest and all such other amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by Borrower; provided, however,
that if an event described in subsection (g) of this Section 7.01 shall
occur, the result which would otherwise occur only upon giving of notice by
Lender to Borrower as specified in clause (i) above shall occur
automatically,
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without the giving of any such notice; (ii) Lender may immediately declare
any and all of Lender's obligations under this Agreement terminated; and
(iii) Lender may immediately, and whether or not the actions referred to in
the preceding clause (i) have been taken, exercise any or all of Lender's
rights and remedies under the Loan Documents, including the rights of a
secured party pursuant to the UCC."
11. Article IX, Governing Law, Section 9.01, Governing Law. Section 9.01 is
hereby deleted in its entirety and replaced with: "This Agreement, the other
Loan Documents, and all of the transactions contemplated thereby shall be
governed by and construed in accordance with the laws of the State of New
York, without regard to any conflict of law rules which might result in the
application of the laws of any other jurisdiction. Borrower, Guarantor and
Lender have entered into this Agreement and the other Loan Documents in
specific reliance upon Section 35.51 of the Texas Business and Commerce
Code, and but for the ability of the parties hereto to agree that the law of
New York would govern the Loan Documents and transactions contemplated
thereby, Lender would not have entered into the Loan Documents, nor would
Lender have made any of the Advances.
12. Borrower hereby irrevocably Article IX, Governing Law, Section 9.02,
Jurisdiction; Immunity. Subsection (a) is hereby deleted in its entirety and
replaced with: "Borrower hereby irrevocably consents that any legal action
related in any way to this Agreement or any of the Loan Documents
("Proceeding") shall only be brought in any court of the State of Utah
located in Salt Lake City or in the United States District Court for the
District of Utah, Central Division, and by execution and delivery of this
Agreement, Borrower hereby irrevocably submits to the exclusive, personal
jurisdiction of the courts of the State of Utah located in Salt Lake City
and of the United States District Court for the District of Utah, Central
Division."
13. Article X, Miscellaneous, Section 10.01 Amendments and Waivers. Section
10.01 is deleted in its entirety and replaced with: "Borrower hereby
acknowledges its understanding that no past practices of Borrower and Lender
relating to maturity extensions, waivers, or any other modifications of the
obligations of Borrower with respect to any other previous or concurrent
financings will in any way be applicable to the Notes, the Maturity Date or
any other obligations of Borrower arising under this Agreement or any other
document or agreement relating to the transactions contemplated hereunder.
No waiver by Lender of any default, misrepresentation or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend
to any prior or subsequent default, misrepresentation or breach of warranty
or covenant hereunder or affect in any way rights arising by virtue of any
prior or subsequent such occurrence. Borrower agrees to make any
amendments to the Loan Documents requested by Lender in connection with an
assignment or participation provided such amendment does not increase
Borrower's financial obligations hereunder."
9
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<PAGE>
EXECUTION COPY
14. Article X, Miscellaneous. A new subsection is added: "Section 10.16.
Release; Lender's Discretion. Borrower (and all related and affiliated
entities thereof) for itself and for all persons and entities claiming by,
through or under any of them (collectively, the "Borrower Parties"), hereby
irrevocably, unconditionally and completely release and forever discharge
Lender and all Lender's employees, shareholders, directors, agents,
affiliates, and related parties (collectively, "Lender Parties") of and from
any and all liabilities, obligations, claims, damages, and causes of action
of any kind or nature whatsoever, at law or in equity, which Borrower
Parties (or any of them) had, has, may have, or may claim to have, directly
or indirectly against Lender or Lender Parties (or any of them), including
specifically but without limiting the generality of the foregoing, any and
all claims in any way concerning or arising out of, or relating to, the
Credit Agreement. Notwithstanding any other term or condition set forth
herein, in any other Loan Document or otherwise, Borrower and Lender
expressly agree that Lender's obligation to make any Advance (or to provide
any other financing of any kind) to Borrower or any Affiliate of Borrower
shall be in Lender's sole and absolute discretion."
15. Representations and Warranties. Borrower hereby represents and warrants to,
and covenants with, Lender that: the Recitals above are accurate; Borrower
has had the opportunity to consult with independent legal counsel with
respect to the advisability of executing this Amendment; Borrower has made
such investigation of the facts pertaining to this Amendment and all matters
pertaining hereto as it deems necessary; Borrower has read and understands
all of the terms and provisions of this Amendment; Borrower signs this
Amendment voluntarily and of its own free will, without coercion or duress,
intending to be legally bound; and, in executing this Amendment, Borrower
does not rely on any inducements, promises or representations of Lender or
any agent of Lender, other than the terms and conditions specifically set
forth in this Amendment;.
16. No other Changes. Except as modified herein, the Agreement remains unchanged
and the parties hereto reaffirm all the terms and conditions of the
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers or agents thereunto duly authorized, as of the date
first above written.
"LENDER:" "BORROWER:"
SENTRY FINANCIAL CORPORATION, AUTOBOND ACCEPTANCE CO.,
a Utah corporation a Texas corporation
By: /s/ Jonathan M. Ruga By: /s/ William O. Winsauer
______________________________ _____________________________________
Name: Jonathan M. Ruga Name: William O. Winsauer
____________________________ ____________________________________
Title: Chief Executive Officer Title: President
___________________________ ___________________________________
10
<PAGE>
<PAGE>
THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"); OR UNDER ANY APPLICABLE LAW OR
REGULATION OF ANY STATE. THIS COMMON STOCK WARRANT MAY NOT BE SOLD, OFFERED,
ASSIGNED OR TRANSFERRED UNLESS THE WARRANT IS REGISTERED UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND
TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
AUTOBOND ACCEPTANCE CORPORATION
COMMON STOCK PURCHASE WARRANT
DATED: March 31, 1998
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
No. 1
Number of Common Shares: 100,000 Holder: Infinity Investors Limited
Purchase Price: $8.73 38 Hertford Street
London, England W1Y7TG
Expiration Date: March 31, 2003
For identification only. The governing terms of this Warrant are set forth below.
- ------------------------------------------------------------------------------------------------
</TABLE>
AUTOBOND ACCEPTANCE CORPORATION, a Texas corporation (the "Company"),
hereby certifies that, for value received, Infinity Investors Limited or assigns
(each a "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date hereof
and prior to the fifth anniversary hereof (the "Exercise Period"), at the
Purchase Price hereinafter set forth, One Hundred Thousand (100,000) fully paid
and nonassessable shares of Common Stock (as hereinafter defined) of the
Company. The number and character of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.
The purchase price per share of Common Stock issuable upon exercise of
this Warrant (the "Purchase Price") shall initially be $8.73; provided, however,
that the Purchase Price shall be adjusted from time to time as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include AutoBond Acceptance
Corporation and any entity that shall succeed or assume the obligations
of such corporation hereunder.
(b) The term "Common Stock" includes (a) the Company's common
stock, no par value per share, (b) any other capital stock of any class
or classes (however
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 1
(AutoBond Acceptance Corporation)
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<PAGE>
designated) of the Company, authorized on or after such date, the
holders of which shall have the right, without limitation as to amount,
either to all or to a share 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 contingencies, be entitled to vote for the
election of a majority of directors of the Company (even though the
right so to vote has been suspended by the happening of such a
contingency) and (c) any other securities into which or for which any of
the securities described in (a) or (b) may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of
assets or otherwise.
(c) 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) that the holder of this Warrant at any time
shall be entitled to receive, or shall have received, on the exercise of
this Warrant, in lieu of or in addition to Common Stock, or that 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 4 or
otherwise.
(d) The term "Market Value" shall mean the average closing sales
price of the Common Stock during the twenty (20) trading days preceding
(but not including) the Exercise Date as reported on any national
securities exchange or automated quotation system on which the Common
Stock is then traded (as reported by Bloomberg L.P.), and if the Common
Stock is not then listed on any national securities exchange or quoted
on any automated quotation system, then the Market Value shall be the
fair market value of the Common Stock as mutually determined by the
Company and the holder hereof and in the absence of such mutual
determination as determined by the Board of Directors of the Company in
good faith; provided, however, that for purposes of Section 5 hereof in
the case of (i) a primary underwritten public offering the Market Price
shall be deemed to be the price to the underwriters 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
Market Price shall be deemed to be the exercise price of such options.
1. Exercise of Warrant.
1.1. Method of Exercise. This Warrant may be exercised in whole
or in part (but not as to a fractional share of Common Stock), at any
time and from time to time during the Exercise Period by the Holder
hereof by delivery of a notice of exercise (a "Notice of Exercise")
substantially in the form attached hereto as Exhibit A via facsimile to
the Company. Promptly thereafter the Holder shall surrender this Warrant
to the Company at its principal office, accompanied by payment of the
Purchase Price multiplied by the number of shares of Common Stock for
which this Warrant is being exercised (the "Exercise Price"). Payment of
the Exercise Price shall be made, at the option of the Holder, (i) by
check or bank draft payable to the order of the Company, (ii)
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 2
(AutoBond Acceptance Corporation)
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<PAGE>
by wire transfer to the account of the Company, (iii) in shares of
Common Stock having a Market Value on the Exercise Date (as hereinafter
defined) equal to the aggregate Exercise Price or (iv) by presentation
and surrender of this Warrant to the Company for cashless exercise (a
"Cashless Exercise"), with such surrender being deemed a waiver of the
Holder's obligation to pay all or any portion of the Exercise Price. In
the event the Holder elects a Cashless Exercise (which such election
shall be irrevocable) the Holder shall exchange this Warrant for that
number of shares of Common Stock determined by multiplying the number of
shares of Common Stock being exercised by a fraction, the numerator of
which shall be the difference between the then current Market Value of
the Common Stock and the Purchase Price, and the denominator of which
shall be the then current Market Value of the Common Stock. If the
amount of the payment received by the Company is less than the Exercise
Price, the Holder will be notified of the deficiency and shall make
payment in that amount within five (5) business days. In the event the
payment exceeds the Exercise Price, the Company will promptly refund the
excess to the Holder. Upon exercise, the Holder shall be entitled to
receive, promptly after payment in full, one or more certificates,
issued in the Holder's name or in such name or names as the Holder may
direct, subject to the limitations on transfer contained herein, for the
number of shares of Common Stock so purchased. The shares of Common
Stock so purchased shall be deemed to be issued as of the close of
business on the date on which the Company shall have received from the
Holder payment in full of the Exercise Price (the "Exercise Date").
1.2. Regulation D Restrictions. The Holder hereof represents and
warrants to the Company that it has acquired this Warrant and
anticipates acquiring the shares of Common Stock issuable upon exercise
of the Warrant solely for its own account for investment purposes and
not with a view to or for distributing such securities unless such
distribution has been registered with the Securities and Exchange
Commission or an applicable exemption is available therefor. At the time
this Warrant is exercised, the Company may require the Holder to state
in the Notice of Exercise such representations concerning the Holder as
are necessary or appropriate to assure compliance by the Holder with the
Securities Act.
1.3. Company Acknowledgment. The Company will, at the time of the
exercise of this Warrant, upon the request of the Holder hereof,
acknowledge in writing its continuing obligation to afford to the Holder
any rights to which the Holder shall continue to be entitled after such
exercise in accordance with the provisions of this Warrant. If the
Holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to the Holder
any such rights.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, and in any event within the time
periods specified in the Purchase Agreement, the Company at its expense
(including the payment by it of any applicable issue, stamp or transfer taxes
upon issuance to the Holder) will cause to be issued in the name of and
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 3
(AutoBond Acceptance Corporation)
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<PAGE>
delivered to the Holder thereof, or, to the extent permissible hereunder, to
such other person as the Holder may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, plus, in
lieu of any fractional share to which the Holder would otherwise be entitled,
cash equal to such fraction multiplied by the then applicable Purchase Price,
together with any other stock or other securities and property (including cash,
where applicable) to which the Holder is entitled upon such exercise pursuant to
Section 1 or otherwise.
3. Adjustment for Dividends in Other Stock Property, etc.,
Reclassification, etc. In case at any time or from time to time the holders of
Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor, other or
additional stock or other securities or property by way of dividend or any cash
(excluding cash dividends payable solely out of earnings or earned surplus of
the Company), or other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement other
than additional shares of Common Stock (or Other Securities) issued as a stock
dividend or in a stock split (adjustments in respect of which are provided for
in Section 5), then and in each such event, the Holder of this Warrant, on the
exercise hereof as provided in Section 1 shall be entitled to receive the amount
of stock and other securities and property that the Holder would have been
entitled to receive on the effective date of such event if the Holder had so
exercised this Warrant immediately prior thereto, giving effect to all
adjustments called for during such period by Sections 4 and 5.
4. Adjustment for Reorganization, Consolidation, Merger, etc.
4.1. Reorganization, etc. In case at any time or from time to
time, the Company shall (a) effect a reorganization, (b) consolidate
with or merge into any other person or (c) transfer all or substantially
all of its properties or assets to any other person under any plan or
arrangement contemplating the dissolution of the Company, then, in each
such case, the Holder of this Warrant, on the exercise hereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Common
Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and
property (including cash) to which the Holder would have been entitled
upon such consummation or in connection with such dissolution, as the
case may be, if the Holder had so exercised this Warrant, immediately
prior thereto, all subject to further adjustment thereafter as provided
herein.
4.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expense
deliver or cause to be delivered the stock and other
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 4
(AutoBond Acceptance Corporation)
<PAGE>
<PAGE>
securities and property (including cash, where applicable) receivable by
the Holder of this Warrant after the effective date of such dissolution
pursuant to this Section 4 to a bank or trust company, as trustee for
the Holder or Holders of this Warrant.
4.3. Continuation of Terms. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any
transfer) referred to in this Section 4, this Warrant shall continue in
full force and effect and the terms hereof shall be applicable to the
shares of stock and other securities and property receivable on the
exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following
any such transfer, as the case may be, and shall be binding upon the
issuer of any such stock or other securities, including, in the case of
any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall
have expressly assumed the terms of this Warrant as provided in Section
8.
5. Purchase Price Adjustments.
(a) The Purchase Price to be paid by the Holder upon
exercise of this Warrant shall be adjusted in case at any time or
from time to time the Company should (i) subdivide the
outstanding shares of Common Stock into a greater number of
shares, (ii) consolidate the outstanding shares of Common Stock
into a smaller number of shares, (iii) issue shares of Common
Stock or securities convertible into or exchangeable for shares
of Common Stock as a dividend to all or substantially all holders
of shares of Common Stock or (iv) issue by reclassification of
shares of Common Stock, any shares of capital stock of the
Company, in each event pursuant to Article X of that certain
Securities Purchase Agreement dated June 30, 1997 among the
Company, Infinity Emerging Opportunities, Limited and Lion
Capital Partners, L.P. (the "Purchase Agreement") as if such
provisions were specifically set forth herein.
(b) In case at any time and from time to time the Company
shall issue any shares of Common Stock ("Additional Shares of
Common Stock") for consideration less than the then Market Price,
in each such case the Purchase Price shall, concurrently with
such issuance, be reduced to a price determined by multiplying
the Purchase Price immediately prior to such event by a fraction:
(i) the numerator of which shall be the sum of (x) the number of
shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (y) the
number of shares of Common Stock that the aggregate consideration
received by the Company for the total number of such Additional
Shares of Common Stock so issued would purchase at the Market
Price and (ii) the denominator of which shall be the sum of (x)
the number of shares of Common Stock outstanding immediately
prior to the issuance of
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 5
(AutoBond Acceptance Corporation)
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<PAGE>
Additional Shares of Common Stock plus (y) the number of such
Additional Shares of Common Stock so issued or sold.
(c) In case the Company shall issue any warrants, options
or other rights to subscribe for or purchase any Additional
Shares of Common Stock and the consideration per share for which
such Additional Shares of Common Stock may at any time thereafter
be issuable pursuant to the terms of such warrants, options or
other rights shall be less than the then applicable Market Price,
then the Purchase Price shall be reduced as provided in
subsection (b) above on the basis that (i) the maximum number of
Additional Shares of Common Stock issuable pursuant to all such
warrants, options or other rights shall be deemed to have been
issued as of the date of issuance of such warrants, options or
other rights and (ii) the aggregate consideration for such
maximum number of Additional Shares of Common Stock shall be
deemed to be the minimum consideration received and receivable by
the Company for the issuance of such Additional Shares of Common
Stock pursuant to such warrants, options or other rights.
(d) In case the Company shall issue any securities
convertible into or exchangeable for shares of Common Stock
("Convertible Securities") and the consideration per share for
which such Additional Shares of Common Stock may at any time
thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the then applicable Market Price,
then the Purchase Price shall be reduced as provided in
subparagraph (b) above on the basis that (i) the maximum number
of Additional Shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall
be deemed to have been issued as of the date of issuance of such
Convertible Securities and (ii) the aggregate consideration for
such maximum number of Additional Shares of Common Stock shall be
deemed to be the minimum consideration received and receivable by
the Company for the issuance of such Additional Shares of Common
Stock pursuant to the terms of such Convertible Securities. No
adjustment of the Purchase Price shall be made under this
subsection (d) upon the issuance of any Convertible Securities
that are issued pursuant to the exercise of any warrants, options
or other purchase rights for such Convertible Securities, if any
such adjustment shall previously have been made upon the issuance
of such warrants, options or other rights pursuant to subsection
(c) above.
6. No Impairment. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, 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 in order to protect the rights of the Holder of this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 6
(AutoBond Acceptance Corporation)
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of any shares of stock receivable on the exercise of this Warrant above the
amount payable therefor on such exercise, (b) will take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of stock on the exercise of this
Warrant and (c) will not transfer all or substantially all of its properties and
assets to any other person (corporate or otherwise), or consolidate with or
merge into any other person or permit any such person to consolidate with or
merge into the Company (if the Company is not the surviving person), unless such
other person shall expressly assume in writing and will be bound by all the
terms of this Warrant.
7. Accountants' Certificate as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
or the Purchase Price issuable on the exercise of this Warrant, the Company at
its expense will cause independent certified public accountants of national
standing selected by the Company (which may be the Company's auditors) to
compute such adjustment or readjustment in accordance with the terms of this
Warrant and prepare a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (a) the consideration received or receivable by
the Company for any additional shares of Common Stock (or Other Securities)
issued or sold or deemed to have been issued or sold, (b) the number of shares
of Common Stock (or Other Securities) outstanding or deemed to be outstanding
and (c) the Purchase Price and the number of shares of Common Stock to be
received upon exercise of this Warrant, in effect immediately prior to such
issue or sale and as adjusted and readjusted as provided in this Warrant. The
Company will forthwith mail a copy of each such certificate to the Holder of
this Warrant, and will, on the written request at any time of the Holder of this
Warrant, furnish to the Holder a like certificate setting forth the Purchase
Price at the time in effect and showing how it was calculated.
8. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders
of any class or securities for the purpose of determining the
holders thereof who are entitled to receive any dividend 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, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all the assets of
the Company to, or consolidation or merger of the Company with or
into, any other person, or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 7
(AutoBond Acceptance Corporation)
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then, and in each such event, the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) 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, and
(ii) 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 on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 days prior to the date specified in such
notice on which any action is to be taken.
9. Reservation of Stock, etc. Issuable on Exercise of Warrant. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of this Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of this Warrant.
10. Exchange of Warrant. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant of like tenor, in
the name of such Holder or as such Holder (on payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock called for on the face of
the Warrant so surrendered.
11. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
12. Remedies. The Company stipulates that the remedies at law of the
Holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
13. Negotiability, etc. This Warrant is issued upon the following terms,
to all of which each Holder or owner hereof by the taking hereof consents and
agrees:
(a) title to this Warrant may be transferred by
endorsement (by the Holder hereof executing the form of
assignment at the end hereof) and delivery in
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 8
(AutoBond Acceptance Corporation)
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<PAGE>
the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly
endorsed is authorized to represent himself as absolute owner
hereof and is empowered to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser hereof
for value; each prior taker or owner waives and renounces all of
his equities or rights in this Warrant in favor of each such bona
fide purchaser, and each such bona fide purchaser shall acquire
absolute title hereto and to all rights represented hereby;
(c) until this Warrant is transferred on the books of the
Company, the Company may treat the registered Holder hereof as
the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary; and
(d) notwithstanding the foregoing, this Warrant may not be
sold, transferred or assigned except pursuant to an effective
registration statement under the Securities Act of 1933, as
amended (the "Act"), or, pursuant to an applicable exemption
therefrom (including in accordance with Regulation D promulgated
under the Act).
14. Registration Rights. The Company is obligated to register the shares
of Common Stock issuable upon exercise of this Warrant in accordance with the
terms of a Registration Rights Agreement executed and delivered in connection
with the Purchase Agreement.
15. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by the Holder or, until any the Holder furnishes to the
Company an address, then to, and at the address of, the last Holder of this
Warrant who has so furnished an address to the Company.
16. Miscellaneous. This Warrant and any term 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 Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of New York, except where the Texas
Business Corporation Act or other law applies. The headings in this Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 9
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[SIGNATURE PAGE FOLLOWS]
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 10
(AutoBond Acceptance Corporation)
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DATED as of March 31, 1998.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William O. Winsauer
_____________________________
Name: William O. Winsauer
___________________________
Title: Chairman
__________________________
COMMON STOCK PURCHASE WARRANT NO. 1-PAGE 11
(AutoBond Acceptance Corporation)
<PAGE>
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE - WARRANT
(To be executed only upon exercise or conversion
of the Warrant in whole or in part)
To AutoBond Acceptance Corporation
The undersigned registered holder of the accompanying Warrant hereby
exercises such Warrant or portion thereof for, and purchases thereunder,
______________________(1) shares of Common Stock (as defined in such Warrant)
and herewith makes payment therefor in the amount and manner set forth below, as
of the date written below. The undersigned requests that the certificates for
such shares of Common Stock be issued in the name of, and delivered to,
_________________________________ whose address is ____________________________
_______________________________________________________________________________.
The Exercise Price is paid as follows:
[ ] Bank draft payable to the Company in the amount of $__________.
[ ] Wire transfer to the account of the Company in the amount of
$________.
[ ] Delivery of ___________ previously held shares of Common Stock
having an aggregate Market Value of $_________.
[ ] Cashless exercise. Surrender of __________ shares purchasable
under this Warrant for such shares of Common Stock issuable in
exchange therefor pursuant to the Cashless Exercise provisions of
the Warrant, as provided in Section 1.1(iv) thereto.
Upon exercise pursuant to this Notice of Exercise, the holder will be in
compliance with the Limitation on Exercise (as defined in the Securities
Purchase Agreement pursuant to which this Warrant was issued).
Dated: ________________
________________________________________________
(Name must conform to name of holder as specified
on the face of the Warrant)
By:
______________________________________
Name:
_________________________________
Title:
_______________________________
Address of Holder: ______________________
______________________
______________________
Date of exercise: ___________________
- --------
(1) Insert the number of shares of Common Stock as to which the
accompanying Warrant is being exercised. In the case of a partial exercise, a
new Warrant or Warrants will be issued and delivered, representing the
unexercised portion of the accompanying Warrant, to the holder surrendering the
same.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<CASH> 12,599,944
<SECURITIES> 17,992,197
<RECEIVABLES> 3,326,920
<ALLOWANCES> 242,102
<INVENTORY> 244,406
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,073,093
<CURRENT-LIABILITIES> 0
<BONDS> 15,237,728
<COMMON> 1,000
0
11,250,000
<OTHER-SE> 15,339,744
<TOTAL-LIABILITY-AND-EQUITY> 57,073,093
<SALES> 0
<TOTAL-REVENUES> 5,351,158
<CGS> 0
<TOTAL-COSTS> 4,131,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 1,290,405
<INCOME-PRETAX> (170,330)
<INCOME-TAX> (49,192)
<INCOME-CONTINUING> (121,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,138)
<EPS-PRIMARY> $(0.05)
<EPS-DILUTED> $(0.05)
</TABLE>
