<PAGE>
<PAGE>
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-21673
------------------------
AUTOBOND ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
TEXAS 75-2487218
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
301 CONGRESS AVENUE, 78701
AUSTIN, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 435-7000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- -------------------------------------------------------------------- ------------------------
<S> <C>
Common Stock, No Par Value Per Share American Stock Exchange
15% Series A Cumulative Preferred Stock
No Par Value Per Share American Stock Exchange
</TABLE>
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on May 19, 1998 (based on the closing price on such date as
reported on the American Stock Exchange) was $ .(1)
As of May 19, 1998, there were 6,531,311 shares of the registrant's
Common Stock, no par value, and 1,125,000 of the registrant's 15% Series A
Cumulative Preferred Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the registrant's definitive Proxy Statement with
respect to the registrant's 1998 Annual Meeting of Shareholders, to be filed not
later that 120 days after the close of the registrant's fiscal year.
- ------------
(1) Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers, directors and five percent shareholders of the
registrant, without conceding that all such persons are 'affiliates' of the
registrant for purposes of the Federal securities laws.
________________________________________________________________________________
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I..................................................................................................... 1
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 16
Item 3. Legal Proceedings............................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............................................. 17
PART II.................................................................................................... 17
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters........................... 17
Item 6. Selected Financial Data......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 20
Item 8. Financial Statements and Supplementary Data..................................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 34
PART III................................................................................................... 35
Item 10. Directors and Executive Officers of the Registrant.............................................. 35
Item 11. Executive Compensation.......................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 35
Item 13. Certain Relationships and Related Transactions.................................................. 35
PART IV.................................................................................................... 36
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.................................. 36
Signatures................................................................................................. 38
</TABLE>
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
AutoBond Acceptance Corporation (the 'Company') is a specialty consumer
finance company engaged in underwriting, acquiring, servicing and securitizing
retail installment contracts ('finance contracts') originated by franchised
automobile dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources of
credit ('sub-prime consumers'). Sub-prime consumers generally are borrowers
unable to qualify for traditional financing due to one or more of the following
reasons: negative credit history (which may include late payments, charge-offs,
bankruptcies, repossessions or unpaid judgments); insufficient credit;
employment or residence histories; or high debt-to-income or payment-to-income
ratios (which may indicate payment or economic risk).
The Company acquires finance contracts generally from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. This has enabled the Company to
securitize those contracts into investment grade securities with similar terms
from one issue to another providing consistency to investors. For the period of
inception through December 31, 1997, the Company acquired 23,386 finance
contracts with an aggregate outstanding principal balance of $270 million. Since
inception, the Company has completed ten securitizations pursuant to which it
privately placed $242 million in finance contract-backed securities.
RECENT DEVELOPMENTS
On May 20, 1998, the Company and Promethean Investment Group, L.L.C.
('Promethean') entered into a common stock investment agreement (the
'Agreement') and related registration rights agreement whereby Promethean
(together with its successors in interest and assigns or designees, the
'Investor') agreed to purchase from the Company, on the terms and conditions
outlined below, up to $20 million (subject to increase up to $25 million at the
Investor's option) of the Company's common stock, no par value. The Company must
deliver a preliminary notice of its intention to require the Investor to
purchase common shares at least ten but not more than thirty days prior to the
Company's delivery of its final notice. The Company may only deliver such final
notice if (i) the dollar volume-weighted price of the common stock reported on
the business day of such final notice is at least $3.25 per share, (ii) at all
times during the period beginning on the date of delivery of the preliminary
notice and ending on and including the closing date (a) a registration statement
covering the resale of no less than 150% of the shares to be sold to Investor
under the Agreement has been declared and remains effective and (b) shares of
the Company's common stock are at such time listed on a major national
securities exchange, and (iii) the Company has not delivered another final
notice to the Investor during the preceding twenty-five business days preceding
delivery of such final notice. Following receipt of a final notice, the
Investor's purchase obligation will equal the lowest of: (i) the amount
indicated in such final notice, (ii) $5 million and (iii) 20% of the aggregate
of the daily trading dollar volume on the twenty consecutive business days
following delivery of the put notice. The Investor may, in its sole discretion,
increase the amount purchasable in the preceding sentence by 125%. The Investor
must conclude all required purchases of common shares within twenty-five
business days of receipt of the final notice. The Investor's purchase obligation
during any 61-day period is limited to no more than 4.99% of the number of
common shares outstanding on the date of the related final notice. The purchase
price for the Company's shares will be equal to 95% of the lowest daily dollar
volume-weighted average price during the six consecutive trading days ending on
and including the date of determination. The Investor's obligation to purchase
shares under the Agreement shall end either upon the mutual consent of the
parties or automatically upon the earliest of the date (a) on which total
purchases by Promethean under the Agreement total $20 million, (b) which is two
years after the effective date of the registration statement relating to the
common shares covered by the Agreement, or (c) which is twenty-seven months from
the date of the Agreement. In consideration of Promethean's obligations under
the Agreement, the Company will pay to Promethean within one business day
following the effective date of the registration statement covering the common
shares issuable pursuant to the Agreement an amount equal to $500,000 in cash or
common stock.
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 and damages. 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.'
On May 19, 1998, Moody's announced that the ratings on such senior
securities were reduced to Ba1 (B2 for the 1997B and 1997C transactions),
explaining that although "cumulative gross defaults have been somewhat higher
than originally anticipated, while net losses have been only mildly above
expectations due to the continued high recovery rates...a greater concern is
that a number of factors may have impaired the legal and structural integrity of
these securitizations," including (1) the alleged non-adherence to the
transaction documents with regard to charge-off policy and the calculation of
delinquency and loss triggers, (2) the Company's procedures for allocating
prepaid insurance among the trusts, (3) instances of the Company waiving fees
and making cash contributions to the transactions to enhance their
performance, and (4) 'instances of commingled collections.' While the Company
was not requested by Moody's to provide legal guidance as to whether or not
these factors would as a matter of law "increase the uncertainty" with respect
to the transactions, the Company does note the following: (1) with the transfer
of servicing from Loan Servicing Enterprise now completed, the Company is
endeavoring to service in accordance with the documentation and correct past
errors; (2) the transaction documents did not contemplate the allocation of
prepaid insurance claims, a phenomenon brought about by the Company's prevailing
upon Interstate Insurance to speed up the payment of claims for the benefit of
the trusts in manner the Company believes is fair to the trusts; (3) the
transaction documents do not prohibit fee waivers and explicitly permit the
Company to make voluntary capital contributions to the trusts, and (4) at the
insistence of the former servicer, collections have always gone to omnibus
lockboxes in the name of, and under the control of the transaction trustees,
and unfortunately, identification and reconciliation of these restricted funds
among transactions as part of the servicing transfer has taken some effort.
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
1
<PAGE>
<PAGE>
forward.
The Company entered into an employment agreement, dated as of January 1,
1998, with Manuel A. Gonzalez, a former outside director to serve as a
consultant to the Company until February 1, 1998, whereupon he agreed to become
President of the Company for a period of three years. On March 3, 1998, Robert
Shuey was appointed to fill the vacancy left by Mr. Gonzalez' departure from the
Board.
During January 1998, the Company privately placed $7,500,000 in aggregate
principal amount of senior subordinated notes (the 'subordinated notes') to an
affiliate of BankBoston, N.A. The subordinated notes bear interest at 15% per
annum, mature on February 1, 2001 and $1,215,925 in principal amount are
convertible into up to 368,462 shares of the Company's common stock at a price
of $3.30 per share (subject to adjustment). Although the subordinated notes
contain customary restrictive covenants, they do not prohibit the Company from
paying dividends on the preferred stock out of earnings legally available
therefor. In addition, the Company issued to the purchaser a warrant to purchase
such shares to the extent the notes have not been converted prior to maturity.
Net proceeds from the sale of the subordinated notes were used (i) to pay
short-term liabilities, (ii) to repay the Company's 18% convertible notes and
(iii) for working capital purposes.
On February 20, 1998, the Company sold 1,000,000 of shares of it 15% Series
A Cumulative Preferred Stock (the 'Preferred Stock') in a public offering at a
price of $10 per share. The net proceeds from the issuance and sale of preferred
stock amounted to approximately $9,000,000 after deducting underwriter discounts
and issuer expenses. Portions of the net proceeds were used (i) for the
acquisition and financing of finance contracts, including the funding of
reserves and other credit enhancements and (ii) for working capital and general
corporate purposes. The underwriters of the Company's public offering purchased
an additional 125,000 shares of the Preferred Stock at $10 per share by
exercising their over-allotment option on February 27, 1998. The net proceeds
from the issuance and sale of these over-allotment shares amounted to
approximately $1,125,000.
GROWTH AND BUSINESS STRATEGY
The Company's growth strategy anticipates the acquisition of an increasing
number of finance contracts. The key elements of this strategy include: (i)
increasing the number of finance contracts acquired per automobile dealer; (ii)
expanding the Company's presence within existing markets; (iii) penetrating new
markets that meet the Company's economic, demographic and business criteria and
(iv) securitizing portfolios of acquired finance contracts.
To foster its growth and increase profitability, the Company will continue
to pursue a business strategy based on the following principles:
Targeted Market and Product Focus -- The Company targets the sub-prime
auto finance market because it believes that sub-prime finance presents
greater opportunities than does prime lending. This greater opportunity
stems from a number of factors, including the relative newness of sub-prime
auto finance, the range of finance contracts that various sub-prime auto
finance companies provide, the relative lack of competition compared to
traditional automotive financing and the potential returns sustainable from
large interest rate spreads. The Company focuses on late model used rather
than new vehicles, as management believes the risk of loss is lower on used
vehicles due to lower depreciation rates, while interest rates are
typically higher than on new vehicles. For the period from inception
through December 31, 1997, new vehicles and used vehicles represented 6.8%
and 93.2%, respectively, of the finance contract portfolio. In addition,
the Company concentrates on acquiring finance contracts from dealerships
franchised by major automobile manufacturers because they typically offer
higher quality vehicles, are better capitalized, and have better service
facilities than used car dealers.
Efficient Funding Strategies -- Through an investment-grade warehouse
facility and a periodic securitization program, the Company increases its
liquidity, redeploys its capital and reduces its exposure to interest rate
fluctuations. The net effect of the Company's funding and securitization
program is to provide more proceeds than the Company's acquisition costs,
resulting in positive
2
<PAGE>
<PAGE>
revenue cash flow and lower overall costs of funding, and permitting loan
volume to increase with limited additional equity capital.
Uniform Underwriting Criteria -- To manage the risk of delinquency or
defaults associated with sub-prime consumers, the Company has utilized
since inception underwriting criteria which are uniformly applied in
evaluating credit applications. This evaluation process is conducted on a
centralized basis utilizing experienced personnel. These uniform
underwriting criteria create consistency in the securitization portfolios
of finance contracts that make them more easily analyzed by the rating
agencies and more marketable and permit static pool analysis of loan
defaults to optimally structure securitizations. See 'Management's
Discussion and Analysis -- Repossession Experience -- Static Pool
Analysis.'
Centralized Operating Structure -- While the Company establishes and
maintains relationships with dealers through sales representatives located
in the geographic markets served by the Company, all of the Company's
day-to-day operations are centralized at the Company's offices in Austin,
Texas. This centralized structure allows the Company to closely monitor its
marketing, funding, underwriting and collections operations and eliminates
the expenses associated with full-service branch or regional offices.
Experienced Management Team -- The Company actively recruits and
retains experienced personnel at the executive, supervisory and managerial
levels. The senior operating management of the Company consists of seasoned
automobile finance professionals with substantial experience in
underwriting, collecting and financing automobile finance contracts. In
1997 the difficulties experienced by several competitors provided an
opportunity to attract experienced personnel to work for the Company.
Hiring in 1998 is not expected to be as rapid but will continue
selectively.
Intensive Collection Management -- The Company believes that intensive
collection efforts are essential to ensure the performance of sub-prime
finance contracts and to mitigate losses. The Company's collections
managers contact delinquent accounts frequently, working cooperatively with
customers to get full or partial payments, but will initiate repossession
of financed vehicles no later than the 90th day of delinquency. As of
December 31, 1997, a total of $32,426,203 or 17.33%, of the Company's
finance contract portfolio were between 30 and 89 days past due and
$8,368,493, or approximately 4.5%, of the Company's finance contracts
outstanding were 90 days past due or greater. The aforementioned
percentages and amounts include finance contracts in the Company's
portfolio where the Company has discontinued collection efforts, such as
where the underlying vehicle has been repossessed, the borrower is in
bankruptcy, the dealer is to buy back the loan, or an insurance claim has
been filed. From inception through December 31, 1997, the Company
repossessed 2,936 (approximately 13%) of its financed vehicles, and the
Company had completed the disposal of 1,351 vehicles, resulting in an
average loss per repossession of approximately $2,419 per vehicle. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Loss Per Repossession.'
Limited Loss Exposure -- To reduce its potential losses on defaulted
finance contracts, the Company historically has insured each finance
contract it funds against damage to the financed vehicle through a vendor's
comprehensive single interest physical damage insurance policy (a 'VSI
Policy'). In addition, in connection with certain of the Company's
warehouse financing and securitizations through December 31, 1997, the
Company purchased credit default insurance through a deficiency balance
endorsement (the 'Credit Endorsement') to the VSI Policy. The Credit
Endorsement reimburses the Company for the difference between the unpaid
contract finance balance and the net proceeds received in connection with
the sale of the repossessed vehicle. Moreover, the Company limits
loan-to-value ratios and applies a purchase price discount to the finance
contracts it acquires. The Company's combination of underwriting criteria,
intensive collection efforts and the VSI Policy and Credit Endorsement has
resulted in net charge-offs (after receipt of liquidation and insurance
proceeds) of 20.98% (excluding repossession costs) of the principal balance
outstanding on disposed repossessed vehicles for which the liquidation
process has been completed as of December 31, 1997. For its 1997-B and
1997-C securitizations, the Company purchased credit default insurance from
Progressive Northern Insurance Company. See
3
<PAGE>
<PAGE>
'Recent Developments,' 'Insurance' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Net Loss per
Repossession.'
As discussed, the Company's business strategy depends on its ability to
increase the rate of revenue growth more rapidly than the rate of expenses,
which would involve a reversal of an adverse trend experienced through much of
1997. Thus, continued growth in revenues is important for the Company to succeed
in its business strategy.
BORROWER CHARACTERISTICS
Borrowers under finance contracts in the Company's finance contract
portfolio are generally sub-prime consumers. Sub-prime consumers are purchasers
of financed vehicles with limited access to traditional sources of credit and
are generally individuals with weak or no credit histories. Based on a sample of
1,533 finance contracts in the finance contract portfolio which the Company
believes are representative of the portfolio as a whole, the Company has
determined the following characteristics with respect to its finance contract
borrowers. The average borrower's monthly income is $2,400, with an average
payment-to-income ratio of 15.7%. The Company's guidelines permit a maximum
payment-to-income ratio and debt-to-income ratio of 20% and 50%, respectively.
The Company's guidelines require a cash down payment of 10% of the vehicle
selling price. Based upon a sample of its borrowers which the Company believes
to be representative, the average borrower's time spent at current residence is
65.6 months, while the average time of service at current employer is 46.6
months. The average borrower's age is 34.3 years.
CONTRACT PROFILE
From inception to December 31, 1997, the Company acquired 23,386 finance
contracts with an aggregate initial principal balance of $269,922,491. Of the
finance contracts acquired, approximately 6.8% have related to the sale of new
automobiles and approximately 93.2% have related to the sale of used
automobiles. The average age of used finance vehicles was approximately two
years at the time of sale. The finance contracts had, upon acquisition, an
average initial principal balance of $12,228; a weighted average APR of 19.8%;
and a weighted average contractual maturity of 52.5 months. As of December 31,
1997, the finance contracts in the finance contract portfolio had a weighted
average remaining maturity of 43.6 months.
DEALER NETWORK
General. The Company acquires finance contracts originated by automobile
dealers in connection with the sale of late-model used and, to a lesser extent,
new cars to sub-prime borrowers. Accordingly, the Company's business development
strategy depends on enrolling and promoting active participation by automobile
dealers in the Company's financing program. Dealers are selected on the basis of
geographic location, financial strength, experience and integrity of management,
stability of ownership, quality of used car inventory, participation in
sub-prime financing programs, and the anticipated quality and quantity of
finance contracts which they originate. The Company principally targets dealers
operating under franchises from major automobile manufacturers, rather than
independent used car dealers. The Company believes that franchised dealers are
generally more stable and offer higher quality vehicles than independent
dealers. This is due, in part, to careful initial screening and ongoing
monitoring by the automobile manufacturers and to the level of financial
commitment necessary to secure and maintain a franchise. As of December 31,
1997, the Company was licensed or qualified to do business in 40 states. Over
the near term, the Company intends to focus its proposed geographic expansion on
states in the midwest and mid-Atlantic regions.
Location of Dealers. Approximately 30% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
A group of six dealerships (including Charlie Thomas Ford, Inc.) under
substantial common ownership accounted for approximately 26.51% and 17.56% for
the fiscal year ended 1995 and 1996 respectively, of finance contracts acquired
during the same period. One dealership, Charlie Thomas Ford, Inc. of Houston,
Texas, accounted for 8.79% of the finance contracts acquired by the Company for
the period from inception through December 31,
4
<PAGE>
<PAGE>
1996 (8.77% and 8.94% for the fiscal year ended 1995 and 1996 respectively). The
Company is no longer purchasing contracts from these dealerships due to a
dispute over repurchase obligations. See 'Legal Proceedings.'
DEALER SOLICITATION
Marketing Representatives. As of December 31, 1997, the Company utilized 43
marketing representatives, 36 of whom were individuals employed by the Company
and seven of whom were marketing organizations serving as independent
representatives. The Company also maintained one loan production office. These
representatives have an average of ten years' experience in the automobile
financing industry. The Company is currently evaluating candidates for
additional marketing representative positions. The marketing representatives
reside in the region for which they are responsible. Marketing representatives
are compensated on the basis of a salary plus commissions based on the number of
finance contracts purchased by the Company in their respective areas. The
Company maintains an exclusive relationship with the independent marketing
representatives and compensates such representatives on a commission basis. All
marketing representatives undergo training and orientation at the Company's
Austin headquarters.
The Company's marketing representatives establish financing relationships
with new dealerships, and maintain existing dealer relationships. Each marketing
representative endeavors to meet with the managers of the finance and insurance
('F&I') departments at each targeted dealership in his or her territory to
introduce and enroll dealers in the Company's financing program, educating the
F&I managers about the Company's underwriting philosophy, its practice of using
experienced underwriters (rather than computerized credit scoring) to review
applications, and the Company's commitment to a single lending program that is
easy for dealers to master and administer. The marketing representatives offer
training to dealership personnel regarding the Company's program guidelines,
procedures and philosophy.
After each dealer relationship is established, a marketing representative
continues to actively monitor that relationship with the objective of maximizing
the volume of applications received from the dealer that meet the Company's
underwriting standards. Due to the non-exclusive nature of the Company's
relationships with dealers, the dealers retain discretion to determine whether
to seek financing from the Company or another financing source. Each
representative submits a weekly call report describing contacts with prospective
and existing dealers during the preceding week and a monthly competitive survey
relating to the competitive situation and possible opportunities in the region.
The Company provides each representative with a weekly report detailing
applications received and finance contracts purchased from all dealers in the
region. The marketing representatives regularly telephone and visit F&I managers
to remind them of the Company's objectives and to answer questions. To increase
the effectiveness of these contracts, the marketing representatives can obtain
real-time information from the Company's newly installed management information
systems, listing by dealership the number of applications submitted, the
Company's response to such applications and the reasons why a particular
application was rejected. The Company believes that the personal relationships
its marketing representatives establish with the F&I managers are an important
factor in creating and maintaining productive relationships with its dealership
customer base.
The role of the marketing representatives is generally limited to marketing
the Company's financing program and maintaining relationships with the Company's
dealer network. The marketing representatives do not negotiate, enter into or
modify dealer agreements on behalf of the Company, do not participate in credit
evaluation or loan funding decisions and do not handle funds belonging to the
Company or its dealers. The Company intends to develop notable finance contract
volume in each state in which it initiates coverage. The Company has elected not
to establish full service branch offices, believing that the expense and
administrative burden of such offices are generally unjustified. The Company has
concluded that the ability to closely monitor the critical functions of finance
contract approval and contract administration and collection are best performed
and controlled on a centralized basis from its Austin facility.
Dealer Agreements. Each dealer with which the Company establishes a
financing relationship enters into a non-exclusive written dealer agreement (a
'Dealer Agreement') with the Company, governing
5
<PAGE>
<PAGE>
the Company's acquisition of finance contacts from such dealer. A Dealer
Agreement generally provides that the dealer shall indemnify the Company against
any damages or liabilities, including reasonable attorney's fees, arising out of
(i) any breach of a representation or warranty of the dealer set forth in the
Dealer Agreement or (ii) any claim or defense that a borrower may have against a
dealer relating to financing contract. Representations and warranties in a
Dealer Agreement generally relate to matters such as whether (a) the financed
automobile is free of all liens, claims and encumbrances except the Company's
lien, (b) the down payment specified in the finance contract has been paid in
full and whether any part of the down payment was loaned to the borrower by the
dealer and (c) the dealer has complied with applicable law. If the dealer
violates the terms of the Dealer Agreement with respect to any finance contract,
the dealer is obligated to repurchase such contract on demand for an amount
equal to the unpaid balance and all other indebtedness due to the Company from
the borrower.
FINANCING PROGRAM
Unlike certain competitors who offer numerous marketing programs that the
Company believes serve to confuse dealers and borrowers, the Company markets a
single financing contract acquisition program to its dealers. The Company
believes that by focusing on a single program, it realizes consistency in
achieving its contract acquisition criteria, which aids the funding and
securitization process. The finance contracts purchased by the Company must meet
several criteria, including that each contract: (i) meets the Company's
underwriting guidelines; (ii) is secured by a new or late-model used vehicle of
a type on the Company's approved list; (iii) was originated in a jurisdiction in
the United States in which the Company was licensed or qualified to do business,
as appropriate; (iv) provides for level monthly payments (collectively, the
'Scheduled Payments') that fully amortize the amount financed over the finance
contract's original contractual term; (v) has an original contractual term from
24 to 60 months; (vi) provides for finance charges at an APR of at least 14%;
(vii) provides a verifiable down payment of 10% or more of the cash selling
price; and (viii) is not past due or does not finance a vehicle which is in
repossession at the time the finance contract is presented to Company for
acquisition. Although the Company has in the past acquired a substantial number
of finance contracts for which principal and interest are calculated according
to the 'Rule of 78s,' the Company's present policy is to acquire primarily
finance contracts calculated using the simple interest method.
The amount financed with respect to a finance contract will generally equal
the aggregate amount advanced toward the purchase price of the financed vehicle,
which equals the net selling price of the vehicle (cash selling price less down
payment and trade-in), plus the cost of permitted automotive accessories (e.g.,
air conditioning, standard transmission, etc.), taxes, title and license fees,
credit life, accident and health insurance policies, service and warranty
contracts and other items customarily included in retail automobile installment
contracts and related costs. Thus, the amount financed may be greater than the
Manufacturer's Suggested Retail Price ('MSRP') for new vehicles or the market
value quoted for used vehicles. Down payments must be in cash or real value of
traded-in vehicles. Dealer-assisted or deferred down payments are not permitted.
The Company's current purchase criteria limit acceptable finance contracts
to a maximum of the (a) net selling price of the lesser of (i) 112% of wholesale
book value (or dealer invoice for new vehicles) or (ii) 95% of retail book value
(or MSRP for new vehicles) and (b) amount financed of 120% of retail book value
in the case of a used vehicle, or 120% of MSRP in the case of a new vehicle. In
assessing the value of a trade-in for purposes of determining the vehicle's net
selling price, the Company uses the published wholesale book value without
regard to the value assigned by the dealer.
The credit characteristics of an application approved by the Company for
acquisition generally consist of the following: (i) stability of applicant's
employment, (ii) stability of applicant's residence history, (iii) sufficient
borrower income, (iv) credit history, and (v) payment of down payment.
The Company applies a loan-to-value ratio in selecting finance contracts
for acquisitions calculated as equaling the quotient of: (a) the cash selling
price less the down payment on the vehicle, divided by (b) the wholesale value
of the vehicle (net of additions or subtractions for mileage and equipment
additions listed in the applicable guide book). For new vehicles, wholesale
value is based on the invoice amount, including destination charges. For used
vehicles, wholesale value is computed using the applicable guide book (Kelley or
NADA) in use within the market in which the vehicle is located.
6
<PAGE>
<PAGE>
All of the Company's finance contracts are prepayable at any time. Finance
contracts acquired by the Company must prohibit the sale or transfer of the
financed vehicle without the Company's prior consent and provide for
acceleration of the maturity of the finance contract in the absence of such
consent. For an approved finance contract, the Company will agree to acquire
such finance contract from the originating dealer at a non-refundable contract
acquisition discount of approximately 8.5% to 12% of the amount financed.
CONTRACT ACQUISITION PROCESS
General. Having selected an automobile for purchase, the sub-prime consumer
typically meets with the dealership's F&I manager to discuss options for
financing the purchase of the vehicle. If the sub-prime consumer elects to
finance the vehicle's purchase through the dealer, the dealer will typically
submit the borrower's credit application to a number of potential financing
sources to find the most favorable terms. In general, an F&I department's
potential sources of financing will include banks, thrifts, captive finance
companies and independent finance companies.
For the year ended December 31, 1997, 133,039 credit applications were
submitted to the Company. Of these 133,039 applications, approximately 23.4%
were approved and 7.9%, or 10,554 contracts, were acquired by the Company. The
difference between the number of applications approved and the number of finance
contracts acquired is attributable to a common industry practice in which
dealers often submit credit applications to more than one finance company and
select on the basis of the most favorable terms offered. The prospective
customer may also decide not to purchase the vehicle notwithstanding approval of
the credit application.
Contract Processing. Dealers send credit applications along with other
information to the Company's Credit Department in Austin via facsimile. Upon
receipt, the credit application and other relevant information is entered into
the Company's computerized contract administration system by the Company's
credit verification personnel and a paper-based file where the original
documents are created. Once logged into the system, the applicant's credit
bureau reports are automatically accessed and retrieved directly into the
system. At this stage, the computer assigns the credit application to the
specific credit manager assigned to the submitting dealer for credit evaluation.
Credit Evaluation. In evaluating the applicant's creditworthiness and the
collateral value of the vehicle, the credit underwriter reviews each application
in accordance with the Company's guidelines and procedures, which take into
account, among other things, the individual's stability of residence, employment
history, credit history, ability to pay, income, discretionary income and debt
ratio. In addition, the credit underwriter evaluates the applicant's credit
bureau report in order to determine if the applicant's (i) credit quality is
deteriorating, (ii) credit history suggests a high probability of default or
(iii) credit experience is too limited for the Company to assess the probability
of performance. The Company also assesses the value and useful life of the
automobile that will serve as collateral under the finance contract. Moreover,
the credit underwriters consider the suitability of a proposed loan under its
financing program in light of the (a) proposed contract term and (b) conformity
of the proposed collateral coverage to the Company's underwriting guidelines.
Verification of certain applicant-provided information (e.g., employment
and residence history) is required before the Company makes its credit decision.
Such verification typically requires submission of supporting documentation,
such as a paycheck stub or other substantiation of income, or a telephone bill
evidencing a current address. In addition, the Company does not normally approve
any applications from persons who have been the subject of two or more
bankruptcy proceedings or two or more repossessions.
The Company's underwriting standards are applied uniformly by experienced
credit underwriters with a personal analysis of each application, utilizing
experienced judgment. These standards have been developed and refined by the
Company's senior credit and collections management who, on average, possess more
than 24 years of experience in the automobile finance industry. The Company
believes that having its credit underwriters personally review and communicate
to the submitting dealership the decision with respect to each application,
including the reasons why a particular application may have been declined,
enhances the Company's relationship with such dealers. This practice encourages
F&I
7
<PAGE>
<PAGE>
managers to submit contracts meeting the Company's underwriting standards,
thereby increasing the Company's operating efficiency by eliminating the need to
process applications unlikely to be approved.
The Company's Credit Department personnel undergo ongoing internal training
programs that are scheduled on a weekly basis and are attended by such personnel
depending on their responsibilities. All of these personnel are located in the
Company's offices in Austin where they are under the supervision of the Vice
President - Credit and the credit manager. The credit manager and the Vice
President - Credit have an aggregate of more than 30 years of experience in the
automobile finance business. In addition, the Company reviews all repossessions
to identify factors that might require refinements in the Company's credit
evaluation procedures.
Approval Process. The time from receipt of application to final credit
approval is a significant competitive factor, and the Company seeks to complete
its funding approval decision in an average of two to three hours. When the
Company approves the purchase of a finance contract, the credit manager notifies
the dealer by facsimile or telephone. Such notice specifies all pertinent
information relating to the terms of approval, including the interest rate, the
term, information about the automobile to be sold and the amount of discount
that the Company will deduct from the amount financed prior to remitting the
funds to the dealer. The discount is not refundable to the dealer.
Contract Purchase and Funding. Upon final confirmation of the terms by the
borrower, the dealer completes the sale of the automobile to the borrower. After
the dealer delivers all required documentation (including an application for
title or a dealer guaranty of title, naming the Company as lienholder) to the
Company, the Company remits funds to the dealer via overnight delivery service
within a commercially reasonable time of having received the complete loan
funding package. As a matter of policy, the Company takes such measures as it
deems necessary to obtain a perfected security interest in the related financed
vehicles under the laws of the states in which such vehicles are originated.
This generally involves taking the necessary steps to obtain a certificate of
title which names the Company as lienholder. Each finance contract requires that
the automobile be adequately insured and that the Company be named as loss
payee, and compliance with these requirements is verified prior to the
remittance of funds to the dealer.
From time to time, the Company also acquires bulk portfolios from other
originators. In this event, the Company reunderwrites such contracts to ensure
appropriate credit standards are maintained. The Company acquired approximately
$14.8 million in finance contracts in 1996 from Greenwich Capital Financial
Products which were originated by First Fidelity Acceptance Corp. During the
first quarter of 1997, the Company acquired approximately $12.8 million in
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ('CSFB')
which were originated by Jefferson Capital Corporation. During the third quarter
of 1997, the Company acquired a total of $7.9 million in finance contracts from
three originators. During the fourth quarter of 1997, the Company acquired a
total of $7.4 million in finance contracts from third party originators and,
from CSFB, approximately $12.5 million in finance contracts, which were
originated by several third parties. CSFB also provided acquisition financing
for the purchase.
CONTRACT SERVICING AND COLLECTION
Contract servicing includes contract administration and collection. Because
the Company believes that an active collection program is essential to success
in the sub-prime automobile financing market, the Company retains responsibility
for finance contract servicing and collection. Prior to December 1997, the
Company engaged CSC Logic/MSA L.L.P. (a Texas limited liability partnership
doing business as 'Loan Servicing Enterprise') ('LSE') to provide contract
administration for its warehouse arrangements and securitizations.
Contract Administration. The Company, as servicer, performs certain
contract administration functions in connection with finance contracts
warehoused or sold to securitization trusts, including payment processing,
statement rendering, insurance tracking, data reporting and customer service for
finance contracts. The Company inputs newly originated finance contracts on the
contract system daily. The servicer then mails a welcome letter to the borrower
and subsequently mails monthly billing statements to each borrower approximately
ten days prior to each payment due date. All borrower
8
<PAGE>
<PAGE>
remittances are directed to a lock box. Remittances received are then posted to
the proper account on the system. The Company also handles account inquiries
from borrowers, performs insurance tracking services and sends out notices to
borrowers for instances where proper collateral insurance is not documented.
Contract Collection. As collection agent, the Company is responsible for
pursuing collections from delinquent borrowers. The Company utilizes proactive
collection procedures, which include making early and frequent contact with
delinquent borrowers, educating borrowers as to the importance of maintaining
good credit, and employing a consultative and customer service approach to
assist the borrower in meeting his or her obligations. The Company's ability to
monitor performance and collect payments owed by contract obligors is a function
of its collection approach and support systems. The Company's approach to the
collection of delinquent contracts is to minimize repossessions and charge-offs.
The Company maintains a computerized collection system specifically designed to
service sub-prime automobile finance contracts. The Company believes that if
problems are identified early, it is possible to correct many delinquencies
before they deteriorate further.
As of December 31, 1997, the Company employed 191 people full-time,
including 81 collections specialists and other support personnel, in the
Collections Department. Each employee is devoted exclusively to collection
functions. The Company attempts to maintain a ratio of between 500 and 600
finance contracts per collections specialist. As of December 31, 1997, there
were 236 finance contracts in the Company's finance contract portfolio for every
collections specialist. The Collections Department is managed by the Vice
President - Collections, who possesses 30 years experience in the automotive and
finance industry. The Company hires additional collections specialists in
advance of need to ensure adequate staffing and training.
Accounts reaching five days past due are assigned to collectors who have
specific responsibility for those accounts. These collectors contact the
customer frequently, both by phone and in writing. Accounts that reach 60 days
past due are assigned to two senior collectors who handle those accounts until
resolved. To facilitate collections from borrowers, the Company has increased
its utilization of Western Union's 'Quick Collect,' which allows borrowers to
pay from remote locations, with a check printed at the Company's office.
Consistent with the Company's internal policies and securitization documents,
finance contract provisions, such as term, interest rate, amount, maturity date
or payment schedule will not be amended, modified or otherwise changed, except
when required by applicable law or court order or where permitted under the
applicable documentation.
Payment extensions may be granted if, in the opinion of management, such
extension provides a permanent solution to resolve a temporary problem. An
extension fee must be paid by the customer prior to the extension. Normally,
there can be only one extension during the first 18 months of a finance
contract. Additional extensions may be granted if allowed under the applicable
VSI Policy, although the Company's securitization documents restrict permitted
extensions to no longer than one month and not more than once per year. Payment
due dates can be modified once during the term of the contract to facilitate
current payment by the customer.
Repossessions and Recoveries. If a delinquency exists and a default is
deemed inevitable or the collateral is in jeopardy, and in no event later than
the 90th day of delinquency (as required by the applicable VSI Policy), the
Company's Collections Department will initiate the repossession of the financed
vehicle. Bonded, insured outside repossession agencies are used to secure
involuntary repossessions. In most jurisdictions, the Company is required to
give notice to the borrower of the Company's intention to sell the repossessed
vehicle, whereupon the borrower may exercise certain rights to cure his or her
default or redeem the automobile. Following the expiration of the legally
required notice period, the repossessed vehicle is sold at a wholesale auto
auction (or in limited circumstances, through dealers), usually within 60 days
of the repossession. The Company closely monitors the condition of vehicles set
for auction, and procures an appraisal under the applicable VSI Policy prior to
sale. Liquidation proceeds are applied to the borrower's outstanding obligation
under the finance contract and loss deficiency claims under the VSI Policy and,
if applicable, any deficiency balance policy are then filed. See
' -- Insurance.'
9
<PAGE>
<PAGE>
INSURANCE
Each finance contract requires the borrower to obtain comprehensive and
collision insurance with respect to the related financed vehicle with the
Company named as a loss payee. The Company relies on a written representation
from the selling dealer and independently verifies that a borrower in fact has
such insurance in effect when it purchases contracts. Each finance contract
acquired by the Company prior to December 31, 1996 is covered by the Interstate
VSI Policy, including the Credit Endorsement. The Interstate VSI Policy has been
issued to the Company by Interstate Fire & Casualty Company ('Interstate').
Interstate is an indirect wholly-owned subsidiary of Fireman's Fund Insurance
Company. Certain finance contracts acquired by the Company after December 31,
1996 are covered by either the Interstate VSI Policy, including the Credit
Endorsement, another VSI Policy (which does not include a Credit Endorsement),
or the VSI Policy and deficiency balance endorsement (the 'Progressive Policy')
issued by Progressive Northern Insurance Company ('Progressive').
Physical Damage and Loss Coverage. The Company initially relies on the
requirement, set forth in its underwriting criteria, that each borrower maintain
adequate levels of physical damage loss coverage on the respective financed
vehicle. The Company tracks the physical damage insurance of borrowers and
contacts borrowers in the event of a lapse in coverage or inadequate
documentation. Moreover, the VSI Policies insure against: (i) all risk of
physical loss or damage from any external cause to financed vehicles which the
Company holds as collateral; (ii) any direct loss which the Company may sustain
by unintentionally failing to record or file the instrument evidencing each
contract with the proper public officer or public office, or by failing to cause
the proper public officer or public office to show the Company's encumbrance
thereon, if such instrument is a certificate of title; (iii) any direct loss
sustained during the term of the applicable VSI Policy, by reason of the
inability of the Company to locate the borrower or the related financed vehicle,
or by reason of confiscation of the financed vehicle by a public officer or
public office; and (iv) all risk of physical loss or damage from any external
cause to a repossessed financed vehicle for a period of 60 days while such
financed vehicle is (subject to certain exceptions) held by or being repossessed
by the Company.
The physical damage provisions of a VSI Policy generally provide coverage
for losses sustained on the value of the financed vehicle securing a contract,
but in no event is the coverage to exceed: (i) the cost to repair or replace the
financed vehicle with material of like kind and quality; (ii) the actual cash
value of the financed vehicle at the date of loss, less its salvage value; (iii)
the unpaid balance of the contract; (iv) $40,000 per financed vehicle (or, in
the case of losses or damage sustained on repossessed financed vehicles, $25,000
per occurrence), or $50,000 in the case of the Progressive Policy; or (v) the
lesser of the amounts due the Company under clauses (i) through (iv) above, less
any amounts due under all other valid insurance on the damaged financed vehicle
less its salvage value. No assurance can be given that the insurance will cover
the amount financed with respect to a financed vehicle.
All claim settlements for physical damage and loss coverage under the
Interstate Policy are subject to a $500 deductible per loss ($250 for the
Progressive Policy). There is no aggregate limitation or other form of cap on
the number of claims under the VSI Policy. Coverage on a financed vehicle is for
the term of the related contract and is noncancellable. Each VSI Policy requires
that, prior to filing a claim, a reasonable attempt be made to repossess the
financed vehicle and, in the case of claims on skip losses, every professional
effort be made to locate the financed vehicle and the related borrower.
Deficiency Balance Endorsements. In addition to physical damage and loss
coverage, the Interstate VSI Policy contains a Credit Endorsement which provides
that Interstate shall indemnify the Company for certain losses incurred due to a
deficiency balance following the repossession and resale of financed vehicles
securing defaulted finance contracts eligible for coverage. Coverage under the
Credit Endorsement is strictly conditioned upon the Company's maintaining and
adhering to the credit underwriting criteria set forth in the Credit
Endorsement. Losses on each eligible contract are covered in an amount equal to
the deficiency balance resulting from the Net Payoff Balance (as defined below)
less the sum of (i) the Actual Cash Value (as defined below) of the financed
vehicle plus (ii) the total amount recoverable from all other applicable
insurance, including refunds from cancelable add-on products. The maximum
coverage under the Credit Endorsement is $15,000 per contract.
'Actual Cash Value' for the purposes of the Credit Endorsement only, means
the greater of (i) the price for which the subject financed vehicle is sold or
(ii) the wholesale market value at the time of the
10
<PAGE>
<PAGE>
loss as determined by an automobile guide approved by Interstate applicable to
the region in which the financed vehicle is sold.
'Net Payoff Balance' for the purposes of the Credit Endorsement, means the
outstanding principal balance as of the default date plus late fees and
corresponding interest no more than 90 days after the date of default. In no
event shall Net Payoff Balance include non-approved fees, taxes, penalties or
assessments included in the original instrument, or repossession, disposition,
collection or remarketing expenses and fees or taxes incurred.
The Progressive Policy contains a Deficiency Balance Endorsement (the
'DBE'), pursuant to which Progressive will insure the Company's interest in the
Financed Vehicles against direct loss incurred due to the Company's inability to
recover one hundred percent (100%) of the balance due under an instrument
representing a finance contract. Under the DBE, Progressive will cover such
impairment of the Company's interest in the financed vehicle, measured as the
Net Payoff Amount, reduced by (a) claim settlements from other insurance
policies, (b) claim settlements due under other coverage provisions of the VSI
Policy or its other endorsements, and (c) monies recoverable under any other
recourse or repurchase agreement or through any dealer hold-back, or any other
source. The maximum liability under the DBE is Five Thousand Dollars ($5,000)
for any financed contract, and claims payments may not exceed, on a monthly
basis, 88% of the premiums paid. See ' -- Recent Developments.'
MANAGEMENT INFORMATION SYSTEMS
Management believes that a high level of real-time information flow and
analysis is essential to manage the Company's informational and reporting needs
and to enhance the Company's competitive position. Significant infrastructure
development was completed throughout 1997 to accommodate the servicing functions
which were assumed from LSE. Such development of both personnel and technology
increased expenses in 1997. The Company hopes to realize the benefits of such
investment in 1998 and thereafter.
In addition, management uses customized reports, with a download of
information to personal computers, to issue investor reports and to analyze the
Company's finance contract portfolio on a monthly basis. The system's
flexibility allows the Company to achieve productivity improvements with
enhanced data access. Management believes that it has sufficient systems in
place to permit significant growth in the Company's finance contract portfolio
without the need for material additional investment in management information
systems.
FUNDING/SECURITIZATION OF FINANCE CONTRACTS
Warehouse Credit Facilities. The Company obtains a substantial portion of
its working capital for the acquisition of finance contracts through warehouse
credit facilities. Under a warehouse facility, the lender generally advances
amounts requested by the borrower on a periodic basis, up to an aggregate
maximum credit limit for the facility, for the acquisition and servicing of
finance contracts or other similar assets. Until proceeds from a securitization
transaction are used to pay down outstanding advances, as principal payments are
received on the finance contracts, the principal amount of the advances may be
paid down incrementally or reinvested in additional finance contracts on a
revolving basis.
Effective August 1, 1994, the Company entered into a secured revolving
credit agreement with Sentry Financial Corporation ('Sentry') which was amended
and restated on July 31, 1995. The amended agreement (the 'Sentry Facility')
provides for a $10.0 million warehouse line of credit which terminates December
31, 2000, unless terminated earlier by the Company or Sentry upon meeting
certain defined conditions. The proceeds of the Sentry Facility are to be used
to originate and acquire finance contracts, to pay for loss default insurance
premiums, to make deposits to a reserve account with Sentry, and to pay for fees
associated with the origination of finance contracts. The Sentry Facility is
collateralized by the finance contracts acquired with the outstanding
borrowings. Interest is payable monthly and accrues at a rate of prime plus
1.75% (10.25% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth,
11
<PAGE>
<PAGE>
and cash and cash equivalent balances. The Company pays a utilization fee of up
to 0.21% per month on the average outstanding balance of the Sentry Facility.
The Sentry Facility also requires the Company to pay up to 0.62% per quarter on
the average unused balance. At December 31, 1997, $10,000,000 was available for
borrowing under the credit line as there were no amounts outstanding at that
date.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the 'Daiwa
Facility') with Daiwa Finance Corporation ('Daiwa') effective as of February 1,
1997. Advances under the Daiwa Facility mature on the earlier of 120 days
following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the finance contracts funded be covered by
default deficiency insurance. Interest is payable upon maturity of the advances
and accrues at the lesser of (x) 30 day LIBOR plus 1.15% (6.87% at December 31,
1997) or (y) 11% per annum. The Company also pays a non-utilization fee of .25%
per annum on the unused amount of the line of credit. Pursuant to the Daiwa
Facility, the Company paid a $243,750 commitment fee. The Daiwa Facility
contains certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations including, among
other things, delinquency and repossession triggers. While no new advances will
be made under the Daiwa Facility after March 31, 1998, the maturity date for
existing advances has been extended to April 30, 1998, with interest therein
accruing at LIBOR plus 4.00% per annum. At December 31, 1997, advances under the
Daiwa Facility totaled $7,639,201 and remaining availability was $15,759,792.
The Company incurred interest expense under the Daiwa Facility of approximately
$1,118,883 during the year ended December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable funding warehouse notes (beneficial interests) which
are convertible into term notes at the option of the holder of such notes.
Transfers of finance contracts to the special purpose entities have been
recognized as sales under Statement of Financial Accounting Standards No. 125,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities' ('SFAS No. 125').
On December 31, 1997, the Company purchased approximately $12.5 million of
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ('CSFB'),
at a purchase price of 93.5% of the outstanding principal balance of the finance
contracts. The Company financed its purchase through a warehouse securitization
facility with CSFB pursuant to which the finance contracts were transferred to a
bankruptcy remote, special purpose corporation, AutoBond Master Funding
Corporation II and variable beneficial interests were issued to CSFB. Pursuant
to the structure, the Company agreed to maintain sufficient
over-collateralization such that CSFB's investment in the special purpose
corporation is collateralized by assets having a value equal to or greater than
117% of such investment. Recourse to the Company is limited to 10% of the
original unpaid balance of the finance contracts, and the variable beneficial
interests accrue interest at LIBOR plus 3% per annum. The variable beneficial
interests matures at 120 days and are convertible at CSFB's option into a term
securitization. The transfer of finance contracts to the special purpose entity
has been recognized as a sale under SFAS No. 125. As of March 31, 1998, the
Company is currently in active discussions with several potential warehouse
providers. To the extent that the Company is unable to maintain the revolving
credit facilities or is unable to arrange new warehouse lines of credit, the
Company would have to curtail its finance contract acquisition activities, which
would have a material adverse effect on operations and cash position. The
Company ability to obtain a successor facility or similar financing will depend
on, among other things, the willingness of financial organizations to
participate in funding subprime finance contracts and the Company's financial
condition and results of operations. The Company's growth is dependent upon its
ability to obtain sufficient financing under warehouse credit facilities, at
rates and upon terms acceptable to the Company. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
12
<PAGE>
<PAGE>
Securitization Program. The periodic securitization of finance contracts is
an integral part of the Company's business. Securitizations enable the Company
to monetize its assets and redeploy its capital resources and warehouse credit
facilities for the purchase of additional finance contracts. To date, the
Company has completed ten securitizations involving approximately $242 million
in aggregate principal amount of finance contracts.
In its securitization transactions through December 31, 1996, the Company
sold pools of finance contracts to a special purpose subsidiary, which then
assigned the finance contracts to a trust in exchange for cash and certain
retained beneficial interests in the trust. The trust issued two classes of
fixed income investor certificates: Class A Certificates which were sold to
investors, generally at par with a fixed coupon, and subordinated excess spread
certificates (representing a senior interest in excess spread cash flows from
the finance contracts) which were retained by the Company's securitization
subsidiary and which collateralize borrowings on a non-recourse basis. The
Company also funded a cash reserve account that provides credit support to the
Class A Certificates. The Company's securitization subsidiaries also retained an
interest in the trust that is subordinate to the interest of the investor
certificate holders. The retained interests entitle the Company to receive the
future excess spread cash flows from the trust after payment to investors,
absorption of losses, if any, that arise from defaults on the transferred
finance contracts and payment of the other expenses and obligations of the
trust. In accounting for its securitization transactions in 1997, the Company
followed the provisions of SFAS 125. In these securitizations the Company sold
pools of finance contracts to a special purpose subsidiary, which then issued
notes under a trust indenture secured by such finance contracts. The special
purpose corporations may issue multiple classes of secured notes, including
subordinated excess spread notes. The Company also funded a cash reserve account
that provides credit support to the senior notes. The Company's securitization
subsidiaries also have retained an interest in the finance contracts that is
subordinate to the interest of the note holders. The retained interests entitle
the Company to receive the future excess spread cash flows from the trust estate
after payment to investors, absorption of losses, if any, that arise from
defaults on the transferred finance contracts and payment of the other expenses
and obligations of the trust estate.
Securitization transactions impact the Company's liquidity in two primary
ways. First, the application of proceeds toward payment of the outstanding
advances on warehouse credit facilities makes additional borrowing available, to
the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. Second, additional working capital is obtained
through the Company's practice of borrowing, through the issuance of
non-recourse debt, against the value of the senior interest in the retained
excess spread. If the structure of the securitizations was changed, it could
impact the Company's ability to generate liquidity. See ' -- Recent
Developments.'
Upon each securitization, the Company recognizes the sale of finance
contracts and records a non-cash gain or loss in an amount which takes into
account the amounts expected to be received as a result of its retained
interests. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Revenues -- Gain on Sale of Finance Contracts.' At
December 31, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $17.2 million, a portion of which had been pledged to
secure notes payable of $9.9 million.
If the Company were unable to securitize contracts in a financial reporting
period, the Company would incur a significant decline in total revenues and net
income or report a loss for such period. If the Company were unable to
securitize its contracts and did not have sufficient credit available, either
under its warehouse credit facilities or from other sources, the Company would
have to sell portions of its portfolio directly to investors or curtail its
finance contract acquisition activities. The Company is currently negotiating a
$200 million revolving purchase securitization facility and hopes to secure such
a facility in the short term.
When the Company securitizes finance contracts, it repays a portion of its
outstanding warehouse indebtedness, making such portion available for future
borrowing. As finance contract volume increases, the Company expects to
securitize its assets at least quarterly, although there can be no assurance
that the Company will be able to do so. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
13
<PAGE>
<PAGE>
The securitization trust agreements and the servicing agreement contain
certain events of administrator termination, the occurrence of which entitles
the trustee to terminate the Company's right to act as collection agent and
administrator. Events of administrator termination typically include: (i)
defaults in payment obligations under the trust agreements; (ii) unremedied
defaults in the performance of certain terms or covenants under the trust
agreements, the servicing agreements or related documents; (iii) the institution
of certain bankruptcy or liquidation proceedings against the Company; (iv)
material breaches by the Company of representations and warranties made by it
under the servicing agreements and the sale agreements pursuant to which it has
sold the securitized finance contracts; (v) the occurrence of a trigger event
whereby the ratio of delinquent finance contracts to total securitized finance
contracts for each transaction exceeds the percentage set forth in the servicing
agreements; (vi) a material adverse change in the consolidated financial
condition or operations of the Company, or the occurrence of any event which
materially adversely affects the collectibility of a material amount of the
securitized finance contracts or which materially adversely affects the ability
of the Company to collect a material amount of the finance contracts or to
perform in all material respects its obligations under the servicing agreements,
trust agreements and related documents; or (vii) any of the rating agencies
rating the securitization transactions determines that the Company's serving as
collection agent under the related servicing agreement would prevent such agency
from maintaining the required ratings on such transactions, or would result in
such transactions being placed on negative review suspension or downgrade.
The trust agreements contain amortization events, the occurrence of any of
which may affect the Company's rights to receive payments in respect of the
future excess spread cash flows otherwise payable to it until principal and
interest payments due the holders of all investor certificates are paid in full.
Such amortization events include:
(i) defaults in certain payments or repurchase obligations under the
trust agreements; (ii) unremedied defaults in the performance of any
covenants or terms of the trust agreements by a securitization subsidiary;
(iii) the occurrence of certain bankruptcy or insolvency events of a
securitization subsidiary; (iv) unremedied material breaches of
representations or warranties of a securitization subsidiary; (v)
occurrence of an event of administrator termination; (vi) failure of a
securitization subsidiary to transfer certain required amounts of unpaid
principal balance of finance contracts to each securitization trust or to
retain the resulting shortfall in the collection accounts; (vii) failure of
any transfer under the trust agreements to create, or failure of any
investor certificates to evidence, a valid and perfected first priority
undivided ownership or security interest in the pool of securitized finance
contracts and related collateral; (viii) failure of the Company to own,
directly or indirectly, 100% of the outstanding shares of common stock of
any securitization subsidiary; (ix) entry of unpaid and unstayed judgments
aggregating in excess of $25,000 are entered against any securitization
subsidiary; or (x) occurrence of a 'change in control' with respect to the
Company.
COMPETITION
The sub-prime credit market is highly fragmented, consisting of many
national, regional and local competitors, and is characterized by relative ease
of entry and the recent arrival of a number of well capitalized publicly-held
competitors. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loan associations, small loan
companies, industrial thrifts, leasing companies and captive finance companies
owned by automobile manufacturers and others. Many of these financial
organizations do not consistently solicit business in the sub-prime credit
market. The Company believes that captive finance companies generally focus
their marketing efforts on this market only when inventory control and/or
production scheduling requirements of their parent organizations dictate a need
to enhance sales volumes and exit the market once such sales volumes are
satisfied. The Company also believes that increased regulatory oversight and
capital requirements imposed by market conditions and governmental agencies have
limited the activities of many banks and savings and loan associations in the
sub-prime credit market. In many cases, those organizations electing to remain
in the automobile finance business have migrated toward higher quality customers
to allow reductions in their overhead cost structures.
14
<PAGE>
<PAGE>
As a result, the sub-prime credit market is primarily serviced by smaller
finance organizations that solicit business when and to the extent their capital
resources permit. The Company believes no one of its competitors or group of
competitors has a dominant presence in the market. The Company's strategy is
designed to capitalize on the market's relative lack of major national financing
sources. Nonetheless, several of these competitors have greater financial
resources than the Company and may have a significantly lower cost of funds.
Many of these competitors also have long-standing relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing or services not provided by the Company. Furthermore, during the past
two years, a number of automobile finance companies have completed public
offerings of common stock, the proceeds of which are being used, at least in
part, to fund expansion and finance increased purchases of finance contracts.
The Company's ability to compete successfully depends largely upon its
relationships with dealerships and the willingness of dealerships to offer
finance contracts to the Company that meet the Company's underwriting criteria.
There can be no assurance that the Company will be able to continue successfully
in the markets it serves.
Additionally, during the first half of 1997, several of the Company's
competitors have experienced serious problems ranging from allegedly fraudulent
misstatements of earnings to increasing losses and inadequate reserves. Although
the Company believes it has made adequate reserves to cover losses, the ability
of the Company to obtain funding in the future and the rates at which such
financings may be obtained could be impaired as a result of the turmoil in the
sub-prime auto finance industry. Although the Company was able to obtain
financing under the Daiwa Facility and continues to have financing available
under the Sentry Facility, there can be no assurance that the recent negative
developments in the sub-prime auto finance industry will not have an effect on
the Company's ability to raise funds and may result in an increased cost of
funding to the Company. See 'Recent Developments.'
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statues and regulations. As of December 31, 1997, the
Company was licensed to conduct business operations with dealers located in 41
states, and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states where the Company operates (i) limit the
interest rates, fees and other charges that may be imposed by, or prescribe
certain other terms of, the finance contracts that the Company purchases and
(ii) define the Company's rights to repossess and sell collateral. In addition,
the Company is required to be licensed or registered to conduct its finance
operations in certain states in which the Company purchases finance contracts.
As the Company expands its operations into other states, it will be required to
comply with the laws of such states.
Numerous federal and state consumer protection laws and related regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Reporting Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.
In addition, the Federal Trade Commission ('FTC') has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the unclear application of various truth-in-lending laws
and regulations to certain products offered by companies in the industry,
industry participants are sometimes named as defendants in litigation involving
alleged
15
<PAGE>
<PAGE>
violations of federal and state consumer lending or other similar laws and
regulations. A significant judgment against the Company or within the industry
in connection with any litigation could have a material adverse effect on the
Company's financial condition and results of operations.
In the event of default by a borrower under a finance contract, the Company
is entitled to exercise the remedies of a secured party under the Uniform
Commercial Code ('UCC'). The UCC remedies of a secured party include the right
to repossession by self-help means, unless such means would constitute a breach
of the peace. Unless the borrower voluntarily surrenders a vehicle, self-help
repossession by an independent repossession agent engaged by the Company is
usually employed by the Company when a borrower defaults. Self-help repossession
is accomplished by retaking possession of the vehicle. If a breach of the peace
is likely to occur, or if applicable state law so requires, the Company must
obtain a court order from the appropriate state court and repossess the vehicle
in accordance with that order. None of the states in which the Company presently
does business has any law that would require the Company, in the absence of a
probable breach of the peace, to obtain a court order before it attempts to
repossess a vehicle.
In most jurisdictions, the UCC and other state laws require a secured party
to provide an obligor with reasonable notice of the date, time and place of any
public sale or the date after which any private sale of collateral may be held.
Unless the obligor waives his rights after default, the obligor in most
circumstances has a right to redeem the collateral prior to actual sale (i) by
paying the secured party all unpaid installments on the obligation, plus
reasonable expenses for repossessing, holding and preparing the collateral for
disposition and arranging for its sale, plus in some jurisdictions, reasonable
attorneys' fees or (ii) in some states, by paying the secured party past-due
installments. Repossessed vehicles are generally resold by the Company through
wholesale auctions which are attended principally by dealers.
EMPLOYEES
As of December 31, 1997, the Company employed 191 persons, none of whom was
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
PROPERTIES AND FACILITIES
The Company's headquarters are located in approximately 18,900 square feet
of leased space at 301 Congress Avenue, Austin, Texas, for a monthly rent of
$18,390. The lease for such facility expires in June 1998. Thereafter, it plans
to relocate to 100 Congress Avenue, Austin, Texas. Accordingly, the Company has
leased approximately 40,530 square feet of office space at a monthly rent of
$46,863 for a term of seven years following the initial commencement date
(projected on June 1, 1998). The Company's headquarters contain the Company's
executive offices as well as those related to automobile finance contract
acquisition. The Company does not maintain any regional office facilities,
although its securitization subsidiaries are incorporated and maintain an office
in Nevada.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is from time to time made
a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating dealer and name the Company
and/or its assignees as subsequent holders of the finance contracts. To date,
none of these actions have resulted in the payment of damages, or any judgments
therefor, by the Company or its assignees, nor have any actions been certified
as eligible for class-action status.
In March 1998, after Progressive Northern Insurance purported to cancel the
VSI and deficiency balance insurance policies issued in favor of the Company,
the Company sued Progressive, its affiliate United Financial Casualty Co. and
their agent in Texas, Technical Risks, Inc. in the district court of Harris
County, Texas. The action seeks declaratory relief confirming the Company's
interpretation of the policies, as discussed under 'Business -- Recent
Developments', as well as claims for damages based upon breach of contract, bad
faith and fraud. The Company has not yet received the defendants'
16
<PAGE>
<PAGE>
answers. Also in March 1998, the Company commenced an action in Travis County,
Texas, against Loan Servicing Enterprise, alleging LSE's contractual breach of
its servicing obligations on a continuing basis. LSE has commenced an action
against AutoBond in Texas state court seeking recovery from the Company of
putative termination fees in connection with LSE's termination as servicer. The
Company expects the two actions to be consolidated.
The Company's carrier for the credit deficiency insurance obtained through
1996, Interstate Fire & Casualty Co. ('Interstate') determined in late 1996 to
no longer offer such coverage to the auto finance industry, including the
Company. In connection with Interstate's attempt to no longer offer credit
deficiency coverage for contracts originated after December 1996, the Company
commenced an action in the United States District Court for the Western District
of Texas, Austin Division, seeking a declaratory judgment that (a) the Company
was entitled to 180 days' prior notice of cancellation and (b) Interstate was
not entitled to raise premiums on finance contracts for which coverage was
obtained prior to the effectiveness of such cancellation, as well as seeking
damages for Interstate's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. While settlement discussions are ongoing,
Interstate and the Company have to date acted on the basis of a cancellation
date of May 12, 1997 (i.e., no finance contracts presented after that date will
be eligible for credit deficiency coverage by Interstate, although all existing
contracts for which coverage was obtained will continue to have the benefits of
such coverage), no additional premiums having been demanded or paid, and the
claims-paying process having been streamlined. In particular, in order to speed
the claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate destination for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.
As set forth in the discussion of finance contracts held for sale in Note 3
to the Notes to the Company's audited financial statements, in February 1997 the
Company discovered certain breaches of representations and warranties by certain
dealers with respect to finance contracts sold into a securitization. The
Company honored its obligations to the securitization trust and repurchased
finance contracts totaling $619,520 from that trust during the three months
ended March 31, 1997. Of the total amount of these finance contracts, $190,320
were purchased from one dealer. Although the Company has requested that this
dealer repurchase such contracts, the dealer has refused. After such dealer's
refusal to repurchase, the Company commenced an action in the 157th Judicial
District Court for Harris County, Texas against Charlie Thomas Ford, Inc. to
compel such repurchase. Discovery is proceeding but no trial date has been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOHLDER MATTERS
On November 8, 1996, the Company's Common Stock was listed for quotation
and began trading on Nasdaq National Market ('Nasdaq') under the symbol 'ABND.'
Prior to such date, the Company's stock was closely held and not traded on any
regional or national exchange.
HIGH AND LOW SALE PRICES BY PERIOD
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
December 31, 1996............................................ $11 $9 1/4
March 31, 1997............................................... $10 3/8 $4
June 30, 1997................................................ $ 4 3/4 $2 1/4
September 30, 1997........................................... $ 5 1/8 $3 13/16
December 31, 1997............................................ $ 4 1/2 $2 5/8
</TABLE>
17
<PAGE>
<PAGE>
On February 27, 1998, the Company's common stock listing was transferred to
the American Stock Exchange and began trading under the symbol 'ABD'. The
transfer agent and registrar for the Common Stock is American Stock Transfer &
Trust Company. As of March 26, 1998, the Company had approximately 16
stockholders of record, exclusive of holders who own their shares in 'street' or
nominee names.
The Company has not paid and does not presently intend to pay cash
dividends on its common stock. The Company anticipates that its earnings for the
foreseeable future will be retained for use in operation and expansion of
business. Payment of cash dividends, if any, in the future will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's financial condition, earnings, current and anticipated capital
requirements, terms of indebtedness and other factors deemed relevant by the
Company's Board of Directors.
18
<PAGE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries for the periods and at the date indicated. The
selected financial data were derived from the financial statements and
accounting records of the Company. The data presented below should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, ---------------------------------
1994(2) 1995 1996 1997
-------------- ------ ------------ -------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Statement of operations data:
Interest income......................................... $ 38 $2,881 $ 2,520 $ 4,119
Gain on sale of finance contracts....................... -- -- 658 18,666
Servicing fee income.................................... -- 4,086 12,820 1,131
Other income (loss)..................................... -- -- 388 (1,485)
------- ------ ------------ -------
Total revenues..................................... 38 6,967 16,386 22,431
------- ------ ------------ -------
Provision for credit losses............................. 45 49 412 613
Interest expense........................................ 19 2,100 2,383 3,880
Salaries and benefits................................... 226 1,320 4,529 7,357
General and administrative.............................. 245 1,463 2,331 6,075
Other operating expenses................................ 48 963 1,120 2,005
------- ------ ------------ -------
Total expenses..................................... 583 5,895 10,775 19,930
------- ------ ------------ -------
Income before income taxes and extraordinary loss....... (545) 1,072 5,611 2,501
Provision for income taxes.............................. -- 199 1,926 888
Extraordinary loss, net of tax benefit.................. -- -- (100) --
------- ------ ------------ -------
Net income.............................................. $ (545) $ 873 $ 3,585 $ 1,613
------- ------ ------------ -------
Earnings per share before extraordinary item............ $(0.11) $0.17 $0.64 $0.25
Earnings per share-basic................................ $(0.11) $0.17 $0.62 $0.25
Earnings per share-diluted.............................. $(0.11) $0.17 $0.62 $0.25
Weighted average shares outstanding.......................... 5,118,753 5,190,159 5,791,189 6,516,056
Cash flow data:
Cash used in operating activities....................... (2,514) (3,913) (2,726) (3,135)
Cash used in investing activities....................... (16) (1,987) (2,582) (10,807)
Cash provided by financing activities................... 2,530 5,992 9,337 9,980
Asset quality data:
Delinquencies as a percentage of principal balance of
finance contract portfolio serviced (end of period)(1)
30-59 days past due..................................... 4.69% 7.55% 11.48%
60+ days past due....................................... 2.32% 4.63% 10.32%
</TABLE>
19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1994 1995 1996 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents.............................................. $ -- $ 93 $ 4,121 $ 159
Restricted funds....................................................... -- 1,683 2,982 6,904
Finance contracts held for sale, net................................... 2,361 3,355 228 1,366
Interest-only strip receivable......................................... -- 847 4,247 9,428
Total assets................................................. 2,500 11,065 26,133 43,033
Revolving credit agreement............................................. 2,055 1,150 -- 7,639
Notes payable.......................................................... -- 2,675 10,175 9,841
Repurchase agreement................................................... -- 1,061 -- --
Total debt................................................... 2,055 4,886 10,175 17,480
Shareholders' equity................................................... (109) 3,026 12,142 15,171
</TABLE>
- ------------
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Includes finance contracts where underlying
vehicle is repossessed (but subject to redemption), the borrower is in
bankruptcy, the dealer is to buy back the loan, or insurance claims have
been filed and are pending.
(2) The Company was incorporated on June 15, 1993 and commenced operations on
August 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding 'Selected
Financial Data' and the Company's Consolidated Financial Statements and Notes
thereto and the other financial data included herein. Certain of the financial
information set forth below has been rounded in order to simplify its
presentation. However, the ratios and percentages set forth below are calculated
using the detailed financial information contained in the Financial Statements
and the Notes thereto, and the financial data included elsewhere in this Form
10-K.
The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
('finance contracts') originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ('sub-prime
consumers'). Sub-prime consumers generally are borrowers unable to qualify for
traditional financing due to one or more of the following reasons: negative
credit history (which may include late payments, charge-offs, bankruptcies,
repossessions or unpaid judgments); insufficient credit; employment or residence
histories; or high debt-to-income or payment-to-income ratios (which may
indicate payment or economic risk).
The Company acquires finance contracts generally from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. The Company has experienced
significant growth in its finance contract portfolio since it commenced
operations in August 1994.
The continued acquisition and servicing of subprime finance contracts by an
independent finance company under current market conditions is a capital and
labor intensive enterprise. Capital is needed to fund the acquisition of finance
contracts and to effectively securitize them so that additional capital is made
available for acquisition activity. While a portion of the Company's capital has
been obtained with investment grade ratings at relatively low interest rates,
the remainder is difficult to obtain and requires
20
<PAGE>
<PAGE>
the Company to pay high coupons, fees and other issuance expenses, with a
negative impact on earnings. The underwriting and servicing of a growing
subprime finance contract portfolio requires a higher level of experienced
personnel than that required for a portfolio of higher credit-quality consumer
loans. Accordingly, the Company's growth in finance contract volume since
inception has corresponded with a significant increase in expenses related to
building the infrastructure necessary for effective underwriting and servicing,
resulting in a decrease in net income for 1997 fiscal year as compared with
1996. Although the Company's assumption of all servicing functions in late 1997
is expected to increase servicing income, it is uncertain when the Company will
begin to realize overall improvements in net income as the growth in acquisition
volume continues, especially in view of the high cost of capital. See
' -- Results of Operations' and ' -- Liquidity and Capital Resources;' and Note
1 to the Notes to the Consolidated Financial Statements.
REVENUES
The Company's primary sources of revenues consist of three components:
interest income, gain on sale of finance contracts and servicing fee income.
Interest Income. Interest income consists of the sum of three primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on Class B certificates. Other factors
influencing interest income during a given fiscal period include (a) the annual
percentage rate of the finance contracts acquired, (b) the aggregate principal
balance of finance contracts acquired and funded through the Company's warehouse
and other credit facilities prior to securitization, and (c) the length of time
such contracts are funded by the warehouse and other credit facilities. Finance
contract acquisition growth has had a significant impact on the amount of
interest income earned by the Company.
Gain on Sale of Finance Contracts. Upon completion of a securitization
prior to 1997, the Company recognized a gain on sale of finance contracts equal
to the present value of future excess spread cash flows from the securitization
trust, and the difference between the net proceeds from the securitization and
the net carrying cost (including the cost of insurance premiums, if any) to the
Company of the finance contracts sold. Excess spread cash flows represent the
difference between the weighted average contract rate earned and the rate paid
on multiple class certificates issued to investors in the securitization, taking
into account certain assumptions regarding prepayments, defaults, proceeds from
disposal of repossessed assets, and servicing and other costs, over the life of
the securitization.
The Company implemented Statement of Financial Accounting Standards No. 125
'Transfer and Servicing of Financial Assets and Extinguishment of Liabilities'
('SFAS No. 125') as of January 1, 1997. SFAS No. 125 provides new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement also provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings and 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
21
<PAGE>
<PAGE>
security holders until such time as all accrued interest together with principal
have been paid in full. Subsequently, all remaining excess spread cash flows are
paid to the Company.
An impairment review of the interest-only strip receivable is performed
quarterly by calculating the net present value of the expected future excess
spread cash flows after giving effect to changes in assumptions due to market
and economic changes and the performance of the loan pool to date. The discount
rate used is an estimated market rate, currently 15%. Impairment is determined
on a disaggregated basis consistent with the risk characteristics of the
underlying finance contracts, consisting principally of origination date and
originating dealership, as well as the performance of the pool to date. To the
extent that the Company deems the asset to be permanently impaired, the Company
would record a charge against earnings and write down the asset accordingly. The
Company recorded an adjustment to other income (loss) of $1,312,234 during the
year ended December 31, 1997 as a result of the impairment review.
The Company's cost basis in finance contracts sold has varied from
approximately 97.5% to 103% of the value of the principal balance of such
finance contracts. This portion of recognized gain on sale varies based on the
Company's cost of insurance covering the finance contracts and the discount
obtained upon acquisition of the finance contracts. Generally, the Company has
acquired finance contracts from dealers at a greater discount than with finance
contracts acquired from third parties. Additionally, costs of sale reduce the
total gain recognized. As the Company's securitization program matures,
placement fees and other costs associated with the sale are expected to shrink
as a percentage of the size of the securitization.
Further, the excess spread component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization. The
Company believes that margins in the range of those previously recognized are
sustainable subject to adverse interest rate movements, availability of VSI
insurance at current rates and the Company's ability to continue purchasing
finance contracts from dealers at approximately an 8.5% discount.
The gain on sale of finance contracts is affected by the aggregate
principal balance of contracts securitized and the gross interest spread on
those contracts. The following table illustrates the gross interest spread for
each of the Company's securitizations (dollars in thousands):
22
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING WEIGHTED
BALANCE AT AVERAGE
DECEMBER 31, CONTRACT CERTIFICATE GROSS
SECURITIZATION BALANCE(1) 1997 RATE RATE RATINGS(2) SPREAD(3)
- ---------------------------------- ------------ ------------ --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A.................... $ 26,261,009 $ 11,429,768 18.9% 7.23% Baa2 11.7%
AutoBond Receivables
Trust 1996-A.................... 16,563,366 9,119,507 19.7% 7.15% Baa2 12.5%
AutoBond Receivables
Trust 1996-B.................... 17,832,885 10,529,943 19.7% 7.73% Baa2 12.0%
AutoBond Receivables
Trust 1996-C.................... 22,296,719 16,759,706 19.7% 7.45% Baa2 12.3%
AutoBond Receivables
Trust 1996-D.................... 25,000,000 19,346,258 19.5% 7.37% Baa2 12.1%
AutoBond Receivables
Trust 1997-A(4)................. 27,196,052 22,130,875 20.8% 7.82% Baa2 13.0%
AutoBond Receivables
Trust 1997-B.................... 34,725,196 32,523,526 19.9% 7.66% Baa3 12.3%
AutoBond Receivables
Trust 1997-C.................... 34,430,079 33,289,098 20.0% 7.56% Baa3 12.5%
AutoBond Master Funding
Corporation(5).................. 26,601,006 26,601,006 19.7% 7.09% -- 12.5%
AutoBond Master Funding
Corporation II(5)............... 11,285,431 11,285,431 18.6% 8.73% -- 9.9%
------------ ------------
Total................... $242,191,743 $193,015,118
------------ ------------
------------ ------------
</TABLE>
(1) Refers only to balances on senior investor certificates.
(2) Indicates ratings by Moody's Investors Service, Inc.
(3) Difference between weighted average contract rate and senior certificate
rate.
(4) Includes Class A and Class B Notes.
(5) Includes Variable Rate Funding Notes.
---------------------------
See 'Business -- Recent Developments' for a discussion of recent actions
taken by Fitch and Moody's.
Servicing Fee Income. The Company earns substantially all of its servicing
fee income on the contracts it services on behalf of securitization trusts.
Servicing fee income consists of: (i) contractual administrative fees received
through securitizations, equal to $7.00 per month per contract included in each
trust (excluding amounts paid to third-party servicers by the trust); (ii)
contractual servicing fees received through securitizations, equal to $8.00 per
month per contract included in each trust; and (iii) fee income earned as
servicer for such items as late charges and documentation fees, which are earned
whether or not a securitization has occurred.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition activity (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
----------- ------------
<S> <C> <C>
Number of finance contracts acquired........................................... 7,331 13,189
Principal balance of finance contracts acquired........................... $86,522,631 $148,931,331
Number of active dealerships(1)........................................... 654 1,060
Number of enrolled dealerships............................................ 715 1,621
</TABLE>
23
<PAGE>
<PAGE>
(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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET INCOME
In the year ended December 31, 1997, net income decreased $1,971,833 to
$1,613,053 from $3,584,886 for the year ended December 31, 1996. The decrease
in net income was primarily attributable to an increase in infrastructure costs
to support higher finance contract acquisition and servicing volumes and
impairment charges on interest-only strip receivables. The principal balance of
finance contracts acquired increased $62.4 million to $148.9 million for the
year ended December 31, 1997 from $86.5 million for the year ended December 31,
1996. Due to weakened competitors, the Company more aggressively added qualified
personnel as they became available in the year ended December 31, 1997, and this
added to the growth in salary and benefit expenses.
TOTAL REVENUES
Total revenues increased $6,044,588 to $22,431,128 for the year ended
December 31, 1997 from $16,386,540 for the year ended December 31, 1996 due to
expansion of the Company's finance contract acquisition and securitization
activities.
Interest Income. Interest income increased $1,599,183 to $4,118,795 for the
year ended December 31, 1997 from $2,519,612 for the year ended December 31,
1996 due the growth and timing of finance contract acquisitions. The Company
acquired finance contracts totaling $148.9 million during the year ended
December 31, 1997 compared to $86.5 million in the comparable 1996 period.
Accretion on interest-only strip receivables increased $392,478 from the
respective 1996 period to $546,507 during the year ended December 31, 1997.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $18,666,570 on finance contracts carried at $136.4 million (13.7%)
during the year ended December 31, 1997. Gain on sale amounted to $12,820,700
on finance contracts carried at $85.0 million (15.1%) in the comparable 1996
period. Accordingly, gain on sale of finance contracts rose $5,845,870 during
the year ended December 31, 1997 over the comparable 1996 period.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the year ended December
31, 1997, servicing fee income was $1,131,142, primarily collection agent fees.
Servicing fee income increased by $473,192 from the year ended December 31, 1996
as a result of increased securitization activity by the Company. The ratio of
servicing fee income to the average principal balance of finance contracts
outstanding declined from 1.0% for the year ended December 31, 1996 to .8%
during the year ended December 31, 1997, as the Company waived $149,415 in
servicing fees during the later period. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
1997, increasing the rate of repayment of non-recourse notes. The result of such
waiver is the deferral and subordination of the Company's ultimate receipt of
such waived fees.
Other Income (Loss). For year ended December 31, 1997, other income (loss)
amounted to ($1,485,379), compared with $388,278 for the comparable 1996 period.
The Company recorded a charge against earnings for permanent impairment of the
interest-only strip receivable, determined on a disaggregated basis, of
$1,312,234 during the year ended December 31, 1997. Additionally, unrealized
loss on the Company's Class B certificates totaled $293,188 during the year
ended December 31, 1997.
24
<PAGE>
<PAGE>
TOTAL EXPENSES
Total expenses of the Company increased $9,154,803 to $19,929,904 for year
ended December 31, 1997 from $10,775,101 for the year ended December 31, 1996.
The ratio of total expenses to the average principal balance of finance
contracts outstanding declined from 16.9% for the year ended December 31, 1996
to 13.4% for year ended December 31, 1997 on an annualized basis. As of December
1, 1997 the Company completed the transfer of certain servicing functions from
LSE to in-house personnel and equipment. The Company incurred significant
expenses in the hiring and training of personnel as well as the acquisition and
leasing of equipment primarily to facilitate the servicing transfer during the
year ended December 31, 1997. For example, the incremental equipment expense
for the period was approximately $441,366.
Provision for Credit Losses. Provision for credit losses on finance
contracts increased $200,328to $612,715 for the year ended December 31, 1997
from $412,387 for the year ended December 31, 1996.
Interest Expense. Interest expense rose to $3,879,543 for the year ended
December 31, 1997 from $2,382,818 for the year ended December 31, 1996. Interest
expense increased by $1,496,725 due to higher borrowing volumes outstanding
under the revolving credit facilities, along with increased debt issuance costs
amortization of $320,985.
Salaries and Benefits. Salaries and benefits increased $2,828,278 to
$7,357,284 for the year ended December 31, 1997 from $4,529,006 the year ended
December 31, 1996. This increase was due primarily to an increase in the number
of the Company's employees necessary to handle the increased contract
acquisition volume and the collection activities on a growing portfolio of
finance contracts. As of December 1, 1997 the Company completed the transfer of
certain servicing functions from LSE to in-house personnel and equipment. The
Company incurred significant expenses in the hiring and training of personnel as
well as the acquisition and leasing of equipment to facilitate the servicing
transfer during the year ended December 31, 1997. The number of employees of the
Company increased by 75 to 191 employees at December 31, 1997, compared to 116
employees at December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased $3,743,879 to $6,075,125 for the year ended December 31, 1997 from
$2,331,246 the year ended December 31, 1996. This increase was due primarily to
growth in the Company's operations. General and administrative expenses consist
principally of office, furniture and equipment leases, professional fees,
non-employee marketing commissions, communications and office supplies, and are
expected to increase as the Company continues to grow and also due to the costs
of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports and insurance) increased $885,593 to
$2,005,237 for the year ended December 31, 1997 from $1,119,644 for the year
ended December 31, 1996. This increase was due to increased finance contract
acquisition volume.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET INCOME
In the year ended December 31, 1996, net income increased to $3.6 million
from $873,487 for the year ended December 31, 1995. Net income for the year
ended December 31, 1996 includes an extraordinary charge of $100,000, net of
income tax benefits of $50,000, which represents the prepayment penalty
associated with the early redemption of the Class B Certificate Notes from the
1995-A securitization. The increase in net income was primarily attributable to
an increase in the number of finance contracts securitized during 1996: $81.7
million, compared to $26.3 million in 1995.
TOTAL REVENUES
Total revenues increased $9.1 million to $14.0 million for the year ended
December 31, 1996 from $4.9 million for the year ended December 31, 1995 due to
growth in finance contract acquisition and securitization activity.
25
<PAGE>
<PAGE>
Net Interest Income. Net interest income decreased $644,300 to $136,794 for
the year ended December 31, 1996 from $781,094 for the year ended December 31,
1995. The decrease in net interest income was primarily due to a reduction in
the average daily balance of finance contracts held for sale. This was due to
the fact that the Company securitized its production quarterly in 1996 versus a
single securitization in 1995. Interest income also declined due to an increase
in overall net borrowing costs and fees associated with non-recourse term loans
and Revolving Credit Facilities. Finally, there is no spread between the
interest rate earned on the Class B certificates and the related non-recourse
loans collateralized by such certificates. The increase in the outstanding
balance of the Class B certificates and the related debt causes net interest
income to narrow. The average APR of outstanding finance contracts was 19.45% at
December 31, 1996, compared with 19.3% at December 31, 1995.
Gain on Sale of Finance Contracts. For the year ended December 31, 1996,
gain on sale of finance contracts amounted to $12.8 million. For the year ended
December 31, 1996, the Company completed four securitizations aggregating
approximately $81.7 million in principal amount of finance contracts and the
gain on sale of finance contracts accounted for 91.6% of total revenues. For the
year ended December 31, 1995, there was one securitization transaction in the
principal amount of million. The gain on sale of finance contracts for this sale
transaction accounted for 84.0% of total revenues in 1995.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the year ended December
31, 1996, servicing fee income was $657,950, of which $402,016 was collection
agent fees, $154,029 resulted from discount accretion on the excess servicing
receivable, $50,000 was management fees from an affiliated company, and $51,904
arose from other sources. The Company had completed only one securitization in
1995, which was completed at December 31, 1995, and had no servicing fee income
for such period.
TOTAL EXPENSES
Total expenses of the Company increased $4.6 million to $8.4 million for
the year ended December 31, 1996 from $3.8 million for the year ended December
31, 1995. Although operating expenses increased during the year ended December
31, 1996, the Company's finance contract portfolio grew at a faster rate than
the rate of increase in operating expenses. Total expenses as a percentage of
total percentage balance of finance contracts acquired in the period decreased
slightly to 10.1% during the year ended December 31, 1996 from 12.0% for the
year ended December 31, 1995, reflecting improved efficiency in the Company's
operations.
Salaries and Benefits. Salaries and benefits increased $3.2 million to $4.5
million for the year ended December 31, 1996 from $1.3 million for the year
ended December 31, 1995. This increase was due primarily to an increase in the
number of the Company's employees necessary to handle the increased contract
acquisition volume and the collection activities on a growing portfolio of
loansfinance contracts, and due to compensation of the Company's Chief Executive
Officer, which the Company began paying in May 1996. See Note 11 to Notes to
Consolidated Financial Statements.
General and Administrative Expenses. General and administrative expenses
increased $868,506 to $2.3 million for the year ended December 31, 1996 from
$1.5 million for the year ended December 31, 1995. This increase was due
primarily to growth in the Company's operations. General and administrative
expenses consist principally of office, furniture and equipment leases,
professional fees, communications and office supplies, and are expected to
increase as the Company continues to grow and also due to the costs of operating
as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicing fees, credit bureau reports and insurance) increased $156,628 to
$1.1 million for the year ended December 31, 1996 from $963,017 for the year
ended December 31, 1995. This increase was due to increased finance contract
acquisition volume.
FINANCIAL CONDITION
Restricted Cash. Restricted cash increased $3.9 million to $6.9 million at
December 31, 1997 from $3.0 million at December 31, 1996. In accordance with the
Company's revolving credit facilities, proceeds advanced by the lender for
purchase of finance contracts are held by a trustee until the
26
<PAGE>
<PAGE>
Company delivers qualifying collateral to release the funds, normally in a
matter of days. The trustee held $6.6 million of funds advanced for the purchase
of finance contracts at December 31, 1997. The Company is also required to
maintain a cash reserve with its lenders up to 11% of the proceeds received from
the lender for the origination of the finance contracts. Access to these funds
is restricted by the lender; however, such funds may be released in part upon
the occurrence of certain events including payoffs of finance contracts.
Finance Contracts Held for Sale, Net. Finance contracts held for sale, net
of allowance for credit losses, increased $1.2 million to $1.4 million at
December 31, 1997, from $228,429 at December 31, 1996. The number and principal
balance of contracts held for sale are largely dependent upon the timing and
size of the Company's securitizations. The Company plans to securitize finance
contracts on a regular basis.
Interest-Only Strip Receivables. The following table provides historical
data regarding the interest-only strip receivable:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
---------- -----------
<S> <C> <C>
Beginning balance............................................. $ 846,526 $ 4,247,274
Unrealized appreciation....................................... -- 1,589,782
Additions from securitization transactions.................... 3,246,719 4,356,656
Accretion of discount......................................... 154,029 546,507
Impairment charge............................................. -- (1,312,233)
---------- -----------
Ending balance........................................... $4,247,274 $ 9,427,986
---------- -----------
---------- -----------
</TABLE>
Trust Receivable. At the time a securitization closes, the Company's
securitization subsidiary is required to fund a cash reserve account within the
trust to provide additional credit support for the senior investor securities.
Additionally, depending on the structure of the securitization, a portion of the
future excess spread cash flows from the trust is required to be deposited in
the cash reserve account to increase the initial deposit to a specified level.
Amounts on deposit in cash reserve accounts are also reflected as advances to
the relevant trust under the item 'Cash flows from investing activities' in the
Company's consolidated statements of cash flows. The initial cash reserve
deposits for the Company's securitizations follow:
<TABLE>
<CAPTION>
SENIOR INVESTOR INITIAL
CERTIFICATE RESERVE
SECURITIZATION AMOUNT(1) DEPOSIT PERCENT
- ---------------------------------------------------------------- --------------- ---------- -------
<S> <C> <C> <C>
AutoBond Receivables Trust 1995-A............................... $26,261,009 $ 525,220 2.0%
AutoBond Receivables Trust 1996-A............................... 16,563,366 331,267 2.0%
AutoBond Receivables Trust 1996-B............................... 17,832,885 356,658 2.0%
AutoBond Receivables Trust 1996-C............................... 22,297,719 445,934 2.0%
AutoBond Receivables Trust 1996-D............................... 25,000,000 500,000 2.0%
AutoBond Receivables Trust 1997-A(2)............................ 27,196,052 560,744 2.1%
AutoBond Receivables Trust 1997-B............................... 34,725,196 868,130 2.5%
AutoBond Receivables Trust 1997-C............................... 34,430,079 860,752 2.5%
AutoBond Master Funding Corporation(3).......................... 26,601,006 4,285,855 16.1%
AutoBond Master Funding Corporation II(3)....................... 11,285,431 -- 0.0%
</TABLE>
- ------------
(1) Refers only to balances on senior investor certificates upon issuance.
(2) Includes Class A and Class B Notes.
(3) Includes Variable Rate Funding Notes (beneficial interests).
------------------------
A portion of excess spread cash flows will increase such reserves until
they reach a target reserve level (initially 6%) of the outstanding balance of
the senior investor certificates.
27
<PAGE>
<PAGE>
Other Assets. The Company carried $1.4 million in assets as of December 31,
1997 primarily related to the Company's retained interest in amounts sold to a
special purpose subsidiary which issued variable rate funding notes.
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts
outstanding.................................... $104,889,892 $187,098,957
Delinquent finance contracts(1):
30-59 days past due.............................. 7,916,425 7.55% 21,484,450 11.48%
60-89 days past due.............................. 2,102,014 2.00% 10,941,753 5.85%
90 days past due and over........................ 2,763,300 2.63% 8,368,493 4.47%
------------ ----- ------------ -----
Total.................................. $ 12,781,739 12.18% $ 40,794,696 21.80%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
- ------------
(1) Percentage based upon outstanding balance. Includes finance contracts where
the underlying vehicle is repossessed (but subject to redemption), the
borrower is in bankruptcy, a dealer buy back is expected or where insurance
claims are filed and pending.
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for contracts held for sale.
The Company reports a provision for credit losses on finance contracts held for
sale. Management evaluates the reasonableness of the assumptions employed by
reviewing credit loss experience, delinquencies, repossession trends, the size
of the finance contract portfolio and general economic conditions and trends. If
necessary, assumptions will be changed in the future to reflect historical
experience to the extent it deviates materially from that which was assumed.
If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary repossessions. In most jurisdictions, notice to the
borrower of the Company's intention to sell the repossessed vehicle is required,
whereupon the borrower may exercise certain rights to cure his or her default
and redeem the automobile. Following the expiration of the legally required
notice period, the repossessed vehicle is sold at a wholesale auto auction (or
in limited circumstances, through dealers), usually within 60 days of the
repossession. The Company closely monitors the condition of vehicles set for
auction, and procures an appraisal under the relevant VSI policy prior to sale.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the finance contract and insurance claims under the VSI policy and, if
applicable, the deficiency balance policy are then filed.
Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. This effect on the delinquency statistics can
be observed in the comparison of 1997 versus 1996 delinquency percentages since
the portfolio is tangibly more seasoned as of December 31, 1997. Accordingly,
delinquency and charge-off rates in the portfolio may not fully reflect the
rates that may apply when the average holding period for finance contracts in
the portfolio is longer. Increases in the delinquency and/or charge-off rates in
the portfolio would adversely affect the Company's ability to obtain credit or
securitize its receivables.
REPOSSESSION EXPERIENCE -- STATIC POOL ANALYSIS
Because the Company's finance contract portfolio is continuing to grow
rapidly, management does not manage losses on the basis of a percentage of the
Company's finance contract portfolio, because percentages can be favorably
affected by large balances of recently acquired finance contracts.
28
<PAGE>
<PAGE>
Management monitors actual dollar levels of delinquencies and charge-offs and
analyzes the data on a 'static pool' basis.
The following table provides static pool repossession frequency analysis in
dollars of the Company's portfolio performance from inception through December
31, 1997. In this table, all finance contracts have been segregated by quarter
of acquisition. All repossessions have been segregated by the quarter in which
the repossessed contract was originally acquired by the Company. Cumulative
repossessions equals the ratio of repossessions as a percentage of finance
contracts acquired for each segregated quarter. Annualized repossessions equals
an annual equivalent of the cumulative repossession ratio for each segregated
quarter. This table provides information regarding the Company's repossession
experience over time. For example, recently acquired finance contracts
demonstrate few repossessions because properly underwritten finance contracts to
sub-prime consumers generally do not default during the initial term of the
contract. Between approximately one year and 18 months of seasoning, frequency
of repossessions on an annualized basis appear to reach a plateau. Based on
industry statistics and the performance experience of the Company's finance
contract portfolio, the Company believes that finance contracts seasoned in
excess of approximately 18 months will start to demonstrate declining
repossession frequency. The Company believes this may be due to the fact that
the borrower perceives that he or she has equity in the vehicle. The Company
also believes that the finance contracts generally amortize more quickly than
the collateral depreciates, and therefore losses and/or repossessions will
decline over time.
<TABLE>
<CAPTION>
REPOSSESSION FREQUENCY
----------------------------------------------------------------------
PRINCIPAL
PRINCIPAL BALANCE OF BALANCE
YEAR AND QUARTER OF REPOSSESSIONS BY OF CONTRACTS
ACQUISITION QUARTER ACQUIRED CUMULATIVE(1) ANNUALIZED(2) ACQUIRED
- ------------------------------------ -------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
1994
Q3................................ $ 21,148 20.91% 5.97% $ 101,161
Q4................................ 558,044 22.89% 7.04% 2,437,674
1995
Q1................................ 1,570,799 24.89% 8.30% 6,310,421
Q2................................ 1,556,086 25.14% 9.14% 6,190,596
Q3................................ 1,753,861 24.23% 9.69% 7,239,813
Q4................................ 2,050,507 16.82% 7.48% 12,188,863
1996
Q1................................ 4,721,783 30.54% 15.27% 15,460,823
Q2................................ 4,288,468 23.16% 13.23% 18,520,410
Q3................................ 4,036,155 14.36% 9.58% 28,098,899
Q4................................ 3,833,759 15.68% 12.55% 24,442,500
1997
Q1................................ 3,948,029 11.32% 11.32% 34,875,869
Q2................................ 2,610,105 7.39% 9.86% 35,305,817
Q3................................ 409,489 1.18% 2.36% 34,629,616
Q4................................ 19,474 0.04% 0.18% 44,120,029
</TABLE>
- ------------
(1) For each quarter, cumulative repossession frequency equals the number of
repossessions divided by the number of contracts acquired 2 Annualized
repossession frequency converts cumulative repossession frequency into an
annual equivalent (e.g., for Q4 1994, principal balance of $558,044 in
repossessions divided by principal balance of $2,437,674 in contracts
acquired, divided by 13 quarters outstanding times four equals an annual
repossession frequency of 7.04%).
NET LOSS PER REPOSSESSION
Upon initiation of the repossession process, it is the Company's intent to
complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
29
<PAGE>
<PAGE>
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. As less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
table demonstrates the net charge-off per repossessed automobile since
inception.
<TABLE>
<CAPTION>
FROM AUGUST 1,
1994 (INCEPTION)
TO DECEMBER 31, 1997
--------------------
<S> <C>
Number of finance contracts acquired................................... 23,386
Number of vehicles repossessed......................................... 2,936
Repossessed units disposed of.......................................... 1,351
Repossessed units awaiting disposition(1).............................. 1,585
Cumulative gross charge-offs(2)........................................ $ 14,520,631
Costs of repossession(2)............................................... 225,003
Proceeds from auction, physical damage insurance and refunds(2)........ (8,035,075)
--------------------
Net loss............................................................... 6,710,560
Deficiency insurance settlement received(2)............................ (3,438,798)
--------------------
Net charge-offs(2)..................................................... $ 3,271,762
--------------------
--------------------
Net charge-offs per unit disposed...................................... $ 2,422
Net loss as a percentage of cumulative gross charge-offs............... 53.79%
Recoveries as a percentage of cumulative gross charge-offs(3)(4)....... 79.02%
</TABLE>
- ------------
(1) The vehicles may have been sold at auction; however AutoBond might not have
received all insurance proceeds as of December 31, 1997.
(2) Amounts are based on actual liquidation and repossession proceeds (including
insurance proceeds) received on units for which the repossession process had
been completed as of December 31, 1997.
(3) Not including the costs of repossession which are reimbursed by the
securitization trusts.
(4) Includes the effect of certain loans included in term securitization 97-A
which did not have credit default insurance coverage.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily funded its operations and the
growth of its finance contract portfolio through seven principal sources of
capital: (i) cash flows from operating activities; (ii) funds provided from
borrowers' payments received under finance contracts held for sale; (iii)
borrowings under various warehouse and working capital facilities; (iv) proceeds
from securitization transactions; (v) cash flows from servicing fees; (vi)
proceeds from the issuances of subordinated debt and capital contributions of
principal shareholders and (vii) an initial public offering of common stock.
Cash Flows. Significant cash flows related to the Company's operating
activities include the use of cash for purchases of finance contracts, and cash
provided by payments on finance contracts and sales of finance contracts. Net
cash used in operating activities totaled $3.1 million during the year ended
December 31, 1997. The Company used $140.4 million to purchase finance contracts
and $136.4 million was received from sales of finance contracts, primarily
through securitizations during the year ended December 31, 1997.
Significant activities comprising cash flows from investing activities
include net advances to AutoBond Receivables Trusts of $7.4 million for the year
ended December 31, 1997. Cash flows from financing activities include net
borrowings under revolving credit facilities of $7.6 million for the year ended
December 31, 1997.
Revolving Credit Facilities. The Company obtains a substantial portion of
its working capital for the acquisition of finance contracts through revolving
credit facilities. Under a warehouse facility, the lender generally advances
amounts requested by the borrower on a periodic basis, up to an aggregate
30
<PAGE>
<PAGE>
maximum credit limit for the facility, for the acquisition and servicing of
finance contracts or other similar assets. Until proceeds from a securitization
transaction are used to pay down outstanding advances, as principal payments are
received on the finance contracts, the principal amount of the advances may be
paid down incrementally or reinvested in additional finance contracts on a
revolving basis.
At December 31, 1997, the Company had no outstanding balance on a $10.0
million revolving credit facility (the 'Sentry Facility') with Sentry Financial
Corporation ('Sentry'), which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay applicable credit default insurance premiums and to make deposits to a
reserve account with Sentry. The Company pays a utilization fee of up to 0.21%
per month on the average outstanding balance under the Sentry Facility. The
Sentry Facility also requires the Company to pay up to 0.62% per quarter on the
average unused balance. Interest is payable monthly and accrues at a per annum
rate of prime plus 1.75% (10.25% at December 31, 1997).
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. In April 1996, the Company paid a
one-time commitment fee of $700,000 to Sentry. Under the Sentry Facility, the
Company incurred interest expense of $420,674 for the year ended December 31,
1997.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the 'Daiwa
Facility') with Daiwa Finance Corporation ('Daiwa') effective as of February 1,
1997. Advances under the Daiwa Facility mature on the earlier of 120 days
following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the finance contracts funded be covered by
default deficiency insurance. Interest is payable upon maturity of the advances
and accrues at the lesser of (x) 30 day LIBOR plus 1.15% (6.87% at December 31,
1997), or (y) 11% per annum. The Company also pays a non-utilization fee of .25%
per annum on the unused amount of the line of credit. Pursuant to the Daiwa
Facility, the Company paid a $243,750 commitment fee. The debt issuance cost is
being amortized as interest expense on a straight line basis through March 1998.
The Daiwa Facility contains certain covenants and representations similar to
those in the agreements governing the Company's existing securitizations
including, among other things, delinquency and repossession triggers. At
December 31, 1997, advances under the Daiwa Facility totaled $7,639,201 and
remaining availability was $15,759,792. The Company incurred interest expense
under the Daiwa Facility of approximately $1,118,883 during the year ended
December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable funding warehouse notes which are convertible into
term notes at the option of the holder of such notes. Transfers of finance
contracts to the special purpose entities have been recognized as sales under
SFAS No. 125.
Notes Payable. Pursuant to the Agreement (the 'Securities Purchase
Agreement') entered into on June 30, 1997, the Company issued by private
placement $2,000,000 in aggregate principal amount of senior secured convertible
notes ('Convertible Notes'). Interest on the Convertible Notes was payable
quarterly at a rate of 18% per annum. The Convertible Notes were redeemed by the
Company in February 1998.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998. To date, the holders have
purchased $5.8 million of subordinated asset-backed securities.
In January 1998, the Company privately placed with BancBoston Investments,
Inc. ('BancBoston') $7,500,000 in aggregate principal amount of its 15% senior
subordinated convertible notes (the 'Subordinated Notes'). Interest on the
Subordinated Notes is payable quarterly until maturity on
31
<PAGE>
<PAGE>
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 nonrecourse warehouse debt and securitization debt), (ii)
limitations on restricted payments such as dividends (but excluding, so long as
no event of default has occurred under the Indenture, dividends or distributions
on the Preferred Stock), (iii) limitations on sales of assets other than in the
ordinary course of business and (iv) certain financial covenants, including a
minimum consolidated net worth test of $12 million (plus proceeds from equity
offerings), a minimum ratio of earnings to interest of 1.5 to 1, and a maximum
cumulative repossession ratio of 27%.
Events of default under the Indenture include failure to pay, breach of
covenants, cross-defaults in excess of $1 million, or material breach of
representations or covenants under the purchase agreement with BankBoston.
Net proceeds from the sale of the subordinated notes were used to pay
short-term liabilities, with the remainder available to provide for the
repayment of the Company's 18% Convertible Secured Notes and for working
capital.
Securitization Program. In its securitization transactions through the end
of 1996, the Company sold pools of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to a trust in exchange for
cash and certain retained beneficial interests in future excess spread cash
flows. The trust issued two classes of fixed income investor certificates:
'Class A Certificates' which were sold to investors, generally at par with a
fixed coupon, and subordinated excess spread certificates ('Class B
Certificates'), representing a senior interest in excess spread cash flows from
the finance contracts, which were typically retained by the Company's
securitization subsidiary and which collateralize borrowings on a non-recourse
basis. The Company also funded a cash reserve account that provides credit
support to the Class A Certificates. The Company's securitization subsidiaries
also retained a 'Transferor's Interest' in the contracts that is subordinate to
the interest of the investor certificate holders.
In the Company's March 1997, August 1997 and October 1997 securitization
transactions, the Company sold a pool of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to an indenture trustee.
Under the trust indenture, the special purpose subsidiary issued three classes
of fixed income investor notes, which were sold to investors, generally at par,
with fixed coupons. The subordinated notes represent a senior interest in
certain excess spread cash flows from the finance contracts. In addition, the
securitization subsidiary retained rights to the remaining excess spread cash
flows. The Company also funded cash reserve accounts that provide credit support
to the senior class or classes.
The retained interests entitle the Company to receive the future cash flows
from the trust after payment to investors, absorption of losses, if any, that
arise from defaults on the transferred finance contracts and payment of the
other expenses and obligations of the trust.
Securitization transactions impact the Company's liquidity primarily in two
ways. First, the application of proceeds toward payment of the outstanding
advances under warehouse credit facilities makes additional borrowing available,
to the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. During the year ended December 31, 1997, the
Company securitized approximately $270 million in nominal principal amount of
finance contracts and used the net proceeds to pay down borrowings under its
warehouse credit facilities.
Second, additional working capital is obtained through the Company's
practice of borrowing funds, on a non-recourse basis, collateralized by its
interest in future excess spread cash flows from its
32
<PAGE>
<PAGE>
securitization trusts. At December 31, 1997, the Company held interest-only
strip receivables and Class B Certificates totaling $17.2 million, substantially
all of which had been pledged to collateralize notes payable of $9.8 million.
The Company relies significantly on a strategy of periodically selling
finance contracts through asset-backed securitizations. The Company's ability to
access the asset-backed securities market is affected by a number of factors,
some of which are beyond the Company's control and any of which could cause
substantial delays in securitization including, among other things, the recent
withdrawal of ratings by Fitch and downgrade by Moody's, the requirements for
large cash contributions by the Company into securitizations, conditions in the
securities markets in general, conditions in the asset-backed securities market
and investor demand for subprime auto paper. Additionally, gain on sale of
finance contracts represents a significant portion of the Company's total
revenues and, accordingly, net income. If the Company were unable to securitize
finance contracts or account for any securitization as a sale transaction in a
financial reporting period, the Company would likely incur a significant decline
in total revenues and net income or report a loss for such period. Moreover, the
Company's ability to monetize excess spread cash flows has been an important
factor in providing the Company with substantial liquidity, but such ability
appears to be diminishing due to the difficulty in obtaining acceptable
insurance and ratings. If the Company were unable to securitize its finance
contracts and did not have sufficient credit available, either under warehouse
credit facilities or from other sources, the Company would have to sell portions
of its portfolio directly to whole loan buyers or curtail its finance contract
acquisition activities. See 'Business -- Funding/Securitization of Finance
Contracts.'
Equity Offerings. In February 1998, the Company completed the underwritten
public offering of 1,125,000 shares of its 15% Series A Cumulative Preferred
Stock (the 'Preferred Stock'), with a liquidation preference of $10 per share.
The price to public was $10 per share, with net proceeds to the Company of
approximately $10,150,000. Such net proceeds have been utilized for working
capital purposes, including the funding of finance contracts. Dividends on the
Preferred Stock are cumulative and payable quarterly on the last day of March,
June, September and December of each year, commencing on June 30, 1998, at the
rate of 15% per annum. After three years from the date of issuance, the Company
may, at its option, redeem one-sixth of the Preferred Stock each year, in cash
at the liquidation price per share (plus accrued and unpaid dividends), or, if
in Common Stock, that number of shares equal to $10 per share of Preferred Stock
to be redeemed, divided by 85% of the average closing sale price per share for
the Common Stock for the 5 trading days prior to the redemption date. The
Preferred Stock is not redeemable at the option of the holder and has no stated
maturity.
If dividends on the Preferred Stock are in arrears for two quarterly
dividend periods, holders of the Preferred Stock will have the right to elect
three additional directors to serve on the Board until such dividend arrearage
is eliminated. In addition, certain changes that could materially affect the
holders of Preferred Stock, such as a merger of the Company, cannot be made
without the affirmative vote of the holders of two-thirds of the shares of
Preferred Stock, voting as a separate class. The Preferred Stock ranks senior to
the Common Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up.
On November 14, 1996, the Company completed the initial public offering of
its common stock. The closing comprised 825,000 shares sold by the Company
(including 75,000 shares issued pursuant to the exercise of the underwriters,
overallotment option) and 250,000 shares sold by the Selling Shareholders. With
a price to the public of $10 per share and an underwriting discount at $.70 per
share, the Company received gross proceeds of $7,492,500 from the offering, from
which it paid offering expenses of approximately $1.8 million. The net proceeds
were utilized for working capital, repayment of subordinated debt of $300,000
and investment in finance contracts.
Management recognizes that the ability to monetize residual cash flows from
securitizations in 1998 is uncertain and that both warehousing and
securitization of the Company's finance contracts will require greater levels of
cash outlays by the Company. Accordingly the Company intends to tap the equity
markets, initially in the context of the Preferred Stock Offering, as well as
the debt markets (initially in connection with the Company's placement of Senior
Subordinated Notes), in order to meet
33
<PAGE>
<PAGE>
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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 131, 'Disclosure about
Segments of an Enterprise and Restated Information,' which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
The Company does not believe the implementation of the recent accounting
pronouncements will have a material effect on its consolidated financial
statements, since the Company operates in one business segment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[Financial statements are set forth in this report beginning at page F-1.]
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated above reference
thereto.
No person who, at any time during the fiscal year ended December 31, 1997,
was a director, officer, beneficial owner of more than ten percent of any class
of equity securities of the Company registered pursuant to Section 12 of the
Exchange Act, or any other person subject to Section 16 of the Exchange Act with
respect to the Company because of the requirements of Section 30 of the
Investment Company Act ('reporting person') has failed to file or is delinquent
in filing the forms and reports required by Section 16(a) of the Exchange Act
during the fiscal year ended December 31, 1997 or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
35
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
<TABLE>
<S> <C>
1. Financial Statements
Report of Independent Accountants -- Coopers & Lybrand L.L.P.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II; Valuation and Qualifying Accounts
3. Exhibits
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
3.1(1) -- Restated Articles of Incorporation of the Company
3.2(1) -- Amended and restated Bylaws of the Company
3.3(5) -- Certificate of Designation for the Company's 15% Series A Cumulative Preferred Stock
4.1(1) -- Specimen Common Stock Certificate
4.2(5) -- Specimen Preferred Stock Certificate
10.1(1) -- Amended and Restated Loan Origination, Sale and Contribution Agreement dated as of December 15, 1995
by and between the Company and AutoBond Funding Corporation I
10.2(1) -- Security Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, the Company and
Norwest Bank Minnesota, National Association
10.3(1) -- Credit Agreement and Side Agreement, dated as of May 21, 1996 among AutoBond Funding Corporation II,
the Company and Peoples Life Insurance Company
10.4(1) -- Servicing Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, CSC Logic/MSA
L.L.P., doing business as 'Loan Servicing Enterprise', the Company and Norwest Bank Minnesota,
National Association
10.5(1) -- Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and between the Company
and AutoBond Funding Corporation II
10.6(1) -- Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31, 1995 between
Sentry Financial Corporation and the Company
10.7(1) -- Management Administration and Services Agreement dated as of January 1, 1996 between the Company and
AutoBond, Inc.
10.8(1) -- Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9(1) -- Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the Company
10.10(1) -- Vender's Comprehensive Single Interest Insurance Policy and Endorsements, issued by Interstate Fire
& Casualty Company
10.11(1) -- Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12(1) -- Employee Stock Option Plan
10.13(1) -- Dealer Agreement dated November 9, 1994, between the Company and Charlie Thomas Ford, Inc.
10.14(1) -- Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company, First Fidelity
Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15(2) -- Servicing Agreement, dated as of January 29, 1997, between CSC LOGIC/MSA L.P.P., doing business as
'Loan Servicing Enterprise' and the Company
10.16(2) -- Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company
and Daiwa Finance Corporation
10.17(2) -- Security Agreement, dated as of February 1, 1997, by and among AutoBond Funding Corporation II, the
Company and Norwest Bank Minnesota, National Association
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.18(2) -- Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit Suisse First
Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the Company
10.19(3) -- Automobile Loan Sale Agreement, dated as of March 26, 1997, by and between Credit Suisse First
Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the Company
10.20(4) -- Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding Corporation, the
Company and Daiwa Finance Corporation
10.21(4) -- Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond Master Funding
Corporation, AutoBond Acceptance Corporation and Norwest Bank Minnesota, National Association.
10.22(4) -- Securities Purchase Agreement, dated as of June 30, 1997, by and among the Company, Lion Capital
Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23(5) -- Credit Agreement, dated as of December 31, 1997, by and among AutoBond Master Funding Corporation
II, the Company and Credit Suisse First Boston Mortgage Capital L.L.C
10.24(5) -- Trust Indenture, dated as of December 31, 1997, among AutoBond Master Funding Corporation II, the
Company and Manufacturers & Traders Trust Company
10.25(5) -- Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse First Boston
Mortgage Capital L.L.C and the Company
10.26(5) -- Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond Master Funding
Corporation II and Manufacturers & Traders Trust Company
10.27(5) -- Indenture and Note, dated January 30, 1998, between the company and Bank Boston, N.A.
10.28(5) -- Warrant, dated January 30, 1998, issued to BancBoston Investments, Inc.
10.29(5) -- Purchase Agreement, dated January 30, 1998, between the Company and BancBoston Investments, Inc.
10.30 -- Warrant, dated February 2, 1998, issued to Dresner Investments Services, Inc. (previously filed)
10.31 -- Warrant Agreement and Warrant, dated February 20, 1998, issued to Tejas Securities Group, Inc.
(previously filed)
10.32(5) -- Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A. Gonzalez and the
Company
10.33(5) -- Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the Company
10.34 -- Common Stock Investment Agreement, dated May 19, 1998, between Promethean Investment Group, L.L.C. and
Autobond Acceptance Corporation
21.1(4) -- Subsidiaries of the Company
21.2(5) -- Additional Subsidiaries of the Company
27.1 -- Financial Data Schedule (previously filed)
</TABLE>
- ------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-05359).
(2) Incorporated by reference to the Company's 1996 annual report on Form 10-K
for the year ended December 31, 1996.
(3) Incorporated by reference to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997.
(4) Incorporated by reference to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-41257).
------------------------
(b)Reports of Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1997.
37
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ WILLIAM O. WINSAUER
...................................
WILLIAM O. WINSAUER,
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: June 2, 1998
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ WILLIAM O. WINSAUER Chairman of the Board and Chief Executive June 2, 1998
......................................... Officer
(WILLIAM O. WINSAUER)
/s/ ADRIAN KATZ Vice Chairman of the Board, Chief June 2, 1998
......................................... Operating Officer and Chief
Financial Officer
(ADRIAN KATZ)
/s/ R. T. PIGOTT, JR. Vice President and Chief Accounting Officer June 2, 1998
.........................................
(R. T. PIGOTT, JR.)
/s/ JOHN S. WINSAUER Secretary and Director June 2, 1998
.........................................
(JOHN S. WINSAUER)
/s/ THOMAS BLINTEN Director June 2, 1998
.........................................
(THOMAS BLINTEN)
</TABLE>
38
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-3
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1995, 1996 and
1997..................................................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997....... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
Schedule II -- Valuation and Qualifying Accounts........................................................... S-1
</TABLE>
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements, related notes, or other schedules.
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the years ended December 31, 1995, 1996
and 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company's most significant warehouse and
securitization facility, which expires March 31, 1998, has been extended to
April 30, 1998. The Company is currently in negotiations with other parties for
additional warehouse and securitzation facilities. The Company is dependent upon
obtaining sufficient financing at rates and upon terms acceptable to the Company
in order to maintain its level of operations.
As discussed in Note 1, the previously issued consolidated financial
statements of AutoBond Acceptance Corporation and Subsidiaries as of and for
the year ended December 31, 1997 have been restated.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the years ended December 31, 1995, 1996 and 1997, in conformity with generally
accepted accounting principles.
As described in Note 1, the Company implemented Statement of Financial
Accounting Standards ('SFAS') No. 125, 'Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities' as of January 1, 1997
and SFAS No. 130, 'Reporting Comprehensive Income,' for the year ended
December 31, 1997.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 30, 1998
F-2
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 4,121,342 $ 159,293
Restricted funds................................................................... 2,981,449 6,904,264
Finance contracts held for sale, net............................................... 228,429 1,366,114
Collateral acquired, net........................................................... 152,580 150,908
Class B certificates............................................................... 10,465,294 7,878,306
Retained interest in beneficial interest of trust.................................. -- 5,083,213
Interest-only strip receivables.................................................... 4,247,274 9,427,986
Debt issuance cost................................................................. 997,338 605,847
Trust receivable................................................................... 2,230,003 9,627,144
Due from affiliates................................................................ 25,300 --
Other assets....................................................................... 683,955 1,830,410
----------- -----------
Total assets............................................................. $26,132,964 $43,033,485
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facilities................................................... $ -- $ 7,639,201
Notes payable................................................................. 10,174,633 9,841,043
Accounts payable and accrued liabilities...................................... 1,474,586 3,386,685
Bank overdraft................................................................ -- 2,936,883
Payable to affiliates......................................................... 265,998 554,233
Deferred income taxes......................................................... 2,075,553 3,504,249
----------- -----------
Total liabilities........................................................ 13,990,770 27,862,294
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued
Common stock, no par value; 25,000,000 shares authorized, 6,512,500 and
6,531,311 shares issued and outstanding...................................... 1,000 1,000
Additional paid-in capital.................................................... 8,617,466 8,781,669
Deferred compensation......................................................... (11,422) --
Due from shareholders......................................................... (378,618) (187,555)
Unrealized appreciation on interest-only strip receivables.................... -- 1,049,256
Retained earnings............................................................. 3,913,768 5,526,821
----------- -----------
Total shareholders' equity............................................... 12,142,194 15,171,191
----------- -----------
Total liabilities and shareholders' equity.......................... $26,132,964 $43,033,485
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income................................................. $2,880,961 $ 2,519,612 $ 4,118,795
Gain on sale of finance contracts............................... 4,085,952 12,820,700 18,666,570
Servicing fee income............................................ -- 657,950 1,131,142
Other income (loss)............................................. -- 388,278 (1,485,379)
---------- ----------- -----------
Total revenues............................................. 6,966,913 16,386,540 22,431,128
---------- ----------- -----------
Expenses:
Provision for credit losses..................................... 48,702 412,387 612,715
Interest expense................................................ 2,099,867 2,382,818 3,879,543
Salaries and benefits........................................... 1,320,100 4,529,006 7,357,284
General and administrative...................................... 1,462,740 2,331,246 6,075,125
Other operating expenses........................................ 963,017 1,119,644 2,005,237
---------- ----------- -----------
Total expenses............................................. 5,894,426 10,775,101 19,929,904
---------- ----------- -----------
Income before income taxes and extraordinary loss.................... 1,072,487 5,611,439 2,501,224
Provision for income taxes........................................... 199,000 1,926,553 888,171
---------- ----------- -----------
Income before extraordinary loss..................................... 873,487 3,684,886 1,613,053
Extraordinary loss, net of tax....................................... -- (100,000) --
---------- ----------- -----------
Net income................................................. 873,487 3,584,886 1,613,053
Other comprehensive income, net of tax:
Unrealized appreciation on interest-only strip receivables...... -- -- 1,049,256
---------- ----------- -----------
Other comprehensive income...................................... -- -- 1,049,256
---------- ----------- -----------
---------- ----------- -----------
Comprehensive income............................................ $ 873,487 $ 3,584,886 $ 2,662,309
---------- ----------- -----------
---------- ----------- -----------
Earnings per common share basic:
Income before extraordinary loss................................ $0.17 $0.64 $0.25
Extraordinary loss, net of tax.................................. -- (0.02) --
----- ----- -----
----- ----- -----
Net income................................................. $0.17 $0.62 $0.25
----- ----- -----
----- ----- -----
Earnings per common share diluted
Income before extraordinary loss................................ $0.17 $0.63 $0.25
Extraordinary loss, net of tax.................................. -- 0.01 --
----- ----- -----
----- ----- -----
Net income................................................. $0.17 $0.62 $0.25
----- ----- -----
----- ----- -----
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Common stock shares:
Beginning of year............................................... 5,118,753 5,118,753 6,512,500
Stock issued pursuant to employee contract...................... -- 568,747 --
Issuance of common stock in public offering..................... -- 825,000 --
Exercise of common stock warrants............................... -- -- 18,811
---------- ----------- -----------
End of year..................................................... 5,118,753 6,512,500 6,531,311
---------- ----------- -----------
---------- ----------- -----------
Common stock:
Beginning balance............................................... $ 1,000 $ 1,000 $ 1,000
---------- ----------- -----------
Ending balance.................................................. 1,000 1,000 1,000
---------- ----------- -----------
Additional paid-in capital:
Beginning balance............................................... 451,000 2,912,603 8,617,466
Capital contributions........................................... 2,323,103 -- --
Deferred compensation pursuant to employee contract............. 138,500 -- --
Issuance of common stock in public offering..................... -- 5,704,863 --
Issuance/exercise of common stock warrants...................... -- -- 164,203
---------- ----------- -----------
Ending balance.................................................. 2,912,603 8,617,466 8,781,669
---------- ----------- -----------
Deferred compensation:
Beginning balance............................................... -- (62,758) (11,422)
Deferred compensation pursuant to employee contract............. (138,500) -- --
Amortization of deferred compensation........................... 75,742 51,336 11,422
---------- ----------- -----------
Ending balance.................................................. (62,758) (11,422) --
---------- ----------- -----------
Due from shareholders:
Beginning balance............................................... (16,000) (153,359) (378,618)
Payments from (to) shareholders................................. (137,359) (225,259) 191,063
---------- ----------- -----------
Ending balance.................................................. (153,359) (378,618) (187,555)
---------- ----------- -----------
Unrealized appreciation on interest-only strip receivables:
Beginning balance............................................... -- -- --
Increase in unrealized appreciation on interest-only strip
receivables................................................... -- -- 1,049,256
---------- ----------- -----------
Ending balance.................................................. -- -- 1,049,256
---------- ----------- -----------
Retained earnings:
Beginning balance............................................... (544,605) 328,882 3,913,768
Net income...................................................... 873,487 3,584,886 1,613,053
---------- ----------- -----------
Ending balance.................................................. 328,882 3,913,768 5,526,821
---------- ----------- -----------
Total shareholders' equity........................................... $3,026,368 $12,142,194 $15,171,191
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 873,487 $ 3,584,886 $ 1,613,053
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of finance contract acquisition discount
and insurance....................................... (795,579) (358,949) (11,472)
Amortization of deferred compensation................. 75,742 51,336 11,422
Amortization of debt issuance costs................... 497,496 818,481
Provision for credit losses........................... 48,702 412,387 612,715
Depreciation and amortization......................... -- -- 288,878
Deferred income taxes................................. 199,000 1,876,553 888,171
Accretion of interest-only strip receivables.......... -- (154,029) (546,507)
Impairment of interest-only strip receivables......... -- -- 1,312,234
Unrealized (gain) loss on Class B certificates........ -- (388,278) 293,188
Changes in operating assets and liabilities:
Other assets.......................................... (354,208) (329,747) (1,435,333)
Class B certificates.................................. (2,834,502) (7,242,514) 2,293,800
Retained interest in beneficial interest of trust..... -- -- (5,083,213)
Interest-only strip receivables....................... (846,526) (3,246,719) (4,356,657)
Accounts payable and accrued liabilities.............. 1,110,446 (361,496) 1,912,099
Due to/due from affiliates............................ (248,937) (14,899) 313,535
Purchases of finance contracts............................. (31,200,131) (83,672,335) (140,364,193)
Sales of finance contracts................................. 27,399,543 85,014,394 136,389,461
Repayments of finance contracts............................ 2,660,018 1,605,461 1,915,606
------------ ------------ -------------
Net cash used in operating activities............ (3,912,945) (2,726,453) (3,134,732)
------------ ------------ -------------
Cash flows from investing activities:
Increase in restricted funds............................... (1,544,661) (1,298,612) (3,922,815)
Advances to AutoBond Receivables Trusts.................... (525,220) (1,704,783) (7,397,141)
Decrease (increase) in due from shareholders............... (137,359) (225,259) 191,063
Disposal proceeds from collateral acquired................. 220,359 646,600 321,870
------------ ------------ -------------
Net cash used in investing activities............ (1,986,881) (2,582,054) (10,807,023)
------------ ------------ -------------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facilities... (904,355) (1,150,421) 7,639,201
Debt issuance costs........................................ -- (794,834) (426,991)
Proceeds (payments) from borrowings on repurchase
agreement................................................ 1,061,392 (1,061,392) --
Proceeds from notes payable................................ 2,674,597 12,575,248 2,015,150
Payments on notes payable.................................. -- (5,075,212) (2,348,740)
Shareholder contributions.................................. 2,323,103 -- --
Increase (decrease) in bank overdraft...................... 837,749 (861,063) 2,936,883
Proceeds from public offering of common stock, net......... -- 5,704,863 --
Issuance/exercise of common stock warrants................. -- -- 164,203
------------ ------------ -------------
Net cash provided by financing activities............. 5,992,486 9,337,189 9,979,706
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents............ 92,660 4,028,682 (3,962,049)
Cash and cash equivalents at beginning of period................ -- 92,660 4,121,342
------------ ------------ -------------
Cash and cash equivalents at end of period...................... $ 92,660 $ 4,121,342 $ 159,293
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
AutoBond Acceptance Corporation ('AAC') was incorporated in June 1993 and
commenced operations August 1, 1994. AAC and its wholly-owned subsidiaries,
AutoBond Funding Corp I ('ABF I'), AutoBond Funding Corp II ('ABF II'), and
AutoBond Funding Corp III ('ABF III') (collectively, the 'Company'), engage
primarily in the business of acquiring, securitizing and servicing automobile
installment sale contracts ('finance contracts') originated by franchised
automobile dealers. The Company specializes in contracts to consumers who
generally have limited access to traditional financing, such as that provided by
commercial banks or captive finance companies of automobile manufacturers. The
Company purchases contracts directly from automobile dealers or from other
originators, with the intent to resell them to institution investors in
securitization structures.
Principals of Consolidation
The consolidated financial statements include the accounts of AAC and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior years' financial statements to conform with the current
year's presentation.
Pervasiveness of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company records the present value of estimated future cash flows in
connection with its determination of the carrying value of its interest-only
strip receivables. Such estimation considers significant assumptions about the
future performance of finance contracts, including prepayments, default rates,
collections on repossessions of automobiles, delinquencies and timing of cash
receipts. Since such assumptions may not predict actual performance, it is at
least reasonably possible that the carrying value of the interest-only strip
receivables will be adjusted in the near term and the change could be material
to the results of operations.
The Company and its credit loss deficiency insurance provider on two of its
securtizations disagree over the cancellability of coverages and the aggregate
limitation of liability under such policies. The Company has filed suit to seek
a declaratory judgment to affirm their interpretation of the insurance policies.
Should the Company's interpretation be incorrect, the Company would need to
reassess its carrying value of its interest-only strip receivables under new
assumptions and the result of this reevaluation could be material. The Company's
estimated future cash flow at December 31, 1997 exceed the aggregate limitations
asserted by the insurance provider by approximately $.5 million.
Included in the Company's finance contracts held for sale are certain
finance contracts which were otherwise ineligible to be part of a securitzation
transaction. Such finance contracts have inherently higher risk than performing
finance contracts acquired in the normal course of business. The Company's
reserve on such finance contracts is determined based upon an estimate of the
historical default rates, the liquidation value of the underlying collateral and
recoveries of insurance proceeds. Actual results from the ultimate liquidation
of the loan will differ from the net recorded amount and the differences could
be material.
F-7
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liquidity Risk
The Company's warehousing and securitization facility agreement with Daiwa
expires on March 31, 1998. Daiwa has extended the current maturities of the
facilities to April 30, 1998. The Company's availability under the Daiwa and
Sentry warehouse facilities totals $2.7 million and $7.6 million at March 30,
1998, respectively. The Company is currently in the process of securing new
warehouse and securitization facilities. Signed term sheets for a $50 million
warehouse facility and a $200 million revolving asset purchase funding facility
have been received in March of 1998. Such term sheets do not obligate the
Company or the lender to extend credit. Extension of credit under the term
sheets are contingent upon processes such as due diligence procedures of the
lenders, approvals of lending committees or board of directors, and drafting and
signing of final agreements. In addition, the Company has an agreement for an
additional warehouse facility of $10 million, which is expected to close March
31, 1998. Failure to obtain a suitable warehousing and securitization facility
could have a material adverse effect on the Company's financial operations and
would result in the Company significantly curtailing its operations. Rating
agencies have taken certain recent actions on the Company's prior term
securitizations. Fitch has withdrawn its ratings on all securitzations of the
Company. Moody's has downgraded the senior securities in each of the Company's
term securitizations to Baa2 and Baa3 (97B and 97C securitizations). These
actions may limit the Company's ability to do similar securitization structures
in the near term. Future downgrades are possible as such securitizations
continue to be on review by Moody's. Management plans to obtain bond insurance
and has a term sheet from FSA, in order to complete future term securitizations.
The Company believes that it will be successful in obtaining the appropriate
warehousing and securitization facilities.
The Company's cash position at March 26, 1998 is approximately $1 million.
The Company has funded loans out of its own account for approximately $4.3
million since March 1, 1998 and believes net cash outflows will be $2 to $3
million per quarter. Given the cash position, the Company may need to secure
additional equity or debt to fund operations by the end of the year. Management
believes additional cash may be generated if a term securitization structure
with subordinated traunches is successfully implemented.. The Company continues
to pursue equity or debt infusions and currently a term sheet which covers the
issuance of convertible debt of up to $5 million has been received. Similar to
the warehouse agreement, the term sheet does not represent a binding commitment
to extend credit. The Company believes it will be successful in obtaining
necessary equity or debt and believes it has a history of raising sufficient
debt or equity for the Company. Without additional debt or equity, including
obtaining additional warehousing and securitization financing, the Company may
not be able to generate the necessary cash inflows to cover its operating costs
through the end of the year.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
less than three months to be cash equivalents.
Restricted Cash
In accordance with the Company's revolving credit facilities, proceeds
advanced by the lender for purchase of finance contracts are held by a trustee
until the Company delivers qualifying collateral to release the funds, normally
in a matter of days. The Company is also required to maintain a cash reserve
with its lenders up to 11% of the proceeds received from the lender for the
origination of the finance contracts. Access to these funds is restricted by the
lender; however, such funds may be released in part upon the occurrence of
certain events including payoffs of finance contracts.
F-8
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trust Receivable
At the close of a securitization, the Company is required to establish a
cash reserve within the trust for future credit losses. Additionally, depending
on each securitization structure, a portion of the Company's future servicing
cash flow is required to be deposited as additional reserves for credit losses.
The initial cash reserve deposits for the Company's securitizations totaled
$525,220, $1.6 million and $6.6 million for the years ended December 31, 1995,
1996 and 1997, respectively. These amounts represented 2.0%, 2.0% and 4.9% of
the senior investor certificates issued by the trusts during the respective
periods. The trust reserves are increased monthly from excess cash flows until
such time as they attain a level of 6% of the outstanding principal balance.
Finance Contracts Held for Sale
Finance contracts held for sale are stated at the lower of aggregated
amortized cost or market value. Market value is determined based on the
estimated value of the finance contracts as if securitized and sold. The Company
generally acquires finance contracts at a discount, and has purchased loss
default and vender single interest physical damage insurance on the finance
contracts. The purchase discount and insurance are amortized as an adjustment to
the related finance contract's yield and operating expense, respectively,
utilizing the same basis as that used to record income on the finance contracts,
over the contractual life of the related finance contracts. At the time of sale,
any remaining unamortized amounts are netted against the finance contract's
principal amounts outstanding to determine the resultant gain or loss on sale.
Allowance for credit losses on the finance contracts is based on the
Company's historical default rate, the liquidation value of the underlying
collateral in the existing portfolio, estimates of repossession costs and
probable recoveries from insurance proceeds. The allowance is increased by
provisions for estimated future credit losses which are charged against income.
The allowance account is reduced for direct charge-offs using the specific
identification method, and for estimated losses upon repossession of automobiles
which is netted against the related finance contracts and transferred to
collateral acquired.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments, interest-only strip
receivables and deferred tax assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation of impairment is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is required. No such write-downs were
recorded during the years ended December 31, 1995, 1996 and 1997.
Collateral Acquired
Automobiles repossessed and held for sale are initially recorded at the
recorded investment in the finance contracts on the date of repossession less an
allowance. This value approximates the expected cash proceeds from the sale of
the assets and applicable insurance payments, net of all disposition costs. Due
to the relatively short time period between acquisition and disposal of the
assets, discounting of the expected net cash proceeds to determine fair value is
not utilized.
Subsequent impairment reviews are performed quarterly on a disaggregated
basis. A valuation allowance is established if the carrying amount is greater
than the underlying fair value of the assets. Subsequent increases and decreases
in fair value result in an adjustment of the valuation allowance which is
recorded in earnings during the period of adjustment. Adjustments for subsequent
increases in fair value are limited to the existing valuation allowance amount,
if any. During each of the periods presented, no valuation allowance was
established.
F-9
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class B Certificates
Pursuant to certain securitization transactions, the related trusts have
issued Class B certificates to the Company which are subordinate to the Class A
Certificates and senior to the interest-only strip receivables with respect to
cash distributions from the trust. The Company accounts for the Class B
certificates as trading securities in accordance with Statement of Financial
Accounting Standards No. 115 'Accounting for Certain Investments in Debt and
Equity Securities' ('SFAS No. 115'). SFAS No. 115 requires fair value accounting
for these certificates with the resultant unrealized gain or loss recorded in
the statements of operations in the period of the change in fair value. The
Company determines fair value on a disaggregated basis utilizing quotes from
outside dealers who utilize discounted cash flow analyses similar to that
described below for determining market value of the excess servicing receivable,
as well as other unique characteristics such as the remaining principal balance
in relation to estimated future cash flows and the expected remaining terms of
the certificates. Estimated transaction costs associated with a sale of the
Class B certificates are not deducted from the fair value determination. The
Company recorded unrealized gain (loss) on the Class B certificates of $388,278
and ($293,188) during the years ended December 31, 1996 and 1997, respectively.
The Class B certificates accrue interest at 15%.
INTEREST-ONLY STRIP RECEIVABLES AND ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards No. 125,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities' ('SFAS No. 125'), as amended by Statement of Financial
Accounting Standards No. 127, 'Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125 -- An Amendment of FASB Statement No. 125'
('SFAS No. 127'), on January 1, 1997. SFAS No. 125 applies a control-oriented,
financial-components approach to financial-asset-transfer transactions whereby
the Company (1) reognizes the financial and servicing assets it controls and the
liabilities it has incurred, (2) derecognizes financial assets when control has
been surrendered, and (3) derecognizes liabilities once they are extinquished.
Under SFAS No. 125, control is considered to have been surrendered only if: (i)
the transferee assets have been isolated from the transferor and its creditors,
even in bankruptcy or other receivership (ii) the transferee has the right to
pledge or exchange the transferred assets, or, is a qualifying special-purpose
entity (as defined) and the holders of beneficial interests in that entity have
the right to pledge or exchange those interests; and (iii) the transferor does
not maintain effective control over the transferred assets through an agreement
which both entitles and obligates it to repurchase or redeem those assets prior
to maturity, or through an agreement which both entitles and obligates it to
repurchase or redeem those assets if they were not readily obtainable elsewhere.
If any of these conditions are not met, the Company accounts for the transfer as
a secured borrowing.
As a result of adopting SFAS No. 125, the excess servicing receivables
previously shown on the consolidated balance sheet as of December 31, 1996 have
been reclassified as interest-only strip receivables, and accounted for as an
investment security classified similar to those classified as 'available for
sale' under SFAS No. 115. Accordingly, any unrealized gain or loss in the fair
value is included as a component of equity, net of the income tax effect. Any
impairment deemed permanent is recorded as a charge against earnings.
The fair value of interest-only strip receivables is calculated based upon
the present value of the estimated future interest income after considering the
effects or estimated prepayments, defaults and delinquencies. The discount rate
utilized is based upon assumptions that market participants would use for
similar financial instruments subject to prepayments, defaults, collateral value
and interest rate risks.
The Company accretes income for its interest-only strip receivable on the
interest method based upon the expected rate of return of such assets.
F-10
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bank Overdraft
Bank overdrafts result from checks prepared but not sent to the related
creditor.
Debt Issuance Costs
The costs related to the issuance of debt are capitalized and amortized in
interest expense over the lives of the related debt. Debt issuance costs related
to the issuance of notes payable collateralized by Class B certificates, are
amortized on a dissaggregated basis over the term of the related note using the
interest method. Debt issuance costs related to warehouse credit facilities are
amortized using the straight-line method.
Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Expenditures for additions and improvements are capitalized while
minor replacements, maintenance and repairs which do not improve or extend the
life of such assets are charged to expense. Gains of losses on disposal of fixed
assets are reflected in operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets,
ranging from 3 to 5 years. Leasehold improvements are depreciated over the term
of the lease.
Advertising
Advertising costs are expensed as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the year in deferred tax assets and
liabilities. The Company files a consolidated federal income tax return.
EXTRAORDINARY ITEM
During the year ended December 31, 1996, the Company recorded an
extraordinary loss related to a $150,000 prepayment fee on a $2,684,000 term
loan that was repaid during 1996.
EARNINGS PER SHARE
The Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, 'Earnings Per Share' ('SFAS No. 128')
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities of other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
F-11
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Income
Generally, interest income on finance contracts acquired prior to December
31, 1995 is determined on a monthly basis using the Rule of 78s method which
approximates the simple interest method. Subsequent to December 31, 1995, the
Company generally uses the simple interest method to determine interest income
on finance contracts acquired. The Company discontinues accrual of interest on
finance contracts past due for more than 90 days. The Company accrues interest
income on the Class B certificates monthly at 15% using the interest method
Comprehensive Income
Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive
Income' ('SFAS No. 130'). SFAS No. 130 establishes disclosure standards for
reporting comprehensive income, which is the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income
reconciles net income to retained earnings on the face of the statement of
income.
CONCENTRATION OF CREDIT RISK
The Company generally acquires finance contracts from a network of
automobile dealers located in forty states. Finance contracts acquired with
borrowers in Texas totaled 64% and 38% of the portfolio at December 31, 1996 and
1997, respectively. Finance contracts acquired with borrowers in Florida totaled
25% at December 31, 1997. The Company had no dealer concentrations which
accounted for more than 10% of the portfolio at December 31, 1996 and 1997.
RESTATEMENT OF FINANICAL STATEMENTS
The Company has restated its consolidated financial statements as of and
for the year ended December 31, 1997 to correct certain errors in such
statements discovered subsequent to their original issuance. The most
significant 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. The error occurred in connection with the transfer of servicing
from a third party servicer to in-house personnel and technology. The net effect
of the restatement on certain line items in the consolidated balance sheet and
statement of income and comprehensive income is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY RESTATED
REPORTED ADJUSTMENT BALANCE
------------ ----------- ---------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C>
Income before income taxes........... $2,874,574 $(373,350) $2,501,224
Provision for income taxes........... 1,015,110 (126,939) 888,171
---------- --------- ----------
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
===== ====== =====
DECEMBER 31, 1997
-------------------------------------------
Retained earnings..................... $5,773,232 $(246,411) $5,526,821
========== ========= ==========
</TABLE>
2. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in finance contracts held for sale as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
Unpaid principal balance............................................ $266,450 $1,946,135
Prepaid insurance................................................... 18,733 --
Contract acquisition discounts...................................... (31,554) (129,899)
Allowance for credit losses......................................... (25,200) (450,122)
-------- ----------
-------- ----------
$228,429 $1,366,114
-------- ----------
-------- ----------
</TABLE>
3. INTEREST-ONLY STRIP RECEIVABLES AND GAIN ON SALE
The changes in interest-only strip receivables follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
---------- -----------
<S> <C> <C>
Beginning balance............................................. $ 846,526 $ 4,247,274
Unrealized appreciation....................................... -- 1,589,782
Additions from securitization transactions.................... 3,246,719 4,356,656
Accretion of discount......................................... 154,029 546,507
Impairment charge............................................. -- (1,312,233)
---------- -----------
---------- -----------
Ending balance................................................ $4,247,274 $ 9,427,986
---------- -----------
---------- -----------
</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
F-12
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized as an adjustment to stockholders' equity. The cumulative adjustment
amounted to a net unrealized gain of $1,589,782, net of related tax effect of
$540,526, on the valuation of the interest-only strip receivables for the year
ended December 31, 1997. Additionally, the Company recorded a charge against
earnings for permanent impairment of interest-only strip receivables, determined
on a disaggregated basis, of $1,312,233 for the year ended December 31, 1997.
During the fourth quarter of 1997, the Company revised its estimate of
future cash flows related to its interest-only strip receivables. Significant
assumptions utilized in the estimation of future cash flows include:
<TABLE>
<CAPTION>
VARIABLE ASSUMPTIONS
- ------------------------------------------------------------ ---------------------------------------------------
<S> <C>
Discount rate 15%
Default rates Variable curve based upon historical experience,
varies from 5% to 17%
Lag in sale of collateral and insurance receipts 5 months and 7 months
Collections on defaulted loans 76% of base wholesale collateral value reduced over
time to give effect to estimated changes in such
wholesale automobile values plus insurance
proceeds
Prepayment rates 1% in first month, reducing to .4% per month over
the loan term
</TABLE>
As a result, the Company adjusted its carrying value of the interest-only
strip receivables by $1,312,233, which was recognized as a permanent impairment
in accordance with EITF 89-4 on a disaggregated basis. In addition, the Company
utilized these same assumptions to estimate its gain on sale of the fourth
quarter transfers to AutoBond Master Funding Corporation and AutoBond Master
Funding Corporation II. Under the transfer, the variable beneficiary holder has
an option to redeem such certificates for term certificates. The gain on sale
calculation assumes that the variable rate holders do not exercise such option
and the facility pays out under a turbo arrangement.
4. REVOLVING CREDIT FACILITIES
Effective August 1, 1994, the Company entered into a secured revolving
credit agreement with Sentry Financial Corporation ('Sentry') which was amended
and restated on July 31, 1995. The amended agreement (the 'Sentry Facility')
provides for a $10.0 million warehouse line of credit which terminates December
31, 2000, unless terminated earlier by the Company or Sentry upon meeting
certain defined conditions. The proceeds of the Sentry Facility are to be used
to originate and acquire finance contracts, to pay for loss default insurance
premiums, to make deposits to a reserve account with Sentry, and to pay for fees
associated with the origination of finance contracts. The Sentry Facility is
collateralized by the finance contracts acquired with the outstanding
borrowings. Interest is payable monthly and accrues at a rate of prime plus
1.75% (10.25% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth, and cash and cash equivalent balances. Under the Sentry Facility, the
Company paid interest of $411,915, $220,674 and $420,674 for the years ended
December 31, 1995, 1996 and 1997, respectively. Pursuant to the Sentry Facility,
the Company was required to pay a $700,000 warehouse facility fee payable upon
the successful securitization of finance contracts. The $700,000 was payable in
varying amounts after each of the first three securitizations. The Company
accrued the $700,000 debt issuance cost upon the first securitization in
December 1995, the date the Company determined the liability to be probable in
accordance with SFAS No. 5. The $700,000 debt issuance cost is being amortized
as interest expense on a straight line basis through December 31, 2000, the
termination date of the Sentry Facility. The Company pays a utilization fee of
up to 0.21% per month on the average outstanding balance of the Sentry Facility.
The Sentry Facility also requires the Company to pay up to 0.62% per quarter on
the average unused balance. At December 31, 1997, $10,000,000 was available for
borrowing under the credit line as there were no amounts outstanding at that
date.
F-13
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective May 21, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20 million revolving warehouse
facility (the 'Providian Facility'), with Peoples Security Life Insurance
Company (an affiliate of Providian Capital Management), which expired December
15, 1996. The proceeds from the borrowings under the Providian Facility were
used to acquire finance contracts, to pay credit default insurance premiums and
to make deposits to a reserve account. Interest was payable monthly at a per
annum rate of LIBOR plus 2.60%. The Providian Facility also required the Company
to pay a monthly fee on the average unused balance of 0.25% per annum. The
Providian Facility was collateralized by the finance contracts acquired with the
outstanding borrowings.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the 'Daiwa
Facility') with Daiwa Finance Corporation ('Daiwa') effective as of February 1,
1997. Advances under the Daiwa Facility mature on the earlier of 120 days
following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the finance contracts funded be covered by
default deficiency insurance. Interest is payable upon maturity of the advances
and accrues at the lesser of (x) 30 day LIBOR plus 1.15% (6.87% at December 31,
1997) or (y) 11% per annum. The Company also pays a non-utilization fee of .25%
per annum on the unused amount of the line of credit. Pursuant to the Daiwa
Facility, the Company paid a $243,750 commitment fee. The debt issuance cost is
being amortized as interest expense on a straight line basis through March 1998.
The Daiwa Facility contains certain covenants and representations similar to
those in the agreements governing the Company's existing securitizations
including, among other things, delinquency and repossession triggers. The
Company had credit availability under the Diawa Facility of $15,759,792 at
December 31, 1997.
The Company incurred interest expense under the Daiwa Facility of
approximately $1,118,883 during the year ended December 31, 1997.
The interest rate on borrowings under revolving credit agreements ranged
from 6% to 11% for the year ended December 31, 1997. The weighted average
interest rate on revolving credit agreements was 7.10% at December 31, 1997.
During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable beneficial interests which are convertible into term
beneficial interests at the option of the holder of such notes. Transfers of
finance contracts to the special purpose entities have been recognized as sales
under SFAS No. 125.
6. NOTES PAYABLE
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- ----------
<S> <C> <C>
Notes payable, collateralized by Class B certificates............................. $10,050,781 $7,783,219
Convertible notes payable......................................................... -- 2,000,000
Other notes payable............................................................... 123,852 57,824
----------- ----------
----------- ----------
$10,174,633 $9,841,043
----------- ----------
----------- ----------
</TABLE>
Pursuant to the securitization completed in December 1995, the Company
entered into a term loan agreement with a finance company to borrow
approximately $2,684,000. The loan was collateralized by the Company's Class B
certificates from its 1995 securitization as well as the interest-only strip
receivables from the cash flows of the related trust. The loan accrued interest
at 20% per annum
F-14
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable monthly and principal payments were made based on principal payments
received on the Class B certificates.
Effective April 8, 1996, the outstanding balance of $2,585,757 was
refinanced through a non-recourse term loan entered into with a new finance
company. The term loan is collateralized by the Company's Class B certificates,
and matures April 8, 2002. The term loan bears interest at 15% per annum payable
monthly. Principal and interest payments on the term loan are paid directly by
the trustee to the finance company and are based on payments required to be made
to the Class B certificate holders pursuant to the trust. The Company can prepay
the term loan in whole or part at any time if the holder seeks to transfer such
loan to a third party.
Effective March 28, 1996, the Company obtained another non-recourse term
loan in the amount of $2,059,214 from an institutional investor under similar
terms as described in the preceding paragraph. The loan is collateralized by the
Class B certificates issued to the Company pursuant to the March 29, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to March 28, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of March 28, 2002 or the date that all
outstanding principal and accrued interest has been paid by the trustee or the
Company. The term loan bears interest at 15% per annum payably monthly.
Effective June 27, 1996, the Company obtained a third non-recourse term
loan in the amount of $2,066,410 from an institutional investor under similar
terms as described in the preceding two paragraphs. The loan is collateralized
by the Class B certificates issued to the Company pursuant to the June 27, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to June 27, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of June 26, 2002 or the date that all
outstanding principal and accrued interest has been paid by the trustee or the
Company. The term loan bears interest at 15% per annum payable monthly.
Effective September 30, 1996 and December 27, 1996, the Company obtained
non-recourse term loans for $2,403,027 and $2,802,891, respectively, from
institutional investors under similar terms as described above. The loans are
collateralized by the Class B certificates issued to the Company pursuant to the
September 30, 1996 and December 27, 1996 securitization transactions. The
Company may prepay the loans in whole or in part at any time subsequent to
September 30, 1997, or any time after receiving notice by the investor of its
intent to transfer the loan to a third party. The maturity date for the loans is
September 30, 2002 and December 31, 2002, respectively. The term loan bear
interest at 15% per annum payable monthly.
Pursuant to the an agreement (the 'Securities Purchase Agreement') entered
into on June 30, 1997, the Company issued by private placement $2,000,000 in
aggregate principal amount of senior secured convertible notes ('convertible
notes'). Interest is payable quarterly at a rate of 18% per annum until maturity
on June 30, 2000. If the Company pays down the convertible notes in full prior
to June 30, 1998, the holders will have no conversion rights. The convertible
notes, collateralized by the interest-only strip receivables from the Company's
first four securitizations, are convertible into shares of common stock of the
Company upon the earlier to occur of (i) an event of default on the convertible
notes and (ii) June 30, 1998, through the close of business on June 30, 2000,
subject to prior redemption. The conversion price is equal to the outstanding
principal amount of the convertible note being converted divided by the lesser
of (x) $5.00 (as adjusted by the terms of the Securities Purchase Agreement) and
(y) 85% of the average of the five lowest closing bid prices of the Company's
common stock on the Nasdaq Stock Market, or such other exchange or market where
the common stock is then traded during the 60 trading days immediately preceding
the date the convertible note is converted or the applicable date of repayment
(subject to adjustment under certain circumstances specified in the Securities
Purchase Agreement). The Company also paid certain debt issuance costs to the
purchaser
F-15
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
6. INITIAL PUBLIC OFFERING
On November 14, 1996, the Company and selling shareholders sold 750,000 and
250,000, respectively, of shares of common stock in an initial public offering
at a price of $10 per share. The net proceeds from the issuance and sale of
common stock amounted to approximately $5,000,000 after deducting underwriter
discounts and issuer expenses. Portions of the net proceeds were used (i) to
prepay outstanding subordinated debt of approximately $300,000 plus accrued
interest, (ii) to repay advances under revolving credit facilities and (iii) for
general corporate and working capital purposes.
The underwriters of the Company's initial public offering purchased an
additional 75,000 shares of the Company's common stock at $10 per share by
exercising half of their over-allotment option. The net proceeds from the
issuance and sale of these shares amounted to approximately $700,000 after
deducting underwriter's discounts.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 consisted of a provision for deferred taxes and the Company had no
current liability. The reconciliation between the provision for income taxes and
the amounts that would result from applying the Federal statutory rate is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Federal tax at statutory rate of 34%............................ $364,646 $1,907,889 $ 850,416
Other........................................................... 17,354 18,664 37,755
Change in valuation allowance................................... (183,000) -- --
-------- ---------- ----------
Provision for income taxes...................................... $199,000 $1,926,553 $ 888,171
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
F-16
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and income tax purposes Significant components of
the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................................ $ 16,728 $ 244,489
Cost related to securitizations........................................ 491,935 727,443
Other.................................................................. 3,883 61,769
Net operating loss carryforwards....................................... 2,792,067 8,098,975
---------- ----------
Gross deferred tax assets......................................... 3,304,613 9,132,676
---------- ----------
Deferred tax liabilities:
Gain on securitizations................................................ 5,242,372 11,755,155
Other.................................................................. 137,794 341,245
---------- ----------
Gross deferred tax liabilities.................................... 5,380,166 12,096,400
---------- ----------
2,075,553 2,963,724
Unrealized appreciation on interest-only strip receivables.................. -- 540,525
---------- ----------
Net deferred tax liabilities................................................ $2,075,553 $3,504,249
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the Company had tax net operating loss carryforwards
of approximately $23,821,000 expiring in fiscal years 2009 through 2012.
8. STOCKHOLDERS' EQUITY
Effective May 30, 1996, the Board of Directors adopted restated articles of
incorporation, which authorized 25,000,000 shares of no par value common stock
and 5,000,000 shares of no par value preferred stock.
Stock Based Compensation Plan
The Company grants stock options under a stock-based incentive compensation
plan (the 'Option Plan'). The Company applies Accounting Principles Board
Opinion 25 and related interpretations in accounting for the Option Plan. In
1995, SFAS No. 123 'Accounting for Stock-Based Compensation' ('SFAS 123') was
issued, which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the Option Plan. Adoption of the cost
recognition provisions of SFAS 23 is optional and the Company has decided not to
elect these provisions of SFAS 123. However, pro forma disclosures as if the
Company adopted the expense recognition provisions of SFAS 123 are required by
SFAS 123 and are presented below.
Under the Option Plan, the Company is authorized to issue shares of Common
Stock pursuant to 'Awards' granted in various forms, including incentive stock
options (intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended), non-qualified stock options, and other similar stock-based
Awards. The Company granted stock options in 1996 and 1997 under the Option Plan
in the form of non-qualified stock options.
Stock Options
The Company has granted stock options to employees and directors. The stock
options granted in 1996 and 1997 have contractual terms of 10 years. All options
granted to the employees and directors have an exercise price no less than the
fair market value of the stock at grant date. The options granted
F-17
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vest 33.33% per year, beginning on the first anniversary of the date of grant.
In accordance with APB 25, the Company has not recognized any compensation cost
for the stock options granted.
A summary of the status of the Company's stock options for the years ended
December 31, 1996 and 1997 is presented below:
<TABLE>
<CAPTION>
# SHARES OF AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ --------------
<S> <C> <C>
Outstanding at December 31, 1995.................................... -- --
Granted........................................................ 297,500 $10.11
---------- -------
Outstanding at December 31, 1996.................................... 297,500 $10.12
Granted........................................................ 93,000 5.67
Exercised...................................................... --
Forfeited...................................................... -119,500 9.50
---------- -------
Outstanding at December 31, 1997.................................... 271,000 $ 8.85
---------- -------
---------- -------
Options exercisable at end of period................................ 64,329 $10.17
---------- -------
---------- -------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
# SHARES OF AVERAGE AVERAGE
RANGE OF EXERCISE PRICES UNDERLYING OPTIONS REMAINING LIFE EXERCISE PRICE
- --------------------------------------------------- ------------------ -------------- --------------
<S> <C> <C> <C>
$2.00 to $2.99..................................... 11,000 9.4 $ 2.48
$3.00 to $3.99..................................... 14,000 9.6 3.59
$4.00 to $4.99..................................... 29,000 9.4 4.38
$8.00 to $8.99..................................... 3,000 9.1 8.88
$9.00 to $9.99..................................... 112,000 9.0 9.82
$10.00 to $10.99................................... 102,000 8.9 10.48
---------- --- -------
Total......................................... 271,000 9.0 $ 8.85
---------- --- -------
---------- --- -------
</TABLE>
The fair value of each stock option and warrant granted is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997: dividend yield of 0.00%;
risk-free interest rates of 6.36%, the expected lives of options of 5 years; and
a volatility of 63.51% for all grants.
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's Option Plan been determined
consistent with SFAS 123, the Company's net income and net income per common
share for 1996 and 1997 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
SFAS 123 charge, pre-tax:
As reported......................................................... $ -- $ --
Pro Forma........................................................... 33,343 375,086
APB 25 charge:
As reported......................................................... -- --
Pro Forma........................................................... -- --
Net income:
As reported......................................................... 3,584,886 1,613,053
Pro Forma........................................................... 3,562,991 1,370,422
Net income per common share (basic):
As reported......................................................... $0.62 $0.25
Pro Forma........................................................... 0.62 0.21
Net income per common share (diluted):
As reported......................................................... .62 .25
Pro Forma........................................................... .61 .21
</TABLE>
F-18
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
Warrants
The Company issued to its underwriters of their initial public offering a
warrant to purchase up to 100,000 common shares of the Company's common stock at
a price per share equal to $12.00. The warrant is exercisable after one year
from November 14, 1996, or earlier if the Company effects certain registrations
of its common stock.
In addition to subordinated debt issued March 12, 1996, which was not
outstanding at December 31, 1996, a detachable warrant was issued to an
individual for the purchase of 18,811 shares of common stock at an exercise
price equal to the fair market value as of March 12, 1996, the date of grant.
Management has determined that the fair value of the warrant at its issuance
date was de minimus. This warrant was excercised during 1997.
In addition to senior secured convertible notes issued June 30, 1997, the
Company issued warrants, which upon exercise allow the holders to purchase up to
200,000 shares of common stock at $4.225 per share. The warrants are exercisable
to the extent the holders thereof purchase up to $10,000,000 of the Company's
subordinated asset-backed securities before June 30, 1998. To date, the holders
have purchased $5.8 million of subordinated asset-backed securities.
Preferred Stock
Pursuant to the Company's amended articles of incorporation, the Company is
authorized to issue from time to time up to 5,000,000 shares of preferred stock,
in one or more series. The Board of Directors is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange, any voting
right, any rights and terms of redemption (including sinking fund provisions),
the redemption rights or prices, the liquidation preferences and any other
rights, preferences, privileges and restrictions of any series of preferred
stock and the number of shares constituting such series and the designation
thereof.
There were no shares of preferred stock issued or outstanding during the
years ended December 31, 1996 and 1997.
Earnings Per Share
Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards ('SFAS') No. 128, 'Earnings Per
Share', which establishes standards for computing and presenting earnings per
share ('EPS') for entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, 'Earnings Per Share', and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS, which excludes dilution. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Basic earnings per share were
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share differs
from basic earnings per share due to the assumed conversions of dilutive
options, warrants and convertible debt that were outstanding during the period.
EPS for periods ended prior to December 31, 1997 has been restated to conform
with the requirements of SFAS No. 128.
F-19
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1995:
Net income............................................... $ 873,487
-----------
Basic EPS:
Income available to common shareholders.................. 873,487 5,190,159 $0.17
---------
---------
Effect of dilutive securities
Warrants.................................................
Incentive stock options..................................
Diluted EPS:
----------- -------------
Income available to common shareholders + assumed
conversions............................................ $ 873,487 5,190,159 $0.17
----------- ------------- ---------
----------- ------------- ---------
Year Ended December 31, 1996:
Net income............................................... $ 3,584,886
-----------
Basic EPS:
Income available to common shareholders.................. 3,584,886 5,791,189 $0.62
---------
---------
Effect of dilutive securities
Warrants................................................. 16,470
Incentive stock options.................................. 1,498
Diluted EPS:
----------- -------------
Income available to common shareholders + assumed
conversions............................................ $ 3,584,886 5,809,157 $0.62
----------- ------------- ---------
----------- ------------- ---------
Year Ended December 31, 1997:
Net income............................................... $ 1,613,053
-----------
Basic EPS:
Income available to common shareholders.................. 1,613,053 6,516,056 $0.25
---------
---------
Effect of dilutive securities
Warrants................................................. 16,590
Incentive stock options.................................. 4,994
18% convertible notes payable............................ 119,460 428,238
Diluted EPS:
----------- -------------
Income available to common shareholders + assumed
conversions............................................ $ 1,732,513 6,965,877 $0.25
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
Effective May 30, 1996, the Board of Directors of the Company voted to
effect a 767.8125-for-1 stock split. All share information and earnings per
share calculations for the periods presented in the financial statements herein,
and the notes hereto, have been retroactively restated for such stock split.
9. RELATED PARTY TRANSACTIONS
Prior to January 1, 1996 the Company shared certain general and
administrative expenses with AutoBond, Inc. ('ABI'), which was founded and is
100% owned by the Chief Executive Officer ('CEO') of the Company. The CEO owns
55.9% of the Company. Each entity was allocated expenses based on a proportional
cost method, whereby payroll costs were allocated based on management's review
of each individual's responsibilities, and costs related to office space and
equipment rentals were based on management's best estimate of usage during the
year. Miscellaneous expenses were allocated based on the specific purposes for
which each expense related. Management believes the methods used
F-20
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to allocate the general and administrative expenses shared with ABI were
reasonable, and that the expenses reported in the financial statements after the
ABI allocations approximate the expenses that would have been incurred on a
stand-alone entity basis. Total expenses allocated to the Company from ABI
amounted to approximately $2,163,000 for the year ended December 31, 1995.
Additionally, neither the Company nor any of its affiliates had paid any
compensation to its CEO during 1995; however, management of the Company
commenced compensation payments to the CEO during the latter half of 1996 (see
Note 11). The Company estimated that a reasonable amount of compensation to pay
the CEO on a stand-alone entity basis would approximate $100,000 for the year
ended December 31, 1995.
The Company and ABI entered into a management agreement dated as of January
1, 1996 (the 'ABI Management Agreement') which requires ABI to pay an annual fee
of $50,000 to the Company for services rendered by it or the Company's employees
on behalf of ABI as follows: (i) monitoring the performance of certain
partnership interests owned by ABI and its sole shareholder, (ii) certain cash
management services, including the advancing of funds to pay ABI's ordinary
business expenses and (iii) providing advice as to regulatory compliance. The
ABI Management Agreement also provides that the Company will perform certain
accounting functions on behalf of ABI including (i) maintenance of financial
books and records, (ii) monitoring of cash management functions, (iii)
preparation of financial statements and tax returns and (iv) providing advice in
connection with retention of independent accountants. The ABI Management
Agreement further provides for the reimbursement of advances made by the Company
for out-of-pocket costs and expenses incurred on behalf of ABI. Amounts due to
the Company under the ABI Management Agreement amounted to $143,547 at December
31, 1996.
Since July 1994, ABI has also provided certain administrative services to
Intercontinental Brokerage Inc. ('Intercontinental'), an independent insurance
broker, in connection with Intercontinental's obligations as administrator of
pools of finance contracts subject to the Interstate Policy,. ABI received fees
from Intercontinental totaling approximately $752,000 for the period from July
1994 to March 1997, including with respect to finance contracts as to which the
Company has paid administrative fees to Intercontinental. Since March 1997, the
Company has elected not to insure finance contracts under the Interstate Policy
and ABI will not receive any future fees from Intercontinental with respect to
such finance contracts.
Certain executive officers received (repaid) advances from the Company
totaling $137,359, $81,712 and ($224,479) during the years ended December 31,
1995, 1996, and 1997. The outstanding advances, provided on a
non-interest-bearing basis without repayment terms, are shown as a reduction of
shareholders' equity.
10. EMPLOYMENT AGREEMENTS
The Company and its chief operating officer ('COO') entered into an
employment agreement dated November 15, 1995 and effective from such date
through November 15, 1998. This agreement is automatically extended unless the
Company gives six months notice of its intent not to extend the terms of the
agreement. This agreement provides for a minimum monthly salary of $12,500,
together with shares of the Company's common stock, issued January 1, 1996,
equal to 10% of the outstanding shares after giving effect to the shares issued
to the COO. Half of such issued shares were not subject to forfeiture whereas
the remaining 50% were subject to forfeiture until November 15, 1997. The
Company valued the shares issued January 1, 1996 based on an independent
appraisal of the Company as of November 15, 1995, the measurement date, and
recorded an increase to additional paid-in capital and deferred compensation of
$138,500. Deferred compensation is amortized on a straight-line basis over the
two forfeiture periods ending November 15, 1997 resulting in compensation
expense of $75,742, $51,336 and $11,422 for the years ended December 31, 1995,
1996 and 1997, respectively.
The Company and its chief executive officer ('CEO') also entered into an
employment agreement dated May 31, 1996, and effective from such date for five
years. The agreement provides for
F-21
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation at a base salary of $240,000 per annum, which may be increased and
may be decreased to an amount of not less than $240,000, at the discretion of
the Board of Directors. The agreement entitles the CEO to receive the benefits
of any cash incentive compensation as may be granted by the Board to employees,
and to participate in any executive bonus or incentive plan established by the
Board of Directors. The agreement also provides the CEO with certain additional
benefits. The agreement automatically terminates upon (i) the death of the CEO,
(ii) disability of the CEO for six continuous months together with the
likelihood that the CEO will be unable to perform his duties for the following
continuous six months, as determined by the Board of Directors, (iii)
termination of the CEO 'for cause' (which termination requires the vote of a
majority of the Board) or (iv) the occurrence of the five-year expiration date
provided, however, the agreement may be extended for successive one-year
intervals unless either party elects to terminate the agreement in a prior
written notice.
The CEO may terminate his employment for 'good reason' as defined in the
agreement. In the event of the CEO's termination for cause, the agreement
provides that the Company shall pay the CEO his base salary through the date of
termination and the vested portion of any incentive compensation plan to which
the CEO may be entitled. Other than following a change in control, if the
Company terminates the CEO in breach of the agreement, or if the CEO terminates
his employment for good reason, the Company must pay the CEO: (i) his base
salary through the date of termination; (ii) a severance payment equal to the
base salary multiplied by the number of years remaining under the agreement; and
(iii) in the case of breach by the Company of the agreement, all other damages
to which the CEO may be entitled as a result of such breach, including lost
benefits under retirement and incentive plans. In the event of the CEO's
termination following a change in control, the Company is required to pay the
CEO an amount equal to three times the sum of (i) his base salary, (ii) his
annual management incentive compensation and (iii) his planned level of annual
perquisites. The agreement also provides for indemnification of the CEO for any
costs or liabilities incurred by the CEO in connection with his employment.
11. LEASES
The Company leases property under capital leases as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
---- --------
<S> <C> <C>
Furniture................................................................. $-- $ 49,606
Equipment................................................................. -- 515,891
Less: Accumulated depreciation............................................ -- (92,941)
---- --------
$-- $472,556
---- --------
---- --------
</TABLE>
Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1997 follow:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------------------------------------------------------
<S> <C>
1998.................................................................... $226,385
1999.................................................................... 217,329
2000.................................................................... 129,173
--------
Total minimum lease payments............................................ 572,887
Less: amounts representing interest..................................... (71,872)
--------
Present value of net minimum lease payments............................. $501,015
--------
--------
</TABLE>
F-22
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under operating leases (which reflect leases
having noncancelable lease terms in excess of one year) as of December 31, 1997
follow:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------
<S> <C>
1998.................................................................. $ 610,926
1999.................................................................. 743,838
2000.................................................................. 716,583
2001.................................................................. 623,488
2002.................................................................. 562,356
Later years........................................................... 1,312,163
----------
Total............................................................ $4,569,354
----------
----------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1995, 1996 and 1997 were approximately $351,000, $524,000 and $371,555,
respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the Trusts, which generally duplicate
the substance of the representations and warranties made by the dealers in
connection with the Company's purchase of the finance contracts. In the event of
a breach by the Company of any representation or warranty, the Company is
obligated to repurchase the finance contracts from the Trust at a price equal to
the remaining principal plus accrued interest. The Company repurchased finance
contracts totaling $619,520 from a Trust during 1997. Of the total amount of
these finance contracts, $190,320 was purchased from one dealer. Although the
Company has requested that this dealer repurchase such contracts, the dealer has
refused. The Company has commenced litigation against such dealer.
The Company is the plaintiff or the defendant in several legal proceedings
that its management considers to be the normal kinds of actions to which an
enterprise of its size and nature might be subject, and not to be material to
the Company's overall business or financial condition, results of operations or
cash flows.
The Company is taking actions to provide that their computer systems are
capable of processing for the periods in the year 2000 and beyond. The costs
associated with this are not expected to significantly affect operating cash
flow; however, the nature of their business requires that they rely on external
vendors and services who may not be year 2000 compliant. Therefore, there is no
assurance that the Company's actions in this regard will be successful.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company would realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
F-23
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those investments.
Finance Contracts Held for Sale
The fair value of finance contracts held for sale is based on the estimated
proceeds expected on securitization of the finance contracts held for sale.
Interest-Only Strip Receivables
The fair value of interest-only strip receivables is based on discounted
future net cash flows utilizing a discount rate that market participants would
use for financial instruments with similar risks. Due to the nature of this
financial instrument and the relative recency of the securitization transaction
date, the carrying amount approximates fair value.
REVOLVING CREDIT BORROWINGS, NOTES PAYABLE AND REPURCHASE AGREEMENT
The fair value of the Company's debt is based upon the quoted market prices
for the same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities and characteristics. The revolving
credit lines are variable rate loans, resulting in a fair value that
approximates carrying cost at December 31, 1997.
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............................. $ 4,121,342 $ 4,121,342 $ 159,293 $ 159,293
Finance contracts held for sale........................ 228,429 228,429 1,366,114 1,366,114
Class B certificates................................... 10,465,294 10,465,294 7,878,306 7,878,306
Interest-Only Strip Receivables........................ 4,247,274 4,247,274 9,427,986 9,427,986
Revolving credit facilities............................ -- -- 7,639,201 7,639,201
Notes payable.......................................... 10,174,633 10,174,633 9,841,043 9,841,043
</TABLE>
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information with respect to payments of interest is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid............................. $2,099,867 $1,885,322 $3,771,566
</TABLE>
No income taxes were paid during fiscal 1995, 1995 or 1997. The Company
entered into capital leases totaling $565,497 during the year ended December 31,
1997.
15. SUBSEQUENT EVENTS
The Company entered into an employment agreement, dated as of January 1,
1998, with a former outside director to serve as a consultant to the Company
until February 1, 1998, whereupon he agreed to become President of the Company
for a period of three years. The agreement provides for compensation at a base
salary of $200,000 per annum, with a one time signing bonus of $100,000 and
additional performance bonuses of up to $25,000 per quarter, as approved by the
CEO and the Compensation Committee. In addition, the President received options
under the Option Plan to purchase 100,000 shares of the Company's common stock,
along with an agreement to grant additional
F-24
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options to purchase 50,000 of the Company's common stock on December 1, 1998.
The agreement automatically terminates upon (i) the death of the President, (ii)
the disability of the President, which continues for a period of six months,
(iii) 'for cause,' (iv) at the President's option, or (v) at the Company's
option. Upon such termination, the Company is obligated to pay the President his
accrued base pay through the date of such termination, unless terminated by the
Company without cause, whereupon he would be entitled to his base pay for the
remainder of the year in which such termination occurred. Pursuant to a separate
Severance Agreement, dated as of February 1, 1998, upon the occurrence of a
'change in control' the Company must pay the President a lump sum payment equal
to the sum of the base pay plus any incentive pay for that year, plus the
Company will arrange to provide, for a period of twelve months following the
termination date, such employee benefits as are substantially similar to those
that he was receiving or entitled to receive immediately prior to such
termination date.
During January 1998, the Company privately placed $7,500,000 in aggregate
principal amount of senior subordinated notes (the 'subordinated notes') to an
affiliate of BankBoston, N.A. The subordinated notes bear interest at 15% per
annum, mature on February 1, 2001 and are convertible into up to 368,462 shares
of the Company's common stock at a price of $3.30 per share (subject to
adjustment). Although the subordinated notes contain customary restrictive
covenants, they do not prohibit the Company from paying dividends on the
preferred stock out of earnings legally available therefor. In addition, the
Company issued to the purchaser a warrant to purchase such shares to the extent
the notes have not been converted prior to maturity. Net proceeds from the sale
of the subordinated notes were used (i) to pay short-term liabilities, (ii) to
repay the Company's 18% convertible notes and (iii) for working capital
purposes.
On February 20, 1998, the Company issued 1,000,000 shares of preferred
stock in a public offering at a price of $10 per share. The net proceeds from
the issuance and sale of preferred stock amounted to approximately $9,000,000
after deducting underwriter discounts and issuer expenses. Portions of the net
proceeds will be used (i) for the acquisition and financing of finance
contracts, including the funding of reserves and other credit enhancements and
(ii) for working capital and general corporate purposes. The underwriters of the
Company's public offering purchased an additional 125,000 shares of the
Company's preferred stock at $10 per share by exercising their entire
over-allotment option on February 27, 1998. The net proceeds from the issuance
and sale of the over-allotment of shares amounted to approximately $1,125,000.
16. SELECTED QUARTERLY DATA (UNAUDITED)
The following financial data summarizes quarterly results for the Company
for the year ended December 31, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1997
Total revenues..................................... $4,288,664 $6,110,826 $6,370,219 $5,661,419
Net income......................................... 179,028 966,869 511,814 (44,658)
Earnings per common share basic and diluted........ .03 .15 .08 (.01)
</TABLE>
17. EVENT OF MOODY'S DOWNGRADE OF SENIOR SECURITIES ON TERM SECURITIZATIONS
(UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
ACCOUNTANTS
On May 19, 1998, Moody's further downgraded the ratings on the senior
securities in each of the Company's term securitizations to Ba1 (except 1997B
and 1997C) and B2 (for the 1997B and 1997C transactions). These actions may
limit the Company's ability to enter into similar term or other securitization
transactions.
F-25
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
SCHEDULE II
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
AT BEGINNING COST AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
- ------------------------------------------------------------ ------------ --------- ------------- ---------
<S> <C> <C> <C> <C>
Allowance for credit losses:
Year ended December 31, 1995........................... $ 45,000 $ 48,702 $ -- $ 93,702
Year ended December 31, 1996........................... 93,702 412,387 (480,889) 25,200
Year ended December 31, 1997........................... 25,200 612,715 (187,793) 450,122
</TABLE>
- ------------
(1) Deductions were write-offs of uncollectible finance contracts.
S-1
<PAGE>
<PAGE>
PROPRIETARY AND CONFIDENTIAL
COMMON STOCK
INVESTMENT AGREEMENT
Between
Promethean Investment Group, L.L.C.
And
AutoBond Acceptance Corporation
Dated as of May 19, 1998
<PAGE>
<PAGE>
COMMON STOCK INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of May
19, 1998, by and among AutoBond Acceptance Corporation, a Texas corporation,
with headquarters located at 301 Congress Avenue, 9th Floor, Austin, Texas 78701
(the "Company") and Promethean Investment Group L.L.C., a limited liability
company organized and existing under the laws of the State of New York (together
with its successors in interest and assigns or its designees, the "INVESTOR").
WHEREAS:
A. The Company and the Investor are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) under the Securities Act of 1933, as amended and the rules and
regulations thereunder, or any similar successor statutes (the "1933 ACT");
B. The parties desire that, upon the terms and subject to the conditions
contained herein, the Investor shall invest up to $20,000,000 (subject to
increase up to $25,000,000 as set forth in Section 1(d)) in shares (the
"SHARES") of the Company's common stock, no par value (the "COMMON STOCK"); and
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Investor hereby agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK
a. Purchase and Sale of Common Stock. Upon the terms and conditions set
forth herein, the Company shall issue and sell to the Investor, and the Investor
shall purchase from the Company, up to those number of Shares having an
aggregate Purchase Price (as defined in Section 1(g)) of $20,000,000 (subject to
increase up to $25,000,000 as set forth in Section 1(d)).
b. Delivery of Put Notices. Subject to the satisfaction of the
conditions set forth in this Section 1, at any time and from time to time during
the period beginning on and including the Business Day (as defined below)
immediately following the date on which the Registration Statement (as defined
in the Registration Rights Agreement) is declared effective (the "EFFECTIVE
DATE") by the Securities and Exchange Commission (the "SEC") and ending on the
earlier of (A) the date which is two years after the Effective Date and (B)
termination of this Agreement in accordance with Section 8 (the "OPEN PERIOD"),
the Company may, in its sole discretion, deliver a written notice to the
Investor (each such notice hereinafter referred to as a "PUT NOTICE") stating a
dollar amount (the "DOLLAR AMOUNT") of Common Stock which the Company intends to
sell to the Investor during the period beginning on the Business Day immediately
following the date on which the Investor receives the Put Notice (the "PUT
NOTICE DATE") and ending on and including the date which is 25 Business Days
after such Put Notice Date (the "PURCHASE PERIOD"). The Dollar Amount designated
by the Company in a Put Notice shall be
1
<PAGE>
<PAGE>
in increments of $250,000. During the Open Period, Put Notices may be delivered
no more frequently than once in each period of twenty-six (26) consecutive
Business Days, such that a Put Notice may not be given during a Purchase Period.
For purposes of this Agreement, "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the City of New York are
authorized or required by law or executive order to remain closed or on which
the Principal Market (as defined below) for the Common Stock is not open for
trading.
c. Delivery of Preliminary Put Notices. At least ten days but not more
than 30 days prior to the Company's delivery of a Put Notice to the Investor,
the Company shall deliver written notice to the Investor (a "PRELIMINARY PUT
NOTICE") stating that the Company may deliver a Put Notice to the Investor. The
Company shall not be obligated to deliver a Put Notice following its delivery of
a Preliminary Put Notice; provided, however, if the Company has engaged auditors
that are acceptable to the Investor (including, but not limited to a "big five"
accounting firm) and if on two occasions the Company fails to deliver a Put
Notice within 30 days after its delivery of a Preliminary Put Notice then on
each subsequent occasion that the Company delivers a Preliminary Put Notice the
Company shall be obligated to reimburse the Investor for reasonable due
diligence costs of the Investor up to $10,000 on each such occasion.
Notwithstanding the foregoing, if the Company has failed to engage auditors or
has engaged auditors that are not a "big five" accounting firm or are
unacceptable to the Investor, the Company shall be obligated to reimburse the
Investor for due diligence costs of the Investor up to $20,000 during each 90
calendar day period beginning on the Effective Date.
d. Investor Obligation and Right to Purchase Shares. Following the
Investor's receipt of a validly delivered Put Notice, the Investor shall be
required to purchase from the Company during the related Purchase Period a
number of Shares having an aggregate Purchase Price equal to the lower of (i)
the Dollar Amount set forth in the Put Notice (subject to reduction during the
Purchase Period as hereinafter provided), (ii) $5,000,000 (subject to reduction
during the Purchase Period as hereinafter provided) and (iii) 20% of the
aggregate of the Daily Trading Dollar Volume (as defined below) on the 20
consecutive Business Days immediately following the Put Notice Date (the lesser
of (i), (ii) or (iii) above shall be referred to herein as the "REQUIRED DOLLAR
AMOUNT"). The Investor shall have the right, but not the obligation, solely at
its election to purchase during any such Purchase Period a number of Shares from
the Company having an aggregate Purchase Price equal to up to 125% of the
Required Dollar Amount. The Investor shall not in any event be required to
purchase pursuant to this Agreement a number of Shares having an aggregate
Purchase Price which is greater than $20,000,000 (excluding additional purchases
which may be made at the election or option of the Investor pursuant to the
immediately preceding sentence). The amount provided in clause (i) in the first
sentence of this Section 1(d) shall be in effect at the beginning of each
Purchase Period but shall be reduced during such Purchase Period by an amount
equal to one-twentieth of the Dollar Amount in effect at the beginning of such
Purchase Period for each trading day during such Purchase Period on which the
weighted-average trading price of the Common Stock (as reported by Bloomberg
Financial Markets ("BLOOMBERG") through its "Volume at Price" function) is less
than $3.25 per share. The amount provided in clause (ii) of the first sentence
of this Section 1(d) shall be in effect at the beginning of each Purchase Period
but shall be reduced during such Purchase Period by $250,000 for each trading
day during such Purchase Period on which the weighted-average trading price per
share of the Common Stock (as reported by Bloomberg
2
<PAGE>
<PAGE>
through its "Volume at Price" function) is less than $3.25 per share. For
purposes hereof "DAILY TRADING DOLLAR VOLUME" shall mean the number of shares of
Common Stock traded on such day on the Principal Market on which the Common
Stock is traded multiplied by such day's weighted-average trading price (as
reported by Bloomberg through its "Volume at Price" function).
e. Limitation on Investor's Obligation to Purchase Shares.
Notwithstanding anything to the contrary in this Agreement, in no event shall
the Investor be required to purchase and a Required Dollar Amount may not
include an amount, which when added to the sum of (x) the additional number of
Shares which the Investor has the right to purchase with respect to such
Required Dollar Amount (as set forth in the second sentence of Section 1(e)) and
(y) all other Shares acquired by the Investor pursuant to this Agreement during
the 61 days preceding the Put Notice Date with respect to which this
determination of the permitted Required Dollar Amount is being made, would
exceed 4.99% of the number of shares of Common Stock outstanding on the Put
Notice Date for such Purchase Period, as determined in accordance with Section
13(d) of the Securities Exchange Act of 1934 Act, as amended (the "1934 ACT").
The Put Notice shall include a representation of the Company as to the number of
shares of Common Stock outstanding on the Put Notice Date as determined in
accordance with Section 13(d) of the 1934 Act. In the event that the number of
shares of Common Stock outstanding as determined in accordance with Section
13(d) of the 1934 Act is different on any date during a Purchase Period than on
the Put Notice Date associated with such Purchase Period, then the number of
shares of Common Stock outstanding on such date during such Purchase Period
shall govern for purposes of determining whether the Investor, when aggregating
all purchases of Common Stock made pursuant to this Agreement in the 61 calendar
days preceding such date, would have acquired more than 4.99% of the number of
shares of Common Stock outstanding during such period.
f. Conditions to Investor's Obligation to Purchase Shares.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be entitled to deliver a Put Notice and require the Investor to purchase any
Shares at a Closing (as defined below) unless each of the following conditions
are satisfied: (i) the Applicable Trading Price (hereinafter defined) on the
Business Day prior to delivery of such Put Notice is at least $3.25 per share;
(ii) the Registration Statement shall have been declared effective and shall
remain effective and available for sale of all the Registrable Securities (as
defined in the Registration Rights Agreement) at all times during the period
beginning on the date of delivery of the Preliminary Put Notice and ending on
and including the related Closing Date; (iii) at all times during the period
beginning on the date that the Company delivers a Preliminary Put Notice and
ending on and including the related Closing Date, the Common Stock shall have
been listed on The American Stock Exchange, Inc. or The New York Stock Exchange,
Inc. or designated on the Nasdaq National Market (the "PRINCIPAL MARKET") and
shall not have been suspended from trading and the Company shall not have been
notified of any pending or threatened proceeding or other action to delist or
suspend the Common Stock; and (iv) during the period beginning on the date of
this Agreement and ending on and including the applicable Closing Date, there
shall not have occurred a Triggering Event (as defined below), a Major
Transaction (as defined below) which has or could have a Material Adverse Effect
(as defined in Section 3(a)) or the public announcement of a Major Transaction
which has or could have a Material Adverse Effect which has not been abandoned
or terminated; and (v) the Company has complied with its obligations and is
3
<PAGE>
<PAGE>
otherwise not in breach of or in default of this Agreement, the Registration
Rights Agreement or the Notes. If (x) the Applicable Trading Price on any
trading day during the Purchase Period associated with an effective Put Notice
shall be less than $3.25 per share or (y) any of the events described in clauses
(ii) through (v) above occurs after an effective Put Notice is so delivered, and
if any such circumstance described in (x) or (y) above so occurs before the
entire Required Dollar Amount of Common Stock covered by such Put Notice shall
have been purchased during the Purchase Period, then the Investor shall have no
further obligation to purchase the balance of such Required Dollar Amount of
Common Stock during such Purchase Period; provided, however, that on any day
during the balance of such Purchase Period upon which such events described in
clauses (ii) through (v) above do not exist or which follows a trading day upon
which the Applicable Trading Price shall be $3.25 per share or more, the
Investor may in its sole discretion but shall not be required to give the
Company one or more Purchase Notices (as defined below) covering some or all of
such balance of the Required Dollar Amount, as well as some or all of the
additional amounts of Common Stock which the Investor may elect to purchase
during such Purchase Period pursuant to Section 1(d) above. The "APPLICABLE
TRADING PRICE" with respect to the Common Stock on any day, shall mean the
dollar volume-weighted average price of Common Stock reported on such Business
Day (as reported by Bloomberg through its "Volume at Price" function) or, in
case no sales take place on such day, the average of the closing bid and asked
prices on such prior day, in either case, as reported on Bloomberg through its
"Volume at Price" function for such day, or, if not reported on the Bloomberg,
the last quoted price on such prior day (or, if not so quoted, the average of
the last quoted high bid and low asked prices) in the over the counter market,
as reported by The Nasdaq Stock Market, Inc. such other system then in use, or,
if on any such prior day no bids are quoted by any such organization, the
average of the closing bid and asked prices on such prior day furnished by a
professional market maker making a market in Common Stock selected by the Board
of Directors of the Company, and, if on any such prior day, no market maker is
making a market in the Common Stock, the fair market value of the Common Stock
as of such prior day determined reasonably and in good faith by the Board of
Directors of the Company.
For purposes of this Agreement, a "MAJOR TRANSACTION" shall be deemed to
have occurred at the closing of any of the following events: (i) the
consolidation, merger or other business combination of the Company with or into
another Person (other than pursuant to a migratory merger effected solely for
the purpose of changing the jurisdiction of incorporation of the Company); (ii)
the sale or transfer of all or substantially all of the Company's assets; or
(iii) the consummation of a purchase, tender or exchange offer made to and
accepted by the holders of more than 30% of the outstanding shares of Common
Stock. For purposes of this Agreement, a "TRIGGERING EVENT" shall be deemed to
have occurred at such time as, in the event that the Investor or its affiliates
consummates an agreement with the Company to purchase convertible notes of the
Company (the "NOTES"), a "Triggering Event" (as defined in the Notes) occurs
under the Notes.
g. Purchase Price Per Share. For purposes of this Agreement, the
"PURCHASE PRICE" for each Share purchased by the Investor shall be equal to the
product of (i) 95% and (ii) the lowest daily dollar volume-weighted average
price (as reported by Bloomberg through its "Volume at Price" function) of the
Common Stock for the six consecutive trading days ending on and including the
date of determination. The number of Shares so to be purchased pursuant
4
<PAGE>
<PAGE>
to each Purchase Notice shall be rounded to the nearest whole number so as to
avoid the issuance of fractional shares.
h. Mechanics of Purchase of Shares by Investor. To effect a purchase of
Shares during a Purchase Period the Investor shall deliver one or more written
notices to the Company (each a "PURCHASE NOTICE") at any time and from time to
time during the Purchase Period. Each Purchase Notice shall set forth (i) the
aggregate Purchase Price for the Shares being purchased by the Investor pursuant
to such Purchase Notice, (ii) the Purchase Price per Share as of the date of
delivery of such Purchase Notice and (iii) the number of Shares being purchased
pursuant to such Purchase Notice. The "PURCHASE NOTICE DATE" with respect to a
Purchase Notice shall be the date on which the Investor delivers a copy of such
Purchase Notice to the Company by facsimile transmission prior to 11:59 pm
Central Time on such date. If prior to the last day of a Purchase Period the
Investor shall not have delivered Purchase Notices covering the purchase of a
number of Shares with an aggregate Purchase Price equal to at least the Required
Dollar Amount of Common Stock required to be purchased during the respective
Purchase Period, then the Investor shall be deemed to have delivered a Purchase
Notice on the last day of such Purchase Period covering the purchase of a number
of Shares with an aggregate Purchase Price equal to the difference of (x) the
Required Dollar Amount with respect to such Purchase Period minus (y) the
aggregate Purchase Price of the Shares covered by Purchase Notices delivered by
the Investor to the Company during such Purchase Period. Subject to the
satisfaction of the conditions set forth in Sections 1(f), 6 and 7, the closing
of the purchase by the Investor of Shares shall occur at 10:00 a.m. Central
Time, within three Business Days following the respective Purchase Notice Date
(or such later date as is mutually agreed to by the Company and the Investor) (a
"CLOSING DATE") at the offices of Katten Muchin & Zavis, 525 West Monroe Street,
Suite 1600, Chicago, Illinois 60661-3693. On each Closing Date, (A) the Company
shall deliver to the Investor certificates representing the shares of Common
Stock to be issued and sold to the Investor on such date and registered in the
name of the Investor or deposit such shares into the accounts (and the Investor
has confirmation that the shares are in such account) designated by the Investor
for the benefit of the Investor and (B) on each Closing Date, the Investor shall
deliver to the Company the price to be paid for such shares (after receipt of
confirmation of delivery of such Shares), determined as aforesaid, by cashier's
check or wire transfer in immediately available funds to such account as shall
be designated in writing by the Company. In addition, each of the Company and
the Investor shall deliver all documents, instruments and writings required to
be delivered by either of them pursuant to this Agreement at or prior to each
Closing. In the alternative to physical delivery of certificates for Common
Stock, if delivery of the shares of Common Stock may be effectuated by
electronic book-entry through Depository Trust Company ("DTC"), then delivery of
the shares of Common Stock pursuant to such purchase shall, unless requested
otherwise by such Investor (or holder of such shares), settle by book-entry
transfer through DTC by the third Business Day following the Investor's delivery
of a Purchase Notice to the Company. The parties agree to coordinate with DTC to
accomplish this objective.
i. Effect of Failure to Satisfy Closing Obligations. Subject to the
Company's compliance with all of the terms and conditions of this Agreement,
with respect to each Purchase Period, if the Investor shall fail to purchase the
entire Required Dollar Amount (subject to reduction as provided in Section 1(d))
by the third Business Day following the end of such Purchase Period, the
Investor shall, in addition to any other remedies under this Agreement, pay
5
<PAGE>
<PAGE>
as additional damages in cash to the Company, on the eighth Business Day
following the end of such Purchase Period and on each succeeding fifth Business
Day thereafter until the Required Dollar Amount is paid, an amount equal to one
percent (1%) of the balance of the Required Dollar Amount that was not paid to
the Company for such Purchase Period. Subject to the Investor's compliance with
all of the terms and conditions of this Agreement, with respect to each Closing,
if the Company shall fail to deliver to the Investor the shares of Common Stock
to be issued and sold to the Investor by the third Business Day following
delivery of a Purchase Notice, whether by physical delivery of certificates or
by book-entry transfer through DTC for such shares of Common Stock, the Company
shall, in addition to any other remedies under this Agreement, pay as additional
damages in cash to the Investor, by the eighth Business Day following the
delivery of a Purchase Notice and on each succeeding fifth Business Day
thereafter until the shares of Common Stock are delivered, an amount equal to
one percent (1%) of the value of the shares not delivered to the Investor by the
third Business Day following the delivery of a Purchase Notice.
j. Certain Adjustments. Applicable Daily Trading Dollar Volume, daily
dollar volume-weighted average price, Purchase Prices per Share and the $3.25
amounts provided in Section 1(d) hereof shall be adjusted appropriately to
reflect stock splits, stock dividends, combinations and like transactions
affecting the Common Stock.
k. Delisting; Deregistration; Suspension. If at any time during the Open
Period or within thirty days after the end of the Open Period, (i) the
Registration Statement, after it has been declared effective, shall not remain
effective and available for sale of all the Registrable Securities, (ii) the
Common Stock shall not be listed on The American Stock Exchange, Inc. or The New
York Stock Exchange, Inc. or designated on the Nasdaq National Market or shall
have been suspended from trading or the Company shall have been notified of any
pending or threatened proceeding or other action to delist or suspend the Common
Stock; or (iii) there shall have occurred a Triggering Event, the Investor shall
have the right, as partial relief for the damages to any Investor by reason of
the occurrence of the events listed in clauses (i), (ii) or (iii) above (which
remedy shall not be exclusive of any other remedies available at law or equity),
at its option in its sole discretion, which right shall be exercised within
thirty days of such event or occurrence (a "REPURCHASE EVENT"), to sell to the
Company, and the Company agrees to buy, promptly upon the exercise of such right
by the Investor, but in any event within thirty (30) calendar days of the
exercise of such right, and subject to the limitations imposed by the Texas
Business Corporation Law, all or any part of the Common Stock issued to the
Investor within 45 Business Days preceding the Investor's exercise of the option
provided to it in this Section 1(k) and then held by the Investor at a price per
share equal to the highest Applicable Trading Price during the period beginning
on the date of the Repurchase Event and ending on and including the date on
which the Investor exercises its right to require the Company to repurchase such
Shares (the "PAYMENT AMOUNT"). If the Company fails to purchase the number of
Shares of Common Stock from the Investor within ten calendar days of the
exercise of the Investor's option hereunder, the Company shall pay to the
Investor, on the first Business Day following such tenth calendar day, in
addition to and not in lieu of the amount payable by the Company to the Investor
upon exercise of the option, an amount equal to two percent (2%) of the
aggregate Payment Amount then due and payable to the Investor, in cash or by
certified check or wire transfer, plus compounded annual interest of 15% on such
Payment Amount
6
<PAGE>
<PAGE>
during the period, beginning on the day following such thirtieth calendar day,
during which such amount, or any portion, is outstanding.
l. Overall Limit on Common Stock Issuable. Notwithstanding anything
herein contained to the contrary, the number of shares of Common Stock issuable
by the Company and purchasable by the Investor hereunder shall not exceed twenty
percent of the outstanding Common Stock of the Company as of the date hereof,
subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock, (the
"MAXIMUM COMMON STOCK ISSUANCE"), unless the issuance of Common Stock hereunder
in excess of the Maximum Common Stock Issuance shall first be approved by the
Company's stockholders in accordance with applicable law and the bylaws of the
Company. Without limiting the generality of the foregoing, such stockholders'
approval will duly authorize the issuance by the Company of shares of Common
Stock totaling twenty percent or more of the Company's Common Stock outstanding
on the date hereof. The parties understand and agree that the Company's failure
to obtain such approval shall in no way adversely affect the validity and due
authorization of the issuance and sale of Common Stock hereunder, and that such
approval pertains only to the applicability of the Maximum Common Stock Issuance
limitation provided in this Section 1(l).
2. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
The Investor represents and warrants to the Company that:
a. Investment Purpose. The Investor is acquiring the Shares for its
own account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the Investor does not agree to hold any of
the Shares for any minimum or other specific term and reserves the right to
dispose of the Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. The Investor is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D under the
1933 Act.
c. Reliance on Exemptions. The Investor understands that the Shares
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and the
Investor's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Investor to acquire such Shares.
d. Information. The Investor and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Shares which
have been requested by the Investor. The Investor and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by the
7
<PAGE>
<PAGE>
Investor or its advisors, if any, or its representatives shall modify, amend or
affect the Investor's right to rely on the Company's representations and
warranties contained in Section 3 below. The Investor understands that its
investment in the Shares involves a high degree of risk. The Investor has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Shares.
e. No Governmental Review. The Investor understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Shares or the
fairness or suitability of the investment in the Shares nor have such
authorities passed upon or endorsed the merits of the offering of the Shares.
f. Transfer or Resale. The Investor understands that except as
provided in the Registration Rights Agreement: (i) the Shares have not been and
are not being registered under the 1933 Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) the Investor shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Shares to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) the Investor
provides the Company with reasonable assurance that such Shares can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or
a successor rule thereto) ("RULE 144"); (ii) any sale of the Shares made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Shares under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Shares under the 1933 Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder.
g. Legends. The Investor understands that, until such time as the
sale of the Shares have been registered under the 1933 Act as contemplated by
the Registration Rights Agreement, the stock certificates representing the
Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT
TO RULE 144 UNDER SAID ACT.
8
<PAGE>
<PAGE>
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Shares upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such Shares
are registered for sale under the 1933 Act, (ii) in connection with a sale
transaction, such holder provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of such Shares may be made without registration under the 1933 Act, or
(iii) such holder provides the Company with reasonable assurances that such
Shares can be sold pursuant to Rule 144 without any restriction as to the number
of securities acquired as of a particular date that can then be immediately
sold.
h. Authorization; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Investor and is a
valid and binding agreement of the Investor enforceable against the Investor in
accordance with its terms, subject as to enforceability to general principles of
equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
i. Residency. The Investor is a resident of the State of New York.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Investor that:
a. Organization and Qualification. The Company and its "SUBSIDIARIES"
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest) (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT"
means any material adverse effect on the business, properties, assets,
operations, results of operations, financial condition or prospects of the
Company and its Subsidiaries, if any, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined below).
b. Authorization; Enforcement; Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined below) and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the "TRANSACTION DOCUMENTS"), and
to issue the Shares in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the
consummation
9
<PAGE>
<PAGE>
by it of the transactions contemplated hereby and thereby, including without
limitation the reservation for issuance and the issuance of the Shares issuable
upon purchases pursuant to this Agreement, have been duly authorized by the
Company's Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company and
(iv) the Transaction Documents constitute the valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 25,000,000 shares of Common Stock, of which
as of the date hereof, 6,531,311 shares were issued and outstanding, 1,165,000
shares are issuable and reserved for issuance pursuant to the Company's stock
option and purchase plans and 933,775 shares are issuable and reserved for
issuance pursuant to securities (other than the Notes) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000
shares of preferred stock, which as of the date hereof, 1,250,000 were issued
and outstanding. All of such outstanding shares have been, or upon issuance will
be, validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(c), (i) no shares of the Company's capital stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company, (ii) there are no outstanding debt
securities, (iii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement),
(v) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries, (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Shares as described in this Agreement, and (vii) the Company
does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement. The Company has furnished to the
Investor true and correct copies of the Company's Articles of Incorporation, as
amended and as in effect on the date hereof (the "ARTICLES OF INCORPORATION"),
and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and
the terms of all securities convertible into or exercisable for Common Stock and
the material rights of the holders thereof in respect thereto.
d. Issuance of Shares. A number of shares of Common Stock equal
to 150% of the number of Shares issuable based on the current Purchase Price
upon purchase of the Shares pursuant to this Agreement (regardless of any
limitation on the timing or amount of such
10
<PAGE>
<PAGE>
purchases) initially have been duly authorized and reserved for issuance
(subject to adjustment pursuant to the Company's covenant set forth in Section
4(f) below) pursuant to this Agreement. Upon issuance in accordance with this
Agreement, the Shares will be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common Stock.
The issuance by the Company of the Shares is exempt from registration under the
1933 Act.
e. No Conflicts. The execution, delivery and performance of this
Agreement and the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby will not (i)
result in a violation of the Articles of Incorporation, any Articles of
Amendment, Preferences and Rights of any outstanding series of Preferred Stock
of the Company or the By-laws or (ii) conflict with, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or result in a violation of any
law, rule, regulation, order, judgment or decree (including United States
federal and state securities laws and regulations and the rules and regulations
of the principal market or exchange on which the Common Stock is traded or
listed) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 3(e), neither the Company nor its
Subsidiaries is in violation of any term of or in default under the Articles of
Incorporation, any Articles of Amendment, Preferences and Rights of any
outstanding series of Preferred Stock or the By-laws or their organizational
charter or by-laws, respectively, or any contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its Subsidiaries, except for
possible conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations that would not individually or in the aggregate
have a Material Adverse Effect. The business of the Company and its Subsidiaries
is not being conducted, and shall not be conducted, in violation of any law,
ordinance, regulation of any governmental entity, except for possible violations
the sanctions for which either individually or in the aggregate would not have a
Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required under the 1933 Act, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self regulatory agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents or to perform its obligations under
this Agreement, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. Except as disclosed in Schedule 3(e),
the Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing. The Company is not in violation of the
listing requirements of the Principal Market as in effect on the date hereof and
on each of the Closing Dates and is not aware of any facts which would
reasonably lead to delisting of the Common Stock by the Principal Market in the
foreseeable future.
f. SEC Documents; Financial Statements. Since November 8, 1996,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act (all of the
11
<PAGE>
<PAGE>
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The
Company has delivered to the Investor or their respective representatives true
and complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments), except for changes to the Company's 1997 audited financial
statements filed with the SEC as disclosed in the Company's Form 10-Q for the
three-month period ended March 31, 1998 (the "FIRST QUARTER 10-Q"). No other
information provided by or on behalf of the Company to the Investor which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading. Neither the Company nor any of its Subsidiaries or
any of their officers, directors, employees or agents have provided the Investor
with any material, nonpublic information which will continue to be material,
nonpublic information.
g. Absence of Certain Changes. Except as disclosed in the First
Quarter 10-Q, since December 31, 1997, there has been no change or development
in the business, properties, operations, financial condition, results of
operations or prospects of the Company or its Subsidiaries which has had or
would have a Material Adverse Effect. The Company has not taken any steps, and
does not currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings.
h. Absence of Litigation. Except as set forth in Schedule 3(h), there
is no action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened
against or affecting the Company, the Common Stock or any of the Company's
Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or
directors in their capacities as such, in which an adverse decision could have a
Material Adverse Effect.
12
<PAGE>
<PAGE>
i. Acknowledgment Regarding Investor's Purchase of Shares. The
Company acknowledges and agrees that the Investor is acting solely in the
capacity of arm's length purchaser with respect to the Transaction Documents and
the transactions contemplated thereby. The Company further acknowledges that the
Investor is not acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by the Investor or any of
its respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Investor's purchase of the Shares. The Company further represents to the
Investor that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
j. No Undisclosed Events, Liabilities, Developments or Circumstances.
No material, adverse event, liability, development or circumstance has occurred
or exists, or is contemplated to occur, with respect to the Company or its
Subsidiaries or their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.
k. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Shares.
l. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Shares under the 1933 Act or cause this offering of Shares to be integrated
with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of the Principal Market, nor will the Company or any
of its Subsidiaries take any action or steps that would require registration of
the Shares under the 1933 Act or cause the offering of the Shares to be
integrated with other offerings.
m. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with
their employees are good. No executive officer (as defined in Rule 501(f) of the
1933 Act) has notified the Company that such officer intends to leave the
Company's employ or otherwise terminate such officer's employment with the
Company.
n. Intellectual Property Rights. The Company and its Subsidiaries own
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their
13
<PAGE>
<PAGE>
respective businesses as now conducted. None of the Company's trademarks, trade
names, service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government authorizations,
trade secrets or other intellectual property rights necessary to conduct its
business as now or as proposed to be conducted have expired or terminated, or
are expected to expire or terminate within two years from the date of this
Agreement. The Company and its Subsidiaries do not have any knowledge of any
infringement by the Company or its Subsidiaries of trademark, trade name rights,
patents, patent rights, copyrights, inventions, licenses, service names, service
marks, service mark registrations, trade secret or other similar rights of
others, or of any such development of similar or identical trade secrets or
technical information by others and, there is no claim, action or proceeding
being made or brought against, or to the Company's knowledge, being threatened
against, the Company or its Subsidiaries regarding trademark, trade name,
patents, patent rights, invention, copyright, license, service names, service
marks, service mark registrations, trade secret or other infringement; and the
Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing. The Company and its Subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of all of their intellectual properties.
o. Intentionally Omitted.
p. Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(p) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or any of its
Subsidiaries. Any real property and facilities held under lease by the Company
or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
q. Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
r. Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate United States
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
14
<PAGE>
<PAGE>
s. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. Intentionally Omitted.
u. Tax Status. The Company and each of its Subsidiaries has made or
filed all United States federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.
v. Certain Transactions. Except as set forth in the SEC Documents
filed at least ten days prior to the date hereof and except for arm's length
transactions pursuant to which the Company makes payments in the ordinary course
of business upon terms no less favorable than the Company could obtain from
third parties and other than the grant of stock options disclosed on Schedule
3(c), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
w. Dilutive Effect. The Company understands and acknowledges that the
number of Shares issuable upon purchases pursuant to this Agreement will
increase in certain circumstances. The Company further acknowledges that,
subject to such limitations as are expressly set forth in the Transaction
Documents, its obligation to issue Shares upon purchases pursuant to this
Agreement is absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.
15
<PAGE>
<PAGE>
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Blue Sky. The Company shall, on or before each of the Closing
Dates, take such action as the Company shall reasonably determine is necessary
to qualify the Securities for, or obtain exemption for the Securities for, sale
to the Investor at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Investor on or prior
to the Closing Date. The Company shall make all filings and reports relating the
offer and sale of the Securities required under the applicable securities or
"Blue Sky" laws of the states of the United States following each of the Closing
Dates.
c. Reporting Status. Until the earlier of (i) the date which is one
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto), or (ii) the date on which (A) the Investors shall have sold all the
Conversion Shares and (B) none of the Notes is outstanding (the "REGISTRATION
PERIOD"), the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale
of the Shares for general corporate and working capital purposes.
e. Financial Information. The Company agrees to send the following to
each Investor during the Registration Period: (i) within two (2) days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its
Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any
registration statements or amendments (other than on Form S-8) filed pursuant to
the 1933 Act; (ii) on the same day as the release thereof, facsimile copies of
all press releases issued by the Company or any of its Subsidiaries and (iii)
copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders.
f. Reservation of Shares. The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, no
less than 150% of the number of shares of Common Stock needed to provide for the
issuance of the Shares. In the event that, notwithstanding the foregoing, the
Company determines that it does not have a sufficient number of authorized
shares of Common Stock to reserve and keep available for issuance as described
in this Section 4(f), the Company shall use its best efforts to increase the
number of authorized shares of Common Stock by seeking stockholder approval for
the authorization of such additional shares.
16
<PAGE>
<PAGE>
g. Listing. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the Common Stock's authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall promptly provide to each
Investor copies of any notices it receives from the Principal Market regarding
the continued eligibility of the Common Stock for listing on such automated
quotation system or securities exchange. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(g).
h. Information Statement. The Company shall provide each stockholder
entitled to vote at the next meeting of stockholders of the Company, which shall
be not later than 60 days after the date hereof (the "STOCKHOLDER ACTION
DEADLINE"), an information statement, which has been previously reviewed by the
Investor and a counsel of their choice, notifying such stockholders of the
proposed action of the controlling stockholders to approve the Company's
issuance of all of the Shares as described in this Agreement, that satisfies the
stockholder approval requirements of the Principal Market or otherwise obtain
shareholder approval that satisfies such requirements. On or before June 1,
1998, the Company shall deliver to the Investor copies of proxy agreements, in a
form reasonably acceptable to the Investor, executed by William O. Winsauer,
John S. Winsauer and Adrian Katz pursuant to which such persons agree to vote in
favor of the matters described in this Section 4(h).
i. Transactions With Affiliates. The Company shall not, and shall
cause each of its Subsidiaries not to, enter into, amend, modify or supplement,
or permit any Subsidiary to enter into, amend, modify or supplement, any
agreement, transaction, commitment or arrangement with any of its or any
Subsidiary's officers, directors, person who were officers or directors at any
time during the previous two years, stockholders who beneficially own 5% or more
of the Common Stock, or affiliates or with any individual related by blood,
marriage or adoption to any such individual or with any entity in which any such
entity or individual owns a 5% or more beneficial interest (each a "RELATED
PARTY"), except for (a) customary employment arrangements and benefit programs
on reasonable terms, (b) any agreement, transaction, commitment or arrangement
on an arms-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, or (c) any
agreement, transaction, commitment or arrangement which is approved by a
majority of the disinterested directors of the Company. For purposes hereof, any
director who is also an officer of the Company or any Subsidiary of the Company
shall not be a disinterested director with respect to any such agreement,
transaction, commitment or arrangement. "AFFILIATE" for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity, (ii)
has 5% or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) shares common control with that person or entity.
"CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.
17
<PAGE>
<PAGE>
j. Filing of Form 8-K/10-K. On or before the date which is three
business days after the initial Closing Date, the Company shall file (i) a Form
8-K or (ii) an amendment to the Company's Form 10-K for the year ended December
31, 1997 with the SEC describing the terms of the transaction contemplated by
the Transaction Documents in the form required by the 1934 Act.
k. Corporate Existence. The Company will take all steps reasonably
necessary to preserve and continue the corporate existence of the Company.
l. Restrictions on Short Sales. During the period beginning on the
date immediately following the Investor's receipt of a Preliminary Put Notice
and ending on the date of the Investor's delivery of the last Purchase Notice
associated with such Preliminary Put Notice, the Investor agrees that it will
not enter into any "short sale" (as such term is defined in Rule 3b-3 of the
1934 Act) of Common Stock as hedging transactions with respect to its purchase
of Shares under this Agreement; provided, however, that the restrictions on
short sales set forth above shall not apply (i) to any sales made on the date
that the Investor delivers a Purchase Notice or (ii) if the Company fails to
deliver a Put Notice within 30 days after its delivery of such Preliminary Put
Notice.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer agent,
and any subsequent transfer agent, to issue certificates, registered in the name
of the Investor or its respective nominee(s), for the Shares in such amounts as
specified from time to time by the Investor to the Company upon delivery of a
Purchase Notice (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Shares under the 1933 Act, all such certificates shall bear
the restrictive legend specified in Section 2(g) of this Agreement. The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof (in the case of the Shares, prior to
registration of the Shares under the 1933 Act) will be given by the Company to
its transfer agent and that the Shares shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section 5 shall
affect in any way the Investor's obligations and agreements set forth in Section
2(g) to comply with all applicable prospectus delivery requirements, if any,
upon resale of the Shares. If the Investor provides the Company with an opinion
of counsel, in generally acceptable form, that registration of a resale by such
Investor of any of such Shares is not required under the 1933 Act, the Company
shall permit the transfer, and, in the case of the Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by the Investor and without any restrictive legends.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Investor by vitiating the intent and purpose of
the transaction contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Investor shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
18
<PAGE>
<PAGE>
6. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL.
The obligation hereunder of the Company to issue and sell the Shares to
the Investor is further subject to the satisfaction, at or before each Closing,
of each of the following conditions set forth below. These conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion.
a. The Investor shall have executed each of this Agreement and the
Registration Rights Agreement and delivered the same to the Company.
b. The Investor shall have delivered to the Company the Purchase
Price for the Shares being purchased by the Investor at the Closing
by check or wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.
c. The representations and warranties of the Investor shall be true
and correct as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties
that speak as of a specific date), and the Investor shall have
performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Investor at or prior to the such
Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions
contemplated by this Agreement.
7. CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE.
The obligation of the Investor hereunder to purchase and pay for Shares
is subject to the satisfaction, at or before each Closing, of each of the
following conditions set forth below. These conditions are for the Investor's
sole benefit and may be waived by the Investor at any time in its sole
discretion.
a. The Company shall have executed each of the Transaction Documents,
and delivered the same to the Investor.
b. The Common Stock shall be authorized for quotation on the
Principal Market, trading in the Common Stock shall not have been
suspended by the Principal Market or the SEC, at any time beginning
on the date hereof and through and including the Initial Closing
Date.
c. The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Initial Closing
Date as though made at that time (except for (i) representations and
warranties that speak as of a specific date and (ii) with respect to
the representations made in Sections 4(g),
19
<PAGE>
<PAGE>
(h) and (j) hereof, events which occur on or after the date of this
Agreement and are disclosed in SEC filings made by the Company at
least ten Business Days prior to such Closing) and the Company shall
have performed, satisfied and complied with the covenants, agreements
and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing
Date. The Investor shall have received a certificate, executed by the
Chief Executive Officer or Chief Operating Officer of the Company,
dated as of the respective Closing Date, to the foregoing effect and
as to such other matters as may be reasonably requested by such
Investor including, without limitation, an update as of such Closing
Date regarding the representation contained in Section 3(c) above.
d. Such Investor shall have received the opinion of the Company's
counsel dated as of such Closing Date, in the form of Exhibit C
attached hereto.
e. The Company shall have executed and delivered to the Investor the
certificates representing the Shares (in such denominations as such
Investor shall request) for the Shares being purchased by the
Investor at such Closing.
f. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form
reasonably acceptable to the Investor (the "RESOLUTIONS").
g. At the first Closing to occur in each Purchase Period, to the
extent permitted and authorized by applicable accounting standards,
the Investor shall have received a letter of the type, in the form
and with the substance of the letter described in Section 3(t) of the
Registration Rights Agreement from the Company's auditors.
h. The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
i. The Company shall have delivered to the Investor a certificate
evidencing the incorporation and good standing of the Company and
each Subsidiary in such corporation's state of incorporation issued
by the Secretary of State of such state of incorporation as of a date
within 10 days of such Closing Date.
j. The Company shall have delivered to such Investor a certified copy
of its Articles of Incorporation as certified by the Secretary of
State of the State of Texas within 10 days of such Closing Date.
k. The Company shall have delivered to such Investor a secretary's
certificate, dated as such Closing Date, as to (i) the Resolutions
described in Section 7(f), (ii) the Articles of Incorporation and
(iii) the Bylaws, each as in effect at such Closing.
20
<PAGE>
<PAGE>
l. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions
contemplated by this Agreement.
m. The Registration Statement shall be effective at the time of each
Closing and no stop order suspending the effectiveness of the
Registration Statement shall have been instituted or shall be
pending.
n. At the time of each Closing, the Registration Statement (including
information or documents incorporated by reference therein) and any
amendments or supplements thereto shall not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
o. There shall have been no filing of a petition in bankruptcy,
either voluntarily or involuntarily with respect to the Company and
there shall not have been commenced any proceedings under any
bankruptcy or insolvency laws, or any laws relating to the relief of
debtors, readjustment of indebtedness or reorganization of debtors,
and there shall have been no calling of a meeting of creditors of the
Company or appointment of a committee of creditors or liquidating
agents or offering of a composition or extension to creditors by,
for, with or without the consent or acquiescence of the Company.
p. The stockholders of the Company shall have approved the issuance
of the Shares in accordance with Section 4(h).
q. The conditions to such Closing set forth in Section 1(f) shall
have been satisfied on or before such Closing Date.
r. The Company shall have delivered to the Investor a letter from the
Transfer Agent certifying the number of shares of Common Stock and
Preferred Stock outstanding as of a date within 3 days of such
Closing Date.
s. The Company shall have delivered to such Investor such other
documents relating to the transactions contemplated by this Agreement
as such Investor or its counsel may reasonably request.
8. Termination.
a. Optional Termination. This Agreement may be terminated at any time
by the mutual written consent of the Company and the Investor. The
representations, warranties and covenants contained in or incorporated into this
Agreement, insofar as applicable to the transactions consummated hereunder prior
to such termination, shall survive its termination for the period of any
applicable statute of limitations.
21
<PAGE>
<PAGE>
b. Automatic Termination . This Agreement shall automatically
terminate without any further action of either party hereto upon the earlier of
(a) when the Investor has invested an aggregate of $20,000,000 in the Common
Stock of the Company pursuant to this Agreement, apart from additional amounts
which may be invested pursuant to Section 1(d); provided that the
representations, warranties and covenants contained in this Agreement insofar as
applicable to the transactions consummated hereunder prior to such termination,
shall survive the termination of this Agreement for the period of any applicable
statute of limitations, (b) on the date which is two years after the Effective
Date or (c) on the date which is twenty-seven months from the date hereof.
All representations, warranties and covenants shall survive the
termination of this Agreement.
9. INDEMNIFICATION.
In consideration of the Investor's execution and delivery of the this
Agreement and the Registration Rights Agreement and acquiring the Shares
hereunder and in addition to all of the Company's other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless the Investor and all of their stockholders, officers, directors,
employees and direct or indirect investors and any of the foregoing person's
agents or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "INDEMNITEES") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim brought
or made against such Indemnitee by a third party and arising out of or resulting
from the execution, delivery, performance or enforcement of the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, (d) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Shares or (e)
the status of such Investor or holder of the Shares as an investor in the
Company, except, in the case of clauses (c), (d) and (e) above, to the extent
that such liability is caused solely by an Indemnitee's or the respective
Investor's breach of its obligations under the Transaction Documents. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
22
<PAGE>
<PAGE>
10. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York without regard to the
principles of conflict of laws. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting the City of
New York, borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
b. Fees and Expenses. (i) Within one Business Days of the date that
the Registration Statement is declared effective by the SEC, the Company shall
deliver to the Investor either (A) an amount equal to $500,000 by wire transfer
of immediately available funds or (B) stock certificates representing a number
of shares of Common Stock having an aggregate Purchase Price (as of the date the
Registration Statement is declared effective) of $500,000 (in either case, the
"COMMITMENT FEE"). The Company shall notify the Investor of the Company's
election to make the payments described in the immediately preceding sentence in
cash or in shares of Common Stock by delivering written notice to the Investor
at least three Business Days prior to the date that such payment is due. If the
Registration Statement is not declared effective by the SEC on or before the
date which is 90 days after the date hereof, then, in lieu of the payments
referred to in the immediately preceding sentence, the Company shall pay to the
Investor on or before the date which is the 2nd Business Day after such 90th day
an amount equal to $500,000 by wire transfer of immediately available funds. If
the Company fails to pay the Commitment Fee when due, then the Company shall pay
to the Investor, on the first Business Day following the date such payment was
due (in addition to and not in lieu of any remedy the Investor may have in law
or in equity) an amount equal to 2% of the Commitment Fee, in cash or by
certified check or wire transfer, plus compounded annual interest of 24% on such
Commitment Fee during the period, beginning on the Business Day after the
Commitment fee was due, during which such amount, or any portion, is
outstanding. In the event that the Company elects to pay the Commitment Fee in
shares of Common Stock, then to the extent possible the Company shall deliver
such shares through DTC.
(ii) As a further inducement to the Investor to enter into this
Agreement, the Company agrees to reimburse the Investor or its designees or
clients, as applicable, for reasonable expenses relating to the negotiation and
execution of this Agreement and any closings hereunder up to $35,000 in the
aggregate. Such amounts to be paid promptly upon submission of an invoice by the
Investor to the Company.
23
<PAGE>
<PAGE>
(iii) Except as otherwise set forth in this Section 10(b), Section 9
and Section 1(c), each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. Any attorneys' fees and expenses incurred by
either the Company or by any Investor in connection with the preparation,
negotiation, execution and delivery of any amendments to this Agreement or
relating to the enforcement of the rights of any party, after the occurrence of
any breach of the terms of this Agreement by another party or any default by
another party in respect of the transactions contemplated hereunder, shall be
paid on demand by the party which breached the Agreement and/or defaulted, as
the case may be. The Company shall pay all stamp and other taxes and duties
levied in connection with the issuance of any Shares issued pursuant hereto.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the Investor, and no provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.
f. Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); (iii) one (1) day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
24
<PAGE>
<PAGE>
If to the Company:
Autobond Acceptance Corporation
301 Congress Avenue
9th Floor
Austin, Texas 78701
Telephone: (512) 435-7000
Facsimile: (512) 472-1548
Attention: Adrian Katz
With a copy to:
Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 326-3939
Facsimile: (212) 755-7306
Attention: Glenn S. Arden, Esq.
If to the Transfer Agent:
American Stock Transfer & Trust Co
40 Wall Street
New York, New York 10005
Telephone: (718) 921-8380
Facsimile: (718) 236-4588
Attention: Barry Rosenthal
If to the Investor:
Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520
New York, New York 10019
Telephone: 212-698-0588
Facsimile: 212-698-0505
Attention: E. Kurt Kim
With a copy to:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: 312-902-5289
Facsimile: 312-902-1061
Attention: Robert J. Brantman, Esq.
25
<PAGE>
<PAGE>
Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes. The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Investor, including by merger or consolidation. The Investor may
assign some or all of its rights hereunder to affiliates or associates of the
Investor, without the consent of the Company, and to others, with the consent of
the Company; provided, however, that any such assignment shall not release the
Investor from its obligations hereunder unless such obligations are assumed by
such assignee and the Company has consented to such assignment and assumption.
Notwithstanding anything to the contrary contained in the Transaction Documents,
the Investor shall be entitled to pledge the Shares in connection with a bona
fide margin account.
h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section 9(l),
the representations and warranties of the Company and the Investor contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
10, and the indemnification provisions set forth in Section 9, shall survive
each of the Closings. Each Investor shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
j. Publicity. The Company and the Investor shall have the right to
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of the Investor, to make
any press release or other public disclosure with respect to such transactions
as is required by applicable law and regulations (although the Investor shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
k. Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Placement Agent. The Company acknowledges that it has engaged
Dresner Investments as placement agent in connection with the sale of the
Shares, which placement agent may have formally or informally engaged other
agents on its behalf. The Company shall be responsible for the payment of any
placement agent's fees or broker's commissions relating to or arising out of the
purchase of the Shares by the Investor. The Company shall pay, and hold the
Investor harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out-of-pocket expenses) arising in connection
with any such claim.
26
<PAGE>
<PAGE>
m. No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
n. Remedies. The Investor and each holder of the Shares shall have
all rights and remedies set forth in this Agreement and the Registration Rights
Agreement and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law. Any person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a payment
or payments to the Investor hereunder or the Registration Rights Agreement or
the Investor enforce or exercise their rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded, repaid
or otherwise restored to the Company, a trustee, receiver or any other Person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
* * * * * *
27
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Common Stock
Investment Agreement to be duly executed as of the date and year first above
written.
COMPANY: INVESTOR:
AUTOBOND ACCEPTANCE PROMETHEAN INVESTMENT GROUP, L.L.C.
CORPORATION
By: By:
------------------------------- -------------------------------
Name: Name: E. Kurt Kim
Its: Its: Duly Authorized
28
