<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER 000-21673
---------
AUTOBOND ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
TEXAS 75-2487218
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 CONGRESS AVENUE, AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
</TABLE>
(512) 435-7000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _____
As of November 13, 1998, there were 6,531,311 shares of the registrant's Common
Stock, no par value, outstanding.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . 3
Item 1. Financial Statements. . . . . . . . . . . . . . . . 3
Three Months Ended . . . . . . . . . . . . . . . . . . . . . 4
Nine Months Ended. . . . . . . . . . . . . . . . . . . . . . 4
INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . 6
FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . 32
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities and Use of Proceeds. . . . . . 33
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . 34
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 34
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . 34
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 35
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 37
EXHIBIT 10.40. . . . . . . . . . . . . . . . . . . . . . . . 38
EXHIBIT 10.41. . . . . . . . . . . . . . . . . . . . . . . . 39
EXHIBIT 10.42. . . . . . . . . . . . . . . . . . . . . . . . 40
EXHIBIT 27.1 . . . . . . . . . . . . . . . . . . . . . . . . 41
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<TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- ----------------
<S> <C> <C>
ASSETS
- - ------------------------------------------------------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 159,293 $ 7,804,822
Restricted funds . . . . . . . . . . . . . . . . . . . . . . 6,904,264 153
Finance contracts held for sale, net . . . . . . . . . . . . 1,366,114 5,783,445
Collateral acquired, net . . . . . . . . . . . . . . . . . . 150,908 22,339
Retained interest in securitizations . . . . . . . . . . . . 32,016,649 17,000,966
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . 605,847 828,751
Due from affiliates. . . . . . . . . . . . . . . . . . . . . 176,963 471,722
Property, Plant, and Equipment, net. . . . . . . . . . . . . 1,148,559 1,179,344
Deferred income taxes. . . . . . . . . . . . . . . . . . . . - 47,754
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 681,851 772,130
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 43,210,448 $ 33,911,426
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------
Liabilities:
Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . $ 9,841,043 $ 14,249,233
Revolving Credit Facilities. . . . . . . . . . . . . . . . . 7,639,201 -
Accounts payable and accrued liabilities . . . . . . . . . . 3,386,685 938,810
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . 2,936,883 1,799,474
Payable to affiliates. . . . . . . . . . . . . . . . . . . . 554,233 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 3,504,249 -
Total liabilities. . . . . . . . . . . . . . . . . . . . . . $ 27,862,294 $ 16,987,517
-------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;. $ - $ 10,856,000
1,125,000 shares of 15% Series A cumulative preferred
stock, $10 liquidation preference, issued and outstanding,
at September 30, 1998
Common stock, no par value; 25,000,000 shares authorized,. . 1,000 1,000
6,531,311 shares issued and outstanding at December 31,
1997 and September 30, 1998
Capital in excess of stated capital. . . . . . . . . . . . . 8,781,669 9,475,207
Due from shareholders. . . . . . . . . . . . . . . . . . . . (10,592) (10,592)
Accumulated other comprehensive income . . . . . . . . . . . 1,049,256
Retained earnings (accumulated deficit). . . . . . . . . . . 5,526,821 (2,897,706)
Investment in common stock agreement . . . . . . . . . . . . - (500,000)
Total shareholders' equity . . . . . . . . . . . . . . . . . $ 15,348,154 $ 16,923,909
-------------- ----------------
Total liabilities and shareholders' equity . . . . . . . . . $ 43,210,448 $ 33,911,426
============== ================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Interest income . . . . . . . . . . . . . . . . . . $ 1,313,304 $ 468,726 $ 3,107,402 $ 2,134,508
Gain on sale of finance contracts . . . . . . . . . 4,840,620 3,456,303 13,532,765 10,093,123
Servicing income. . . . . . . . . . . . . . . . . . 225,482 798,368 659,791 2,116,310
Other income (loss) . . . . . . . . . . . . . . . . (9,554) -0- (62,323) (79,715)
Total revenues. . . . . . . . . . . . . . . . . . . $ 6,369,852 $ 4,723,397 $ 17,237,635 $ 14,264,226
-------------------- ---------------- ------------------- --------------
Expenses:
Provision for credit losses . . . . . . . . . . . . $ 125,000 $ -0- $ 125,000 $ 100,000
Interest expense. . . . . . . . . . . . . . . . . . 1,101,829 1,015,794 2,930,592 3,391,600
Salaries and benefits . . . . . . . . . . . . . . . 2,140,420 2,601,865 5,413,045 7,468,197
General and administrative. . . . . . . . . . . . . 1,722,689 1,523,132 4,481,846 4,398,016
Impairment of retained interest in securitizations. -0- 1,637,190 467,926 7,515,015
Other operating expenses. . . . . . . . . . . . . . 483,140 1,044,853 1,265,830 2,573,723
Total expenses. . . . . . . . . . . . . . . . . . . $ 5,573,078 $ 7,822,834 $ 14,684,239 $ 25,446,551
-------------------- ---------------- ------------------- --------------
Income (loss) before income taxes . . . . . . . . . $ 796,774 ($3,099,437) $ 2,553,396 ($11,182,325)
Provision (benefit) for income taxes. . . . . . . . 284,960 ( 1,047,961) 895,685 ( 3,775,923)
-------------------- ---------------- ------------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . . $ 511,814 ($2,051,476) $ 1,657,711 ($7,406,402)
Weighted average number of common shares basic. . . 6,512,500 6,531,311 6,512,500 6,531,311
Weighted average number of common shares diluted. . 6,543,320 6,531,311 6,538,032 6,531,311
Net income available to common shareholders . . . . $ 511,814 ($2,473,351) $ 1,657,711 ($8,424,527)
==================== ================ =================== ==============
Earnings/(Loss)per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . $ 0.08 ($0.38) $ 0.25 ($1.29)
==================== ================ =================== ==============
Diluted . . . . . . . . . . . . . . . . . . . . . . $ 0.08 ($0.38) $ 0.25 ($1.29)
==================== ================ =================== ==============
Other comprehensive income, net of tax:
Unrealized gain(loss)on retained interest in
securitizations . . . . . . . . . . . . . . . . . . $ 306,342 ($1,416,628) $ 1,265,971 ($1,049,256)
Other comprehensive income (loss) . . . . . . . . . $ 306,342 ($1,416,628) $ 1,265,971 ($1,049,256)
Comprehensive income (loss) . . . . . . . . . . . . $ 818,156 ($3,468,104) $ 2,923,682 ($8,455,658)
==================== ================ =================== ==============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
SHARES AMOUNT
<S> <C> <C>
Preferred stock:
Beginning balance. . . . . . . . . . . . . . . . . . . - $ -
Issuance of preferred stock in public offering . . . . 1,125,000 10,856,000
Ending balance . . . . . . . . . . . . . . . . . . . . 1,125,000 10,856,000
Common stock:
Beginning balance. . . . . . . . . . . . . . . . . . . 6,531,311 1,000
Ending balance . . . . . . . . . . . . . . . . . . . . 6,531,311 1,000
Capital in excess of stated capital
Beginning balance. . . . . . . . . . . . . . . . . . . 8,781,669
Issuance cost of preferred stock. . . . . . . . . . . (1,224,593)
Issuance of common stock warrants. . . . . . . . . . . 1,918,131
Ending balance . . . . . . . . . . . . . . . . . . . 9,475,207
Due from shareholders:
Beginning balance . . . . . . . . . . . . . . . . . . (10,592)
Ending balance . . . . . . . . . . . . . . . . . . . (10,592)
Accumulated other comprehensive income, net of tax:
Beginning balance . . . . . . . . . . . . . . . . . . 1,049,256
Realized loss on retained interest in securitizations (1,049,256)
Ending balance . . . . . . . . . . . . . . . . . . . . -
Accumulated Deficit
Beginning balance . . . . . . . . . . . . . . . . . . 5,526,821
Dividends . . . . . . . . . . . . . . . . . . . . . . (1,018,125)
Net loss . . . . . . . . . . . . . . . . . . . . . . (7,406,402)
Ending balance . . . . . . . . . . . . . . . . . . . (2,897,706)
Investment in common stock agreement
Beginning balance . . . . . . . . . . . . . . . . . . -
Investment in common stock agreement . . . . . . . . . (500,000)
Ending balance . . . . . . . . . . . . . . . . . . . (500,000)
Total shareholders' equity . . . . . . . . . . . . . $16,923,909
============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
------------------- -------------
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OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,657,711 ($7,406,402)
Adjustments to Reconcile Net Income to Net Cash
Amortization of finance contract acquisition discount and insurance. (58,849) (126,215)
Amortization of debt issuance costs and discount . . . . . . . . . . 246,058 887,357
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . 125,000 100,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 197,203 350,684
Impairment of trust and interest -only strip receivables . . . . . . 467,926 7,515,015
Gain on sale of finance contracts. . . . . . . . . . . . . . . . . . (13,532,765) (10,093,123)
Changes in Assets and Liabilities
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . (370,285) (3,552,003)
Restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . (3,183,334) 6,904,111
Finance contracts held for sale. . . . . . . . . . . . . . . . . . . 12,641,330 5,702,007
Retained interest in securitizations . . . . . . . . . . . . . . . . (3,514,274) 6,451,412
Due from affiliates. . . . . . . . . . . . . . . . . . . . . . . . . 274,977 (294,759)
Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . (5,023,154) (471,748)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . 1,596,687 (2,447,875)
Payable to affiliates. . . . . . . . . . . . . . . . . . . . . . . . (75,146) (554,233)
CASH (USED) PROVIDED BY OPERATIONS. . . . . . . . . . . . . . . . . ($8,550,915) $ 2,964,228
------------------- -------------
INVESTING ACTIVITIES
Proceeds from disposal of collateral . . . . . . . . . . . . . . . . (274,445) 128,569
CASH (USED) PROVIDED BY INVESTING ACTIVITIES . . . . . . . . . . . ($274,445) $ 128,569
------------------- -------------
FINANCING ACTIVITIES
Net proceeds (payments) on revolving credit facilities . . . . . . . 4,240,208 (7,639,201)
Payments for debt issue costs. . . . . . . . . . . . . . . . . . . . - (1,110,261)
Proceeds from notes payable. . . . . . . . . . . . . . . . . . . . . - 10,650,000
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . 105,255 (6,241,810)
Increase(decrease) in bank overdraft . . . . . . . . . . . . . . . . 445,137 (1,137,409)
Proceeds from public offering of preferred stock, net. . . . . . . . - 9,631,407
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . - (1,018,125)
Proceeds from issuance of common stock warrants . . . . . . . . . 87,000 1,918,131
Payment for common stock aggreement . . . . . . . . . . . . . . . . . - (500,000)
CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . $ 4,877,600 $ 4,552,732
------------------- -------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . ($3,947,760) $ 7,645,529
Cash and cash equivalents at beginning of period . . . . . . . . 4,121,342 159,293
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . $ 173,582 $ 7,804,822
=================== =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements of AutoBond Acceptance Corporation
("the Company") included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and Securities and Exchange Commission (the "SEC")
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to regulations. In the opinion of management, the financial
statements reflect all adjustments (consisting only of a normal and recurring
nature) which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Results for interim periods
are not necessarily indicative of the results for a full year. For further
information, refer to the audited financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31, 1997, as
amended (SEC File Number 000-21673). Certain data from the prior year has been
reclassified to conform to 1998 presentation.
2. 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 potential dilution of
incremental shares 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 or 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 unless such issuance was
anti-dilutive.
3. Finance Contracts Held for Sale
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<CAPTION>
The following amounts are included in finance contracts held for sale as of:
December 31, 1997 September 30, 1998
------------------- --------------------
(Unaudited)
<S> <C> <C>
Unpaid principal balance . . . $ 1,946,135 $ 6,462,015
Contract acquisition discounts (129,899) (544,508)
Allowance for credit losses. . (450,122) (134,062)
$ 1,366,114 $ 5,783,445
=================== ====================
</TABLE>
4. Retained Interest In Securitizations
The Company's retained interests in securitizations represent the present
value of expected future cash flows to the Company from sales of finance
contracts. The amount of these retained interests may be increased by
additional sales or the revaluation due to changed valuation assumptions. The
amount of these retained interests of finance contracts may decrease due to the
Company's receipt of cash flows from their investment. Retained interests in
securitizations will also decrease in the case of impairments caused by a
revaluation of the future cash flows.
The Company utilizes a financial model to project the cash flows from a
pool of finance contracts. This model projects cash flows for contractual
parties including investors, trustees and servicers, as well as the Company's
retained interests. As is the case with most financial models, its
effectiveness is primarily driven by the performance over time of key financial
model assumptions, including: default rates; delinquency rates; prepayment
rates; discount rates; initial, ongoing and minimum cash reserve
<PAGE>
requirements; the interest rate earned on cash reserves; recovery amounts for
repossessions; repossession recovery lags; insurance claims recovery amounts,
insurance recovery lags; and on-going servicing/trustee fees. Periodically, the
Company's financial models and related assumptions have been updated to reflect
the subtleties of the actual performance characteristics of the finance
contracts. All valuations are conducted on a disaggregated basis. The discount
rates applied for retained interests ranged from 15% to 17%. The non-vector
equivalent of annualized default rates typically ranged from 10% to 12%. The
default rate assumptions are now estimated based on the historical static pool
results. Repossession recovery ratios, with deficiency insurance proceeds
reflected, typically ranged from 80% to 90%.
The Company's term securitizations have involved the placement of excess
spread backed-notes, sometimes referred to as "B Pieces" with institutional
investors. All assumptions used to sized and sell these "B Pieces" were
identical to the initial gain-on-sale assumptions the Company applied with
respect to retained interests.
There were two primary causes of the impairment charges to retained
interest in securitizations during the nine months ended September 30, 1998. The
Company has been engaged in litigation with Progressive Northern Insurance
Company ("Progressive") regarding the interpretation of default insurance
coverage the Company acquired to enhance recoveries. During the earlier stages
of the dispute Progressive continued to pay claims. However, in April 1998
Progressive stopped paying claims. The immediate impact of the loss of cash
flow from Progressive was the necessity to draw funds from the applicable trust
cash reserves. Specifically, the reserves were reduced by approximately $9.2
million through September 30, 1998. The Company is the ultimate beneficiary of
the cash reserves, and such reserves will need to be replenished before cash
flows may resume to the other certificate holders and ultimately to the Company.
The depletion and expected delay in receiving any ultimate cash flows reduced
the value of the retained interests in the second and third quarters. Even
though the Company and its legal counsel are optimistic that the Company will
prevail in its litigation, at this time, Progressive has not resumed payment of
claims. Additional impairment may occur if Progressive continues to not pay
claims or if the Company does not prevail in its litigation.
The second additional factor was the transfer of servicing functions to the
Company from a third party service provider, Loan Servicing Enterprise ("LSE").
In March 1998, the Company commenced litigation against LSE, pertaining to
breaches of its servicing obligations. As the Company assumed all servicing it
accelerated the rate of charge-offs as compared with prior periods. Accelerated
charge-offs result in any available cash flow going to the senior investors that
otherwise would go to subordinate investors or to the benefit of the Company.
In attempting to resolve certain of these issues with Moody's Investors Service
("Moody's"), the agency rating the senior securities, the Company committed to
Moody's in May 1998 that it would not release monies to the "B Piece" investors
until all charge-offs have taken place. The delay of payments to the
subordinated investors causes accretion of the principal amount of their high
interest-rate B Pieces and a corresponding impairment of the Company's retained
interest. Given the accelerated charge-offs and the Company's decision in May
1998 to commit to Moody's to withhold monies from the B Pieces there was a
direct impact on the valuation of the retained interests during the first nine
months of 1998. A total of eight securitizations were impacted by this action.
<PAGE>
The following table presents the valuation and impairment of the Company's
retained interest in securitizations from December 31, 1997, by quarter:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Impairment through
December 31, 1997 March 31, 1998 June 30, 1998 September 30, 1998 September 30, 1998
------------------ --------------- -------------- -------------------- -------------------------
Valuations of . . . . $ 32,016,649 $ 35,643,756 $ 33,043,626 $ 17,000,966(**) N/A
retained interest
in securitizations(*)
Impairment. . . . . . N/A $ 288,022 $ 5,589,802 $ 1,637,191 $ 7,515,015
------------------ --------------- -------------- -------------------- -------------------------
<FN>
*Assets are continuously acquired and sold and therefore the retained interest in securitizations can
demonstrate increases while realizing impairments
**The reduction of the Company's retained interest in securitizations at September 30, 1998 versus the
prior periods is primarily as a result of increased monetization through the Dynex warehouse facility.
</TABLE>
Retained interests also decreased during the nine months ended September
30, 1998 because of higher cash advance rates from the Dynex Warehouse as
described below.
See Note 8 below for a discussion of further contingencies with respect to
the Company's interests in securitizations.
5. Revolving Credit Facilities
On June 10, 1998, the Company and Dynex Capital, Inc., ("Dynex") entered
into an arrangement whereby the Company obtained a commitment from Dynex to
purchase all currently warehoused and future automobile finance contract
acquisitions through at least May 31, 1999 (the "Warehouse Financing"). The
terms of the Warehouse Financing were modified on June 30, October 20, and
October 28, 1998. Under the prior terms of the Warehouse Financing, the Company
transferred finance contracts to AutoBond Master Funding Corporations V ("Master
Funding V"), a qualified unconsolidated special purpose subsidiary, and Dynex
provided warehouse credit facilities in the amount equal to 104% of the unpaid
principal balance of the finance contracts (the "Advance Rate"), the proceeds of
such facilities are received by the Company. Under the modified terms of the
Warehouse Financing, the Advance Rate was reduced from 104% to 88% for an
interim period (the "Interim Period") ending on the earlier of (a) December 31,
1998 and (b) the settlement date of a securitization by Dynex of any finance
contracts originated by the Company. At the end of the Interim Period, the
Advance Rate will revert to 104% and Dynex will advance to the Company an
additional amount equal to 16% of the unpaid principal balance of finance
contracts financed by Dynex during the Interim Period, less any amounts that
otherwise would have been paid as principal on the Notes (as defined below)
during such period. Advances under the Warehouse Financing are limited to $25
million per month after June 1998 until the commitment termination date. Under
the modified terms of the Warehouse Financing, the commitment terminates on July
31, 1999 (provided that 90 days' prior written notice from Dynex is given), or
if such notice is not given, July 31, 2000. At the Company's option the
commitment termination date can be extended an additional four months to
November 30, 1999 (provided that 90 days' prior written notice from Dynex is
given), or if such notice is not given, November 30, 2000. Advances under the
Warehouse Financing are evidenced by Class A and Class B Notes (collectively,
the "Notes") issued by Master Funding V to Dynex. The Class A Notes are issued
in a principal amount equal to 94.0% of the unpaid principal balance of the
finance contracts (88.0% for advances funded during the Interim Period) and bear
interest at a rate equal to 190 basis points over the corporate bond equivalent
yield on the three-year Treasury note on the closing date for each such advance
(equal to an average of 7.38% as of September 30, 1998); provided however, that
during the Interim Period, the interest rate on the Company's Class A Notes will
equal One-Month LIBOR plus 1.50%. The Class B Notes are issued in a principal
amount equal to 10.0% of the unpaid principal balance of the finance contracts
(0.0% for advances funded during the Interim Period) and bear interest at a rate
equal to 16% per annum. The Company retains a subordinated interest in the
pooled finance contracts. Transfers of finance contracts to the special purpose
entities have been recognized as sales under SFAS No. 125. At September 30,
1998, advances under the Dynex Warehouse financing totaled $100.2 million.
<PAGE>
At September 30, 1998, 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% (10.00% at September 30, 1998). During 1998, the Sentry
Facility was amended to allow the Company, at its election, to transfer finance
contracts into qualified unconsolidated special purpose subsidiaries. The
Sentry Facility contains certain conditions and imposes certain requirements,
including, among other things, minimum net worth and cash and cash equivalent
balances in the reserve accounts. Under the Sentry Facility, the Company
incurred interest expense of $189,985 for the nine months ended September 30,
1998. The Sentry Facility was amended in May 1998 to add additional
representations, covenants, a general release of Sentry, the guarantee of
William O. Winsauer, and the right of Sentry to refuse future advances at its
discretion.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the "Daiwa
Facility") with Daiwa Finance Corporation ("Daiwa") effective as of February 1,
1997. Advances under the Daiwa Facility matured as of March 31, 1998. The
proceeds from the borrowings under the Daiwa Facility were used to acquire
finance contracts and to make deposits to a reserve account. The Daiwa Facility
was collateralized by the finance contracts acquired with the outstanding
advances. Interest was payable at the lesser of (x) 30 day LIBOR plus 1.15% or
(y) 11% per annum. The Company paid a non-utilization fee of .25% per annum on
the unused amount of the line of credit. Pursuant to the Daiwa Facility, the
Company paid a $243,750 commitment fee. The debt issuance cost was amortized as
interest expense on a straight line basis through March 1998. The Daiwa Facility
contained certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations including, among
other things, delinquency and repossession triggers. These notes were repaid on
July 1, 1998 through the Warehouse Financing with Dynex.
On December 31, 1997, the Company entered into a warehouse/securitization
arrangement with Credit Suisse First Boston Mortgage Capital L.L.C. ("CSFB"),
whereby $12.5 million of finance contracts were sold to a qualifying
unconsolidated special purpose subsidiary, AutoBond Master Funding Corporation
II. These finance contracts secured variable funding notes, in the initial
amount of $11.3 million, which were repaid on June 30, 1998 through the
Warehouse Financing with Dynex.
On March 31, 1998, the Company entered into a warehouse/securitization
arrangement with Infinity Investors Limited ("Infinity"), whereby $7.2 million
of finance contracts were sold to a qualifying unconsolidated special purpose
subsidiary, AutoBond Master Funding Corporation IV. These finance contracts
collateralized variable funding notes bearing interest at 10% per annum through
May 31, 1998 and thereafter at 17% per annum. In connection with the transaction
with Infinity, the Company issued a warrant to purchase up to 100,000 shares of
Common Stock, at an exercise price of $8.73 per share. These notes were repaid
on June 30, 1998 through the Warehouse Financing with Dynex.
<PAGE>
6. Notes Payable
<TABLE>
<CAPTION>
The following amounts are included in notes payable as of:
December 31, September 30,
1997 1998
------------- ---------------
(Unaudited)
<S> <C> <C>
Non-recourse notes payable, collateralized by Class B Certificates $ 7,783,219 $ 4,960,611
Subordinated notes payable . . . . . . . . . . . . . . . . . . . . - 7,500,000
Convertible notes payable. . . . . . . . . . . . . . . . . . . . . 2,000,000 3,000,000
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . . 57,824 27,969
$ 9,841,043 $ 15,488,580
------------- ---------------
</TABLE>
Pursuant to 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. The convertible notes, collateralized by the interest-only
strip receivables from the Company's first four securitizations, are convertible
into shares of common stock of the Company upon the earlier to occur of (x) an
event of default on the convertible notes and (y) June 30, 1998, through the
close of business on June 30, 2000, subject to prior redemption. The Company
paid off the convertible notes 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. The holders purchased $5,800,000 of subordinated asset-backed
securities. The total value assigned to these warrants was approximately
$154,000 which is included as an adjustment of the gain (loss) on sale of the
related finance contracts.
In January 1998, the Company privately placed with BankBoston Investments,
Inc. ("BankBoston") $7,500,000 in aggregate principal amount of its 15% senior
subordinated convertible notes (the "Subordinated Notes"). Interest on the
Subordinated Notes is payable quarterly until maturity on February 1, 2001. The
Subordinated Notes are convertible at the option of the holder for up to 368,462
shares of common stock of the Company, at a conversion price of $3.30 per share,
subject to adjustment under standard anti-dilution provisions. In the event of a
change of control transaction, the holder of the Subordinated Notes may require
the Company to repurchase the Subordinated Notes at 100% of the principal amount
plus accrued interest. The Subordinated Notes are redeemable at the option of
the Company on or after July 1, 1999 at redemption prices starting at 105% of
the principal amount, with such premium reducing to par on and after November 1,
2000, plus accrued interest. The Subordinated Notes were issued pursuant to an
Indenture, dated as of January 30, 1998 (the "Indenture") between the Company
and BankBoston, N.A., as agent. The Indenture contains certain restrictive
covenants including (i) a consolidated leveraged ratio not to exceed 2 to 1
(excluding non-recourse warehouse debt and securitization debt), (ii)
limitations on restricted payments such as dividends (but excluding, so long as
no event of default has occurred under the Indenture, dividends or distributions
on the preferred stock of the Company), (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 of $12 million (plus
proceeds from equity offerings), a minimum ratio of earnings to interest of 1.5
to 1, and a maximum cumulative repossession ratio of 27%. Events of default
under the Indenture include failure to pay, breach of covenants, cross-defaults
in excess of $1 million or material breach of representations or covenants under
the purchase agreement with BankBoston. The Company capitalized debt issuance
costs of $594,678, and recorded a discount of $1,462,837 on the debt
representing the value of the warrants issued. The debt issuance cost and
discount is being amortized as interest expense on the interest method through
February 2001.
<PAGE>
Due principally to the impairment of the Company's interest in
securitizations, the Company was in breach, as of September 30, 1998, of the
minimum net worth and the minimum ratio of earnings to interest covenants
contained in the Indenture. On November 13, 1998, the Company received a
one-time waiver of such covenants from BankBoston, N.A.
On June 10, 1998, the Company sold to Dynex at par $3 million of the
Company's 12% Convertible Senior Notes due 2003 (the "Senior Notes"). Interest
on the Senior Notes is payable quarterly in arrears, with the principal amount
due on June 9, 2003. The Senior Notes may be converted at the option of Dynex on
or before May 31, 1999 into shares of the Company's common stock at a conversion
price of $6.00 per share. Demand and "piggyback" registration rights with
respect to the underlying shares of common stock were granted.
7. Stockholders' Equity
Preferred Stock
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 the public
was $10 per share, with net proceeds to the Company of approximately
$10,125,000. 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.
Preferred Stock dividends of $596,250 and $421,875 were paid on June 30, 1998
and September 30, 1998, respectively.
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 Company's 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.
Warrants
In connection with the issuance of preferred stock, the Company sold to
Tejas Securities Group, Inc. ("Tejas"), for $100, a warrant (the "Tejas
Warrant") to purchase up to 100,000 shares of the Company's common stock at an
exercise price equal to $7.75 per share. The Tejas Warrant is exercisable for a
period of four years commencing February 17, 1999. The Tejas Warrant may not be
sold, transferred, pledged or hypothecated for a period of one year from
February 17, 1998, except to the officers or partners of Tejas and dealers
participating in the offering and their respective partners and officers. The
Tejas Warrant includes a net exercise provision permitting the holder, upon
consent of the Company, to pay the exercise price by cancellation of a number of
shares with a fair market value equal to the exercise price of such Tejas
Warrant. The value of the warrant was considered additional issuance cost of the
preferred stock resulting in no net adjustment to capital in excess of par.
In June 1997, the Company issued $2,000,000 in aggregate principal amount
of its 18% senior Secured Promissory Notes (which have been redeemed in full)
and Common Stock Purchase Warrants, dated June 30, 1997 (the "June 1997
Warrants"), to Infinity Investors Limited. The June 1997 Warrants entitle the
holders of such Warrants, upon exercise thereof, to purchase from the Company
200,000 shares of its
<PAGE>
common stock at $4.225 per share. The exercise price per share may be adjusted
over time pursuant to standard antidilution provisions.
In connection with the issuance of the Company's Subordinated Notes in
January 1998, the Company issued to BankBoston a warrant (the "Subordinated Note
Warrant"). The Subordinated Note Warrant entities the holder, upon exercise of
the Warrant, to purchase from the Company that number of shares of the Company's
common stock, up to 368,462, which were available for conversion at the maturity
of the Subordinated Notes on February 1, 2001. The Subordinated Note Warrant
contains customary anti-dilution provisions, as well as certain demand and
"piggyback" registration rights. In addition, if certain major corporate events
(such as a change in control or major stock offering) do not occur prior to
February 1, 2001, then the holder will have the right to put the Warrant to the
Company at the difference between the current market price and the warrant
exercise price. The Company has the option to redeem the Subordinated Note
Warrant under certain circumstances. The Subordinated Note Warrant expires on
January 31, 2005.
In connection with the placement of the Subordinated Notes and the
Subordinated Note Warrant, the Company, William O. Winsauer and John S.
Winsauer, as principals (the "Principals") entered into a Shareholders Agreement
with BankBoston pursuant to which the Principals granted to BankBoston certain
"tag-along rights" in connection with sales of common stock by the Principals.
Also, the Company paid a placement fee of 5% of the principal amount of the
Subordinated Notes to Dresner Investment Services, Inc. and issued to the
placement agent a warrant (the "Dresner Warrant") to purchase 65,313 shares of
common stock of the Company, at an exercise price of $6.30 per share.
The Company's remaining outstanding warrants are (a) a warrant (expiring
January 12, 2000) held by Stephen Bischoff exercisable for 7,500 shares of
common stock of the Company at a price of $4.00 per share (the "Bischoff
Warrant"), (b) a warrant (expiring August 30, 2002) held by Preston Paine
exercisable for 30,000 shares of common stock of the Company at a price of
$4.225 per share (the "Paine Warrant"), and (c) a warrant (expiring March 31,
2002) held by Infinity Investors Limited exercisable for 100,000 shares of
common stock of the Company at a price of $8.73 per share (the "Infinity
Warrant").
Common Stock Investment Agreement
On May 20, 1998, the Company and Promethean Investment Group, L.L.C.
("Promethean") entered into a common stock investment agreement (the "Investment
Agreement") and related registration rights agreement whereby Promethean 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 Promethean's option) of
the Company's common stock. The Company must deliver a preliminary notice of its
intention to require Promethean to purchase its 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 its 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 Promethean under the Investment 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 Promethean during the
preceding twenty-five business days preceding delivery of such final notice.
Following receipt of a final notice, Promethean's purchase obligation will equal
the lowest of: (i) the amount indicated in such final notice, (ii) $5,000,000
and (iii) 20% of the aggregate of the daily trading dollar volume on the twenty
consecutive business days following delivery of the put notice. Promethean may,
in its sole discretion, increase the amount purchasable in the preceding
sentence by 125%. Promethean must conclude all required purchases of common
shares within twenty-five business days of receipt of the 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. Promethean's obligation to
purchase shares under the Investment 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 Investment Agreement total
$20,000,000, (b) which is two years after the effective date of the registration
statement relating to the common stock covered by the Investment Agreement, or
(c) which is twenty-seven months from the date of the Investment Agreement. In
consideration of Promethean's obligations under the Investment Agreement, the
Company paid to Promethean on August 19, 1998, an amount equal to $500,000 in
cash which was recorded as an investment in a common stock agreement as a
separate component of stockholders' equity.
<PAGE>
8. Commitments and Contingencies
The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the securitization trusts, which
generally duplicate the substance of the representations and warranties made by
the dealers in connection with the Company's purchase of the finance contracts.
In the event of a breach by the Company of any representation or warranty, the
Company is obligated to repurchase the finance contracts from the securitization
trusts at a price equal to the remaining principal plus accrued interest. The
Company repurchased finance contracts totaling $619,520 from a securitization
trust during 1997. Of the total amount of these repurchased 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.
As a result of the attempt by Progressive Northern Insurance Company
("Progressive") (the provider of credit default insurance for the Company's
1997-B and 1997-C securitizations) to cancel its obligations and its refusal to
honor claims after March 1998, the Company has suffered a variety of damages,
including impairment of its retained interest in securitizations. The Company is
vigorously contesting the legitimacy of Progressive's actions through
litigation. Although a favorable outcome cannot be assured, success in the
litigation could restore at least some of the value of the Company's interests
in such securitizations. Conversely, if the court were to uphold Progressive's
position, further impairment of the Company's interests could occur, resulting
in an adverse effect on the Company's results of operations.
In connection with the 1997-B and 1997-C securitization, $5.8 million in
Class B Notes are exchangeable (at a rate of 117.5% of the principal amount of
Class B Notes exchanged) for the Company's 17% Convertible Notes, solely upon
the occurrence of a delinquency ratio trigger relating to the securitized pools.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto and the other financial data included
herein. The financial information set forth below has been rounded in order to
simplify its presentation. However, the ratios and percentages set forth below
are calculated using the detailed financial information contained in the
Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. Results for interim periods are not necessarily
indicative of the results for a full year. For further information, refer to the
audited consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1997 (SEC File Number
000-21673).
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 servicing and collection function for finance
contracts using its own servicing and collections department. The Company also
acquires finance contracts from third parties other than dealers, for which the
Company re-underwrites and collects such finance contracts in accordance with
the Company's standard guidelines. The Company sells 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
with five pricing tiers 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 sub-prime finance contracts by
an independent finance company under current market conditions is a capital and
labor intensive enterprise. Capital is needed to fund the acquisition of finance
contracts and to effectively securitize them so that additional capital is made
available for acquisition activity. While a portion of the Company's capital has
been obtained with investment grade ratings at relatively low interest rates,
the remainder is difficult to obtain and requires the Company to pay high
coupons, fees and other issuance expenses, with a negative impact on earnings.
The underwriting and servicing of a growing sub-prime finance contract portfolio
requires a higher level of experienced personnel than that required for a
portfolio of higher credit-quality consumer loans. Accordingly, the Company's
growth in finance contract volume since inception has corresponded with a
significant increase in expenses related to building the infrastructure
necessary for effective underwriting and servicing. Although the Company's
assumption of all servicing functions in late 1997 has increased 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.
<PAGE>
REVENUES
The Company's primary sources of revenues consist of three components:
interest income, gain on sale of finance contracts and servicing income.
Interest Income. Interest income consists of the sum of two primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on retained interests in
securitizations. 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.
Gain on Sale of Finance Contracts.
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
between the interests sold and interests retained 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 retained interests in securitizations are carried at estimated fair
value with unrealized gains (losses) recorded in stockholders' equity as part of
accumulated other comprehensive income. The fair value of the retained
interests in securitizations is determined by discounting expected 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 Company's retained interests are subordinated to
other trust securities, consequently cash flows are paid by the securitization
trustee to the investor security holders until such time as all accrued interest
together with principal have been paid in full. Subsequently, all remaining cash
flows are paid to the Company.
An impairment review of the retained interest in securitizations is
performed quarterly by calculating the net present value of the expected future
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 approximately 15%. To the extent
that the Company deems the asset to be permanently impaired, the Company
transfers the unrealized loss in accumulated other comprehensive income to a
realized loss with a charge against earnings. The Company recorded a charge
against earnings of $7,515,015 during the nine months ended September 30, 1998
as a result of the impairment review. See also Notes 4 and 8 to interim
financial statements regarding the impairment of retained interests. The
Company's cost basis in finance contracts sold has varied from approximately
91.91% to 103% of the value of the principal balance of such 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. The gain recognized on the sale
of finance contracts 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
interest income prior to securitization) necessarily results in less available
cash flow from the securitization.
<PAGE>
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:
<TABLE>
<CAPTION>
Finance Contracts(1) Senior Investor Certificates
-------------------- ----------------------------
Principal Weighted Balance
Amount Average September 30, Gross
Securitization Securitized Rate 1998 Ratings(2) Rate Spread(3)
- - ----------------------------- ------------ --------- -------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A. . . . . . . . . $ 26,261,009 18.9% $ 6,019,329 Ba1 7.2% 11.7%
Trust 1996-A. . . . . . . . . 16,563,366 19.7% 5,416,372 Ba1 7.2% 12.5%
Trust 1996-B. . . . . . . . . 17,832,885 19.7% 6,671,800 Ba1 7.7% 12.0%
Trust 1996-C. . . . . . . . . 22,296,719 19.7% 10,436,867 Ba1 7.5% 12.2%
Trust 1996-D. . . . . . . . . 25,000,000 19.5% 12,446,374 Ba1 7.4% 12.1%
Trust 1997-A (4). . . . . . . 28,037,167 20.8% 13,862,448 Ba1 7.8% 13.0%
Trust 1997-B. . . . . . . . . 34,725,196 19.9% 22,936,843 B2 7.7% 12.2%
Trust 1997-C. . . . . . . . . 34,430,079 20.0% 24,455,075 B2 7.6% 12.4%
AutoBond Master Funding
Corporation V Trust Dynex (4) 100,310,063 20.0% 90,323,369 - 7.4%(5) 12.6%
Total . . . . . . . . . . . . $305,456,484 $ 192,568,477
============ ==============
<FN>
1 Data refers to finance contracts at time of securitization.
2 Indicates ratings by Moody's Investors Service, Inc as of September 30, 1998.
3 Difference between weighted average rate of finance contracts securitized and senior certificate
rate.
4 Includes $26 million of finance contracts from securitizations previously retired.
5 Weighted average of senior investor coupon rates
</TABLE>
The gross spread is utilized to pay subordinated investor securities,
servicing and trustee fees, to build required cash reserves, and to absorb
losses and provide liquidity with respect to delinquencies.
Servicing Income. The Company earns substantially all of its servicing
income on the contracts it services on behalf of securitization trusts.
Servicing 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) fees are passed through as
excess, not recorded as income which are earned whether or not a securitization
has occurred.
<PAGE>
<TABLE>
<CAPTION>
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance contract
acquisition activity:
Nine Months Ended
September 30,
1997 1998
------------------ -----------
<S> <C> <C>
Number of finance contracts acquired . . . . . . 9,091 6,723
Principal balance of finance contracts acquired. $ 103,248,512 $76,330,699
Number of active dealerships (1) . . . . . . . . 839 840
Number of enrolled dealerships . . . . . . . . . 1,804 1,797
<FN>
1 Dealers who have sold at least one finance contract to the Company during the
period.
</TABLE>
RESULTS OF OPERATIONS
Period-to-period comparisons of operating results may not be meaningful,
and results of operations from prior periods may not be indicative of future
results. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
NET INCOME
In the three months ended September 30, 1998, net income (loss) decreased
$2,563,290 to ($2,051,476) from $511,814 for the three months ended September
30, 1997. The decrease in net income was primarily attributable to an increase
in infrastructure costs to support higher anticipated finance contract
acquisition and servicing volumes, impairment charges on retained interest in
securitizations, and actual decreases in acquisition volume. The principal
balance of finance contracts acquired decreased $11.7 million to $23.6 million
for the three months ended September 30, 1998 from $35.3 million for the three
months ended September 30, 1997, due to the delay between the expiration of the
Daiwa warehouse facility on March 31, 1998 and the implementation of the Dynex
Warehouse Financing in June 1998, which had a continuing impact in the third
quarter. This delay forced the Company to slow its acquisition of finance
contracts in the second quarter. Third quarter acquisitions improved over the
second quarter, but nonetheless had not yet returned to earlier levels.
Increased hiring of qualified personnel as they became available during the past
year added to the growth in salary and benefit expenses for the three months
ended September 30, 1998.
Total Revenues
Total revenues decreased $1,646,455 to $4,723,397 for the three months
ended September 30, 1998 from $6,369,852 for the three months ended September
30, 1997 due to a slow down in the Company's finance contract acquisition and
securitization activities. The Company expects contract acquisitions in the
fourth quarter 1998 to exceed that for the third quarter.
Interest Income. Interest income decreased $844,578 to $468,726 for the
three months ended September 30, 1998 from $1,313,304 for the three months ended
September 30, 1997 due to the decline in and timing of finance contract
acquisitions.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $3,456,303 on finance contracts carried at $23.3 million (14.8%) during
the three months ended September 30, 1998. Gain on sale
<PAGE>
amounted to $4,840,620 on finance contracts carried at $29.7 million (16.3%) in
the comparable 1997 period.
Servicing Income. The Company reports servicing income only with respect to
finance contracts that are sold. For the three months ended September 30, 1998,
servicing income was $798,368, consisting of contractual administrative fees and
servicer fees. Servicing income increased from the three months ended September
30, 1997 as a result of the Company's assumption of servicer responsibilities in
December 1997. The ratio of annualized servicing income to the average principal
balance of finance contracts outstanding increased during the three months ended
September 30, 1998. The Company also was subjected to withholding and waiver in
servicing income during the three months ended September 30, 1998. The result
of such withholding and waiver is the deferral and/or subordination to investors
of the Company's ultimate receipt of such fees. See Item 5 of Part II.
Total Expenses
Total expenses of the Company increased $2,249,756 to $7,822,834 for the
three months ended September 30, 1998 from $5,573,078 for the three months ended
September 30, 1997, due primarily to impairment of retained interest in
securitizations of $1,637,190 for the three months ended September 30, 1998, as
well as increases in salaries and benefits and other expenses.
Provision for Credit Losses. No provision for credit losses on finance
contracts held by the Company was necessary for the three months ended September
30, 1998 compared to $125,000 for the three months ended September 30, 1997.
Interest Expense. Interest expense fell to $1,015,794 for three months
ended September 30, 1998 from $1,101,829 for three months ended September 30,
1997 as a result of a lower average balance of finance contracts being financed.
Salaries and Benefits. Salaries and benefits increased $461,445 to
$2,601,865 for the three months ended September 30, 1998 from $2,140,420 for the
three months ended September 30, 1997. This increase was due primarily to an
increase in the number of the Company's employees in anticipation of increased
contract acquisition volume, and the servicing and collection activities on a
growing portfolio of finance contracts. As of December 1, 1997 the Company
completed the transfer of certain servicer functions from LSE to in-house
personnel and equipment. The number of employees of the Company increased by 17
to 215 employees at September 30, 1998, compared to 198 employees at September
30, 1997. The annualized salary and benefit cost per employee averaged $52,037
during the three months ended September 30, 1998, representing an increase of
$6,976 (15.48%) over the prior year period.
General and Administrative Expenses. General and administrative expenses
decreased $199,557 to $1,523,132 for the three months ended September 30, 1998
from $1,722,689 for the three months ended September 30, 1997. Professional
services decreased $37,180 to $343,793 during the current period due to
decreased legal and accounting costs. The Company expects reduced legal costs
for the remainder of 1998 due to decreased capital market activities. Rent
increased $150,020 to $206,391 due to costs associated with the Company's home
office relocation. Depreciation and amortization increased $9,129 to $116,874
reflecting increased investment in equipment. Marketing commissions paid
decreased $269,591 to $96,459 due to lower loan originations. General and
administrative expenses consist principally of office, furniture and equipment
leases, professional fees, non-employee marketing commissions and office
expenses.
Impairment of Retained Interest in Securitizations. The Company
periodically reviews the fair value of the retained interest in securitizations.
The Company recorded a charge against earnings for impairment of these assets of
$1,637,190 for the three months ended September 30, 1998. No impairment was
recorded for the three months ended September 30, 1997. This impairment
reflects the revaluation of expected future cash flows to the Company from
securitizations. This revaluation was precipitated in part by reductions in
cash reserve account balances, the charge-off criteria of delinquencies being no
greater than 60 days for the Dynex funding arrangements thereby forcing the
Company to take such loans out of the securitization, and generally a more
adverse market environment for financial asset valuations. As the Company
assumed all servicing functions, it accelerated the rate of charge-offs as
compared with previous
<PAGE>
periods, thereby allocating additional cash collections and reserve account
balances to paying down the senior investor securities. The effect of this was
to stop payments of interest on subordinated securities issued in the
securitizations, thereby causing acceleration in the principal balances of such
securities, resulting in reduced residual cash flows to the Company. See Notes
4 and 8 to the Notes to Consolidated Financial Statements.
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) increased
$561,713 to $1,044,853 for the three months ended September 30, 1998 from
$483,140 for the three months ended September 30, 1997. The Company incurred VSI
insurance premiums totaling $402,832 for loans placed in warehouse facilities
during the period compared to none in the prior year period.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
NET INCOME
In the nine months ended September 30, 1998, net income (loss) decreased
$9,064,113 to ($7,406,402) from $1,657,711 for the nine months ended September
30, 1997. The decrease in net income was primarily attributable to an actual
decrease in acquisition volume, an increase in infrastructure costs to support
higher anticipated finance contract acquisition and servicing volumes, and
impairment charges on the retained interest in securitizations. The principal
balance of finance contracts acquired decreased $26.9 million to $76.3 million
for the nine months ended September 30, 1998 from $103.2 million for the nine
months ended September 30, 1997, due to the delay between the expiration of the
Daiwa warehouse facility in March 1998 and the implementation of the Dynex
Warehouse Financing in June 1998. This delay forced the Company to slow down
its acquisition of finance contracts in the first nine months of 1998. The
Company added qualified personnel as they became available during the past year,
and this added to the growth in salary and benefit expenses for the nine months
ended September 30, 1998.
Total Revenues
Total revenues decreased $2,973,409 to $14,264,226 for the nine months
ended September 30, 1998 from $17,237,635 for the nine months ended September
30, 1997 due to a slow down in the Company's finance contract acquisition and
securitization activities.
Interest Income. Interest income decreased $972,894 to $2,134,508 for the
nine months ended September 30, 1998 from $3,107,402 for the nine months ended
September 30, 1997 due to the decline in and timing of finance contract
acquisitions. The Company acquired finance contracts totaling $76.3 million
during the nine months ended September 30, 1998 compared to $103.2 million in
the comparable 1997 period.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $10,093,123 on finance contracts carried at $66.2 million (15.2%)
during the nine months ended September 30, 1998. Gain on sale amounted to
$13,532,765 on finance contracts carried at $93.3 million (14.5%) in the
comparable 1997 period. Accordingly, gain on sale of finance contracts fell
$3,439,642 during the nine months ended September 30, 1998 over the comparable
1997 period.
Servicing Income. The Company reports servicing income only with respect to
finance contracts that are sold. For the nine months ended September 30, 1998,
servicing income was $2,116,310, consisting of contractual administrative fees
and servicer fees. Servicing income increased by $1,456,519 from the nine months
ended September 30, 1997 as a result of the Company's assumption of servicer
responsibilities in December 1997. Contractual servicer fees contributed
$886,378 to the increase over the past period. The ratio of servicing income to
the average principal balance of finance contracts outstanding increased from
.9% for the nine months ended September 30, 1997 to 2.2% during the nine months
ended September 30, 1998. The Company also was subjected to withholding or
waiver in servicing income during the nine months ended September 30, 1998. The
result of such withholding or waiver is the deferral and/or subordination to the
Company's ultimate receipt of such fees.
<PAGE>
Total Expenses
Total expenses of the Company increased $10,762,312 to $25,446,551 for the
nine months ended September 30, 1998 from $14,684,239 for the nine months ended
September 30, 1997, due primarily to impairment of the retained interest in
securitizations of $7,515,015 for the nine months ended September 30, 1998.
Provision for Credit Losses. Provision for credit losses on finance
contracts held by the Company declined to $100,000 for the nine months ended
September 30, 1998 compared to $125,000 for the nine months ended September 30,
1997.
Interest Expense. Interest expense rose to $3,391,600 for the nine months
ended September 30, 1998 from $2,930,592 for nine months ended September 30,
1997.
Salaries and Benefits. Salaries and benefits increased $2,055,152 to
$7,468,197 for the nine months ended September 30, 1998 from $5,413,045 for the
nine months ended September 30, 1997. This increase was due primarily to an
increase in the number of the Company's employees necessary to handle the
increased contract acquisition volume and the collection activities on a growing
portfolio of finance contracts. As of December 1, 1997, the Company completed
the transfer of certain servicer functions from a third party to in-house
personnel and equipment. The number of employees of the Company increased by 17
to 215 employees at September 30, 1998, compared to 198 employees at September
30, 1997.
General and Administrative Expenses. General and administrative expenses
decreased $83,830 to $4,398,016 for the nine months ended September 30, 1998
from $4,481,846 for the nine months ended September 30, 1997. Professional
services increased $146,376 to $1,112,099 during the current period due
primarily to increased legal costs during the first quarter of 1998.
Depreciation and amortization increased $153,481 to $350,684 reflecting
increased investment in equipment associated with servicer operations. Rent
increased $235,685 to $407,049 due to costs associated with the Company's home
office relocation. Marketing commissions paid decreased $731,896 to $415,359 due
to lower loan originations. General and administrative expenses consist
principally of office, furniture and equipment leases, professional fees,
non-employee marketing commissions and office expenses.
Impairment of retained interest in securitizations. The Company
periodically reviews the fair value of the retained interest in securitizations.
The Company recorded a charge against earnings for impairment of these assets of
$7,515,015 for the nine months ended September 30, 1998, representing an
increase of $7,047,089 from $467,926 for the nine months ended September 30,
1997. This impairment reflects the revaluation of expected future cash flows to
the Company from securitizations. This revaluation was precipitated, in part,
by the loss of cash flow from the refusal of Progressive Northern Insurance
Company ("Progressive") to pay default insurance claims after early April 1998,
reductions in cash reserve balances, and the charge-off criteria of
delinquencies being no greater than 60 days for the Dynex funding arrangement.
As the Company assumed all servicing functions, it accelerated the rate of
charge-offs as compared with previous periods, thereby allocating additional
cash collections and reserve account balances to paying down the senior investor
securities. The effect of this was to stop payments of interest on subordinated
securities issued in the securitizations, thereby causing higher average
principal balances of such securities, resulting in reduced residual cash flows
to the Company. The disposition of the Progressive litigation could further
affect the valuation of these assets. See Notes 4 and 8 to the Notes to
Consolidated Financial Statements.
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) increased
$1,307,893 to $2,573,723 for the nine months ended September 30, 1998 from
$1,265,830 for the nine months ended September 30, 1997. The Company incurred
VSI insurance premiums totaling $928,115 for loans placed in warehouse
facilities during the period compared to none in the prior year period.
<PAGE>
FINANCIAL CONDITION
Restricted Cash. Restricted cash decreased $6.9 million to $153 at
September 30, 1998 from $6.9 million at December 31, 1997, reflecting the
elimination of cash reserve accounts in the new Warehouse Financing with Dynex.
In accordance with the Company's previous revolving credit facilities, proceeds
advanced by the lender for purchase of finance contracts were held by a trustee
until the Company delivered qualifying collateral to release the funds, normally
in a matter of days. The Company was also required to maintain a cash reserve
with its lenders up to 10% of the proceeds received from the lender for the
origination of the finance contracts. Access to these funds was 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 $4.4 million to $5.8 million at
September 30, 1998, from $1.4 million at December 31, 1997. The number and
principal balance of contracts held for sale are largely dependent upon the
timing and size of the Company's securitizations. The Company securitizes
finance contracts on a regular basis through the Dynex Warehouse Financing.
The cash reserve accounts are part of the proceeds that are expected to
ultimately be paid to the Company as part of its retained interests in
securitization.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
The following table reflects the delinquency experience of the Company's finance contract portfolio including loans
sold and serviced by the Company:
December 31, 1997 September 30, 1998
------------------- --------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts outstanding $ 187,098,957 $ 192,138,429
Delinquent finance contracts (1):
30-59 days past due. . . . . . . . . . . . . . . . 21,484,450 11.48% 19,752,568 10.28%
60-89 days past due. . . . . . . . . . . . . . . . 10,941,753 5.85% 6,260,872 3.26%
90 days past due and over. . . . . . . . . . . . . 8,368,493 4.47% 7,314,090 3.81%
Total. . . . . . . . . . . . . . . . . . . . . . . $40,794,696 21.80% $33,327,530 17.35%
=========== =================== =========== ====================
<FN>
1 Percentage based upon outstanding balance. Delinquency balance outstanding 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.
</TABLE>
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for 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 loan (including finance contracts sold and serviced) 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
<PAGE>
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 of loans (including finance contracts sold and serviced) is somewhat
unseasoned. This effect on the delinquency statistics can be observed in the
comparison of 1998 versus 1997 delinquency percentages since the portfolio is
tangibly more seasoned as of September 30, 1998. Accordingly, delinquency and
charge-off rates in the portfolio may not fully reflect the rates that may apply
when the average holding period for finance contracts in the portfolio is
longer. Increases in the delinquency and/or charge-off rates in the portfolio
would adversely affect the Company's ability to obtain credit or sell its
receivables.
REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS
Because the Company's finance contract portfolio of loans (including
finance contracts sold and serviced) is continuing to grow rapidly, management
does not manage losses on the basis of a percentage of the Company's finance
contract portfolio, because percentages can be favorably affected by large
balances of recently acquired finance contracts. Management monitors actual
dollar levels of delinquencies and charge-offs and analyzes the data on a
"static pool" basis.
The following table provides static pool repossession frequency analysis
(in dollars) of the Company's portfolio performance from inception through
September 30, 1998. In this table, all finance contracts have been segregated by
quarter of acquisition. All repossessions have been segregated by the quarter in
which the repossessed contract was originally acquired by the Company.
Cumulative repossessions equals the ratio of repossessions as a percentage of
finance contracts acquired for each segregated quarter. Annualized repossessions
equals an annual equivalent of the cumulative repossession ratio for each
segregated quarter. This table provides information regarding the Company's
repossession experience over time. For example, recently acquired finance
contracts demonstrate few repossessions because properly underwritten finance
contracts to sub-prime consumers generally do not default during the initial
months of the contract. After approximately one year to 18 months, 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 in part 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.
<PAGE>
<TABLE>
<CAPTION>
Repossession Frequency
----------------------
Year and Principal Balance of Principal Balance
Quarter of Repossessions by of Contracts
Acquisition Quarter Acquired Cumulative(1) Annualized(2) Acquired
- - ----------- --------------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1994
Q3 $ 22,046 21.79% 5.13% $ 101,161
Q4 624,674 25.63% 6.41% 2,437,674
1995
Q1 1,846,860 29.27% 7.80% 6,310,421
Q2 1,788,535 28.89% 8.25% 6,190,596
Q3 2,137,610 29.53% 9.08% 7,239,813
Q4 3,992,815 32.76% 10.92% 12,188,863
1996
Q1 4,982,611 32.23% 11.72% 15,460,823
Q2 6,286,352 33.94% 13.58% 18,520,410
Q3 6,791,324 24.17% 10.74% 28,098,899
Q4 7,030,908 28.77% 14.38% 24,442,500
1997
Q1 9,429,190 27.04% 15.45% 34,875,869
Q2 8,541,419 24.19% 16.13% 35,305,817
Q3 6,223,275 17.97% 14.38% 34,629,616
Q4 5,196,954 11.78% 11.78% 44,120,029
1998
Q1 2,135,060 7.17% 9.56% 29,775,406
Q2 762,811 3.33% 6.66% 22,916,849
Q3 60,927 .26% 1.04% 23,518,889
- - ----------- --------------------- ------------- ------------- ------------------
<FN>
1 For each quarter, cumulative repossession frequency equals the principal balance
of repossessions divided by the principal balance of contracts acquired.
2 Annualized repossession frequency converts cumulative repossession frequency into
an annual equivalent (e.g., for Q4 1997, principal balance of $5,196,954 in
repossessions divided by principal balance of $44,120,029 in contracts acquired,
divided by 4 quarters outstanding times four equals an annual repossession frequency
of 11.78%).
</TABLE>
<PAGE>
NET LOSS PER REPOSSESSION
Upon initiation of the repossession process, it is the Company's intent to
complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. As fewer of
the Company's finance contracts are covered by credit deficiency insurance, the
Company expects its net loss per repossession to increase. The following table
demonstrates the net charge-off per repossessed automobile for its finance
contract portfolio including loans sold and serviced by the Company since
inception.
<TABLE>
<CAPTION>
From August 1, 1994 (Inception) to September 30, 1998:
Loans
Loans with without
Default Default
Insurance Insurance All Loans
------------- ------------ -------------
<S> <C> <C> <C>
Number of finance contracts acquired . . . . . . . . . . . . . 30,098
Number of vehicles repossessed . . . . . . . . . . . . . . . . 5,251 1,351 6,602
Repossessed units disposed of. . . . . . . . . . . . . . . . . 2,846 649 3,495
Repossessed units awaiting disposition (1) . . . . . . . . . . 2,405 702 3,107
Cumulative gross charge-offs . . . . . . . . . . . . . . . . . $ 29,107,509 $ 6,875,872 $ 35,983,381
Costs of repossession (3). . . . . . . . . . . . . . . . . . . 1,307,589 308,715 1,616,304
Proceeds from auction, physical damage insurance and refunds . (16,932,690) (4,245,608) (21,178,298)
------------- ------------ -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,482,408 $ 2,938,979 $ 16,421,387
Deficiency insurance settlement received (2) . . . . . . . . . (8,145,075) 0 (8,145,075)
------------- ------------ -------------
Net charge-offs (2). . . . . . . . . . . . . . . . . . . . . . $ 5,337,333 $ 2,938,979 $ 8,276,312
============= ============ =============
Net charge-offs per unit disposed. . . . . . . . . . . . . . . $ 1,875 $ 4,528 $ 2,368
Net loss as a percentage of cumulative gross charge-offs . . . 46.32% 42.74% 45.64%
Recoveries as a percentage of cumulative gross charge-offs (3) 81.66% 57.26% 77.00%
- - -------------------------------------------------------------- ------------- ------------ -------------
<FN>
1 The vehicles may have been sold at auction; however the Company might not have received all insurance
proceeds as of September
30, 1998.
2 Amounts are based on actual liquidation and repossession proceeds (including insurance proceeds)
received on units for which the
repossession process had been completed as of September 30, 1998.
3 Not including the costs of repossession which are reimbursed by the securitization trusts.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires access to significant sources and amounts of cash to
fund its operations and to acquire and securitize finance contracts. The
Company's primary operating cash requirements include the funding of (i) the
acquisition of finance contracts prior to securitization , (ii) the initial cash
deposits to reserve accounts in connection with the warehousing and
securitization of contracts in order to obtain such sources of financing, (iii)
fees and expenses incurred in connection with the warehousing and securitization
of contracts and (iv) ongoing administrative and other operating expenses. The
Company has traditionally obtained these funds in three ways: (a) loans and
warehouse financing arrangements, pursuant to which acquisition of finance
contracts are funded on a temporary basis; (b) securitizations or sales of
finance contracts, pursuant to which finance contracts are funded on a permanent
basis; and (c) general working capital, which if not obtained from operations,
may be obtained through the issuance of debt or equity. Failure to procure
funding from all or any one of these sources could have a material adverse
effect on the Company.
<PAGE>
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 $1.1 million during the nine months
ended September 30, 1998. The Company used $69.2 million to purchase finance
contracts and $63.9 million was received from sales of finance contracts,
primarily through securitizations during the nine months ended September 30,
1998.
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. Under the
financial structures the Company has used to date in its securitizations,
certain cash flows generated by the finance contracts are retained in a cash
reserve or "spread" account to provide liquidity and credit enhancement. While
the specific terms and mechanics of the cash reserve account can vary depending
on each transaction, the relevant agreement generally provides that the Company
is not entitled to receive certain cash flows unless certain reserve account
balances have been attained and the delinquency or losses related to the
contracts in the pool are below certain predetermined levels. In the event
delinquencies and losses on the contracts exceed such levels, the terms of the
warehouse facility or securitization may require increased cash reserve account
balances to be accumulated for the particular pool or, in certain circumstances,
may require the transfer of the Company's servicing function to another
servicer. The imposition of any of the above-referenced conditions could
materially adversely affect the Company's liquidity and financial condition.
The current cash reserve accounts for the Company's outstanding
securitizations follow:
<TABLE>
<CAPTION>
Senior Investor Cash
Certificate Reserve at
Securitization Amount (1) September 30,1998
- - ----------------------------------------- ----------------- ------------------
<S> <C> <C>
AutoBond Receivables Trust 1995-A . . . . $ 26,261,009 $ 361,160
AutoBond Receivables Trust 1996-A . . . . 16,563,366 324,982
AutoBond Receivables Trust 1996-B . . . . 17,832,885 400,308
AutoBond Receivables Trust 1996-C . . . . 22,296,719 626,212
AutoBond Receivables Trust 1996-D . . . . 25,000,000 746,782
AutoBond Receivables Trust 1997-A . . . . 28,037,167 724,926
AutoBond Receivables Trust 1997-B . . . . 34,725,196 -
AutoBond Receivables Trust 1997-C . . . . 34,430,079 150,445
AutoBond Master Funding Corporation V (2) 94,291,459 -
<FN>
1 Refers only to balances on senior investor certificates upon issuance.
2 No cash reserve account.
</TABLE>
See Note 4 to the Notes to the Consolidated Financial Statements for a
discussion of the retained interest in securitizations.
<PAGE>
Revolving Credit Facilities. The Company historically obtained a
substantial portion of its working capital for the acquisition of finance
contracts through revolving credit facilities. Under a warehouse facility, the
lender generally advances amounts requested by the borrower on a periodic basis,
up to an aggregate maximum credit limit for the facility, for the acquisition
and servicing of finance contracts or other similar assets. Until proceeds from
a securitization transaction are used to pay down outstanding advances, as
principal payments are received on the finance contracts, the principal amount
of the advances may be paid down incrementally or reinvested in additional
finance contracts on a revolving basis.
On June 10, 1998, the Company and Dynex Capital. Inc. ("Dynex"), a Virginia
corporation listed on the NYSE, entered into a financing arrangement whereby:
(i) the Company obtained non-recourse financing for all currently warehoused and
future automobile finance contract acquisitions through at least May 31, 1999
(the "Warehouse Financing"); (ii) the Company sold to Dynex $3 million of the
Company's 12% Convertible Senior Notes due 2003 (the "Senior Notes"); and (iii)
Dynex Holding, Inc. an affiliate of Dynex ("Dynex Holding") received an option
(the "Option"), exercisable for one year, to purchase at a price of $6.00 per
share the common stock of the Company held by the three principal stockholders
of the Company, representing approximately 85% of the currently outstanding
common stock of the Company. The terms on the Warehouse Financing were
subsequently modified as summarized below on October 20, 1998.
Under the prior terms of the Warehouse Financing, Dynex provides warehouse
credit facilities to AutoBond Master Funding Corporation V ("Master Funding V"),
a wholly owned, special purpose subsidiary of the Company organized under Nevada
law, in an amount equal to 104% (the "Advance Rate") of the unpaid principal
balance of finance contracts pledged to Dynex. Under the modified terms of the
Warehouse Financing, the Advance Rate was reduced from 104% to 88% for an
interim period ( the "Interim Period") ending on the earlier of (a) December 31,
1998 and (b) the settlement date of a securitization by Dynex of any finance
contracts originated by the Company. At the end of the Interim Period, the
Advance Rate will revert to 104% and Dynex will advance to the Company an
additional amount equal to 16% of the unpaid principal balance of finance
contracts financed by Dynex during the Interim Period, less any amounts that
otherwise would have been paid as principal on the funding notes (referred to
below) during such period. Advances under the Warehouse Financing are limited
to $10 million in the case of the initial advance, $80 million in the case of
other advances during the month of June 1998, and thereafter $25 million per
month until the commitment termination date. Under the modified terms of the
Warehouse Financing, the commitment will terminate on July 31, 1999 (provided
that 90 days prior written notice from Dynex is given), or if such notice is not
given, July 31, 2000. At the Company's option the commitment termination date
can be extended an additional four months to November 30, 1999 (provided that 90
days written notice from Dynex is given), or if such notice is not given,
November 30, 2000. Should the Company exercise its option, discussed in the
immediately preceding sentence, the expiration of Dynex's Option shall be
extended to match the commitment termination date. Advances under the Warehouse
Financing will be evidenced by Class A and Class B Notes issued by Master
Funding V to Dynex. The Class A Notes are issued in a principal amount equal to
94% of the unpaid principal balance of finance contracts (88% for advances
during the Interim Period) and will bear interest at a rate equal to 190 basis
points over the corporate bond equivalent yield on the three-year treasury note
on the closing date for each such advance (equal to an average of 7.38% as of
September 30, 1998), provided however that during the Interim Period, the
interest rate on the Company's Class A Notes will equal One-Month LIBOR plus
1.50%. The Class B Notes are issued in a principal amount equal to 10% of the
unpaid principal balance of finance contracts (0.0% for advances funded during
the Interim Period) and will bear interest at a rate equal to 16% per annum.
Dynex also will obtain securitization rights with respect to the warehoused
finance contracts.
The Company's primary source of financing for the acquisition of finance
contracts is its Warehouse Financing arrangement with Dynex. The Warehouse
Financing with Dynex funds eligible finance contracts thereby providing the
Company with significant liquidity. Since the Warehouse Financing arrangement
constitutes a securitization under generally accepted accounting principles, the
Warehouse Financing also provides gain on sale treatment for the finance
contracts funded. The Company's ability to continue to fund finance contracts
under the Warehouse Financing is dependent upon its compliance with the terms
thereof, including the maintenance by the Company of certain servicing
standards, as well as Dynex's ability to meet its funding commitments under the
Warehouse Financing. There can be no assurance that such facility will be
extended or that substitute facilities will be available on terms
<PAGE>
acceptable to the Company. The Company's ability to obtain a successor facility
or similar financing will depend on, among other things, the willingness of
financial organizations to participate in funding sub-prime 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 the
Warehouse Financing, and any additional or successor facilities, at rates and
upon terms acceptable to the Company. The Company will service the warehoused
finance contracts for a servicing fee of $15 per month per finance contract. At
September 30, 1998, advances under the Dynex Warehouse Financing totaled $100.2
million.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the "Daiwa
Facility") with Daiwa Finance Corporation ("Daiwa") effective as of February 1,
1997. Advances under the Daiwa Facility matured as of March 31, 1998. The
proceeds from the borrowings under the Daiwa Facility were used to acquire
finance contracts and to make deposits to a reserve account. The Daiwa Facility
was collateralized by the finance contracts acquired with the outstanding
advances. Interest was payable at the lesser of (x) 30 day LIBOR plus 1.15% or
(y) 11% per annum. The Company had no credit availability under the Daiwa
Facility after March 31, 1998 and the total amount outstanding was repaid in
July 1998 through the Dynex Warehouse Financing.
On December 31, 1997, the Company entered into a similar
warehouse/securitization arrangement with Credit Suisse First Boston Mortgage
Capital L.L.C. ("CSFB"), whereby $12.5 million of finance contracts were sold to
a qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation II. These finance contracts secured variable funding notes in the
initial amount of $11.3 million, which were repaid through the Dynex Warehouse
Financing on June 30, 1998.
On March 31, 1998, the Company entered into a warehouse/securitization
arrangement with Infinity Investors Limited ("Infinity"), whereby $7.2 million
of finance contracts were sold to a qualifying unconsolidated special purpose
subsidiary, AutoBond Master Funding Corporation IV. These finance contracts
secured variable funding notes in the initial amount of $6.5 million, increasing
up to $10 million. These variable funding notes bore interest at 10% per annum
through May 31, 1998 and thereafter at 17% per annum. These notes were repaid
through the Dynex Warehouse Financing on June 30, 1998. In connection with the
transaction with Infinity, the Company issued a warrant to purchase up to
100,000 shares of common stock, at an exercise price of $8.73 per share.
Notes Payable. Pursuant to the terms of the Senior Note Agreement between
the Company and Dynex, Dynex purchased at par $3 million in principal amount of
the Company's Senior Notes. Interest on the Senior Notes is payable quarterly
in arrears, with the principal amount due on June 9, 2003. The Senior Notes may
be converted at the option of Dynex on or before May 31, 1999 into shares of the
Company's common stock at a conversion price of $6.00 per share. Demand and
"piggy-back" registration rights with respect to the underlying shares of common
stock were granted.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase 200,000 shares of the
Company's 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. The holders have
purchased $5.8 million of asset-backed securities.
In January 1998, the Company privately placed with BankBoston Investments,
Inc. ("BankBoston") $7,500,000 in aggregate principal amount of its 15% senior
subordinated convertible notes (the "Subordinated Notes"). Interest on the
Subordinated Notes is payable quarterly until maturity on February 1, 2001. The
Subordinated Notes are convertible at the option of the holder for up to 368,462
shares of common stock of the Company, at a conversion price of $3.30 per share,
subject to adjustment under standard anti-dilution provisions. In the event of a
change of control transaction, the holder of the Subordinated Notes may require
the Company to repurchase the Subordinated Notes at 100% of the principal amount
plus accrued interest. The Subordinated Notes are redeemable at the option of
the Company on or after July 1, 1999 at redemption prices starting at 105% of
the principal amount, with such premium reducing to par on and after November 1,
2000, plus accrued interest. The Subordinated Notes were issued pursuant to an
Indenture, dated as of January 30, 1998 (the "Indenture") between the Company
and BankBoston, N.A., as agent. The Indenture contains certain restrictive
covenants including (i) a consolidated leveraged ratio not to exceed 2 to 1
(excluding non-recourse warehouse debt and
<PAGE>
securitization debt), (ii) limitations on restricted payments such as dividends
(excluding, so long as no event of default has occurred under the Indenture,
dividends or distributions on the preferred stock of the Company), (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.
The Company has relied 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
requirements for large cash contributions by the Company into securitizations,
conditions in the securities markets in general, conditions in the asset-backed
securities market and investor demand for sub-prime auto paper. Additionally,
gain on sale of finance contracts represents a significant portion of the
Company's total revenues and, accordingly, net income. If the Company were
unable to sell 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. If
the Company were unable to sell 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.
The continued effectiveness of the current arrangement with Dynex will depend on
the ability to securitize or obtain other funding sources for the warehoused
portfolio.
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 $10,125,000. 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
<PAGE>
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 Company's 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. As of September 30, 1998, Preferred
Stock dividends were current.
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.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
than an entity recognize all derivatives as either assets or liabilities in its
balance sheet and that it measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) is dependent upon the intended use of the derivative and the resulting
designation. SFAS No. 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (2) the earnings effect of the hedged forecast
transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, although earlier application is encouraged. The
Company plans to comply with the
<PAGE>
provisions of SFAS No. 133 upon its initial use of derivative instruments. As
of September 30, 1998, no such instruments were being utilized by the Company.
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.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
containing date-sensitive code could recognize a date ending with the digits
"00" as the year 1900 instead of the year 2000. This could result in a system
failure or in miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal activities.
As a specialty consumer finance company, the Company substantially depends
on its computer systems and proprietary software applications in underwriting,
acquiring, servicing and securitizing finance contracts. As a result of
initiatives undertaken in the development of its proprietary software systems,
all of the Company's systems and software applications have been formatted with
a full, four-digit date code in the database management and cash flow evaluation
software. The efficacy of certain of the Company's systems and software
applications in handling Year 2000 issues has been demonstrated repeatedly in
the system's ability to calculate payments streams accurately on finance
contracts with maturity dates that extend beyond December 31, 1999. Based on
its review of the likely impact of the Year 2000 on its business, the Company
believes that it is working constructively toward making its critical and
operational applications Year 2000 compliant.
Nevertheless, the Company may be exposed to the risk that other service
providers may not be in compliance. While the Company does not foresee that the
Year 2000 will pose significant operational problems, the failure of its
vendors, customers or financial institutions to become Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition
and results of operations. To date, the Company has not formulated any
contingency plans to address such consequences.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is from time to time made
a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating dealer and name the Company
and/or its assignees as subsequent holders of the finance contracts. To date,
none of these actions have resulted in the payment of damages, or any judgments
therefor, by the Company or its assignees, nor have any actions been certified
as eligible for class-action status.
In March 1998, after Progressive Northern Insurance ("Progressive")
purported to cancel the VSI and deficiency balance insurance policies issued in
favor of the Company, the Company sued Progressive, its affiliate United
Financial Casualty Co. and their agent in Texas, Technical Risks, Inc. in the
district court of Harris County, Texas. The action seeks declaratory relief
confirming the Company's interpretation of the policies as well as claims for
damages based upon breach of contract, bad faith and fraud. The Company has
received the defendants' answers, denying the Company's claims, and discovery is
proceeding. Progressive stopped paying claims during the second quarter of 1998.
Also in March 1998, the Company commenced an action in Travis County, Texas,
against Loan Servicing Enterprise ("LSE"), 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 termination of LSE as servicer. The
Company expects the two actions to be consolidated.
The Company's carrier for the credit deficiency insurance obtained through
1996, Interstate Fire & Casualty Co. ("Interstate") determined in late 1996 to
no longer offer such coverage to the auto finance industry, including the
Company. In connection with Interstate's attempt to no longer offer credit
deficiency coverage for contracts originated after December 1996, the Company
commenced an action in the United States District Court for the Western District
of Texas, Austin Division, seeking a declaratory judgment that (a) the Company
was entitled to 180 days' prior notice of cancellation and (b) Interstate was
not entitled to raise premiums on finance contracts for which coverage was
obtained prior to the effectiveness of such cancellation, as well as seeking
damages for Interstate's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. Both suits have been voluntarily dismissed, and
Interstate and the Company have to date acted on the basis of a cancellation
date of May 12, 1997 (i.e., no finance contracts presented after that date will
be eligible for credit deficiency coverage by Interstate, although all existing
contracts for which coverage was obtained will continue to have the benefits of
such coverage), no additional premiums have been demanded or paid, and the
claims-paying process has been streamlined. In particular, in order to speed the
claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate destination for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.
In February 1997 the Company discovered certain breaches of representations
and warranties by certain dealers with respect to finance contracts sold into a
securitization. The Company honored its obligations to the securitization trust
and repurchased finance contracts totaling $619,520 from that trust during the
three months ended March 31, 1997. Of the total amount of these finance
contracts, $190,320 were purchased from one dealer. Although the Company has
requested that this dealer repurchase such contracts, the dealer has refused.
After such dealer's refusal to repurchase, the Company commenced an action in
the 157th Judicial District Court for Harris County, Texas against Charlie
Thomas Ford, Inc. to compel such repurchase. Discovery is proceeding but no
trial date has been set.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 10, 1998, AutoBond Acceptance Corporation (the "Company") and Dynex
Capital, Inc., ("Dynex"), a Virginia corporation listed on the NYSE, entered
into a financing arrangement whereby: (i) the Company obtained non-recourse
financing for all currently warehoused and future automobile finance contract
acquisitions through at least May 31, 1999 (the "Warehouse Financing"); (ii)
the Company sold to Dynex $3 million of the Company's 12% Convertible Senior
Notes due 2003 (the "Senior Notes"); and (iii) Dynex Holding, Inc. an affiliate
of Dynex ("Dynex Holding") received an option (the "Option"), exercisable for
one year, to purchase at a price of $6.00 per share the common stock of the
Company held by the three principal stockholders of the Company, representing
approximately 85% of the currently outstanding common stock of the Company. The
terms of the Warehouse Financing were subsequently modified as summarized below
on June 30, 1998, October 20, 1998 and October 28, 1998.
Under the terms of the Warehouse Financing, Dynex will provide warehouse
credit facilities to AutoBond Master Funding Corporation V ("Master Funding V"),
a wholly-owned, special purpose subsidiary of the Company organized under Nevada
law, in an amount equal to 104% (the "Advance Rate") of the unpaid principal
balance of finance contracts pledged to Dynex. Under the modified terms of the
Warehouse Financing, the Advance Rate was reduced from 104% to 88% for an
interim period (the "Interim Period") ending on the earlier of (a) December 31,
1998 and (b) the settlement date of a securitization by Dynex of any finance
contracts originated by the Company. At the end of the Interim Period, the
Advance Rate will revert to 104% and Dynex will advance to the Company an
additional amount equal to 16% of the unpaid principal balance of finance
contracts financed by Dynex during the Interim Period, less any amounts that
otherwise would have been paid as principal on the Funding Notes (referred to
below) during such period. Advances under the Warehouse Financing are limited
to $10 million in the case of the initial advance, $80 million in the case of
all other advances during the month of June 1998 and thereafter $25 million per
month until the commitment termination date. Under the modified terms the
Warehouse Financing commitment will terminate on July 31, 1999, (provided that
90 days' prior written notice from Dynex is given) or if such notice is not
given, July 31, 2000. At the Company's option the commitment termination date
can be extended an additional four months to November 30, 1999 (provided that 90
days written notice from Dynex is given), or if such notice is not given,
November 30, 2000. Should the Company exercise its option discussed in the
immediately preceding sentence, the expiration of Dynex's Option shall be
extended to match the commitment termination date. Advances under the Warehouse
Financing will be evidenced by Class A and Class B Notes issued by Master
Funding V to Dynex. The Class A Notes will be issued in a principal amount equal
to 94% of the unpaid principal balance of finance contracts (88% during the
Interim Period) and will bear interest at a rate equal to 190 basis paints over
the corporate bond equivalent yield on the three-year Treasury note on the
closing date for each such advance. (equal to an average of 7.38% as of
September 30, 1998), provided however that during the Interim Period, the
interest rate on the Company's Class A Notes will equal One-Month LIBOR plus
1.50%. The Class B Notes are issued in a principal amount equal to 10% of the
unpaid principal balance of finance contracts and bear interest at a fixed rate
equal to 16% per annum. Dynex also obtains securitization rights with respect to
the warehoused finance contracts. The Company will service the warehoused
finance contracts for a servicing fee of $15 per month per finance contract.
Pursuant to the terms of the Senior Note Agreement between the Company and
Dynex, Dynex purchased at par $3 million in principal amount of the Company's
Senior Notes. The Company used the proceeds for working capital. Interest on
the Senior Notes is payable quarterly in arrears, with the principal amount due
on June 9, 2003. The Senior Notes may be converted at the option of Dynex on or
before May 31, 1999 into shares of the Company's common stock at a conversion
price of $6.00 per share. Demand and "piggyback" registration rights with
respect to the underlying shares of common stock were granted.
William 0. Winsauer, Chief Executive Officer and Chairman of the Board of
Directors of the Company (the "Board"), Adrian Katz, Chief Operating Officer,
Chief Financial Officer and Vice Chairman of the Board and John S. Winsauer,
Secretary and a member or the Board (collectively, the "Shareholders"), entered
into a Stock Option Agreement (the "Option Agreement") with Dynex Holding
wherein the Shareholders granted to Dynex Holding the Option to purchase all of
the shares of the Company's common stock owned by the Shareholders,
(approximately 85% of the Company's current outstanding common stock) at a price
of $6.00 per share. The Option may be exercised in whole and not in part at
anytime up to and including July 31, 1999. If the Company elects to exercise its
option to extend the commitment
<PAGE>
termination date, the expiration date of the Option shall be extended to match
the commitment termination date. In the event that Dynex Holding exercises its
Option, the exercise price of the Option will be payable in shares of a newly
issued series of convertible preferred stock of Dynex ("Dynex Preferred"). The
number of Dynex Preferred shares to be issued will be equal to the product of
the number of shares of the Company's common stock subject to the Option and
$6.00, divided by 115% of the average of the closing prices per share of the
common stock of Dynex ("Dynex Common") for the ten consecutive trading days
ending immediately prior to the exercise of the Option. Upon exercise of the
Option, Dynex Holding will deliver to each of the Shareholders 80% of his pro
rata share of the Dynex Preferred shares, with the balance to be held by Dynex
Holding subject to certain terms and conditions contained in the Option
Agreement and in each Shareholder's employment agreement with Dynex. The Dynex
Preferred will pay dividends at 9% per annum and be convertible into shares of
Dynex Common at an Initial conversion rate of one to one.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On June 15, 1998 the Company relocated its corporate headquarters in Austin
to 100 Congress Avenue, Suite 600, Austin, Texas 78701.
In May 1998, Coopers & Lybrand L.L.P. resigned as the Company's independent
auditor. On July 15, 1998, the Company appointed Deloitte & Touche L.L.P. as
its independent auditors for 1998.
On May 19, 1998, Moody's announced that the ratings on the senior
securities issued in the Company's term securitization were reduced to Bal (B2
for the 1997B and 1997C transactions), expressing concerns 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 ("LSE") now completed, the
Company believes that it is servicing in accordance with the documentation; (2)
the transaction documents did not contemplate the allocation of prepaid
insurance claims, a phenomenon brought about by the Company's prevailing upon
Interstate to speed up the payment of claims for the benefit of the trusts in a
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 been directed to omnibus lockboxes in the name
of, and under the control of the former servicer and the transaction trustees
and, the trustee is holding cash that is to be paid to certificate holders upon
reconciliation instructions from LSE.
The Company has engaged counsel to perform the deal-by-deal analysis of the
structural and legal integrity of these transactions and resolve the concerns
raised by Moody's. In the meantime, the Company has been notified by the
trustee on certain of the securitizations that the action of Moody's and the
alleged causes constituted events of servicer termination under such
transactions. Although the trustee has not taken any action to remove the
Company as servicer or to exercise remedies available upon an event of default,
the trustee has withheld servicing fees due to the Company. Since the Company
is of the view that no events of servicing termination have occurred and that
the transactions documents did not intend for servicing compensation to the
Company to be cut off where the cause of an event of default is due to the
actions of Progressive and LSE (the former servicer), the Company is seeking to
resolve those issues to the satisfaction of all parties.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<S> <C>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ----------- ------------------------------------------------------------------------------------------
3.1 * . . . Restated Articles of Incorporation of the Company
3.2 * . . . Amended and restated Bylaws of the Company
4.1 * . . . Specimen Common Stock Certificate
4.2 **. . . Specimen Preferred Stock Certificate
10.5 *. . . Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and
between the Company and AutoBond Funding Corporation II
10.6 *. . . Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31,
1995 between Sentry Financial Corporation and the Company
10.7 *. . . Management Administration and Services Agreement dated as of January 1, 1996 between
the Company and AutoBond, Inc.
10.8 *. . . Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9 *. . . Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the
Company
10.10 * . . Vender's Comprehensive Single Interest Insurance Policy and Endorsements, issued by
Interstate Fire & Casualty Company
10.11 * . . Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12 * . . Employee Stock Option Plan
10.13 * . . Dealer Agreement dated November 9, 1994, between the Company and Charlie Thomas
Ford, Inc.
10.14 * . . Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company,
First Fidelity Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15+. . . Servicing Agreement, dated as of January 29, 1997, between CSC LOGIC/MSA L.P.P.,
doing business as "Loan Servicing Enterprise" and the Company
10.16+. . . Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II,
the Company and Daiwa Finance Corporation
10.17+. . . Security Agreement, dated as of February 1, 1997, by and among AutoBond Funding
Corporation II, the Company and Norwest Bank Minnesota, National Association
10.18+. . . Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.19x. . . Automobile Loan Sale Agreement, dated as of March 26, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.20 **. . Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding
Corporation, the Company and Daiwa Finance Corporation
10.21 **. . Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond
Master Funding Corporation, AutoBond Acceptance Corporation and Norwest Bank
Minnesota, National Association.
10.22 **. . Securities Purchase Agreement, dated as of June 30, 1997, by and among the Company,
Lion Capital Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23 xx. . Credit Agreement, dated as of December 31, 1997, by and among AutoBond Master
Funding Corporation II, the Company and Credit Suisse First Boston Mortgage Capital
L.L.C.
10.24 xx. . Trust Indenture, dated as of December 31, 1997, among AutoBond Master Funding
Corporation II, the Company and Manufacturers and Traders Trust Company
10.25 xx. . Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse
First Boston Mortgage Capital L.L.C. and the Company
10.26 xx. . Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond
Master Funding Corporation II and Manufacturers and Traders Trust Company
10.27 xx. . Indenture and Note, dated January 30, 1998, between the Company and Bank Boston, N.A.
10.28 xx. . Warrant, dated January 30, 1998, issued to BankBoston Investments, Inc.
10.29 xx. . Purchase Agreement, dated January 30, 1998, between the Company and BankBoston
Investments, Inc.
10.30 ++. . Warrant, dated February 2, 1998, issued to Dresner Investments Services, Inc.
10.31 ++. . Warrant Agreement and Warrant, dated February 20, 1998, issued to Tejas Securities
Group, Inc.
10.32 ++. . Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A.
Gonzalez and the Company
10.33 ++. . Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the
Company
10.34xxx. . 1998 Stock Option Plan
10.35xxx. . Third Amendment to the Secured Revolving Credit Agreement dated May 5, 1998 between
Sentry Financial Corporation and the Company
10.36xxx. . Warrant, dated March 31, 1998, issued to Infinity Investors Limited
10.37***. . Credit Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.38***. . Servicing Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.39***. . Trust Indenture, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company and Dynex Capital, Inc.
10.40 . . . Letter Agreement, dated June 30, 1998 by and between the Company and Dynex Capital,
Inc.
10.41 . . . Letter Agreement dated October 20, 1998 by and between the Company and Dynex Capital,
Inc.
10.42 . . . Letter Agreement dated October 28, 1998 by and between the Company, Dynex Holding,
Inc., and Dynex Capital, Inc.
21.1 ** . . Subsidiaries of the Company
21.2 xx . . Additional Subsidiaries of the Company
27.1. . . . Financial Data Schedule
<FN>
* Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-05359).
+ Incorporated by reference to the Company's 1996 annual report on Form 10-K for the year ended
December 31, 1996.
x Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended March
31, 1997.
** Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended June
30, 1997.
++ Incorporated by reference to the Company's 1997 annual report on Form 10-K for the year ended
December 31, 1997.
xx Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-41257).
xxx Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1998.
***Incorporated by reference to the Company's report on Form 8-K filed on June 24, 1998.
</TABLE>
(A) REPORTS OF FORM 8-K
On July 15, 1998, the Company filed a report on Form 8-K addressing the
engagement of Deloitte & Touch LLP as its independent auditors. No other
reports on Form 8-K were filed by the Company during the quarter ended September
30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 13, 1998.
AUTOBOND ACCEPTANCE CORPORATION
BY: /S/ WILLIAM O. WINSAUER
- - --------------------------------------------
WILLIAM O. WINSAUER, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
BY: /S/ ADRIAN KATZ
- - --------------------------------------------
ADRIAN KATZ, VICE CHAIRMAN OF THE BOARD,
CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
EXHIBIT 10.40
[DYNEX CAPITAL, INC. LETTERHEAD]
June 30, 1998
Mr. William O. Winsauer Mr. Adrian Katz
Chairman & CEO Vice Chairman and COO
AutoBond Acceptance Corporation AutoBond Acceptance Corporation
100 Congress Avenue 100 Congress Avenue
Austin, TX 78701 Austin, TX 78701
Mr. John S. Winsauer
Director & Secretary
AutoBond Acceptance Corporation
100 Congress Avenue
Austin, TX 78701
Gentlemen:
Pursuant to our discussions this morning outlined below are the adjusted terms
relating to the warehouse financing agreements between AutoBond Acceptance
Corporation ("AutoBond") and Dynex Capital, Inc. ("Dynex"). The modifications
to the financing terms outlined below shall apply retroactively to all prior
advances.
1. Advance rate on all financed contracts lowered from 105% to 104% of the
principal balance of all contracts financed.
2. Such financing shall be divided between the Class A and Class B Funding
Notes as follows:
Class A 94% of the balance of the contracts financed
Class B 10% of the balance of the contracts financed
3. The Interest rate on the Class A shall be lowered from 200 basis points
over the three year treasury note to 190 basis points over the three year
treasury note.
4. Dynex's funding obligations in any single month from July 1998 through
May 1999 (exclusive of loans at other warehouse lenders) shall be increased from
$20 million to $25 million.
Please acknowledge your agreement to these modified terms by signing below.
Sincerely,
/s/ William H. West
- - ----------------------
William H. West, Jr., CPA
Executive Vice President
AGREED AND ACKNOWLEDGED
/s/ William O. Winsauer /s/ John S. Winsauer /s/ Adrian Katz
- - ------------------------- -------------------- ---------------
William O. Winsauer John S. Winsauer Adrian Katz
<PAGE>
EXHIBIT 10.41
[DYNEX CAPITAL, INC. LETTERHEAD]
October 20, 1998
Mr. Adrian Katz
Vice Chairman and COO
AutoBond Acceptance Corporation
100 Congress Avenue
Austin, TX 78701
Dear Adrian:
Pursuant to our discussions outlined below are adjusted terms relating to the
warehouse financing agreements between AutoBond Acceptance Corporation
("AutoBond") and Dynex Capital, Inc. ("Dynex"). All existing agreements between
AutoBond and Dynex remain in force with the exception of the modifications in
this letter.
1. The advance rate on all financed contracts will be lowered from 104% to
88% of the principal balance of all contracts through a period ending the
earlier of the settlement date of a securitization by Dynex of any of the
AutoBond originated finance contracts or December 31, 1998 (the "Period
Terminate Date"). The advance rate will retroactively revert to 104% at the
Period Termination Date less any amounts that would otherwise have been paid as
principal on the Funding Notes during such time period.
2. The financing costs through the Period Termination Date will be LIBOR
plus 150 basis points (1.5%), consistent with the Dynex/Daiwa Securities
financing rate. The financing costs will revert to the rates in the June 30,
1998 financing modification agreement at the Period Termination Date.
3. The "Commitment Termination Date" as defined and applicable in the June
9, 1998 Credit Agreement shall be modified to mean (a) July 31, 1999, upon 90
days' prior written notice from the Lender, or (b) if such notice is not given,
July 31, 2000, Dynex management has also agreed to request the Dynex board of
directors before the end of October, 1998 to extend the Commitment Termination
Date an additional four months to November 30, 1999 and November 30, 2000.
Please acknowledge your agreement to these modified terms by signing below.
Sincerely,
/s/ Lisa R. Cooke
- - --------------------
Lisa R. Cooke
Vice President
AGREED AND ACKNOWLEDGED
/s/ Adrian Katz
- - -----------------
Adrian Katz
<PAGE>
EXHIBIT 10.42
[AutoBond Acceptance Corporation Letterhead]
October 28 , 1998
Mr. Thomas H. Potts
Dynex Capital, Inc.
10900 Nuckols Road, Third Floor
Glen Allen, VA 23060
Dear Tom:
Pursuant to our discussions, outlined below are adjusted terms relating to the
warehouse financing agreements and stock option agreement between AutoBond
Acceptance Corporation ("AutoBond") and Dynex Capital, Inc. ("Dynex") or Dynex
Holding, Inc. ("DHI"). All existing agreements between AutoBond and Dynex or
DHI remain in force with the exception of the modifications in this letter.
1. The "Expiration Date" as defined in the Stock Option Agreement is hereby
changed to July 31, 1999, such that it corresponds to the "Commitment
Termination Date" as amended in the October 20, 1998 letter modifying the Credit
Agreement.
2. Dynex hereby grants AutoBond the option through July 31, 1999 to change
the "Commitment Termination Date" as defined and applicable in the June 9, 1998
Credit Agreement and as amended in the October 20, 1998 agreement modification
letter. This option provides that AutoBond can change the definition of
"Commitment Termination Date" to mean (a) November 30, 1999, upon 90 days' prior
written notice from the Lender, or (b) if such notice is not given, November 30,
2000.
3. Subject to AutoBond exercising its option described in item 2 above to
extend the "Commitment Termination Date", AutoBond hereby grants DHI an
extension of the "Expiration Date" as defined in the Stock Option Agreement to
correspond to the "Commitment Termination Date."
Please acknowledge your agreement to these modified terms by signing below.
Sincerely,
/s/ Adrian Katz
- - -----------------
Adrian Katz /s/ Adrian Katz
-----------------
Chief Operating Officer Adrian Katz
AutoBond Acceptance Corporation
/s/ John S. Winsauer
-----------------------
John S. Winsauer
/s/ William O. Winsauer
-------------------------
William O. Winsauer
AGREED AND ACKNOWLEDGED
/s/ Thomas H. Potts /s/ Thomas H. Potts
- - ---------------------- ----------------------
Thomas H. Potts, President Thomas H. Potts
Dynex Capital, Inc. Dynex Holding, Inc.
<PAGE>
<TABLE> <S> <C>
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<NAME> AutoBond Acceptance Corporation
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
10,856,000
<OTHER-SE> 6,066,909
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