AUTOBOND ACCEPTANCE CORP, 10-Q, 1999-05-17

AUTOBOND ACCEPTANCE CORP
10-Q, 1999-05-17
PERSONAL CREDIT INSTITUTIONS

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<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 March 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______ to _______

COMMISSION FILE NUMBER 000-21673
---------

AUTOBOND ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>

<S> <C>

TEXAS 75-2487218

(State or other jurisdiction (I.R.S. 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 May 17, 1999, there were 6,531,311 shares of the registrant's Common
Stock, no par value, outstanding.

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<PAGE>

<S> <C>
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . 34
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 34
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 35
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 36
EXHIBIT 27.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
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<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<S> <C> <C>
DECEMBER 31, MARCH 31
1998 1999
-------------- ------------
(UNAUDITED)
ASSETS
- ------------------------------------------------------------

Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 5,170,969 $ 2,233,813
Receivable from Dynex. . . . . . . . . . . . . . . . . . . . 6,573,107 -
Finance contracts held for sale, net . . . . . . . . . . . . 867,070 7,047,660
Collateral acquired, net . . . . . . . . . . . . . . . . . . 70,957 -
Retained interest in securitizations - Trading . . . . . . . 4,586,908 4,035,814
Retained interest in securitizations - Available for Sale. . 9,286,443 8,010,503
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . 729,206 637,558
Due from affiliates. . . . . . . . . . . . . . . . . . . . . 396,015 416,187
Property, plant, and equipment, net. . . . . . . . . . . . . 1,187,421 1,193,081
Deferred income taxes. . . . . . . . . . . . . . . . . . . . - 1,497,101
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,463,046 2,009,485
-------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 30,331,142 $27,081,202
============== ============

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------

Liabilities:
Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . $ 10,166,969 $10,203,252
Non-recourse debt. . . . . . . . . . . . . . . . . . . . . . 3,185,050 2,633,956
Payables and accrued liabilities . . . . . . . . . . . . . . 1,324,951 1,152,293
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 101,800 -
-------------- ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . $ 14,778,770 $13,989,501
-------------- ------------

Commitments and contingencies

Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;. $ 10,856,000 $10,856,000
1,125,000 shares of 15% Series A cumulative preferred
stock, $10 liquidation preference, issued and outstanding,
(Dividends in arrears of $421,875)
Common stock, no par value; 25,000,000 shares authorized;. . 1,000 1,000
6,531,311 shares issued and outstanding
Capital in excess of stated capital. . . . . . . . . . . . . 8,291,481 8,291,481
Due from shareholders. . . . . . . . . . . . . . . . . . . . (10,592) (10,592)
(Accumulated deficit). . . . . . . . . . . . . . . . . . . . (3,057,602) (5,518,273)
Investment in common stock agreement . . . . . . . . . . . . (527,915) (527,915)
-------------- ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . $ 15,552,371 $13,091,701
-------------- ------------

Total liabilities and shareholders' equity . . . . . . . . . $ 30,331,142 $27,081,202
============== ============

<FN>

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

</TABLE>

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<PAGE>
<TABLE>
<CAPTION>

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

THREE MONTHS ENDED MARCH 31,
1998 1999
------------------------------ -------------
<S> <C> <C>

Revenues:
Interest income . . . . . . . . . . . . . . . . . . $ 1,138,498 $ 463,986
Gain on sale of finance contracts . . . . . . . . . 3,867,941 1,539,187
Servicing income. . . . . . . . . . . . . . . . . . 506,593 1,005,774
Other income. . . . . . . . . . . . . . . . . . . . 126,149 775,992
------------------------------ -------------
Total revenues. . . . . . . . . . . . . . . . . . . 5,639,181 3,784,939
------------------------------ -------------
Expenses:
Provision for credit losses . . . . . . . . . . . . 100,000 60,465
Interest expense. . . . . . . . . . . . . . . . . . 1,290,405 713,370
Salaries and benefits . . . . . . . . . . . . . . . 2,397,765 3,149,032
General and administrative. . . . . . . . . . . . . 1,084,264 1,869,323
Impairment of retained interest in securitizations. 288,023 1,051,457
Other operating expenses. . . . . . . . . . . . . . 649,054 1,000,864
------------------------------ -------------
Total expenses. . . . . . . . . . . . . . . . . . . 5,809,511 7,844,511
------------------------------ -------------
Loss before income taxes. . . . . . . . . . . . . . (170,330) (4,059,572)
Benefit from income taxes . . . . . . . . . . . . . (49,192) (1,598,901)
------------------------------ -------------
Net loss. . . . . . . . . . . . . . . . . . . . . . (121,138) (2,460,671)

Preferred stock dividend in arrears . . . . . . . . - (421,875)
------------------------------ -------------

Net loss attributable to common shareholders. . . . $ (121,138) $ (2,882,546)
============================== =============

Weighted average number of common shares:
Basic . . . . . . . . . . . . . . . . . 6,531,311 6,531,311
Diluted . . . . . . . . . . . . . . . . 6,531,311 6,531,311
Loss per common share:
Basic. . . . . . . . . . . . . . . . . . ($0.03) ($0.44)
Diluted. . . . . . . . . . . . . . . . . ($0.03) ($0.44)

Net loss. . . . . . . . . . . . . . . . . . . . . . ($121,138) ($2,882,546)
Other comprehensive income, net of tax:
Unrealized loss on retained interest in
Securitizations . . . . . . . . . . . . (38,381) -
------------------------------ -------------
Comprehensive loss. . . . . . . . . . . ( $159,519) ($2,882,546)
============================== =============

<FN>

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

</TABLE>

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<PAGE>

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31, 1999
--------------

<S> <C> <C>
SHARES AMOUNT
Preferred stock:
Beginning balance . . . . . . . . . . 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 . . . . . . . . . . - 8,291,481
Ending balance. . . . . . . . . . . . - 8,291,481

Due (from) shareholders:
Beginning balance . . . . . . . . . . - (10,592)
Ending balance. . . . . . . . . . . . - (10,592)

Accumulated Deficit:
Beginning balance . . . . . . . . . . - (3,057,602)
Net loss. . . . . . . . . . . . . . . - (2,460,671)
------------
Ending balance. . . . . . . . . . . . - (5,518,273)

Investment in common stock agreement:
Beginning balance . . . . . . . . . . - $ (527,915)
Ending Balance. . . . . . . . . . . . - (527,915)

Total shareholders' equity. . . . . . - $13,091,701
============

<FN>

The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>

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<PAGE>

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,

<S> <C> <C>
1998 1999
------------- ------------
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (121,138) $(2,460,671)
Reconcile net loss to net cash from operating activities:
Amortization of debt issuance costs and discounts
Depreciation and amortization . . . . . . . . . . . . . . . 465,019 272,364
Provision for credit losses . . . . . . . . . . . . . . . . 100,000 60,465
Provision for loss on collateral acquired . . . . . . . . . - 70,957
Accretion of retained interest in securitizations . . . . . (127,980) -
Impairment of retained interest in securitizations. . . . . 288,023 1,051,457
Gain on sale of finance contracts . . . . . . . . . . . . . (3,867,941) (1,539,187)
Deferred income taxes . . . . . . . . . . . . . . . . 49,192 (1,598,901)
Changes in operating assets and liabilities:
Restricted funds. . . . . . . . . . . . . . . . . . . (5,634,807) -
Receivable from Dynex . . . . . . . . . . . . . . . . . . . - 6,573,107
Finance contracts held for sale . . . . . . . . . . . . . . 1,942,222 (4,701,868)
Retained interest in securitizations. . . . . . . . . . . . (3,943,688) 224,484
Due to(from) affiliate. . . . . . . . . . . . . . . . . . . (22,500) (20,172)
Prepaids and other assets . . . . . . . . . . . . . . . . . 311,063 (546,439)
Accounts payable and accrued liabilities . . . . . . . . (1,877,414) (172,658)
Payable to affiliates . . . . . . . . . . . . . . . . 1,897,942 -
------------- ------------
Cash used by operating activities. . . . . . . (10,542,007) (2,787,062)
INVESTING ACTIVITIES:
Proceeds from disposal of collateral acquired . . . . . 13,517 -
Purchases of property, plant and equipment. . . . . . . - (144,522)
------------- ------------
Cash provided (used) by investing activities . 13,517 (144,522)
FINANCING ACTIVITIES:
Net payments on revolving credit facilities . . . . . . . . (2,959,461) -
Payments for debt issuance costs. . . . . . . . . . . . . . (2,263,829) -
Proceeds from notes payable . . . . . . . . . . . . . . . . 7,650,000 -
Payments on notes payable . . . . . . . . . . . . . . . . . (2,253,315) (5,572)
Decrease in bank overdraft. . . . . . . . . . . . . . . . . 231,268 -
Proceeds from public offering of preferred stock, net . . . 9,631,407 -
Dividends paid on preferred stock . . . . . . . . . . . . . - -
Proceeds from issuance of common stock warrants . . . . . . 394,000 -
------------- ------------
Cash provided (used) by financing activities 10,430,070 (5,572)
------------- ------------
Decrease in cash. . . . . . . . . . . . . . . . . . . . . . (98,420) (2,937,156)
Beginning cash balance. . . . . . . . . . . . . . . . . . . 159,293 5,170,969
------------- ------------
ENDING CASH BALANCE . . . . . . . . . . . . . . . . . . . . $ 60,873 $ 2,233,813
============= ============

<FN>

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

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<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 ("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 Annual Report on Form 10-K for the year ended December 31, 1998, (SEC
File Number 000-21673). Certain data from the prior year has been reclassified
to conform to the 1999 presentation.

2. Earnings per Share

Basic earnings per share excludes potential dilution of potential 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 would be anti-dilutive.

3. Finance Contracts Held for Sale

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

December 31, 1998 March 31, 1999
------------------- ----------------
<S> <C> <C>
Unpaid principal balance . . . $ 944,830 $ 7,519,770
Accrued interest . . . . . . . - 82,407
Contract acquisition discounts (64,067) (538,813)
Allowance for credit losses. . (13,693) (15,704)
$ 867,070 $ 7,047,660
=================== ================

</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 securitizations. The amount of these retained interests may
decrease in the case of impairments caused by a revaluation of the future cash
flows. Retained interests in securitizations will also decrease due to the
Company's receipt of cash flows from their investment.

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
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<PAGE>
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 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 actual performance characteristics
of the finance contracts. All valuations are conducted on a disaggregated basis.
Impairment of retained interest in securitizations for the quarter endend March
31, 1999 was $1,051,457.

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 size and sell these "B Pieces" were
identical to the initial gain-on-sale assumptions the Company applied with
respect to retained interests. 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 estimated
based on the historical static pool results. Repossession recovery ratios, with
deficiency insurance proceeds reflected, typically ranged from 80% to 90%.

Two primary causes led to the impairment charges to retained interest in
securitizations. 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 loss of cash flow
from Progressive necessitated drawing funds from the applicable trust cash
reserves to pay senior security holders. 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. The Company has continued to
include the expected cash flows from Progressive in its cash flows models. 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. Should the Company's interpretation be incorrect, the Company would
need to reassess the carrying value of its retained interest in securitizations
under new assumptions and the result of this revaluation could be material.

The second primary 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 resulted in the diversion of any available cash flow to the senior
investors that otherwise would flow 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 been reflected in the cash flows
attributable to the senior investors. 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. The
accelerated charge-offs and the Company's decision in May 1998 to commit to
Moody's to withhold monies from the B Piece Holders, resulted in a direct impact
on the valuation of the retained interests. A total of eight securitizations
were impacted by this action.

The Company has engaged counsel to perform a 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
trustees on certain of the securitizations that the action of Moody's and the
alleged causes constituted events of servicer termination under such
transactions. The trustees have threatened to remove the Company as servicer on
certain transactions, and have withheld administrator fees and expenses of
approximately $ 1.3 million as of March 31, 1999, 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
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<PAGE>
issues to the satisfaction of all parties. 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 "Funding Agreement"). The terms
of the Funding Agreement were modified on June 30, October 20, and October 28,
1998. Under the prior terms of the Funding Agreement, the Company transfered
finance contracts to AutoBond Master Funding Corporation V ("Master Funding V"),
a qualified unconsolidated special purpose subsidiary, and Dynex provided credit
facilities in an 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 Funding Agreement, the
Advance Rate was reduced from 104% to 88% for an interim period (the "Interim
Period") ending December 31, 1998. At the end of the Interim Period, the
Advance Rate reverted to 104% and Dynex was to advance to Master Funding V an
additional amount equal to 16% of the unpaid principal balance of finance
contracts financed by Dynex during the Interim Period. This additional amount
receivable from Dynex totalled $6.5 million at December 31, 1998, and was
collected in January and February 1999. Advances under the Funding Agreement 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. 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 qualified special purpose entity have been recognized as sales
under SFAS No. 125. The Company transferred $12.6 million in finance contracts
during the quarter ended March 31, 1999. At March 31, 1999, advances by Dynex
under the Funding Agreement totaled $ 169.2 million. See Note 8 for the status
of the Dynex Funding Agreement.

6. Notes Payable and Non-Recourse Debt

The following amounts are included in notes payable and non-recourse debt as of:

<S> <C> <C>
December 31, March 31,
1998 1999
(Unaudited)
------------- ------------
Non-recourse notes payble, collateralized by Class B Certificates $ 3,185,050 $ 2,633,956
Convertible Senior Notes. . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes. . . . . . . . . . . . . . . . . . 7,500,000 7,500,000
Other notes payable . . . . . . . . . . . . . . . . . . . . . . . 23,342 17,771
Discount on subordinated notes payable. . . . . . . . . . . . . . (356,373) (314,519)
-------------- ------------
$ 13,352,019 $12,837,208

</TABLE>

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<PAGE>
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. The Company
has made all interest payments due on the Senior Notes and expects to continue
to meet such obligations. Dynex also has purported to accelerate the Senior
Notes. The Company disputes the validity of such acceleration.

In January 1998, the Company privately placed with BancBoston Investments,
Inc. ("BancBoston") $7,500,000 in aggregate principal amount of its 15% senior
subordinated convertible notes (the "Subordinated Notes"). Interest on the
Subordinated Notes is payable quarterly until maturity on February 1, 2001. The
Subordinated Notes are convertible at the option of the holder for up to 368,462
shares of common stock of the Company, at a conversion price of $3.30 per share,
subject to adjustment under standard anti-dilution provisions. The Company also
granted BancBoston a warrant to purchase company stock exercisable to the extent
the debt is not converted (See Note 7). 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
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 EBITA 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 BancBoston. The Company capitalized debt issuance costs of $594,688, and
recorded a discount of $507,763 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. At March 31,
1999, the Company did not meet certain of its financial covenants, which
constitutes an event of default on the Subordinated Notes. The Company has made
all payments due on its Subordinated Notes and expects to continue to meet such
obligations. The Subordinated Notes have not been formally accelerated by
BancBoston; however, if such acceleration were made, BancBoston could declare
such amounts immediately due.

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 $9,631,000.
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
five trading days prior to the redemption date. The Preferred Stock is not
redeemable at the option of the holder and has no stated maturity. The Preferred
Stock dividend was not paid for the first quarter of 1999.

-- 8 --
<PAGE>
Because the Company is not in compliance with the certain of the financial
covenants of its Subordinated Notes, the Company did not pay the quarterly
dividend on its Preferred Stock, otherwise payable on March 31, 1999. 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 two
additional directors to serve on the Company's Board of Directors 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 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 of $394,000 was recorded as additional issuance cost of the Preferred
Stock.

In connection with the issuance of the Company's Subordinated Notes in
January 1998, the Company issued to BancBoston a warrant (the "Subordinated Note
Warrant"). The Subordinated Note Warrant entities the holder, upon the exercise
thereof, 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 holder may either convert the
debt represented by the Subordinated Notes or exercise the Subordinated Note
Warrant but not both. 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 Subordinated Note Warrant to the
Company at the difference between the current market price and the exercise
price of the Subordinated Note Warrant. Based on the market price at March 31,
1999, no amount would be payable at such date. The Company has the option to
redeem the Subordinated Note Warrant under certain circumstances. The
Subordinated Note Warrant expires on January 31, 2005. The Subordinated Note
Warrant was valued at $375,831 which was recorded as a discount on the debt.

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 BancBoston pursuant to which the Principals granted to BancBoston 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 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 warrant (expiring
January 12, 2000) held by an individual exercisable for 7,500 shares of common
stock of the Company at a price of $4.00 per share, 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 , a warrant held by an
individual to purchase 30,000 shares of common stock of the Company at a price
of $4.225, and a warrant held by Infinity Investors Limited to purchase 200,000
shares of common stock of the Company at a price of $4.225.

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
-- 9 --
<PAGE>
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 $527,915 in cash on August 19, 1998, which was treated as an
investment in a common stock agreement.

8. Commitments and Contingencies

On February 8, 1999, the Company, AutoBond Master Funding Corporation V, a
wholly-owned subsidiary of the Company ("Master Funding V"), William O.
Winsauer, the Chairman and Chief Executive Officer of the Company, John S.
Winsauer, a Director and the Secretary of the Company, and Adrian Katz, the
Vice-Chairman, Chief Financial Officer and Chief Operating Officer of the
Company (collectively, the "Plaintiffs") commenced an action in the District
Court of Travis County, Texas (250th Judicial District) against Dynex and James
Dolph (collectively, the "Defendants"). This action is hereinafter referred to
as the "Texas Action". The Company and the other Plaintiffs assert in the Texas
Action that Dynex breached the terms of the Credit Agreement (the "Credit
Agreement"), dated June 9, 1998, by and among the Company, Master Funding V and
Dynex. Such breaches include delays and shortfalls in funding the advances
required under the Credit Agreement and ultimately the refusal by Dynex to fund
any further advances under the Credit Agreement. Plaintiffs also allege that
Dynex and Mr. Dolph conspired to misrepresent and mischaracterize the Company's
credit underwriting criteria and its compliance with such criteria with the
intention of interfering with and causing actual damage to the Company's
business, prospective business and contracts. The Plaintiffs assert that Dynex'
funding delays and ultimate breach of the Credit Agreement were intended to
force the Plaintiffs to renegotiate the terms of their various agreements with
Dynex and related entities. Specifically, the Plaintiffs assert that Dynex
intended to force the Company to accept something less than Dynex' full
performance of its obligations under the Credit Agreement. Further, Dynex
intended to force the controlling shareholders of the Company to agree to sell
their stock in the Company to Dynex or an affiliate at a share price
substantially lower than the $6.00 per share price specified in the Stock Option
Agreement, dated as of June 9, 1998, by and among Messrs. William O. Winsauer,
John S. Winsauer and Adrian Katz (collectively, the "Shareholders") and Dynex
Holding, Inc. Plaintiffs in the Texas Action request declaratory judgement that
(a) Dynex has breached and is in breach of its various agreements and contracts
with the Plaintiffs, (b) Plaintiffs have not and are not in breach of their
various agreements and contracts with Defendants, (c) neither the Company nor
Master Funding V has substantially or materially violated or breached any
representation or warranty made to Dynex, including but not limited to the
representation and warranty that all or substantially all finance contracts
funded or to be funded by Dynex comply in full with, and have been acquired by
the
-- 10 --
<PAGE>
Company in accordance with, the Company's customary underwriting guidelines and
procedures, and (d) Dynex is obligated to fund the Company in a prompt and
timely manner as required by the parties' various agreements. In addition to
actual, punitive and exemplary damages, the Plaintiffs also seek injunctive
relief compelling Dynex to fund immediately all advances due to the Company
under the Credit Agreement.

On February 9, 1999, Dynex commenced an action against the Company in the
United States District Court for the Eastern District of Virginia (Richmond
District) (the "Virginia Action") seeking declaratory relief that Dynex is (a)
not obligated to advance funds to Master Funding V under the Credit Agreement
because the conditions to funding set forth in the Credit Agreement have not
been met, and (b) entitled to access to all books, records and other documents
of Master Funding V, including all finance contract files. Specifically, Dynex
alleges that as a result of a partial inspection of certain finance contract
files by Mr. Dolph and Virgil Baker & Associates in January 1999, Dynex
concluded that a significant number of such contracts contained material
deviations from the applicable credit criteria and procedures, an apparent
breach of the Credit Agreement. Dynex also alleges that on February 8, 1999, the
Company refused to permit Mr. Dolph and representatives from Dynex access to the
books, records and finance contract files of the Company. Dynex concludes that
as a result of such alleged breaches, it is not obligated to provide advances
under the Credit Agreement. Dynex also seeks to recover damages resulting from
the Company's alleged breach of the partie's various agreements, which alleged
breach the Company vigorously denies.The Company, Messrs. William O. Winsauer,
John S. Winsauer and Adrian Katz filed a responsive pleading on March 25, 1999.
The Company has sought dismissal of the Virginia Action on the basis that these
matters are being litigated in the previously filed Texas Action.

On February 22, 1999, the same day that Dynex notified the Company of a
purported servicing termination, Dynex filed another action against the Company
in the United States District Court for the Southern District of New York (the
"New York Action"), seeking damages and injunctive relief for the Company's
alleged breaches under the servicing agreement among the Company, Dynex and
Master Funding V. The Company was not notified of the New York Action until
March 1, 1999, when Dynex sought a temporary restraining order against the
Company. After hearing argument from counsel for both sides, the temporary
restraining order was denied. On March 23, 1999, the court issued an order
transferring the action to the Federal District Court in the Eastern District of
Virginia without prejudice. The Company remains the servicer and is performing
in its capacity as servicer.

On March 1, 1999, the Company and the other Plaintiffs filed an application
in the Texas Action for a temporary injunction enjoining Dynex (a) from
continuing to suspend or withhold funding pursuant to the Credit Agreement, (b)
from removing or attempting to remove the Company as servicer, and (c) from
making any further false or defamatory public statements regarding the
Plaintiffs. A hearing is scheduled for June 1999, to consider this application.

Dynex has purportedly accelerated all amounts due under the Senior Note
Agreement dated June 9, 1998, by and between Dynex and the Company. The Company
disputes such purported acceleration.

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.

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.
As a result of the attempt by Progressive 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
-- 11 --
<PAGE>
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.

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 the Company 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. If the Company
prevails against LSE, some of the value of the Company's interest in
securitizations could be restored.

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 beneficiary for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.

The Company is the plaintiff or the defendant in several legal proceedings
that its management considers to be the normal kinds of actions to which an
enterprise of its size and nature might be subject, and not to be material to
the Company's overall business or financial condition, results of operations or
cash flows.

The Company has taken actions to provide that their computer systems are
capable of processing for the periods in the year 2000 and beyond. The costs
associated with this are not expected to significantly affect operating cash
flow; however, the nature of their business requires that they rely on external
vendors and services who may not be year 2000 compliant. Therefore, there is no
assurance that the Company's actions in this regard will be successful.

On April 6, 1999, the Company and the controlling shareholders of the
Company, as defendants (the "Defendants"), were served with notice of a suit
filed on March 31, 1999 in the United States District Court for the Western
District of Texas (Austin Division) by Bruce Willis (the "Plaintiff"), a holder
of the Preferred Stock. The suit alleges, among other things, that the
Defendants violated Section 10(b) of the Securities and Exchange Act of 1934
(and Rule 10b-5 promulgated thereunder) in failing to disclose adequately and in
causing misstatements concerning the nature and condition of the Company's
financing sources. The suit also alleges that such actions constituted
statutory fraud under the Texas Business Corporation Act, common law fraud and
negligent misrepresentation. The Plaintiff seeks class action certification.
The Plaintiff also seeks, among other things, actual, special, consequential,
and exemplary damages in an unspecified sum, as well as costs and expenses
incurred in connection with pursuing the action against the Company. The Company
believes that it has consistently and accurately informed the public of its
business and operations, including the viability of its funding sources, and, as
a consequence believes the suit to be without merit and intends to vigorously
defend against this action.

-- 12 --
<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. Certain of the financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. 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, 1998 (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 collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company has securitized portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers, which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles.

The 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 financing
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. The Company's assumption of
all servicing functions in late 1997 has increased servicing income. In view of
the Dynex situation and the high cost of capital, the Company does not expect to
see profitability until alternate funding is obtained. The Company has begun to
strategically reduce staff in order to conserve capital.

-- 13 --
<PAGE>
REVENUES

The Company's primary sources of revenues consist of three components:
interest income, gain on sale of finance contracts and servicing fee income.

Interest Income. Interest income consists of the sum of two primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on retained interest 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. For transfers of financial assets that
result in the recognition of a sale, the newly created assets obtained and
liabilities incurred by the transferor as a part of a transfer of financial
assets are initially measured at fair value. Interest in the assets that are
retained are measured by allocating the previous carrying amount of the assets
(e.g. finance contracts) between the interest sold (e.g. investor certificates)
and interest 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.

The retained interest in securitizations available for sale are carried at
estimated fair value with unrealized gains (losses) recorded in stockholders'
equity as part of accumulated other comprehensive income and those classified as
trading are carried at estimated fair value with unrealized gain (losses)
recorded currently in income. The fair value of the retained interest 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 interest is 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
excess spread cash flows after giving effect to changes in assumptions due to
market and economic changes and the performance of the loan pool to date.
Impairment is determined on a disaggregated basis consistent with the risk
characteristics of the underlying finance contracts as well as the performance
of the pool to date. To the extent that the Company deems the asset to be
permanently impaired, the Company would record a charge against earnings and
write down the asset accordingly. The Company recorded a charge to income of
$1,051,457 during the three months ended March 31, 1999 as a result of the
impairment review. See Note 4 to the Consolidated Financial Statements.

The Company's cost basis in finance contracts sold has varied from
approximately 92% to 103% of the value of the principal balance of such finance
contracts. This portion of recognized gain on sale varies based on the Company's
cost of insurance covering the finance contracts and the discount obtained upon
acquisition of the finance contracts. Generally, the Company has acquired
finance contracts from dealers at a greater discount than with finance contracts
acquired from third parties. Additionally, costs of sale reduce the total gain
recognized.

Further, the retained interest component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization.

-- 14 --
<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:

Finance Contracts(1) Senior Investor Certificates
-------------------- ----------------------------

Principal Weighted Balance
Amount Average March 31, Gross
Securitization Securitized Rate 1999 Rate Spread(2)
- ----------------------------- ------------ --------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A. . . . . . . . . $ 26,261,009 18.9% $ 4,814,329 7.2% 11.7%

Trust 1996-A. . . . . . . . . 16,563,366 19.7% 4,413,527 7.2% 12.5%

Trust 1996-B. . . . . . . . . 17,832,885 19.7% 5,603,860 7.7% 12.0%

Trust 1996-C. . . . . . . . . 22,296,719 19.7% 8,635,377 7.5% 12.2%

Trust 1996-D. . . . . . . . . 25,000,000 19.5% 10,216,015 7.4% 12.1%

Trust 1997-A (4). . . . . . . 28,037,167 20.8% 9,858,358 7.8% 13.0%

Trust 1997-B. . . . . . . . . 34,725,196 19.9% 18,521,805 7.7% 12.2%

Trust 1997-C. . . . . . . . . 34,430,079 20.0% 19,516,364 7.6% 12.4%
AutoBond Master Funding
Corporation V Trust Dynex (3) 153,092,410 20.0% 130,926,926 7.4%(3) 12.6%
Total . . . . . . . . . . . . $358,238,831 $212,506,561
============ ============

- ----------------------------------------------------------------------------------------
<FN>

1 Refers only to balances on senior investor certificates.
2 Difference between weighted average contract rate and senior certificate rate.
3 Includes $26 million of finance contracts from securitizations previously retired
4 Weighted average of senior investor coupon rates
</TABLE>

Servicing Income. The Company earns substantially all of its servicing fee
income on the contracts it services on behalf of securitization trusts.
Servicing fee income consists of: (i) contractual administrative fees received
through securitizations, equal to $7.00 per month per contract included in each
trust (excluding amounts paid to third-party servicers by the trust); (ii)
contractual servicing fees received through securitizations, equal to $8.00 per
month per contract included in each trust; and (iii) fee income earned as
servicer for such items as late charges and documentation fees, which are earned
whether or not a securitization has occurred.

-- 15 --
<PAGE>

FINANCE CONTRACT ACQUISITION ACTIVITY

The following table sets forth information about the Company's finance contract
acquisition activity:

Three Months Ended
March 31,

<S> <C> <C>
1998 1999
----------- -----------

Number of finance contracts acquired . . . . . . 2,637 1,586
Principal balance of finance contracts acquired. $29,775,406 $20,336,852
Number of active dealerships (1) . . . . . . . . 578 466
Number of enrolled dealerships . . . . . . . . . 1,789 2,332
<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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998

NET LOSS

In the three months ended March 31, 1999, the net loss was $2,460,671 which
represents an increase in loss of $2,339,533 over the three months ended March
31, 1998 net loss of $121,138. The increase in loss primarily resulted from the
termination by Dynex of the Funding Agreement which forced the Company to
discontinue acquisition of finance contracts as of February 9, 1999. The Company
continues to pursue alternative funding sources. Impairment of retained interest
for the three months ending March 31, 1999 was $1,051,457.

Total Revenues

Total revenues for the three months ended March 31, 1999 of $3,784,939
represent a decrease of $1,854,242 from the three months ended March 31, 1998
revenues of $5,639,181. The decrease was due primarily to the reduction in
volume of finance contract sales activity for the first quarter.

Interest Income. Interest income for the three months ended March 31, 1999
of $463,986 represents a decrease of $674,512 from the three months ended March
31, 1998 interest income of $1,138,498 due to the timing of finance contract
acquisitions and the period held before securitization.

Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $1,539,187 (12.2%) on finance contracts of $12.6 million during the
three months ended March 31, 1999. Gain on sale amounted to $3,867,941 (15.8%)
on finance contracts of $24.5 million in the comparable 1998 period. The
decrease of $2,328,754 was primarily due to the reduction in volume of sales as
a result of the termination of the Dynex Funding Agreement.

Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized or sold. For the three months
ended March 31, 1999 servicing fee income was $1,005,774, consisting of
contractual administrative fees and servicer fees. Servicing fee income
increased by $499,181 from the three months ended March 31, 1998 servicing fee
income of $506,593 as a result of the increased volume of contracts being
serviced.

-- 16 --
<PAGE>
Other Income. For the three months ended March 31, 1999, other income
amounted to $775,992 compared with $126,149 for the comparable 1998 period. The
increase was mainly attributable to settlement of litigation with Charlie Thomas
Ford, Inc. on favorable terms. See "Legal Proceedings".

Total Expenses

Total expenses for the three months ended March 31, 1999 of $7,844,511
represent an increase of $2,035,000 from the three months ended March 31, 1998
total expenses of $5,809,511, due primarily to impairment of retained interest
in securitizations of $1,051,457 during the three months ended March 31, 1999,
as well as increases in loan insurance, professional services and expenses
related to computer software enhancements.

Provision for Credit Losses. Provision for credit losses on finance
contracts for the three months ended March 31, 1999 of $60,465 represents a
decrease of $39,535 from the three months ended March 31, 1998 provision for
credit losses of $100,000. The decrease is the result of an evaluation of the
finance contract portfolio.

Interest Expense. Interest expense for the three months ended March 31,
1999 of $713,370 represents a decrease of $577,035 from the three months ended
March 31, 1998 interest expense of $1,290,405. The decrease resulted from
elimination of borrowing under to revolving credit facilities during the period

Salaries and Benefits. Salaries and benefits for the three months ended
March 31, 1999 of $3,149,032 represent an increase of $751,267 from the three
months ended March 31, 1998 salaries and benefits of $2,397,765. Administrative
staff were added in the latter part of the first quarter of 1998. All positions
were filled during the first quarter of 1999.

General and Administrative Expenses. General and administrative expenses
for the three months ended March 31, 1999 of $1,869,323 represent an increase of
$785,059 from the three months ended March 31, 1998 general and administrative
expense of $1,084,264. The Company continued to make compter software
enhancements which resulted in higher computer expense. The Company relocated
its headquarters to larger offices during the second quarter of 1998 which
resulted in correspondingly higher facilities expense.

Impairment of Retained Interest in Securitizations. The Company
periodically reviews the carrying value of the retained interest in
securitizations. The Company recorded a charge against earnings for impairment
of these assets of $1,051,457 for the three months ended March 31, 1999 as
compared with an impairment of $288,023 for the three months ended March 31,
1998. This impairment reflects the revaluation of expected future cash flows to
the Company from securitizations. See Note 4 to the Consolidated Financial
Statements .

Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) for the
three months ended March 31, 1999 of $1,000,864 represent an increase of
$351,810 from the three months ended March 31, 1998 other operating expenses of
$649,054. This increase was mainly due to increased loan insurance premiums.

Income tax. Income taxes for the three months ended March 31, 1999 of
$1,598,901 represent an increase of $1,549,709 from the three months ended March
31, 1998 income tax benefit of $49,192 due to the increased loss for the period
ended March 31, 1999 over the comparable period of 1998.

-- 17 --
<PAGE>

FINANCIAL CONDITION

Cash and Cash Equivalents. Cash and cash equivalents decreased $2,937,156
to $2,233,813 at March 31, 1999 from $5,170,969 at December 31, 1998. The
decrease in cash and cash equivalents was largely the result of an operating
loss of $2,460,671 primarily caused by the termination by Dynex of the Funding
Agreement. Additionally the Company used $144,522 to purchase equipment. Other
decreases in cash and cash equivalents were the result of payments on
liabilities.

Finance Contracts Held for Sale. Finance contracts held for sale, net of
allowance for credit losses, increased $6.1 million to $7.0 million at March 31,
1999 from $0.9 million at December 31, 1998. 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 securitized finance contracts on a
regular basis through the Dynex funding agreement. The balance outstanding at
March 31, 1999 consisted of loans originated with intent to sell to Dynex.
Future securitizations and sales are uncertain.

The Company maintains an allowance for, and reports a provision for, credit
losses on finance contracts held for sale. Management evaluates the
reasonableness of the assumptions employed by reviewing credit loss experience,
delinquencies, repossession trends, the size of the finance contract portfolio
and general economic conditions and trends. If necessary, assumptions will be
changed in the future to reflect historical experience to the extent it deviates
materially from that which was assumed.

Other Assets. Other assets increased $546,439 to $2,009,485 at March 31, 1999
from $1,463,046 at December 31, 1998. The trustees have continued to withhold
administrator fees and expenses and to deposit same into a separate bank account
earning interest. The total amount witheld and deposited into a separate account
is approximately $ 1.3 million as of March 31, 1999, due to the Company.

Retained Interest in Securitizations. 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
15% to 17%. To the extent that the Company deems the asset to be permanently
impaired, the Company records a charge against earnings. The Company recorded a
charge against earnings of $1,051,457 during the three months ended March 31,
1999 as a result of the impairment review of the retained interest in
securitizations.

Prior to the Dynex funding agreement, at the time a securitization closed,
the Company's securitization subsidiary was required to fund a cash reserve
account within the trust to provide additional credit support for the senior
investor securities. Additionally, depending on the structure of the
securitization, a portion of the future excess spread cash flows from the trust
is required to be deposited in the cash reserve account to increase the initial
deposit to a specified level. A portion of excess spread cash flows will
increase such reserves until they reach a target reserve level (initially 6%) of
the outstanding balance of the senior investor certificates. The trust
receivables are ultimately payable to the Company as owner of retained interests
and are included in the estimated cash flow of such retained interests. (i.e.
the "cash out" method).

<S> <C> <C>
December 31, 1998 March 31, 1999
------------------ ---------------
Trust receivable . . . . . . . . . . . . . $ 2,236,362 $ 1,688,443
Class B notes receivable . . . . . . . . . 4,586,908 4,035,814
Interest only strip receivable . . . . . . 7,050,081 6,322,060
Total retained interest in securitizations $ 13,873,351 $ 12,046,317
================== ===============

Trading . . . . . . . . . . . . . $ 4,586,908 $ 4,035,814
Available for sale. . . . . . . . 9,286,443 8,010,503
</TABLE>

-- 18 --
<PAGE>

Notes Payable and Non-Recourse Debt

The following amounts are included in notes payable and non-recourse debt as of:

December 31, March 31,
1998 1999
------------ ---------

<S> <C> <C>
Non-recourse notes payable, collateralized by Class B Certificates $ 3,185,050 $ 2,633,956
Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes , net of discount . . . . . . . . . 7,143,628 7,185,481
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . . 23,342 17,771
$13,352,020 $12,837,208
=========== ===========
</TABLE>

DELINQUENCY EXPERIENCE

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

December 31, 1998 March 31, 1999
----------------- --------------

<S> <C> <C> <C> <C>
Principal balance of finance contracts outstanding $210,947,939 $203,900,254
Delinquent finance contracts (1):
Two payments past due. . . . . . . . . . . . . . . 20,689,671 9.81% 12,635,947 6.20%
Three payments past due. . . . . . . . . . . . . . 7,901,166 3.75% 3,837,154 1.88%
Four or more payments past due . . . . . . . . . . 5,214,162 2.47% 3,399,462 1.67%
------------ ------------- ----------- -----
Total. . . . . . . . . . . . . . . . . . . . . . . $ 33,804,999 16.03% $19,872,563 9.75%
============ ============= =========== =====

<FN>

(1) Percentage based upon outstanding balance. Delinquency balances outstanding excludes finance
contracts where the underlying vehicle is repossessed, where a dealer (seller) buyback is expected,
where a skip claim is paid and where a primary insurance claim is filed.

</TABLE>

CREDIT LOSS EXPERIENCE

If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary repossessions. In most jurisdictions, notice to the
borrower of the Company's intention to sell the repossessed vehicle is required,
whereupon the borrower may exercise certain rights to cure his or her default
and redeem the automobile. Following the expiration of the legally required
notice period, the repossessed vehicle is sold at a wholesale auto auction (or
in limited circumstances, through dealers), usually within 60 days of the
repossession. The Company closely monitors the condition of vehicles set for
auction, and procures an appraisal under the relevant VSI policy prior to sale.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the finance contract and insurance claims under the VSI policy and, if
applicable, the deficiency balance policy are then filed.

Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. This effect on the delinquency statistics can
be observed in the comparison of 1999 versus 1998 delinquency percentages.
Accordingly, delinquency and charge-off rates in the portfolio may not fully
reflect the rates that may apply when the average holding period for finance
contracts in the portfolio is longer. Increases in the delinquency and/or
charge-off rates in the portfolio would adversely affect the Company's ability
to obtain credit or securitize its receivables.

-- 19 --
<PAGE>
REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS

Because the Company's finance contract portfolio is unseasoned, 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 tables provide static pool repossession frequency analysis in
dollars of the Company's portfolio from inception through March 31, 1999. All
finance contracts have been segregated by quarter of acquisition. All
repossessions have been segregated by the quarter in which the repossessed
contract was originally acquired by the Company. Cumulative repossessions equals
the ratio of repossessions as a percentage of finance contracts acquired for
each segregated quarter. Annualized repossessions equals an annual equivalent of
the cumulative repossession ratio for each segregated quarter. This table
provides information regarding the Company's repossession experience over time.
For example, recently acquired finance contracts demonstrate very few
repossessions because properly underwritten finance contracts to sub-prime
consumers generally do not normally default during the initial term of the
contract. Between approximately one year and 18 months of seasoning, frequency
of repossessions on an annualized basis appear to reach a plateau. Based on
industry statistics and the performance experience of the Company's finance
contract portfolio, the Company believes that finance contracts seasoned in
excess of approximately 18 months will start to demonstrate declining
repossession frequency. The Company believes this may be due to the fact that
the borrower perceives that he or she has equity in the vehicle. The Company
also believes that the finance contracts generally amortize more quickly than
the collateral depreciates, and therefore losses and/or repossessions will
decline over time.

-- 20 --
<PAGE>

ALL INCLUSIVE (3)

Repossession Frequency
----------------------

Principal Balance at
Default of Failed Original Principal
Year and Loans by Cumulative Annualized Balance of
Quarter of Acquisition Quarter Acquired Percentage (1) Percentage (2) Contracts Acquired
---------------------- -------------------- -------------- -------------- -------------------

(1) For each quarter, cumulative loss frequency equals the gross principal loss divided by the
gross amount financed of the contracts acquired during that quarter. Annualized loss
frequency converts cumulative loss frequency into an annual equivalent (e.g. for Q4 1997, principal
balance of $8,951,240 in losses divided by $44,120,029 in amount financed of the contracts acquired,
divided by 6 quarters
(2) outstanding times 4 equals an annual loss frequency of 13.53%).

(3) Included are the loans that were repossessed, paid by customers' primary insurance, paid by
skip claim, paid by dealer and charged off due to certain reasons.

</TABLE>

-- 21 --
<PAGE>
<TABLE>
<CAPTION>

REPO AND SKIP (3)

Repossession Frequency
----------------------

Year and Principal Balance at Original Principal
Quarter of Default of Failed Loans Cumulative Annualized Balance of
Acquisition by Quarter Acquired Percentage (1) Percentage (2) Contracts Acquired
----------- ------------------------ -------------- -------------- -------------------
<C> <S> <C> <C> <C> <C>
1994
1 Q3. . . . . $ 22,046 21.79% 4.59% $ 101,161
2 Q4. . . . . 618,987 25.39% 5.64% 2,437,674
1995
3 Q1. . . . . 1,722,482 27.30% 6.42% 6,310,421
4 Q2. . . . . 1,691,215 27.32% 6.83% 6,190,596
5 Q3. . . . . 2,017,088 27.86% 7.43% 7,239,813
6 Q4. . . . . 3,860,674 31.67% 9.05% 12,188,863
1996
7 Q1. . . . . 4,906,589 31.74% 9.76% 15,460,823
8 Q2. . . . . 6,145,169 33.18% 11.06% 18,520,410
9 Q3. . . . . 6,851,537 24.38% 8.87% 28,098,899
10 Q4. . . . . 7,796,022 31.90% 12.76% 24,442,500
1997
11 Q1. . . . . 10,733.916 30.78% 13.68% 34,875,869
12 Q2. . . . . 10,065,175 28.51% 14.25% 35,305,817
13 Q3. . . . . 8,351,956 24.12% 13.78% 34,629,616
14 Q4. . . . . 7,725,129 17.51% 11.67% 44,120,029
1998
15 Q1. . . . . 4,212,679 14.21% 11.37% 29,650,808
16 Q2. . . . . 2,781,197 12.14% 12.14% 22,911,290
17 Q3. . . . . 1,292,337 5.49% 7.32% 23,528,924
18 Q4. . . . . 722,614 1.68% 3.36% 43,006,049
1999
19 Q1. . . . . 71,684 0.35% 1.41% 20,336,852
- -----------------------------------------------------------------------------------------------
<FN>

(1) For each quarter, cumulative loss frequency equals the gross principal loss divided by
the gross amount financed of the contracts acquired during that quarter.

(2) Annualized loss frequency converts cumulative loss frequency into an annual equivalent
(e.g. for Q4 1997, principal balance of $7,725,129 in losses divided by $44,120,029 in amount
financed of the contracts acquired, divided by 6 quarters outstanding times 4 equals an annual
loss frequency of 11.67%).

(3) Included are the loans that were repossessed, and paid by skip claim.
</TABLE>

-- 22 --
<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 less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
table demonstrates the net charge-off per repossessed automobile since
inception:

Loans
Loans with Without
From August 1, 1994 (Inception) to March 31, 1999 Default Default
Insurance Insurance All Loans
------------- ------------- -------------
<S> <C> <C> <C>
Number of finance contracts acquired 34,967
Number of vehicles repossessed . . . . . . . . . . . . . . . . . . 6,393 2,530 8,923
Repossessed units disposed of. . . . . . . . . . . . . . . . . . . 3,724 1,868 5,592
Repossessed units awaiting disposition (1) . . . . . . . . . . . . 2,669 662 3,331
Cumulative gross charge-offs . . . . . . . . . . . . . . . . . . . $ 37,435,138 $ 19,611,522 $ 57,046,660
Costs of repossession. . . . . . . . . . . . . . . . . . . . . . . 1,747,100 779,348 2,526,448
Recoveries:
Proceeds from auction, physical damage insurance and refunds (2) (21,036,302) (11,430,534) (32,466,836)
Deficiency insurance settlement received . . . . . . . . . . . . (9,621,781) 0 (9,621,781)
------------- ------------- -------------
Net charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,524,155 $ 8,960,336 $ 17,484,491
============= ============= =============
Net charge-offs per unit disposed. . . . . . . . . . . . . . . . . $ 2,289 $ 4,797 $ 3,127
Net charge-offs as a percentage of cumulative gross charge-offs. . 22.8% 45.7% 30.6%
Recoveries as a percentage of cumulative gross charge-offs . . . . 81.9% 58.3% 73.8%
- ------------------------------------------------------------------ ------------- ------------- -------------
<FN>

(1) The vehicles may have been sold at auction; however the Company might not have received all insurance
proceeds as of March 31, 1999.
(2) Amounts are based on actual liquidation and repossession proceeds (including insurance proceeds) received
on units for which the repossession process had been completed as of March 31, 1999.
</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.

Since early February 1999, the Company's management has been attempting to
procure alternative sources of funding and other strategic alternatives, in
order to mitigate the situation with Dynex. The Company is currently in
discussions with several investment bankers and direct sources regarding such
-- 23 --
<PAGE>
alternatives which may include joint ventures, or changes in control of the
Company. While management hopes that an alternative opportunity will be
consummated, the Company has suspended origination of finance contracts until
alternative funding sources are obtained. However, there can be no assurance
that such funding will be obtained. As a consequence, the Company is reporting a
loss for the first quarter of 1999 and did not pay the quarterly dividend on its
Preferred Stock otherwise payable on March 31, 1999. Until financing or other
strategic alternatives are consummated the Company is taking steps to reduce its
personnel and operating expenses associated with origination activities. Also,
parties to the Company's various securitization transactions could request that
the Company surrender servicing, although management does not believe such
parties have the right to terminate servicing under the respective agreements.
The Company expects to continue its servicing operations.

Management believes the Company has sufficient liquidity to meet its
current obligations and continue its servicing activities for a reasonable
period of time.

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, collections on retained interests and
sales of finance contracts. Net cash used by operating activities totaled $2.8
million during the three months ended March 31, 1999. Significant activities
comprising cash flows used by investing activities consisted of purchases of
property, plant and equipment. There were no significant cash flows from
financing activities during the three months ended March 31, 1999.

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 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") 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 "Funding Agreement"). The terms
of the Funding Agreement were modified on June 30, October 20, and October 28,
1998. Under the prior terms of the Funding Agreement, the Company transferred
finance contracts to AutoBond Master Funding Corporation V ("Master Funding V"),
a qualified unconsolidated special purpose subsidiary, and Dynex provided credit
facilities in an 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 Funding Agreement, the
Advance Rate was reduced from 104% to 88% for an interim period (the "Interim
Period") ending December 31, 1998. At the end of the Interim Period, the
Advance Rate reverted to 104% and Dynex was to advance to Master Funding V an
additional amount equal to 16% of the unpaid principal balance of finance
contracts financed by Dynex during the Interim Period. This additional amount
receivable from Dynex totalled $6.5 million at December 31, 1998, and was
collected in January and February 1999. Advances under the Funding Agreement 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. 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 qualified special purpose entity have been recognized as sales
under SFAS No. 125. At March 31, 1999 advances by Dynex under the Funding
Agreement totaled $169.2 million. See "Legal Proceedings.

-- 24 --
<PAGE>
William O. 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 "Stock Option Agreement") with Dynex Holding,
Inc.("Dynex Holding") wherein the Shareholders granted to Dynex Holding an
option (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
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 Capital, Inc.("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 Capital, Inc.("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 1 to 1.
As a result of the termination by Dynex of its obligations under the Funding
Agreement, the Shareholders have terminated the Option granted under the Stock
Option Agreement. See "Legal Proceedings".

In January 1998, the Company privately placed with BancBoston Investments,
Inc. ("BancBoston") $7,500,000 in aggregate principal amount of its 15% senior
subordinated convertible notes (the "Subordinated Notes"). Interest on the
Subordinated Notes is payable quarterly until maturity on February 1, 2001. The
Subordinated Notes are convertible at the option of the holder for up to 368,462
shares of common stock 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 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 EBITDA 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 BancBoston. 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. The Company capitalized debt issuance costs of
$594,688, and recorded a discount of $507,763 on the debt representing the value
of warrants issued in connection therewith. The debt issuance cost and discount
is being amortized as interest expense on the interest method through February
2001.

At March 31, 1999 the Company did not meet certain of its financial
covenants, which constitutes an event of default on the Subordinated Notes. The
ability of the Company to meet such covenants is dependant upon future earnings.
The Company has made all payments due on its Subordinated Notes and expects to
continue to meet such obligations. The Subordinated Notes have not been
formally accelerated by BankBoston; however if such acceleration were made,
BankBoston could declare such amounts immediately due.

-- 25 --
<PAGE>
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. Dynex claims that
the Senior Notes are now in default due, among other things, to the impairment
of the Stock Option, an assertion which the Company disputes. The Company has
made all interest payments due on the Senior Notes and expects to continue to
meet such obligations.

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.

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
-- 26 --
<PAGE>
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 who is presently performing 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 trustees on certain of the securitizations that
the action of Moody's and the alleged causes constituted events of servicer
termination under such transactions. The trustees have threatened to remove the
Company as servicer on certain transactions, and have 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.

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 the public was $10 per share, with net proceeds to the Company of
approximately $9,631,000. Such net proceeds have been utilized for working
capital purposes, including the funding of finance contracts. Dividends on the
Preferred Stock are cumulative and payable quarterly on the last day of March,
June, September and December of each year, commencing on June 30, 1998, at the
rate of 15% per annum. After three years from the date of issuance, the Company
may, at its option, redeem one-sixth of the Preferred Stock each year, in cash
at the liquidation price per share (plus accrued and unpaid dividends), or, if
in Common Stock, that number of shares equal to $10 per share of Preferred Stock
to be redeemed, divided by 85% of the average closing sale price per share for
the Common Stock for the 5 trading days prior to the redemption date. The
Preferred Stock is not redeemable at the option of the holder and has no stated
maturity.

If dividends on the Preferred Stock are in arrears for two quarterly
dividend periods, holders of the Preferred Stock will have the right to elect
two 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. The Preferred Stock dividend was not
paid for the first quarter of 1999.

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
-- 27 --
<PAGE>
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 $527,915 in cash on August 19, 1998, which was treated as an
investment in a common stock agreement.

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 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 provisions of SFAS No. 133 upon its initial use
of derivative instruments. As of March 31, 1999, no such instruments were being
utilized by the Company. The Company does not believe the implementation of SFAS
No. 133 will have a material effect on its consolidated financial statements.

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
-- 28 --
<PAGE>
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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments. The Company's market risk management procedures include all market
risk sensitive financial instruments. The Company has no derivative financial
instruments, exposure to currency exchange rates nor commodity risk exposure.

The Company's debt is all fixed rate and the Company's earnings and cash
flows from retained interests in securitization and finance contracts, which are
at fixed rates, are not impacted by changes in market interest rates. The
Company manages market risk by striving to balance its finance contract
origination activities with its ability to sell such contracts in a short period
of time. Changes in market value of its finance contracts and retained interests
may increase or decrease due to pre-payments and defaults influenced by changes
in market conditions and the borrowers' financial condition.

RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS

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.

-- 29 --
<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.

On February 8, 1999, the Company, AutoBond Master Funding Corporation V, a
wholly-owned subsidiary of the Company ("Master Funding V"), William O.
Winsauer, the Chairman and Chief Executive Officer of the Company, John S.
Winsauer, a Director and the Secretary of the Company, and Adrian Katz, the
Vice-Chairman, Chief Financial Officer and Chief Operating Officer of the
Company (collectively, the "Plaintiffs") commenced an action in the District
Court of Travis County, Texas (250th Judicial District) against Dynex and James
Dolph (collectively, the "Defendants"). This action is hereinafter referred to
as the "Texas Action". The Company and the other Plaintiffs assert in the Texas
Action that Dynex breached the terms of the Credit Agreement (the "Credit
Agreement"), dated June 9, 1998, by and among the Company, Master Funding V and
Dynex. Such breaches include delays and shortfalls in funding the advances
required under the Credit Agreement and ultimately the refusal by Dynex to fund
any further advances under the Credit Agreement. Plaintiffs also allege that
Dynex and Mr. Dolph conspired to misrepresent and mischaracterize the Company's
credit underwriting criteria and its compliance with such criteria with the
intention of interfering with and causing actual damage to the Company's
business, prospective business and contracts. The Plaintiffs assert that Dynex'
funding delays and ultimate breach of the Credit Agreement were intended to
force the Plaintiffs to renegotiate the terms of their various agreements with
Dynex and related entities. Specifically, the Plaintiffs assert that Dynex
intended to force the Company to accept something less than Dynex' full
performance of its obligations under the Credit Agreement. Further, Dynex
intended to force the controlling shareholders of the Company to agree to sell
their stock in the Company to Dynex or an affiliate at a share price
substantially lower than the $6.00 per share price specified in the Stock Option
Agreement, dated as of June 9, 1998, by and among Messrs. William O. Winsauer,
John S. Winsauer and Adrian Katz (collectively, the "Shareholders") and Dynex
Holding, Inc. Plaintiffs in the Texas Action request declaratory judgement that
(a) Dynex has breached and is in breach of its various agreements and contracts
with the Plaintiffs, (b) Plaintiffs have not and are not in breach of their
various agreements and contracts with Defendants, (c) neither the Company nor
Master Funding V has substantially or materially violated or breached any
representation or warranty made to Dynex, including but not limited to the
representation and warranty that all or substantially all finance contracts
funded or to be funded by Dynex comply in full with, and have been acquired by
the Company in accordance with, the Company's customary underwriting guidelines
and procedures; and (d) Dynex is obligated to fund the Company in a prompt and
timely manner as required by the parties' various agreements. In addition to
actual, punitive and exemplary damages, the Plaintiffs also seek injunctive
relief compelling Dynex to fund immediately all advances due to the Company
under the Credit Agreement.

On March 1, 1999, the Company and the other Plaintiffs filed an application
in the Texas Action for a temporary injunction joining Dynex (a) from continuing
to suspend or withhold funding pursuant to the Credit Agreement, (b) from
removing or attempting to remove the Company as servicer, and (c) from making
any further false or defamatory public statements regarding the Plaintiffs. A
hearing was held in April 1999. However, no decision has been rendered on this
application.

On February 9, 1999, Dynex commenced an action against the Company in the
United States District Court for the Eastern District of Virginia (Richmond
District) (the "Virginia Action") seeking declaratory relief that Dynex is (a)
not obligated to advance funds to Master Funding under the Credit Agreement
because the conditions to funding set forth in the Credit Agreement have not
been met, and (b) entitled to access to all books, records and other documents
of Master Funding, including all finance contract files. Specifically, Dynex
alleges that as a result of a partial inspection of certain finance contract
files by Mr.
-- 30 --
<PAGE>
Dolph and Virgil Baker & Associates in January 1999, Dynex concluded that a
significant number of such contracts contained material deviations from the
applicable credit criteria and procedures, an apparent breach of the Credit
Agreement. Dynex also alleges that on February 8, 1999, the Company refused to
permit Mr. Dolph and representatives from Dynex access to the books, records and
finance contract files of the Company. Dynex concludes that as a result of such
alleged breaches, it is not obligated to provide advances under the Credit
Agreement. Dynex also seeks to recover damages resulting from the Company's
alleged breach of the partie's various agreements, which alleged breach the
Company vigorously denies. The Company, Messrs. William O. Winsauer, John S.
Winsauer and Adrian Katz filed a responsive pleading on March 25, 1999. The
Company has sought dismissal of the Virginia Action on the basis that these
matters are being litigated in the previously filed Texas Action.

On February 22, 1999, the same day that Dynex notified the Company of a
purported servicing termination, Dynex filed another action against the Company
in the United States District Court for the Southern District of New York (the
"New York Action"), seeking damages and injunctive relief for the Company's
alleged breaches under the servicing agreement among the Company, Dynex and
Master Funding V. The Company was not notified of the New York Action until
March 1, 1999, when Dynex sought a temporary restraining order against the
Company. After hearing argument from counsel for both sides, the temporary
restraining order was denied. On March 23, 1999, the court issued an order
transferring the action to the Federal District Court in the Eastern District of
Virginia. The Company remains the servicer and is performing in its capacity as
servicer.

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.
As a result of the attempt by Progressive 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.

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
-- 31 --
<PAGE>
will continue to have the benefits of such coverage), no additional premiums
having been demanded or paid, and the claims-paying process having been
streamlined. In particular, in order to speed the claims-paying process,
Interstate has paid lump sums to the Company as an estimate of claims payable
prior to completion of processing. Pending the Company's determination of the
appropriate beneficiary 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 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. On favorable terms, the Company has
reached a settlement agreement with Charlie Thomas Ford, Inc. The Company has
received funds related to such settlement.

On March 31, 1999, a suit naming the Company and William O. Winsauer,
Adrian Katz and John S. Winsauer (in their capacities as controlling
shareholders of the Company) as defendants (the "Defendants") was filed in the
United States District Court for the Western District of Texas (Austin Division)
by Bruce Willis (the "Plaintiff"), a holder of the Company's 15% Series A
Cumulative Preferred Stock. The suit alleges, among other things, that the
Defendants violated Section 10(b) of the Securities and Exchange Act of 1934
(and Rule 10b-5 promulgated thereunder) in failing to disclose adequately and in
causing misstatements concerning the nature and condition of the Company's
financing sources. The suit also alleges that such actions constituted
statutory fraud under the Texas Business Corporation Act, common law fraud and
negligent misrepresentation. The Plaintiff seeks class action certification.
The Plaintiff also seeks, among other things, actual, special, consequential,
and exemplary damages in an unspecified sum, as well as costs and expenses
incurred in connection with pursuing the action against the Company. The Company
believes that it has consistently and accurately informed the public of its
business and operations, including the viability of its funding sources, and, as
a consequence believes the suit to be without merit and intends to vigorously
defend against this action.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At March 31, 1999 the Company did not meet certain of its financial
covenants, which failure constitutes an event of Default on the Subordinate
Notes. The ability of the company to meet such covenants is dependant upon
future earnings. The Company has made all payments due on its Subordinated
Notes and expects to continue to meet such obligations. BankBoston has not
formally accelerated the Subordinated Notes, however if such acceleration were
made, BankBoston could declare such amounts immediately due.

Dynex has purportedly accelerated all amounts due under the Senior Note
Agreement dated June 9, 1998, by and between Dynex and the Company. The Company
disputes such purported acceleration.

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
two additional directors to serve on the Company's Board of
-- 32 --
<PAGE>
Directors 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. The dividend was not paid March 31, 1999.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

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<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

<C> <S>

3.1 (1) Restated Articles of Incorporation of the Company
3.2 (1) Amended and restated Bylaws of the Company
4.1 (1) Specimen Common Stock Certificate
10.1 (1) Amended and Restated Loan Origination, Sale and Contribution Agreement dated as of
December 15, 1995 by and between the Company and AutoBond Funding Corporation I
10.2 (1) Security Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II,
the Company and Norwest Bank Minnesota, National Association
10.3 (1) Credit Agreement and Side Agreement, dated as of May 21, 1996 among AutoBond
Funding Corporation II, the Company and Peoples Life Insurance Company
10.4 (1) Servicing Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II,
CSC Logic/MSA L.L.P., doing business as "Loan Servicing Enterprise", the Company
and Norwest Bank Minnesota, National Association
10.5 (1) Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and
between the Company and AutoBond Funding Corporation II
10.6 (1) Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31,
1995 between Sentry Financial Corporation and the Company
10.7 (1) Management Administration and Services Agreement dated as of January 1, 1996 between
the Company and AutoBond, Inc.
10.8 (1) Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9 (1) Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the
Company
10.10 (1) Vender's Comprehensive Single Interest Insurance Policy and Endorsements, issued by
Interstate Fire & Casualty Company
10.11 (1) Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12 (1) Employee Stock Option Plan
10.13 (1) Dealer Agreement dated November 9, 1994, between the Company and Charlie Thomas
Ford, Inc.
10.14 (1) Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company,
First Fidelity Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15 (2) Servicing Agreement, dated as of January 29, 1997, between CSC LOGIC/MSA L.P.P.,
doing business as "Loan Servicing Enterprise" and the Company
10.16 (2) Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II,
the Company and Daiwa Finance Corporation
10.17 (2) Security Agreement, dated as of February 1, 1997, by and among AutoBond Funding
Corporation II, the Company and Norwest Bank Minnesota, National Association
10.18 (2) Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.19 (3) Automobile Loan Sale Agreement, dated as of March 26, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.20 (4) Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding
Corporation, the Company and Daiwa Finance Corporation
10.21 (4) Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond
Master Funding Corporation, AutoBond Acceptance Corporation and Norwest Bank
Minnesota, National Association.
10.22 (4) Securities Purchase Agreement, dated as of June 30, 1997, by and among the Company,
Lion Capital Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23 (6) 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 (6) Trust Indenture, dated as of December 31, 1997, among AutoBond Master Funding
Corporation II, the Company and Manufacturers & Traders Trust Company
10.25 (6) Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse
First Boston Mortgage Capital L.L.C and the Company
10.26 (6) Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond
Master Funding Corporation II and Manufacturers & Traders Trust Company
10.27 (6) Indenture and Note, dated January 30, 1998, between the Company and Bank Boston, N.A.
10.28 (6) Warrant, dated January 30, 1998, issued to BancBoston Investments, Inc.
10.29 (6) Purchase Agreement, dated January 30, 1998, between the Company and BancBoston
Investments, Inc.
10.30 (5) Warrant, dated February 2, 1998, issued to Dresner Investments Services, Inc.
10.31 (5) Warrant Agreement, dated February 2, 1998, issued to Tejas Securities Group, Inc.
10.32 (5) Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A.
Gonzalez and the Company
10.33 (5) Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the
Company
10.34 (7) 1998 Stock Option Plan
10.35 (7) Third Amendment to the Secured Revolving Credit Agreement dated May 5, 1998 between
Sentry Financial Corporation and the Company
10.36 (7) Warrant, dated March 31, 1998, issued to Infinity Investors Limited
10.37 (7) Credit Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.38 (8) Servicing Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.39 (8) Trust Indenture, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company and Dynex Capital, Inc.
10.40 (9) Letter Agreement, dated June 30, 1998 by and between the Company and Dynex Capital,
Inc.
10.41 (9) Letter Agreement dated October 20, 1998 by and between the Company and Dynex Capital,
Inc.
10.42 (9) Letter Agreement dated October 28, 1998 by and between the Company, Dynex Holding,
Inc., and Dynex Capital, Inc.
21.1 (4) Subsidiaries of the Company
21.2 (6) Additional Subsidiaries of the Company
21.3 (10) Additional Subsidiaries of the Company
27.1 Financial Data Schedule
- ---------
<FN>

1 Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-05359).
2 Incorporated by reference to the Company's 1996 annual report on Form 10-K for the year ended
December 31, 1996.
3 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997.
4 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended June
30, 1997.
5 Incorporated by reference to the Company's 1997 annual report on Form 10-K for the year ended
December 31, 1997
6 Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-41257).
7 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1998
8 Incorporated by reference to the Company's report on Form 8-K filed on June 24, 1998
9 Incorporated by reference to the Company's quarterly report on form 10-Q for the quarter ended
September 30, 1998
10 Incorporated by reference to the Company's 1998 annual report on Form 10-K for the year ended
December 31, 1998
- ----------------------------------------------------------------------------------------------------
</TABLE>
-- 34 and 35--
<PAGE>

(B) Reports of Form 8-K

The Company filed Form 8-K on March 8, 1999 advising investors and other
interested parties as to the status of its current dispute with Dynex Capital,
Inc. ("Dynex").

-- 36 --
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 17, 1999.

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

-- 37 --

<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2233813
<SECURITIES> 12046317
<RECEIVABLES> 7479576
<ALLOWANCES> 15729
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1977243
<DEPRECIATION> 784162
<TOTAL-ASSETS> 27081202
<CURRENT-LIABILITIES> 0
<BONDS> 12819437
<COMMON> 1000
0
10856000
<OTHER-SE> 2234701
<TOTAL-LIABILITY-AND-EQUITY> 27081202
<SALES> 0
<TOTAL-REVENUES> 3784939
<CGS> 0
<TOTAL-COSTS> 7070676
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60465
<INTEREST-EXPENSE> 713370
<INCOME-PRETAX> (4059572)
<INCOME-TAX> (1598901)
<INCOME-CONTINUING> (2460671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2460671)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)

-- 38 --

<PAGE>

</TABLE>