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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 8, 1999
AutoBond Acceptance Corporation
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<S> <C> <C>
Texas 600-21673 75-2487218
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) Number)
100 Congress Avenue, 78701
Austin, Texas (Zip Code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code:
(512) 435-7000
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Item 5. Other Events.
AutoBond Acceptance Corporation ("AutoBond") is advising investors and
other interested parties as to the status of its current dispute with Dynex
Capital, Inc. ("Dynex"). The nature of the dispute is as follows: as a result of
the liquidity crisis that gripped much of the real estate finance sector in the
last four months of 1998, Dynex faced liquidity pressures and a falling stock
price. In addition, Dynex failed to procure financing for its fundings of
AutoBond beyond the $100 million line provided by Daiwa Finance Corporation
("Daiwa"). As a result, the terms of Dynex' comprehensive strategic alliance of
AutoBond became less attractive to Dynex. Shortly after execution of the
parties' various agreements, and from time to time thereafter, Dynex requested
that AutoBond agree to renegotiate the terms of the transaction, including the
reduction of the advance rate on funded loans from 105% to 104%, and then again
down to 88% (with the 16% difference to be paid to AutoBond by December 31,
1998). AutoBond accommodated Dynex on these requests, but rejected others,
including the request by Dynex on October 12, 1998 that AutoBond lend $6 million
to Dynex. On December 7, 1998, the President of Dynex threatened that Dynex
would assign its funding obligations to an insolvent affiliate that would then
file for bankruptcy. On December 14, 1998, the President of Dynex presented this
threat to AutoBond in writing, along with two other "alternatives": (a) no
acquisition of AutoBond, but funding to continue through February 28, 1999, only
upon certain conditions, including the ability of Dynex to obtain financing and
a reduction in the advance rate; or (b) the acquisition of AutoBond, but with a
material reduction from the $6 per share previously agreed pursuant to an
existing stock option agreement (the "Stock Option") offered by Dynex Holding,
Inc. ("Dynex Holding"), an affiliate of Dynex, for the AutoBond common stock,
along with numerous other unacceptable conditions. AutoBond's management
rejected these "alternatives", since none of them could be justified to its
shareholders, and management believed that Dynex would ultimately choose to
honor its contractual commitments. Despite Dynex' apparent liquidity pressures,
AutoBond believed, that given Dynex' reported shareholders' equity, Dynex would
have the ability to sell assets or take other necessary actions to generate the
requisite liquidity. To be safe, AutoBond's management did request Dynex to
allow AutoBond to seek alternative funding sources, but Dynex refused this
request.
In addition to Dynex' requests to renegotiate the terms of its
strategic alliance with AutoBond, throughout the latter part of 1998, Dynex was
habitually slow in honoring funding requests. On December 31, 1998, Dynex,
claiming inadequate cash resources, defaulted on its obligation to pay
$6,573,107.44 to AutoBond for the funding accommodations mentioned above. The
full amount was not received until February 2, 1999. The January funding
requests were filled by Dynex either after the contractually required time
period or not at all. No February funding requests have been honored. On
December 31, 1998, AutoBond was informed by Dynex that it had determined to have
its affiliate Dynex Holding exercise its option to acquire AutoBond and in
connection therewith would visit AutoBond during January 1999 in order to
perform final due diligence. The ensuing two-week due diligence review was
extensive and comprehensive, included a review of loan files and servicing
records, and was completed on January 21, 1999. On January 26, 1999, Dynex
Holding, an affiliate of Dynex and holder of the Stock Option, filed a
Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "Hart-Scott filing"). The Hart-Scott filing contained a
description of the Stock Option and included an affidavit wherein the President
of Dynex swore to the Federal Trade Commission that "[Dynex Holding] intends, in
good faith, to make the acquisition referred to in the attached notice."
Concurrently, the President of Dynex sent a letter
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to AutoBond stating that "[Dynex Holding] intends to acquire 5,474,500 shares of
Common Stock of AutoBond which will represent all securities of AutoBond owned
by [Dynex Holding] subsequent to the acquisition." While apparently misleading
AutoBond and the government by its Hart-Scott filing, Dynex requested and
received an exceptions waiver from Daiwa on its credit facility supporting the
AutoBond loans, prior to informing AutoBond of any breaches by AutoBond. Dynex
apparently knew enough to request a waiver from Daiwa, and yet at no time
informed AutoBond during this time of any problems.
It was not until the first week of February 1999 that Dynex'
management notified AutoBond that Dynex was refusing to make additional fundings
of finance contracts, based upon the purported findings of its consultants with
respect to AutoBond's breach of representations regarding loan origination
standards. However, a refusal to fund by Dynex is not the prescribed remedy for
such breaches; rather, a repurchase provision applies, allowing a 30-day grace
period for cure. AutoBond's management pleaded with Dynex throughout this week
for the information necessary to analyze this assertion, but Dynex refused to
provide any substantive information. Over the weekend of February 5 through 7,
representatives of Dynex and AutoBond met at AutoBond's offices to review the
finance contracts against the origination criteria. AutoBond determined that
Dynex' January due diligence utilized a flawed "grid", reflecting criteria
inconsistent with AutoBond's written guidelines. After reaching apparent
agreement on the correct criteria, the Dynex team changed its mind on the
following day, insisting on grading the loans against criteria that differed
materially from the criteria that had been previously agreed-upon and employed
by AutoBond in accordance with its written guidelines. It should be noted that
actual credit performance of the loans in question is such that (a) Dynex'
overcollateralization has increased through the application of available cash
flow and (b) there have been no defaults in the amounts owed to Dynex under the
Credit Agreement.
At this juncture, it became clear to AutoBond that Dynex was
not really interested in objectively appraising AutoBond's performance, but in
concocting reasons for refusing to fund. Having fully utilized its funding line
with Daiwa, Dynex had no funding line for its future AutoBond commitments.
Through March 1, 1999, Dynex has breached commitments totaling at least $30
million owed to AutoBond. On March 3, 1999, Dynex announced its intent to pay
dividends on its preferred stock, thereby further hindering and delaying the
payments owed to AutoBond and other Dynex creditors. Having attempted to cripple
AutoBond (through termination of funding as well as litigation) and in order to
pay off its line with Daiwa, Dynex apparently believes it would be easier to
securitize or finance the $140 million in outstanding AutoBond paper by removing
AutoBond as servicer for those finance contracts. Accordingly, on February 22,
1999, Dynex purported to terminate AutoBond as servicer based on a false
allegation of a servicing termination event. On March 1, 1999, Dynex' attempt
to obtain a temporary restraining order to force the relinquishment of servicing
by AutoBond was defeated in the New York action referred to below.
On February 8, 1999, AutoBond, AutoBond Master Funding
Corporation V, a wholly-owned subsidiary of AutoBond ("Master Funding"), William
O. Winsauer, the Chairman and Chief Executive Officer of AutoBond, John S.
Winsauer, a Director and the Secretary of AutoBond, and Adrian Katz, the
Vice-Chairman and Chief Operating Officer of AutoBond (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".
AutoBond and the other Plaintiffs assert in the Texas Action that Dynex breached
the terms of the Credit Agreement (the "Credit
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Agreement"), dated June 9, 1998, by and among AutoBond, Master Funding and
Dynex. Such breaches include chronic 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
AutoBond's credit underwriting criteria and its compliance with such criteria
with the intention of interfering with and causing actual damage to AutoBond's
business, prospective business and contracts. The Plaintiffs assert that Dynex's
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 AutoBond to accept something less than Dynex's full
performance of its obligations under the Credit Agreement. Further, Dynex
intended to force the controlling shareholders of AutoBond to agree to sell
their stock in AutoBond 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 AutoBond nor Master
Funding 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 AutoBond in accordance
with, AutoBond's customary underwriting guidelines and procedures; and (d) Dynex
is obligated to fund AutoBond 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 AutoBond under the Credit Agreement.
On March 1, 1999, AutoBond 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 AutoBond as servicer, and (c) from
making any further false or defamatory public statements regarding the
Plaintiffs. A hearing is scheduled for March 22, 1999 to consider this
application. Dynex has yet to file any responsive pleadings in the Texas Action.
On February 9, 1999, Dynex commenced an action against AutoBond in the
United States District Court for the Eastern District of Virginia (Richmond
District) (the "Virginia Action") against AutoBond 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. 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, AutoBond refused to permit Mr. Dolph and representatives from Dynex access
to the books, records and finance contract files of AutoBond. Dynex concludes
that as a result of such alleged breaches, it is not obligated to provide
advances under the Credit Agreement. Neither AutoBond nor any of Messrs. William
O. Winsauer, John S. Winsauer or Adrian Katz has filed a responsive
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pleading to date in the Virginia Action. AutoBond intends to seek 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 AutoBond of a
purported servicing termination, Dynex filed another action against AutoBond in
the United States District Court for the Southern District of New York (the "New
York Action"), seeking damages and injunctive relief for AutoBond's alleged
breaches under the servicing agreement among AutoBond, Dynex and Master Funding.
AutoBond was not notified of the New York Action until March 1, 1999, when Dynex
sought a temporary restraining order against AutoBond. After hearing argument
from counsel for both sides, the temporary restraining order was denied. Pending
the filing of pleadings in late March on Dynex' request for injunctive relief,
the court requested counsel to try to arrange an agreement between the parties
as to whether the New York Action should be consolidated with the prior pending
actions in Virginia and Texas, as well as to attempt to establish mutually
acceptable arrangements concerning inspection of the servicing records. As of
this date, the parties have not reached agreement on these issues. To be clear,
notwithstanding Dynex' assertion in past statements, AutoBond remains the
servicer, is performing in its capacity as servicer, and has not hit any
Triggering Event thresholds. Monthly servicing and underwriting procedures
letters, prepared by independent accountants to specific criteria requested by
Dynex, confirm this fact.
On February 9, 1999, AutoBond issued a press release announcing that
Dynex had ceased to fund AutoBond as required under the Credit Agreement. In
response to the findings by Dynex and Mr. Dolph, AutoBond announced that it had
provided a detailed contract-by-contract response and had ascertained that
Dynex' review of the finance contracts was improper and misapplied the AutoBond
guidelines. The aforementioned monthly servicing and underwriting procedures
letters confirm this fact in that the criteria previously agreed upon by Dynex
differs materially from the criteria employed by Dynex and Mr. Dolph in January
1999. AutoBond also cited statistics regarding credit and performance measures
that demonstrated continued improvement, particularly with respect to the Dynex
funded assets. AutoBond further disclosed how independent accountants had
prepared monthly reports, applying procedures agreed upon by Dynex, reviewing
the loan files for compliance with origination and servicing criteria. In
addition, AutoBond retained the services of an outside consultant, The Capital
Group, to review the finance contracts that previously had been reviewed by
Virgil Baker & Associates. Based on its review, The Capital Group concluded that
of the 176 finance contracts cited by Dynex as having been originated outside
AutoBond's guidelines, 17 contained substantive exceptions, most of which were
found to have been made in accordance with the written underwriting guidelines
in that the exception cited had been signed off by management. It is not
credible that Dynex was unaware and uninformed with AutoBond's contract
acquisition and servicing operations during the approximately eight months that
it advanced over $170 million to AutoBond. Rather, Dynex has been intimately
involved with the progress of its strategic alliance with AutoBond throughout.
Dynex' recent complaints about the lack of access to information are
disingenuous by virtue of its bad faith inspection in January 1999 and the fact
that Dynex has breached its agreement with AutoBond by refusing to fund as
required. Prior to the cessation of funding by Dynex, AutoBond provided ample
access to information, including (as previously mentioned) two weeks of due
diligence in January 1999. In addition, Dynex continues to receive
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administrative reports from AutoBond and procedures letters from independent
auditors regarding AutoBond's underwriting and servicing operations.
Since early February, AutoBond's management has been attempting to
procure alternative sources of funding and other strategic alternatives,
including a change in control of AutoBond, in order to mitigate the situation
with Dynex. AutoBond is currently in discussions with several investment bankers
and direct sources regarding such alternatives. While management hopes that an
alternative opportunity will be consummated, there can be no assurance, and
accordingly, AutoBond has been forced to suspend acquisitions and dispositions
of finance contracts since the end of January. As a consequence, AutoBond
expects to report a loss for the first quarter of 1999 and does not expect to
pay the quarterly dividend on its preferred stock otherwise payable on March 31.
AutoBond also expects further pressure to be exerted on it to surrender
servicing under its various securitization transactions. Furthermore, unless a
comprehensive solution to the liquidity problems caused by the Dynex situation
is reached, the future viability of AutoBond's business will be threatened.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits. The following exhibit is filed herewith:
10.43 Press Release of AutoBond Acceptance Corporation,
dated February 9, 1999
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: March 5, 1999
AutoBond Acceptance Corporation
By: /s/ Adrian Katz
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Adrian Katz
Vice-Chairman, Chief Operating
Officer and Chief Financial Officer
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EXHIBIT 10.43
AutoBond Updating Investors to Various Funding and Credit Performance
AUSTIN, Texas, Feb. 9 /PRNewswire/ -- AutoBond Acceptance Corporation (Amex:
ABD) news; "AutoBond"), listed on the Amex under the symbol ABD, is updating
investors as to various funding and credit performance information.
The Company's primary source of financial liquidity is Dynex Capital, Inc.
(NYSE: DX news; "Dynex"). As previously disclosed, AutoBond has been responsive
to Dynex in the past and has accommodated their repeated requests to amend the
original financing agreements to foster Dynex's liquidity. The terms were
modified on June 30, October 20, and October 28, 1998. Under the most recent
terms, the advance rate was reduced from 104% to 88% for an interim period,
ending no later than December 31, 1998. By December 31, 1998 Dynex was required
to advance the additional (adjusted for amortization) 16%. Further, AutoBond has
the option to extend the financing agreements with Dynex through November 30,
1999. In fact, throughout January, 1999 Dynex did not complete their funding to
AutoBond of the additional 16%, although such amount was forthcoming in the past
week. With respect to new financing requests, since the fourth quarter 1998 a
number of these have been funded slower than the prescribed timeframe (2 days)
in the financing agreements. The last filled financing request was January 29,
1999. Notwithstanding the lack of timeliness of fundings, AutoBond is pleased
that Dynex has to date advanced almost $170 million.
At AutoBond's expense, using criteria requested by Dynex, procedures letters are
prepared by accountants on a monthly basis with respect to both underwriting and
servicing of the Dynex assets. These reviews have demonstrated material
compliance with AutoBond guidelines. Dynex recently completed underwriting due
diligence with the assistance of third-party consultants. Dynex has asserted
that the initial results suggested significant non-compliance with AutoBond
guidelines. However, AutoBond has provided detailed loan-by-loan responses to
the Dynex due diligence report and was able to ascertain that the loans were not
properly reviewed against the AutoBond guidelines. In the interim, Dynex has not
been funding. AutoBond is concerned with the pattern of liquidity accommodations
to Dynex, followed by non-compliant, untimely funding, and now most recently
funding restraint on faulty findings. Although success is not assured, AutoBond
is working intensively to ensure that funding is back on track with Dynex as
soon as possible.
AutoBond's credit performance and measures, particularly with respect to the
Dynex funded assets, continues to improve and exceed expectations. Overall
delinquency rates of the AutoBond servicing portfolio have declined
significantly in the past year. The 60-89 day delinquencies have declined from
5.85% at 12/31/97 to 3.71% at 12/31/98 and the 90+ day delinquencies have
declined from 4.47% at 12/31/97 to 3.23% at 12/31/98. In the past 6 months,
covering the period of Dynex fundings, the weighted average number of days of
delinquency declined from 13.4 days to 6.7 days at the end of
January, 1999.
The AutoBond All program, introduced in September, 1998, has proven very
effective at improving the volume of applications, commensurately increasing the
follow-up purchases, and enhancing the overall credit characteristics of the
acquired finance contracts. Various
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comparative measures from 1997 versus November and December, 1998 acquisitions
include: average obligor income increased from an average of $2,192 to $2,674;
average time on the job increased more than a year from 3.6 years to 4.8 years;
and the average vehicle age declined from 2.7 years to 2.1 years. The average
purchase discount for the fourth quarter was 7.6% versus 8.5% prior to the ALL
program.
AutoBond currently has 6,531,311 common shares and 1,125,000 preferred
shares outstanding. AutoBond is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
originated primarily 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. AutoBond is located in Austin,
Texas and acquires contracts nationwide from dealers in approximately 40 states.
The above statements include information that should be considered
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995, and in addition involve a number of risks and uncertainties.
SOURCE: AutoBond Acceptance Corporation
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