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WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from January 1, 2000 to September 30, 2000
COMMISSION FILE NUMBER 000-21673
AUTOBOND ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2487218
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1512 WEST 35TH STREET CUT-OFF, AUSTIN, TEXAS 78731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 472-3600
Securities registered pursuant to Section 12(b) of the Act:
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Title of class Name of each exchange on which registered
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COMMON STOCK, NO PAR VALUE PER SHARE OVER THE COUNTER
15% SERIES A CUMULATIVE PREFERRED STOCK,
NO PAR VALUE PER SHARE OVER THE COUNTER
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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 No X
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant was $155,585 on September 30, 2000
_____________
FOOTNOTE: 1 Calculated by excluding all shares that may be deemed to be
beneficially owned by executive officers, directors and five percent,
shareholders of the registrant, without conceding that all such persons are
"affiliates" of the registrant for purposes of the Federal securities laws.
As of October 31, 2000 there were 5,962,561 shares of the registrant's Common
Stock, no par value, and 1,073,500 of the registrant's 15% Series A Cumulative
Preferred Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
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PART I...................................................................................................1
ITEM 1. BUSINESS.................................................................................1
ITEM 2. PROPERTIES...............................................................................6
ITEM 3. LEGAL PROCEEDINGS.......................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................7
PART II..................................................................................................8
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................8
ITEM 6. SELECTED FINANCIAL DATA................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....16
PART III................................................................................................16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................16
ITEM 11. EXECUTIVE COMPENSATION.................................................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................20
PART IV.................................................................................................22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K..........................22
SIGNATURES..............................................................................................23
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This transition report on Form 10-K (the "Transition Report") constitutes
the annual report of AutoBond Acceptance Corporation, a Texas corporation (the
"Company") for the nine month period ended and as of September 30, 2000, and
accomplishes the change in the Company's fiscal year to September 30.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On June 9, 2000, the litigation between Dynex Capital, Inc. ("Dynex") and
the Company was settled, with Dynex paying $20 million to the Company and
agreeing to the cancellation of $3 million of notes issued by the Company.
Through October 31, 2000, the Company has applied proceeds from the Dynex
settlement to the retirement of indebtedness, the payment of fees and expenses
related to the litigation, salaries and compensation expenses, auditing expenses
and certain investments related to the Company's establishment of a private
investment fund, as more fully discussed below. The Company reached agreement
with Fleet/Bank Boston, the holder of the Company's remaining long-term debt,
and a final payment of $6,500,000 was made to Bank Boston on July 27, 2000.
The Company has moved its headquarters in Austin Texas from 100
Congress to 1512 West 35th Street Cutoff and is also maintaining an office at
Agility Capital Inc., 750 Washington Boulevard, 5th Floor, Stamford, Connecticut
06901. The Company currently has 5 employees. In July 2000, the Board of
Directors of the Company approved changing the Company's name to Agility
Capital, Inc. ("Agility Capital") and the adoption of a new business plan. As
Agility Capital, the Company will pursue revenues by acting as an advisor to,
and investor in, new economy ventures through the establishment of one or more
investment funds. In connection with this strategy, the Company has hired Thomas
Blinten as the new President of the Company. Mr. Blinten has been a director of
the Company since 1996 and has 18 years experience in investment banking, with
recent experience in starting, financing, and managing Internet-related
businesses.
GROWTH AND BUSINESS STRATEGY
The Company is in the process of raising, pursuant to a private
placement, a $50,000,000 venture capital investment fund with a projected
10-year term, to be called the Agility Capital Fund, LLC (the "Fund"). The Fund
will sell and issue membership interests to accredited and institutional
investors. The Company will invest in such interests and will also serve as the
managing member and the initial advisor to the Fund. The Fund will invest in
early stage, privately held companies operating in the e-commerce business
services/internet, information technology and services, new media, enterprise
and application software, and communications industries. On a select basis,
later stage companies in other industries may also be considered.
The Fund's business model is to invest in companies that can benefit
from the collective operating and financial experience of the Fund's managers
and its advisors. The management and advisory team's business and industry
experience and professional relationships will be relevant to the industries
targeted and will be used to help the Fund achieve significant and timely
venture capital rates of returns.
In addition to providing growth capital to a selected group of
companies, the Fund will provide these companies ("Portfolio Companies") with
access to a network of contacts to help them anticipate and address challenges
when they arise and help accelerate their path to profitability. The Fund can
also provide Portfolio Companies with access to technology strategy and software
development resources via its proposed relationship with a technological
consulting and development firm, as well as management recruiting services
through the Fund's proposed association with an executive recruitment firm.
Portfolio Companies will be provided with access to marketing, advertising, and
communication expertise to help them develop marketing strategies to build brand
awareness in the digital marketplace through the Fund's association with a
founder and former President of one of the largest advertising and
communications agencies in the US. Access to significant debt and equity funding
resources to help further portfolio company growth will be facilitated through
the Fund's management team's extensive contacts in the financial community.
Additionally, Portfolio Companies will have access to state of the art business,
technology and consumer market intelligence through the Fund's association with
a leading provider of business technology research, consumer and market
intelligence and decision making tools.
The Fund's Vision and Mission
In the past several years, the venture capital industry in the United
States has experienced dramatic growth, both in terms of the number of venture
capital funds operating and
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the amount of venture capital under management. As a result of this growth many
venture capital funds have elected to concentrate on making investments in
later-stage, well developed companies that require large amounts of investment
capital. Consequently, many deserving, less mature, early-stage companies are
finding it difficult to find venture capital funds that are willing to invest
more modest amounts while providing the hands-on attention they need to help
them successfully grow and reach profitability. Consequently, the Fund believes
many early stage companies in its targeted industries are under served by the
venture capital industry.
The Fund intends to take advantage of these conditions by identifying
and investing in companies where the Fund can leverage its resources and help
these companies create substantial value in accelerated timeframes, and produce
investment returns for the Fund and its investors in excess of those which could
be expected in alternative investment vehicles. These goals will be achieved by
combining the talent, resources, and experiences of the Fund Manager and its
network of personal and professional relationships with the talent, resources,
and experiences existing in the Portfolio Companies.
The Fund intends to reach its goals by:
-Focusing its activities on private companies in the e-commerce business
services/internet, information technology and services, new media,
enterprise and application software, and communications industries.
-Identifying significant venture investment opportunities based upon the
quality and depth of the Fund's management, advisors, portfolio company
management and business and professional relationships.
-Providing Portfolio Companies with advice based upon the experience,
contacts, and leadership of the Fund's management team.
-Providing Portfolio Companies with assistance in raising equity capital,
obtaining bridge and mezzanine financings and developing various buy-out
structures, re-capitalization's, and with securing international
investments.
-Assisting Portfolio Companies to anticipate and address various operational
problems by providing them with access to the Fund's network of advisors
and service providers.
Internet and digital technologies and their industrial support systems
are currently experiencing explosive growth that will significantly affect and
permanently alter dozens of industries worldwide over the next few decades.
Because of this rapid growth and a highly competitive environment, companies
with unique technologies and solutions need to be able to quickly achieve
leadership positions by accelerating the development and commercialization of
their offerings, and getting them to market faster.
Venture capital is increasingly being targeted at later stage companies
that require larger size amounts of investment capital, creating a gap in
available financing sources between "angel" investors and large venture capital
funds. Many of the entrepreneurial companies that could benefit from the Fund's
value-added services are start-up or early stage companies that cannot qualify
for consideration by larger venture capital funds and are too technical or
require more handholding than "angel" investors want or are able to provide. The
Fund will focus its activities on identifying and investing in companies that
fall into this gap.
Portfolio Strategy
The Fund's objective is to create partnerships with its Portfolio
Companies by not only providing capital, but also by actively providing useful
advice and resources in the areas contributing to the development, execution,
and operations of the company. In doing so, the Fund will constantly monitor its
investments and assist Portfolio Companies to achieve greater efficiencies,
accelerating their path to profitability and success. The Fund will encourage
and promote all forms of synergies between the management teams of the Fund and
the Portfolio Companies, including the sharing of management experience, legal
and financial resources, and marketing, business development and technology
advice. We believe our investment model has significant advantages over
traditional venture capital funds because of our investment selection criteria
and the collective knowledge, industry experience, and business contacts we will
make available to our Portfolio Companies.
The selection of a prospective Portfolio Company investment will be
done carefully with an eye toward choosing companies that possess the
characteristics and people with the greatest potential to succeed and the
opportunity to become industry leaders. The Fund Manager will employ a
research-based investment strategy, driven by a bottom-up analysis designed to
identify emerging technology companies in high growth potential,
technology-driven markets. After the investment is made, the Fund Manager plans
to use its resources to add value to Portfolio Companies during the period when
they have the best opportunity to rapidly create increased market value. This
period often coincides with the period the prospective Portfolio Company is
developing its product or service offering and its validation in the
marketplace. Generally, this period of opportunity occurs when the prospective
Portfolio Company is still privately held, and continues until its value is
recognized by the market and it is acquired by
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another company at a premium or it has its initial public offering. The Fund
Manager's investment committee, consisting of all the executive management of
the Fund Manager (the "Investment Committee") will be responsible for all of the
Fund's investment decisions, with each investment decision requiring the
unanimous approval of the Investment Committee. The Fund's primary focus is to
invest in early stage companies, but we may choose to consider more developed,
and even public, companies if the investment thesis is compelling and the Fund's
involvement is deemed to add value to the opportunity.
The Investment Committee's primary investment selection criteria will emphasize
companies that have:
-Unique technologies or solutions, which offer a competitive advantage.
-Technology teams with the proven ability to successfully commercialize
their concepts.
-Large and growing market opportunities. Preference will be given to
companies that have the potential to dominate their target markets.
-A compelling, well articulated and proven business model that is
sustainable.
-A management team that displays entrepreneurial leadership, proven skills,
a successful track record and relevant business experience, or a
willingness to bring in professional management.
The Fund expects that most of its investment opportunities will come
principally from three areas: the Fund's network of professional and business
relationships and its relationships with industry leaders, entrepreneurs, and
legal, accounting, consulting, and executive recruiting firms, the network of
professional, business and investor contacts of its Portfolio Companies, and
from venture capital funds concentrating on later stage investments that see the
Fund as a source for future investments.
In addition to the management team comprised of the Company's current
executive management, the Fund will have an active Advisory Board comprised of
individuals from a wide variety of backgrounds who can be accessed for expert
advice on matters that are relevant to the success of the Fund's Portfolio
Companies. In addition, the Fund's investment team and contacts will seek to
assist Portfolio Companies in locating significant debt and equity resources
through access to leading venture capitalists, as well as Wall Street and
regional investment and merchant banks.
Overview and Diversity of Investments
The Company expects that the size of most of the Fund's investments
will be less than those of the typical venture capital fund, but greater than
those made by the typical "angel" investor. Accordingly, each of the Fund's
initial investments will generally range between $100,000 and $3,000,000 (with
not more than 15% of the Fund's of such committed capital invested in a single
Portfolio Company). Follow-on investments may be made in Portfolio Companies
that are reaching agreed upon milestones.
The Fund anticipates investing in approximately 10 to 15 Portfolio
Companies, assuming the Fund raises $50,000,000 in its offering. The Fund's
investment criteria is designed to produce a diversified investment portfolio.
Initial Investments
Prior to the initial closing of the Fund, the Company has and may
advance funds on behalf of the Fund to make investments which meet the Fund's
investment criteria. At the election of the Company, as Fund Manager, such
investments will be transferred to the Fund in return for the repayment of such
advances, without interest, for Class A Membership Interests in an amount equal
to the amount of funds advanced, or a combination of the two.
As of October 31, 2000, the Company, in anticipation of their transfer
to the Fund, has made investments (aggregating approximately $1.2 million) in
the following:
- a company that provides software technology that enables
distribution and synchronization of image intensive data for the advertising
industry. This company's flagship offering is a proprietary distributed database
product that links together industry participants, enabling business
transactions and the distribution and synchronization of image intensive data.
In this regard, the product acts in many ways like an Applications Service
Provider ("ASP"), but is not limited or tied to the Internet. This service can
be used real-time, on-line or downloaded to a user's network, where the
distributed database will be updated automatically for data changes made by any
user.
-an e-Messaging software company delivering technologies that
can significantly increase the probability of recipient's action when receiving
email, instant messages or other forms of electronic communications. This
Company's intelligent solution provides ISPs and hosting companies the ability
to generate annuity revenues in areas previously impossible. Their
patent-pending solution has significant applications in the broadband and
wireless sectors and can scale as these bandwidths increase their market share.
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-an investment fund that co-invests in private venture-stage
companies with whom the principals of the fund have business or professional
relationships. This fund's investments will be made in conjunction with top-tier
venture capital funds, strategic corporate investors, and senior management
teams. The fund is premised upon the belief that in the world of venture
capital, relationships and successful deal flow are even more critical than in
the public markets and that access to venture opportunities is based on the
quality and depth of business and professional relationships.
The Company's current investments through this fund include (a) a
global services marketplace that allows businesses to transact, develop and
deliver services including software programming, graphic design, translation and
transcription, all developed remotely and delivered on-line, and (b) an Internet
infrastructure company that provides an entirely new class of lightweight,
collaborative applications through a proprietary platform whose applications can
be created and used by knowledge workers and delivered to the inbox or browser,
enabling people to assemble, communicate, and collaborate independent of time,
location, and computing platform.
Exit Strategies for Investments
The Fund will seek to realize returns from its investments through a
variety of exit strategies including, but not limited to: (i) a sale of a
Portfolio Company or the Fund's investment to a strategic or financial buyer and
(ii) an initial public offering ("IPO"). Generally, it is expected that the Fund
will not be able to achieve liquidity until the end of a "lock-up" period,
generally 180 days following an IPO.
Investment Monitoring; Board of Directors of Portfolio Companies
The Fund expects to be involved on a strategic level with all of its
Portfolio Companies. Unless it will benefit the Fund, the Fund does not expect
to be active in the day-to-day operations of its Portfolio Companies. Depending
on the circumstances, the Fund may make controlling or non-controlling
investments in a Portfolio Company, and the Fund may or may not be represented
on its board of directors. In the event that the Fund does appoint a director to
the board of directors of a Portfolio Company, such directors may include the
advisors, officers or directors of the Company, members of the Fund's Board of
Advisors, investors, or upon the advice of the Fund, outside business executives
that are capable of adding significant value to the Portfolio Company.
Management Fee and Carried Interest
It is currently proposed that for managing the Fund, the Company as
Fund Manager will receive an annual management fee equal to 2.5% of committed
capital through year five. Such annual management fee will decline .10% each
year thereafter, but not less than 2%. In addition, it is currently proposed
that the Fund Manager will be entitled to receive a carried interest fee equal
to 20% of the net profit from the Fund's investments, with the remaining 80%
allocated to the members in accordance with their ownership percentages.
Assignment of Fund Management Responsibilities to Management Company
The Company may assign, or may be required by the Fund's Members to
assign, all or a portion of the Company's investment advisory, management and/or
administrative responsibilities to an affiliated "Management Company" and assign
to such management company the right to receive all or any portion of the
management fees otherwise payable to the Company.
Expenses
The Company, as the Fund's Managing Member, will pay all ordinary
administrative and overhead expenses related to managing, originating and
monitoring investments, including salaries, rent, equipment, administrative
expenses which are incurred by the Fund Manager and the Managing Member (to the
extent not reimbursed by a Portfolio Company) in connection with the operation
of the Fund or an investment by the Fund. The Fund will pay all other costs and
expenses relating to its activities (to the extent not reimbursed by a Portfolio
Company), including the management fees, legal, auditing, consulting and
accounting expenses (including expenses associated with the preparation of Fund
financial statements, tax returns and K-1s), expenses of the Advisory Board and
meetings of the Members (annual or special), insurance and other expenses
associated with the acquisition, holding and disposition of its investments, all
third-party expenses in connection with transactions not consummated, and
extraordinary expenses (such as litigation, if any).
Risks Associated with the Company's New Business Plan
Failure to Establish the Fund
The Company's management is using its best efforts to raise the capital
necessary to establish the Fund as a viable venture. The Company has engaged a
securities broker/dealer to serve as placement agent, assembled an initial
advisory board and engaged the services of two consultants. However, market
conditions for private equity funds are challenging, competitive and volatile.
Accordingly, there can be no assurance that the Company will be successful in
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establishing the Fund. If the Fund cannot be established within a reasonable
timeframe, the Company's capital resources would eventually be strained and the
Company could be unable to monetize the investments currently made in
anticipation of their conveyance to the Fund.
Establishment of the Fund on Terms Different From Those Proposed
In order to accomplish the establishment of the Fund on terms
acceptable to investors in the Fund, it may be necessary to amend certain of the
proposed terms of the Fund. In particular, the size of the Fund may be reduced,
the Company may be precluded from selling certain investments to the Fund, the
amount of the management fee or 20% carry payable to the Company may be reduced
or delayed, and/or the Company may be required to assume a greater share of
placement agency fees. Such modifications could have an adverse effect on the
profitability of the Fund for the Company.
Sharing of Management Fees with Managers
The success of the Fund will primarily depend upon the efforts of
individuals designated by the Company, in its capacity as Fund Manager, to
manage the Fund's investments. The Company expects that the attraction and
continued retention of qualified individuals will require compensating these
individuals through the utilization of substantially all of the management fees
received by Company, as well as the reallocation to such individuals of a
portion of the Company's 20% share of the Fund's net profits. Therefore, even if
the Fund is successfully established, there can be no assurance as to the
ultimate revenues available for the Company's shareholders.
Risks Associated with Portfolio Investments
Identifying and participating in attractive investment opportunities
and assisting in the building of successful young enterprises is difficult.
There is no assurance that the Fund's investments will be profitable and there
is a risk that the Fund's losses and expenses will exceed its income and gains.
There generally will be little or no publicly available information regarding
the status and prospects of Portfolio Companies or other private equity
investments. Many investment decisions by the Fund Manager will be dependent
upon the ability of its officers and agents to obtain relevant information from
non-public sources. The marketability and value of each investment will depend
upon many factors beyond the Fund Manager's control. The Fund may be represented
by representatives of the Managing Member or the Fund Manager on a Portfolio
Company's board of directors, although this cannot be assured and each Portfolio
Company will be managed by its own officers (who may not be affiliated with the
Fund, the Managing Member or the Fund Manager. Portfolio Companies may have
substantial variations in operating results from period to period, face intense
competition, and experience failures or substantial declines in value at any
stage. The public market for high technology and other emerging growth companies
is extremely volatile. Such volatility may adversely affect the development of
Portfolio Companies, the ability of the Fund to dispose of investments, and the
value of investment securities on the date of sale or distribution by the Fund.
In particular, the receptiveness of the public market to initial public
offerings by the Fund's Portfolio Companies may vary dramatically from period to
period. An otherwise successful Portfolio Company may yield poor investment
returns if it is unable to consummate an initial public offering at the proper
time. Even if a Portfolio Company effects a successful public offering, the Fund
may be subject to contractual "lock-up," securities laws or other restrictions
which may, for a material period of time, prevent the Fund or the Class A
Members from disposing of the Portfolio Company's securities. Generally, the
investments made by the Fund will be illiquid and difficult to value, and there
will be little or no collateral to protect an investment once made. At the time
of the Fund's investment, a Portfolio Company may lack one or more key
attributes necessary for success (e.g., proven technology, marketable product,
complete management team, or strategic alliances). In most cases, investments
will be long term in nature and may require many years from the date of initial
investment before disposition. The Fund Manager will seek some investments that
may yield short-term returns, but this cannot be assured.
Although investments in Portfolio Companies by the Fund may
occasionally generate some current income, the return of capital and the
realization of gains, if any, from a Portfolio Company investment generally will
occur only upon the partial or complete disposition of such investment. Although
a Portfolio Company investment may be sold at any time, it is not generally
expected that this will occur for a number of years after the Portfolio Company
investment is made. Factors such as overall economic conditions, the competitive
environment, the public market for initial public offerings, and the
availability of potential acquirers, may shorten or lengthen the Fund's holding
period. In addition, it is unlikely that there will be a public market for the
securities held by the Fund at the time of their acquisition. The Fund will
generally not be able to sell its Portfolio investments or its own securities
unless their sale is registered under applicable securities laws, or unless an
exemption from such registration requirements is available.
Highly Competitive Market; Limited Investment Opportunities
The activity of identifying, completing and realizing on attractive
private equity investments is highly competitive, and involves a high degree of
uncertainty.
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The success of the Fund may be influenced by other venture capital
funds, which now exist or may be established in the same geographic location. In
seeking attractive investment opportunities, the Fund may compete with other
venture capital funds, some of which may have greater resources than the Fund,
or be otherwise associated with other prominent executive recruiting firms.
There can be no assurance that the Fund will be able to locate and complete
investments in Portfolio Companies which satisfy the Fund's objectives or
realize upon their values.
No Operating History; Unproven Business Model
The Fund does not have any operating history, and has not made any
investments. While the officers of the Fund Manager have experience with matters
relating to private investments, they have no operating experience with respect
to an independent private equity fund. In addition, this fund is a relatively
new concept and the business model has not yet been successfully proven.
Risk of Limited Number of Investments
Although the Fund anticipates making between 15 and 30 investments,
because of the early stage nature of its investments complete loss of capital in
a Portfolio Company is possible. The aggregate return of the Fund may be
substantially adversely affected by the unfavorable performance of one or a
small number of the Fund's investments.
Additional Financing Needs of Portfolio Companies
Portfolio companies may need substantial additional capital to support
growth or to achieve or maintain a competitive position. Such capital may not be
available on attractive terms. The Fund's capital is limited and may not be
adequate to protect the Fund from dilution in multiple rounds of Portfolio
Company financing. If such financing were to be unavailable or more expensive
than anticipated, the Fund's investments could be adversely affected or lost
entirely.
Reliance on Portfolio Company Management
Although the Managing Member and Fund Manager will monitor the
performance of each Portfolio Company and provide input at a strategic level,
the Fund will rely upon management of each Portfolio Company to operate the
Portfolio Companies on a day-to-day basis. While it is the intent of the Fund to
invest primarily in companies with proven operating management in place, there
can be no assurance that such management will continue to operate successfully.
While the Fund will attempt to assist a Portfolio company with finding effective
management, there is no guarantee that either the Fund or the Portfolio Company
will be successful in acquiring the necessary human resources.
Legal, Tax, Accounting, and Regulatory Risks
Legal, tax, accounting, and regulatory changes could occur during the
term of the Fund that may adversely affect the Fund. For example, from time to
time the market for private equity transactions has been adversely affected by
adverse public markets, availability of equity and mezzanine financing, and a
decrease in the availability of senior and subordinated financing for
transactions. In addition, future changes in the accounting rules applicable to
corporate partnership transactions may restrict the ability of corporations to
achieve off-balance sheet treatment and thereby reduce their interest in
pursuing such transactions.
The Fund anticipates that many of its Portfolio Companies will be
internet-based or facilitated. As of October 31, 2000, there were few laws or
regulations directed specifically at Internet companies. However, because of the
Internet's popularity and increasing use, new laws and regulations may be
adopted, including taxes. These laws and regulations may cover issues such as
the collection and use of data from Web Site visitors and related privacy
issues, pricing, content, copyrights, online gambling, distribution, and the
quality of goods and services. The enactment of any additional laws or
regulations may impede the growth of the Internet, which could decrease the
revenue of Portfolio Companies and place additional financial burdens on them.
MANAGEMENT INFORMATION SYSTEMS
The Company relies on standard accounting software that operates on a
personal computer to assist in the maintenance of its records.
EMPLOYEES
As of September 30, 2000, the Company employed 5 persons.
There are plans to hire additional personnel as the Company expands and
the need arises. The Company believes that its relationship with its employees
is satisfactory.
ITEM 2. PROPERTIES
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The Company has leased approximately 1000 square feet of office space
at a monthly rent of $1,100. The Company's headquarters contain the Company's
executive offices. The Company maintains an additional office in Stamford
Connecticut at a monthly rent of $2,500. Its securitization subsidiaries are
incorporated and maintain an office in Nevada.
ITEM 3. LEGAL PROCEEDINGS
In the course of its previous business as a specialty finance company,
the Company from time to time has been 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 been
certified as eligible for class-action status.
On June 9, 1998, the Company entered into a series of agreements with
Dynex Capital, Inc. ("Dynex") whereby Dynex agreed to provide financing to the
Company, with such financing to be secured by auto loans underwritten and
acquired by the Company. Further, the Company was to service all such loans for
a fee. Additionally, the three principal shareholders of the Company granted to
an affiliate of Dynex, Dynex Holding, Inc., an option to acquire their stock. In
February 1999, Dynex informed the Company that certain alleged "Funding
Termination Events" had occurred and that Dynex would no longer honor its
obligation to fund the Company as per the parties June 9, 1998, agreements. The
Company vigorously disputed Dynex's allegations and, on February 8, 1999, filed
suit against Dynex in the Texas case seeking to enforce Dynex's contractual
obligations and/or to recover damages resulting from the breach thereof. After a
four week jury trial, on March 9, 2000 the jury returned a verdict in favor of
the Company. Specifically, the jury found that (a) the Company made no material,
knowing or reckless misrepresentations to induce Dynex to enter in the June 9,
1998 agreements between the parties, (b) the Company did not breach its June 9,
1998 agreements with Dynex prior to Dynex's cessation of funding, and (c) Dynex
maliciously or negligently made defamatory statements about the Company. Based
on these findings, the jury awarded the Company $18.7 million in direct lost
profits and approximately $50 million in consequential lost profits. After
numerous motions by both parties, the court entered judgment reducing the amount
of damages owed to the Company to $23.3 million. Thereafter, on June 9, 2000 the
Company entered into a settlement agreement with Dynex, pursuant to which (a)
Dynex and the Company released all claims against each other; (b) Dynex paid $20
million to the Company (of which $3.3 million was paid to the Company's Texas
trial counsel pursuant to a contingency fee and expense arrangement), (c) Dynex
surrendered to the Company 51,500 shares of the Company's preferred stock, (d)
Dynex cancelled the Company's indebtedness to Dynex under a $3 million note, and
(e) the Company assigned to Dynex (i) a $1.1 million subordinated note from a
securitization in which Dynex held the senior debt, and (ii) the common stock in
two securitization subsidiaries in which Dynex held the senior debt.
In 1998, the Company initiated suit in state court in Houston, Texas
against Progressive Northern Insurance Co. arising out of insurance policies
issued by Progressive affiliates to the Company. The policies provided
deficiency balance coverage and physical damage coverage on automobile loans
acquired by the Company and sold into certain securitizations. Progressive
contended that there was a cumulative limit on claims under the Deficiency
Balance Policy of 88% of the total premiums paid on that Policy, which was
contrary to the Company's position. On this point, the Company's position was
confirmed by the court. Progressive also contended that it had the right to
cancel the Policies, without any refund of the fully-paid premiums, at any time
pursuant to 30 days' notice and in fact did so in March 1998. The Company and
the securitization trustees disputed this termination as contrary to the terms
and understandings reached with Progressive and relied upon by the parties in
interest, including the securitization market. This issue was submitted by the
court to the jury. After a three week trial in January 2000, the Company failed
to win a verdict against Progressive. The Company filed a motion to set aside
the verdict based on various legal issues and the court denied this motion and
entered a take nothing judgment against the Company. The Company is currently
appealing this verdict.
The Company and Tejas Securities Group, the lead underwriter of the
sale in February 1998 of the Company's 15% Series A Cumulative Preferred Stock,
have been sued by a former holder of the Preferred Stock. Plaintiff claims that
he purchased the Preferred Stock from Tejas in reliance upon alleged
representations made by both the Company and Tejas that the financing the
Company had in place with Dynex was "secure". Plaintiff has alleged violations
of the Texas Securities Act, fraud, negligent misrepresentation, civil
conspiracy and violations of the Texas Business and Commerce Code. Plaintiff had
previously filed a similar suit in Federal Court against the Company which was
dismissed. The Company is vigorously defending this case and anticipates a
favorable outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Due to its limited resources in the year 2000, the Company did not hold
an annual meeting of shareholders during the nine months ended September 30,
2000. The Company intends to hold an annual meeting by early 2001.
7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On November 8, 1996, the Company's Common Stock was listed for
quotation and began trading on the NASDAQ National Market under the symbol
"ABND". Prior to such date, the Company's stock was closely held and not traded
on any regional or national exchange. On February 27, 1998, the Company's common
stock listing was transferred to the American Stock Exchange and began trading
under the symbol "ABD". As a result of the Company's deteriorating financial
condition, the Company's Common Stock was delisted by the American Stock
Exchange and October 5, 1999, was the last day the Company's common and
preferred stock was traded on the exchange. The Company's common stock continues
to be traded in the over the counter market under the symbol "AUBD". High and
low quotations since October 5, 1999 represent bid prices derived from Nasdaq's
website and do not reflect retail mark-ups or commissions and may not
necessarily represent actual transactions.
HIGH AND LOW BID SALE PRICES BY PERIOD
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
March 31, 1998 8 7/8 2 13/16
June 30, 1998 8 1/4 5 1/8
September 30, 1998 7 15/16 5 3/8
December 31, 1998 5 3/8 $3
March 31, 1999 5 13/16
June 30, 1999 1 3/4 7/8
September 30, 1999 1 3/16 3/32
December 31, 1999 1/4 1/32
March 31, 2000 1 5/32
June 30, 2000 3/4 1/8
September 30, 2000 3/16 1/8
</TABLE>
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. As of September 30, 2000 the Company had approximately
19 stockholders of record, exclusive of holders who own their shares in "street"
or nominee names.
The Company has not paid and does not presently intend to pay cash
dividends on its common stock. The Company anticipates that its earnings for the
foreseeable future will be retained for use in operation and expansion of
business. Payment of cash dividends, if any, in the future will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's financial condition, earnings, current and anticipated capital
requirements, terms of indebtedness and other factors deemed relevant by the
Company's Board of Directors. In addition, dividends on the Company's common
stock may not be paid until all cumulative dividends in arrears on the Company's
preferred stock are paid in full. See "Recent Developments" and "Liquidity and
Capital Resources".
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company and its subsidiaries for the periods and at the dates indicated. The
selected financial data were derived from the financial statements and
accounting records of the Company. The data presented below should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein. (Dollars in thousands, except for per
share amounts.)
8
<PAGE>
<TABLE>
<CAPTION>
Nine months Ended Year Ended
September 30, December 31,
----------------------- ---------------------------------------------------
1999 2000 1996 1997 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Interest income 1,494 237 2,520 4,119 1,499 746
Gain on sale of finance contracts 1,704 (8) 12,820 18,667 17,985 1,533
Servicing fee income 2,788 658 1,131 3,222 3,122
Gain on litigation settlement 750 22,583 750
Other income (loss) 149 35 388 (173) 348 349
----------- ----------- ----------- ----------- ----------- ------------
Total revenues 6,885 22,847 16,386 23,743 23,054 6,500
----------- ----------- ----------- ----------- ----------- ------------
Provision for credit losses 304 412 613 100 277
Interest expense 2,328 898 2,383 3,880 3,117 2,042
Salaries and benefits 7,530 1,757 4,529 7,357 10,472 8,272
General and administrative 6,298 6,191 2,331 6,075 6,782 8,052
Impairment of retained interest in
securitizations 4,673 1,312 9,932 8,908
Other operating expenses 2,253 243 1,120 2,005 3,422 2,843
----------- ----------- ----------- ----------- ----------- ------------
Total expenses 23,386 9,089 10,775 21,242 33,825 30,394
----------- ----------- ----------- ----------- ----------- ------------
Income (loss) before taxes and
extraordinary loss (16,501) 13,758 5,611 2,501 (10,771) (23,894)
Provision (benefit) for income taxes (102) - 1,926 888 (3,626) (102)
Extraordinary benefit, net of tax
benefit - 1,804 (100) - - -
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss) (16,399) 15,562 3,585 1,613 (7,145) (23,792)
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss) available to
common shareholders (17,664) 14,354 3,585 1,613 (8,584) (25,479)
Earnings per share before
extraordinary item (2.70) 1.99 .62 .25 (1.31) (3.90)
Weighted average shares
outstanding diluted 6,531,311 6,292,938 5,809,157 6,965,877 6,531,311 6,531,311
Cash flow data:
Cash (used in) provided by
operating activities (3,854) 16,425 (5,730) (14,455) 4,721 (4,404)
Cash (used in) provided by
investing activities (197) 8 421 513 80 89
Cash (used in) provided by
financing activities (17) (10,218) 9,337 9,980 211 (21)
Balance sheet data:
Cash and cash equivalents 1,102 7,050 4,121 159 5,171 835
Restricted funds - 2,982 6,904 - -
Finance contracts held for sale,
net 318 228 1,366 867 208
Retained interests in
securitization 7,005 16,943 32,017 13,873 1,402
Investments 100
Total assets 11,488 7,275 26,133 43,210 30,331 3,623
Revolving credit - - 7,639 - -
Notes payable & non-recourse debt 11,558 10,175 9,841 13,352 10,315
Repurchase agreement - - - - -
Total debt 12,335 668 10,175 17,480 13,352 11,863
Shareholders' equity (deficit) (847) 6,607 12,142 15,348 15,552 (8,240)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the preceding
"Selected Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto and the other financial data included herein. Certain of the
financial information set forth below has been rounded in order to simplify its
presentation. However, the ratios and percentages set forth below are calculated
using the detailed financial information contained in the Financial Statements
and the Notes thereto, and the financial data included elsewhere in this Form
10-K.
REVENUES
The Company's sources of revenue for the nine months ending September
30, 2000 consists of the Dynex settlement, interest income on net cash received
on the settlement and other income related to the settlement of the lawsuit with
Dynex.
The Company's primary sources of revenues for the nine months ending
September 30, 1999 consist prior to ceasing its specialty finance business
consisted 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 interests in
securitizations. Other factors influencing interest income during a given fiscal
period include (a) the annual percentage rate of the finance contracts acquired,
(b) the aggregate principal balance of finance contracts acquired and funded
through the Company's warehouse and other credit facilities prior to
securitization, and (c) the length of time such contracts are funded by the
warehouse and other credit facilities.
Gain on Sale of Finance Contracts. Statement of Financial Accounting
Standards No. 125 "Transfer and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS No. 125") provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings
and requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value. For transfers that result in the recognition of a sale, SFAS No. 125
requires that the newly created assets obtained and liabilities incurred by the
transferors as a part of a transfer of financial assets be initially measured at
fair value. Interests in the assets that are retained are
9
<PAGE>
measured by allocating the previous carrying amount of the assets (e.g. finance
contracts) between the interests sold (e.g. investor certificates) and interests
retained based on their relative fair values at the date of the transfer. The
amount initially assigned to these financial components is a determinant of the
gain or loss from a securitization transaction under SFAS No. 125.
The retained interests in securitizations 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 interests
in securitizations is determined by discounting expected cash flows at a rate
based on assumptions that market participants would use for similar financial
instruments subject to prepayment, default, collateral value and interest rate
risks. The Company's retained interests are subordinated to other trust
securities, consequently cash flows are paid by the securitization trustee to
the investor security holders until such time as all accrued interest together
with principal have been paid in full. Subsequently, all remaining cash flows
are paid to the Company.
An impairment review of the retained interest in securitizations is
performed periodically 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
$4,672,698 during the nine months ending September 30, 1999 as a result of the
impairment review.
The retained interest component of recognized gain is affected by
various factors, including 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.
Servicing Fee Income. The Company earned substantially all of its
servicing fee income on the contracts it serviced 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);
and (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.
As stated above under "Business -- General", the Company completed the
transfer of all of its servicing activities to third party servicers by October
1999.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth certain historical information comparing
the Company's finance contract acquisition activity in 1998, the last year in
which the Company had substantial activity, to 1999, wherein acquisitions of
finance contracts ended by February 1999 due to the cessation of funding by
Dynex:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
Number of finance contracts acquired (1) 10,176 1,586
Principal balance of finance contracts acquired 119,166,628 20,336,852
Number of active dealerships (2) 1,064 466
</TABLE>
(1) There have been no finance contracts acquired since the first
quarter of 1999
(2) Dealers who sold at least one finance contract to the Company
during the period.
RESULTS OF OPERATIONS
Due to the Company's cessation of business as a specialty finance
company in 1999, period-to-period comparisons of operating results will not be
meaningful, and results of operations from prior periods will 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.
Nine Months Ended September 30, 2000 Compared To September 30, 1999
10
<PAGE>
Net Income
In the nine months ended September 30, 2000, net income increased
$31,961,019 to a net income of $15,561,967 from a net loss of $16,399,052 for
the nine months ended September 30, 1999. The increase in net income was due to
the proceeds from the settlement with Dynex, as well as significant decreases in
most operating expense categories. During the first nine months of 1999 the
Company was struggling to maintain its business while receiving no funding from
Dynex. During the first nine months of 2000, the Company had pared its business
operations to five employees, received a substantial cash settlement and
forgiveness of $3 million in debt for its claims against Dynex (resulting in
deemed income of $22,583,122) and saved significant interest expense through the
payoff of debt owed to Bank Boston. The settlement with Bank Boston for an
amount less than par also resulted in non-cash income of $1,804,345.
Total Revenues
Total revenues increased $15,961,746 to $22,847,105 for the nine months
ended September 30, 2000 from $6,885,359 for the nine months ended September 30,
1999. The increase was due the Company winding down it operations and to the
settlement of its litigation.
Interest Income. Interest income decreased $1,257,539 to $237,390 from
$1,494,929 primarily due to the sale in 1999 of the Company's interest-bearing
assets. Interest in 2000 was generated from assets ultimately conveyed to Dynex
as part of the settlement and from interest earned on the proceeds from the
Dynex Settlement.
Gain on Sale of Finance Contracts. The Company realized a loss on sale
totaling $8,099 on finance contracts during the nine months ended September 30,
2000, reflecting whole loans sales at a loss. The Company realized gain on sale
of finance contracts totaling $1,704,219 during the nine months ended September
30, 1999, reflecting securitization gains through the Dynex facility earlier in
the year, offset by losses on whole loan sales later in the period.
Servicing Fee Income. The Company earned no servicing fees for the nine
months ended September 30, 2000. The Company transferred all servicing
responsibilities to third parties during 1999. Servicing fee income for the nine
months ended September 30, 1999 was $2,787,613.
Gain on Litigation Settlement. The Company recorded a gain of
$22,583,122 from its lawsuit with Dynex in June 2000 and the Company recorded a
gain of $750,000 from its lawsuit with an automobile dealer in 1999.
Other Income (Loss). For the nine months ended September 30,2000 and
1999 other income was $34,692 and $148,598, respectively, and consisted of
insurance on auto finance contracts and dividends.
Total Expenses
Total expenses of the Company decreased $14,296,728 to $9,089,483 for
the nine months ended September 30, 2000 from $23,386,211 for the nine months
ended September 30, 1999, due to the Company winding down its operations,
terminating employees and focusing on mitigating its losses caused by the
cessation of funding by Dynex. There was $4.8 million in professional services
expenses accrued in the 2000 period, which the Company incurred mainly in its
litigation with Dynex.
Provision for Credit Losses. There was no provision for credit losses
for the nine months ended September 30, 2000. The Company owned no finance
contracts or other receivable that was doubtful of collection. The provision for
credit losses decreased $303,842 from the comparable period in 1999.
Interest Expense. Interest expense decreased $1,430,650 to $897,744 for
the nine months ended September 30, 2000 from $2,328,394 for the nine months
ending September 30, 1999. The decrease was the result of the extinguishment of
$10.5 million in notes held by Dynex and Bank Boston, and the amortization of
debt issuance costs.
Salaries and Benefits. Salaries and benefits decreased $5,772,620 to
$1,757,280 for the nine months ended September 30, 2000 from $7,529,900 because
of layoffs due to the cessation of operations during 1999. The year 1999 began
with over 225 employees. There were 5 employees as of September 30, 2000.
General and Administrative Expenses. General and administrative
expenses decreased $106,268 to $6,191,783 for the nine months ended September
30, 2000 from $6,298,051 for the nine months ended September 30 1999. The cost
savings program that was implemented in 1999 was more than offset by the high
legal costs incurred by the Company in its litigation of Dynex and Progressive
Insurance, including a final contingency fee and expense payment of $3.3 million
out of settlement proceeds to counsel in the Dynex lawsuit.
Impairment of Retained Interest in Securitizations. The Company
periodically reviews the fair value of the retained interest in securitizations.
The Company recorded a charge
11
<PAGE>
against earnings for impairment of these assets of $4,672,698 for the nine
months ending September 30, 1999. This impairment reflects the revaluation of
expected future cash flows to the Company from securitizations. The revaluation
of the retained interests to zero as of the beginning of the period ending
September 30, 2000 reflects the transfer to Dynex of certain securitization
interests as part of the settlement, and the uncertainty regarding the receipt
of any future cash flows from those securitizations as to which the Company
still maintains a retained interest. 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) decreased $2,010,650 to $242,676 for the nine months ending September
30, 2000 from $2,253,326 for the nine months ended September 30, 1999 because
the Company does not service any loans and has eliminated a substantial portion
of the communication system and need for insurance.
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Net Income
In the year ended December 31, 1999, net loss increased $ 16,647,488 to
a net loss of $23,791,911 from $7,144,423 for the year ended December 31, 1998.
The incurred loss was attributable to the cessation of all business activity
related to the origination and servicing of finance contracts.
Total Revenues
Total revenues decreased $16,553,846 to $6,500,632 for the year ended
December 31, 1999 from $23,054,478 for the year ended December 31, 1998. The
decrease was due to termination of the Company's finance contract origination
and servicing business caused by the cessation of funding from Dynex.
Interest Income. Interest income decreased $752,933 to $746,052 for the
year ended December 31, 1999 from $1,498,985 for the year ended December 31,
1998 due to the volume, timing of finance contract acquisitions and the period
held before securitization.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $1,532,888 on finance contracts during the year ended December 31,1999.
The Company realized gain on sale totaling $17,985,045 on finance contracts
during the year ended December 31, 1998. The decrease in 1999 was due to the
termination of the Dynex Funding facility after January 1999 and subsequent
whole-loan sales of finance contracts at a loss.
Servicing Fee Income. The Company reports servicing fee income only
with respect to finance contracts that are securitized. For the year ended
December 31, 1999, servicing fee income was $3,121,827, consisting of
contractual administrative fees and servicer fees. The Company transferred all
servicing responsibilities to third parties during 1999. Servicing fee income
for the year ended December 31, 1998 was $3,222,669.
Gain on Litigation. The Company recorded a gain of $750,000 from its
lawsuit with an automobile dealer in 1999. There were no gains on litigation in
1998.
Other Income (Loss). For the year ended December 31, 1999, other income
was $349,865 which consisted of insurance on auto finance contracts and
dividends. For the year ended December 31, 1998, other income amounted to
$347,779.
Total Expenses
Total expenses of the Company decreased $3,430,927 to $30,394,343 for
the year ended December 31, 1999 from $33,825,270 for the year ended December
31, 1998, due to the Company winding down its operations during 1999, offset by
increased litigation expenses.
Provision for Credit Losses. Provision for credit losses on finance
contracts increased $176,844 to $276,844 for the year ended December 31, 1999
from $100,000 for the year ended December 31, 1998. The increase was the result
of a higher number of finance contracts held on balance sheet pending eventual
sale.
Interest Expense. Interest expense decreased $1,074,761 to $2,042,450
for the year ended December 31, 1999 from $3,117,211 for the year ended December
31, 1998. The decrease resulted from a lower average balance outstanding
relating to revolving credit facilities and reduced expense related to
nonrecourse borrowings.
Salaries and Benefits. Salaries and benefits decreased $2,199,419 to
$8,272,196 for the year ended December 31, 1999 from $10,471,615 the year ended
December 31, 1998 because of layoffs due to the disruption in operations caused
by Dynex, offset by increased termination expenses. The year began with over 225
employees and ended with 27. Some employees were given two weeks to one month's
salary as severance pay.
12
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased $1,269,682 to $8,051,697 for the year ended December 31, 1999
from $6,782,015 the year ended December 31, 1998. The cost savings program that
was implemented early in 1999 was more than offset by the high legal costs
incurred by the Company in its litigation with Dynex and Progressive Insurance.
Impairment of Retained Interest in Securitizations. The Company
periodically reviews the fair value of the retained interest in securitizations.
The Company recorded a charge against earnings for impairment of these assets of
$8,907,970 and $9,932,169 for the years ended December 31, 1999 and 1998
respectively. This impairment reflects the revaluation of expected future cash
flows to the Company from securitizations. As the Company assumed all servicing
functions, it accelerated the rate of charge-offs as compared with previous
periods, thereby allocating additional cash collections and reserve account
balances to paying down the senior investor securities. The effect of this was
to stop payments of interest on subordinated securities issued in the
securitizations, thereby causing accretion in the principal balances of such
securities, resulting in reduced residual cash flows to the Company. Further
impairments in 1998 and 1999 reflect the unwillingness of insurers to pay
deficiency balance claims, as well as the Company's surrender in 1999 of
servicing to third parties with collection strategies that appeared to be geared
more towards repossession and liquidation, as opposed to preserving excess
spread.
Other Operating Expenses. Other operating expenses (consisting
principally of servicing expenses, credit bureau reports, communications and
insurance) decreased $579,074 to $2,843,186 for the year ended December 31, 1999
from $3,422,260 for the year ended December 31, 1998 because the Company was
winding down its business and focusing on mitigating its losses related to the
disruption of its operations from Dynex's cessation of funding.
FINANCIAL CONDITION
Cash. Cash increased to $7,050,088 at September 30, 2000. The Company
received net proceeds of approximately $16.5 million from the Dynex settlement
on June 9, 2000.
Finance Contracts Held for Sale. The Company completed the sale of all
remaining finance contracts in January and February of 2000. Finance contracts
held for sale, net of allowance for credit losses, decreased $658,778 to
$208,292 at December 31, 1999, from $867,070 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. There
have been no securitizations since the first quarter of 1999 and all remaining
finance contracts were sold as whole loans.
Investments. The Company made its first private equity investment of
$100,000 under its new business plan in September 2000.
Other Assets. The Company engaged an investment firm to place its
securities and paid $125,000, which is reported as deferred offering costs. A
minimum of $75,000 of the fee will be refunded if the securities do not get
placed.
Retained Interest in Securitizations. The Company does not expect to
receive any future cash flow from its retained interest in securitizations. The
balance of the retained interest not previously charged to earnings in 1999 was
transferred in 2000 as part of the settlement with Dynex. An impairment review
of the retained interest in securitizations is performed periodically 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. 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 $8,907,970 during the year
ended December 31, 1999 as a result of the impairment review, reducing this
asset to zero.
The following table presents the valuation and recorded impairment of
the Company's retained interest in securitizations for the year ended December
31, 1999 by quarter:
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
------------------ ---------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Valuation of retained
interest in
securitizations 12,046,317 9,841,447 7,005,422 1,401,858 (1)
Impairment charge 1,051,457 1,520,750 2,100,491 4,235,272
------------------ ---------------- ---------------------- ----------------------
</TABLE>
(1) All valuation of retained interest represented by this amount was
transferred as part of the settlement agreement with Dynex.
CREDIT LOSS EXPERIENCE
13
<PAGE>
An allowance for credit losses was maintained for finance contracts
held for sale. The Company does not own any finance contracts held for sale and,
therefore, no allowance is maintained.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had just over $7 million in cash
and no indebtedness. Management believes the Company has sufficient liquidity to
meet its obligations (primarily employee/consultancy fees and expenses, rent and
professional expenses) and to make selected investments through 2001. Management
hopes to generate additional liquidity and revenues through the establishment of
the Agility Capital Fund in the following ways: (i) the sale to the Fund (at
cost) of certain investments made by the Company on behalf of the Fund, (ii) a
management fee of up to 2.5% per annum of committed funds, (iii) the pro rata
share of realized investment gains on the Company's investment in the Fund
(expected to be 1% of size of the Fund, or a maximum of $500,000), and (iv)
additional fees of up to 20% of the realized gains on Fund investments (net of
amounts utilized for compensation arrangements for the officers of the Fund
Manager). There can be no assurance that the Fund will be established or managed
in a manner in which those revenue goals are met.
Cash Flows. Significant cash flows related to the Company's operating
activities included cash flows from sales of the remainder of the Company's
finance contract portfolio and an increase in liabilities while the Company
struggled while the litigation with Dynex continued. (see "Legal Proceedings")
Cash was provided by investing activities from the auction of collateral
acquired. Cash was used in financing activities for the purchase of the
Company's stock, both preferred and common and for the reduction of the
Company's note payable.
There were no significant sources of cash provided by investing or
financing activities. The Company was released from its obligations under the
convertible notes and subordinated convertible notes payable referred to in the
following table.
Notes Payable and Non-Recourse Debt
The following amounts are included in notes payable and non-recourse debt
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1998 1999 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
12% Senior convertible notes payable 3,000,000 3,000,000 -
15% Subordinated convertible notes payable 7,500,000 7,500,000 -
Other notes payable 23,342 2,605 -
Discount on subordinated notes payable (356,373) (187,479) -
----------------- ----------------- -----------------
10,166,969 10,315,126 -
================= ================= =================
</TABLE>
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 due 2001 (the "Subordinated Notes").
Interest on the Subordinated Notes was payable quarterly. The Subordinated Notes
were 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 Subordinated Notes were
issued pursuant to an Indenture, dated as of January 30, 1998 (the "Indenture")
between the Company and BancBoston, N.A., as agent. The Indenture contained
certain restrictive covenants. 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 the
warrants issued. The debt issuance cost and discount is being amortized as
interest expense on the interest method through February 2001.
The Company entered into an agreement in July 2000 with Bank Boston,
N.A., whereby Bank Boston accepted $6.5 million in settlement of all claims
against the Company for the Subordinated Notes including the outstanding
principal of $7.5 million and accrued interest of approximately $1.1 million.
Mr. William O. Winsauer was awarded an additional bonus of $125,000 for his
assistance in negotiating this settlement.
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 Company and Dynex entered into an agreement June 6,
2000 to settle all disputes between the Company and Dynex. Included in the
settlement agreement was the retirement of the Convertible Senior Notes held by
Dynex without any payment by the Company.
Securitization Program. The Company is currently not involved in a
securitization program. The Company was forced to stop originating and
securitizing loans after Dynex's funding ceased.
14
<PAGE>
Equity Offerings. In February 1998, the Company completed the
underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative
Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10
per share. The price to public was $10 per share, with net proceeds to the
Company of approximately $10,386,000. 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.
As dividends on the Preferred Stock are in arrears for at least two
quarterly dividend periods, holders of the Preferred Stock have exercised their
right to call a special meeting of the Preferred Stock holders for the purpose
of electing two additional directors to serve on the Company's Board of
Directors until such dividend arrearage is eliminated. Such meeting was held on
October 1, 1999; however, because a quorum of preferred shareholders did not
attend or provided proxies for the meeting, no additional directors were
elected. As an accommodation to the Company's preferred shareholders, the Board
has appointed, until the next annual meeting, David Wulf to the Board. As part
of the issuance of the Preferred Stock in 1998, Robert Shuey was appointed to
the Board. 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. During the years 1999 and 2000, no dividends have
been paid on the Preferred Stock and the Company at September 30, 2000 is
$2,817,938 in arrears in dividend payments.
In June 2000, the Company acquired 51,500 shares of its Preferred Stock
as part of its settlement with Dynex. The Company acquired 568,750 shares of its
common stock from former director and executive officer Adrian Katz for $200,000
and in consideration of Mr. Katz' agreement to execute the settlement with Dynex
and release claims against Dynex.
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, subject to certain conditions, including that 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 and shares of the Company's common
stock are at such time listed on a major national securities exchange. In
consideration of Promethean's commitment 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. The agreement expired on August 20, 2000
without exercise by the Company.
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 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 under "Business -- Risks Associated with the Company's Business Plan"
herein.
IMPACT OF INFLATION AND CHANGING PRICES
Since the Company does not originate finance contracts and has no debt,
the Company does not believe that inflation directly has a material adverse
effect on its financial condition or results of operations. Inflation can
adversely affect the Company's operating expenses, such as rent and employee
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
15
<PAGE>
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, 2000,
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
September 30, 2000 the Company was utilizing no such instruments.
The Company does not believe the implementation of SFAS No. 133 will
have a material effect on its consolidated financial statements.
ITEM 7A. 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 fixed rate debt was paid off through settlement
agreements with Dynex on June 9, 2000 and with Bank Boston on July 27, 2000. The
Company's new business plan does not contemplate the incurrence by the Company
of additional material indebtedness.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are set forth in this report beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WILLIAM O. WINSAUER, Chairman of the Board, Chief Executive Officer and
Director.
Mr. Winsauer, age 40, has been Chairman of the Board of Directors and
Chief Executive Officer of the Company since its formation in 1993. Mr. Winsauer
has been an entrepreneur for eighteen years. Between 1993 and 1999 he grew the
Company to over 250 employees, brought the company public and completed a
secondary offering of preferred stock. Prior to the decision to curtail the
Company's specialty finance business, the Company grew to have more than $300
million of assets under management. Prior to the Company, Mr. Winsauer was
responsible for structuring and completing numerous asset-backed financing
transactions. Mr. Winsauer began his career in real estate development and
developed numerous properties in the South and Mid-West regions of the United
States. Mr. Winsauer is a member of the Special Joint Operations Fund. Mr.
Winsauer received a Bachelor of Business Administration in Finance from the
University of Texas at Austin. He is the brother of John S. Winsauer.
THOMAS I. BLINTEN, Director
Mr. Blinten has been a Director of the Company since 1996. Mr. Blinten
has been appointed President of the Company as of July 1, 2000. Mr. Blinten has
18 years experience in portfolio management, investment analysis,
asset/liability management, credit/counterparty/ default risk management, debt
and equity principal finance including derivatives and securitization, and
financial securities sales and trading. During the last three years, Mr. Blinten
has started, financed, and managed Internet-related businesses. In February
2000, Mr. Blinten co-founded and served as Chief Financial Officer of
AttainCapital, an Internet start-up company providing asset-based finance
services to small- and mid-sized companies. In 1999, Mr. Blinten co-founded and
served as President and CEO of Worldo.com, the first Internet based B2B
marketplace for the commercial interiors industry, co-founded in 1998 and served
as President of Bridges Capital, an investment advisory company specializing in
late-stage technology companies. Mr. Blinten also co-founded in 1997 and serves
as Chairman of Caesar Petroleum Systems, a leading provider of oil & gas
property evaluation software. Mr. Blinten has been employed by affiliates of
Nomura Securities International (executive management committee member, Co-Head
of Derivative Products Trading/Sales), General Re Financial Products (Head of
Structured Finance and Institutional Sales), Kemper (Head of Derivative Products
Group), Drexel Burnham Lambert (Head of Risk Controlled Arbitrage and
Asset/Liability Strategies Groups), and First Boston (Associate, Portfolio
Strategies Group). Mr. Blinten has advised several Internet-based companies in
the financial services, energy project finance, insurance, and not-for-profit
industries. Mr. Blinten is on the Board of Directors AK Hedge Fund (a private
equity hedge fund) and Caesar Petroleum Systems. Mr. Blinten earned a Bachelor
of Science degree in Mathematics in 1979 from North Carolina State University,
and pursued graduate studies both in Operations Research from 1979 to 1981 at
North Carolina State University, and in Petroleum Engineering from 1981 to 1983
at Tulane University.
16
<PAGE>
JOHN S. WINSAUER, Managing Director, Secretary and Director
Mr. Winsauer, age 38 and the brother of William Winsauer, has served in
various capacities, including as Chief Marketing Officer, Secretary and a
Director of the Company, since October 1995. In addition, Mr. Winsauer has been
a shareholder of the Company since June 1993. Mr. Winsauer has fifteen years
experience working with entrepreneurial companies to help them meet their sales
and marketing objectives. Mr. Winsauer has worked with Q-Hire, a human resource
assessment company that delivers its services over the Internet and screens
applicants through techniques based on industrial psychology research designed
to increase the likelihood of employer/employee satisfaction when hiring new
employees. Mr. Winsauer was instrumental in helping Q-Hire create a sales plan
and recently signed up MCI, WorldCom and The Texas Workman's Compensation
Insurance Fund as beta sites. At the Company, Mr. Winsauer was responsible for
establishing relationships with over 3000 clients in 40 states and increasing
annual volume of loans under management from $6 million to $190 million. Mr.
Winsauer was the also involved in the development of a Marketing and Sales
Information Management System that was used by over 100 sales and marketing
people. From January 1993 until August 1996, Mr. Winsauer was employed by
Amherst Securities Group Inc. (a broker/dealer previously known as USArbour
Financial) as a Senior Vice President, prior to which he served as a Senior Vice
President of The Westcap Corporation (a broker/dealer) from April 1989 to
January 1993. Mr. Winsauer received a Bachelor of Business Administration from
the University of Texas at Austin.
STUART A. JONES, Director
From March 1986 to the present, Mr. Jones, age 45, has been
self-employed as head of Stuart A. Jones Finance and Investments, Dallas, Texas,
a privately-owned consultancy specializing in investment banking and real estate
financing. From August 1988 to February 1989, Mr. Jones served as Deputy
Director for the Assets, Operations and Liquidations Division, Federal Saving &
Loan Insurance Corporation, Washington, D.C. From January 1990 to January 1994,
Mr. Jones also served as Counsel to the Brock Group, Ltd., Washington, D.C., an
international trade and investment strategies consulting firm, where he
represented clients in various real estate, energy and environmental matters.
Mr. Jones received his B.A. in Economics at Harvard, cum laude in 1977,
including graduate studies at the Harvard Business School. He received his Juris
Doctorate at Southern Methodist University School of Law in 1979 and earned the
Southwest Law Review. Mr. Jones is a member of the Texas Bar Association. Mr.
Jones has been a Director of the Company since 1996.
ROBERT A. SHUEY III, Director
Mr. Shuey, 44, founded Institutional Equities, an investment banking
firm in Dallas, Texas. In September 1997, Mr. Shuey was previously associated
with Tejas Securities Group, Inc., a securities broker/dealer headquartered in
Dallas, Texas, and served as a managing director and Chief Executive Officer
until August 1998. Mr. Shuey was appointed as a director to replace Manuel
Gonzalez in March 1998. From June 1996 to September 1997, Mr. Shuey was a Vice
President, investment banking, at National Securities (a broker/dealer), and
prior to that was associated with various securities broker/dealers. See
"Certain Relationships and Related Transactions".
DAVID WULF, Director (effective October 2000)
Mr. Wulf, 47 years old, is co-founder and CEO of Wulf, Bates, & Murphy,
Inc. a registered investment advisor under the Investment Advisors Act of 1940,
which manages investments for individuals and institutions. Mr. Wulf advises a
holder of 225,000 shares of the Company's Preferred Stock. Prior to founding
Wulf, Bates, & Murphy, Inc., Mr. Wulf was a Registered Representative for
Merrill Lynch from 1978-1982 and Vice President for Shearson/Lehman Brothers
from 1982-1986. Mr. Wulf has a Bachelor of Science degree from Southeast
Missouri State University.
MARK ESPOSITO, Director (effective October 2000)
Mr. Esposito, age 39, has 16 years in financial executive recruitment.
Mr. Esposito co-heads the Christian & Timbers ("C&T") financial search practice.
C&T is one of the top three leading national brands in executive search for
CEOs, as well as Internet and technology companies. Mr. Esposito and C&T have
business and personal relationships with many of the top-tier venture firms in
the country, senior executives, and Boards of venture-backed companies for whom
they have done searches. The firm's primary industry focus is in
e-commerce/Internet, hardware and software, information technology, new media,
semiconductors, and telecommunications. Examples of venture-backed and leading
companies for whom C&T has successfully placed CEOs (or Presidents) include
Hewlett Packard, Offroad Capital, Net2Phone, GIGA Information Group, Network
Solutions, Phoenix Technologies, Hyperion Systems, FireDrop, Electron Economy,
and TeleTech Holdings. C&T has also placed senior management for iVillage, SCI
Systems, Talk City, and Lycos. Mr. Esposito performs human resource due
diligence for Agility. In addition, C&T currently has important relationships
with and/or has done work for the portfolio companies of major venture capital
firms, including Kleiner, Perkins, Caufield, & Byers, Softbank Venture Capital,
The Mayfield Fund, Sequoia Capital, Battery Ventures, TA Associates, Flatiron
Partners, and Patricof & Co. Ventures. Previously with DS Wolf and Smith Hanley.
Mr. Esposito earned a Bachelor of Arts from Gettysburg College. Mr. Esposito
will serve as a member of the advisory board for the Agility Capital Fund.
MARK COOPER, Director (effective October 2000)
17
<PAGE>
Mr. Cooper, age 33, is co-founder and a corporate director for the
Athens Group, an employee-owned technology strategy and software development
firm based in Austin, Texas. Currently Vice President and Director of Technology
Strategy Consulting, he has over 12 years of experience in information
technology consulting. His expertise includes technology strategy development,
software engineering, and electronic commerce. He has provided technology
consulting services to clients ranging from Fortune 100 (SBC, Dell, Motorola),
to Internet technology firms (PCOrder.com, Copera, Partnerware), to start-up
companies (Crossroads Systems, InfraWorks, Community Education Partners) among
others. He also leads the Technology Due Diligence knowledge center at Athens
Group, providing services for investors such as Morgan Stanley, Capvest Limited,
and SBC. In addition to previous positions with IBM and Andersen Consulting, his
background includes an MBA in Information Systems Management from the University
of Texas at Austin. Mr. Cooper also a 1995-96 graduate of Leadership Austin, a
program of the Greater Austin Chamber of Commerce. Mr. Cooper will serve as a
member of the advisory board for the Agility Capital Fund.
Reports under Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own more
than 10% of the Company's Common Stock or other equity securities to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company on Forms 3, 4 and 5. Officers, directors and 10% shareholders are
required by SEC regulations to furnish the Company with copies of all Forms 3, 4
and 5 they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3 under the Exchange Act during
its most recent fiscal year and Form 5 and amendments thereto furnished to the
Company with respect to its most recent fiscal year, the Company believes that
the following directors and officers failed to file in a timely manner one or
more of their reports required under Section 16(a):
Stuart A. Jones, an outside director of the Company, filed a
Form 5 on April 23, 1999 disclosing transactions that occurred
on June 1, 1998 and July 20, 1998.
Other than as noted above, the Company believes that during such fiscal
year no other director, officer, beneficial owner of more than ten percent of
any class of equity securities of the Company failed to file on a timely basis,
as disclosed in the above Forms, reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year or prior fiscal years.
COMMITTEES AND MEETINGS OF THE BOARD
During the nine months ended September 30, 2000 and the year ended
December 31, 1999, the Board held eight and seven regular meetings,
respectively. The Board has an Audit Committee and a Compensation Committee.
During the nine months ended September 30, 2000 and the year ended December 31,
1999, each of the Audit Committee and the Compensation Committee consisted of
Messrs. Jones, Shuey and Blinten. During 1999, the Audit Committee met one time.
The Audit Committee did not meet during the nine months ended September 30,
2000. The Audit Committee reviews and reports to the Board with respect to
various auditing and accounting matters, including the nomination of the
Company's independent public accountants, the scope of audit procedures, general
accounting policy matters, the Company's internal audit function, and the
performance of the Company's independent public accountants. The Compensation
Committee met three times during the nine months ending September 30, 2000. No
meetings of the Compensation Committee were held in 1999. The Compensation
Committee is responsible for the review and approval of the annual corporate
compensation guidelines, management bonuses, executive officer compensation, and
the potential levels of awards under the Company's 1998 Stock Option Plan (the
"Plan") for the ensuing year. During 2000 and 1999, all of the directors
attended 100% of the meetings of the Board and committees of which they are
members, except for John Winsauer and Robert A. Shuey, each of whom did not
attend one of the Company's board meetings.
DIRECTORS' COMPENSATION
Currently, each director who is not employed by the Company receives an
annual retainer of $5,000 plus $500 for each meeting of the Board or any
committee attended (and reimbursement of out-of-pocket expenses), as well as for
periodic consultations. It is anticipated that 10,000 share options will be
granted to each outside director under the Company's new option plan. In
recognition of the outside directors' services, without compensation, to the
Company throughout the litigation with Dynex, the disinterested directors
approved bonuses of $50,000 each for Messrs. Blinten, Shuey and Jones in June
2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the nine months ended September 30, 2000 and
for the years ended December 31, 1999, 1998 and 1997, the annual and long-term
compensation for the Company's highest paid employees ("named executives").
18
<PAGE>
<TABLE>
<CAPTION>
Annual compensation Compensation
Awards
--------------------------------------------------------------------
Name and Principal Position Year Base Salary Bonus Other Securities
Compensation Underlying
Options
<S> <C> <C> <C> <C> <C>
William O. Winsauer (1) 2000 $240,000 $450,000 $125,000
Chairman of the Board and Chief Executive Officer 1999 240,000 18,262
1998 240,000 18,105
1997 240,000 - 16,500
-
Adrian Katz (2) 2000 - 261,000 -
Former Vice Chairman of the 1999 200,262 -
Board, Chief Operating 1998 200,000 145,000
Officer and Chief Financial 1997 150,000 -
Officer
John S. Winsauer (1) 2000 $216,000 $450,000
Director, Vice President 1999 120,000 88,988
and Secretary 1998 120,000 52,850
1997 120,000 27,525
-
Manuel Gonzalez (3) 2001 $41,667 - $90,000 -
Former President 1999 200,000 75,263
1998 200,000 112,500 $17,723 100,000
Thomas I Blinten (1) 2001 $200,000 $50,000 (4)
President
</TABLE>
(1) Amounts are stated on an annualized basis.
(2) Mr. Katz resigned from the Company and the Board of Directors December 31,
1999, but continued to provide services on behalf of the Company until May
2000 and participated in the settlement with Dynex in June 2000. As part of
the Dynex settlement, Mr. Katz released his claims against Dynex,
surrendered his shares of common stock in the Company and received $200,000
from the Company in consideration therefor.
(3) Mr. Gonzalez was released from his contract early in 2000 and received
$90,000 for the remainder of his contract. He had been paid $41,667 salary
until his release.
(4) The Company has agreed to grant to Mr. Blinten options on 600,000 shares,
with a strike price of $1/share, subject to approval by the shareholders of
a new stock option plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 2000 by (i) each
person who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each named executive officer, and (iv) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Name and Address of Beneficial Owner Amount of Percentage
Beneficial Owned
Ownership
<S> <C> <C>
William O. Winsauer 3,690,061 (1) 61.89%
Autobond Acceptance
P.O. Box 30320
Austin, Texas 78755-3320
John S. Winsauer 1,135,688 19.05%
Autobond Acceptance
P.O. Box 30320
Austin, Texas 78755-3320
Thomas I. Blinten 38,500 (3) .65%
58 Tomac Avenue
Old Greenwich, Connecticut 06870
Stuart A. Jones 3,000 (4) -
Stuart A. Jones Finance and Investments
200 Expressway Tower
6116 North Central Expressway
Dallas, Texas 75225
Robert A. Shuey III 3,000 (5) -
Institutional Equities
8214 Westchester, Suite 500
Dallas, Texas 75225
----------------- -------------
Total (all executive officers and directors as a group) 4,870,250 81.69%
</TABLE>
(1) Includes 40,000 shares that Mr. William O. Winsauer has the right to acquire
pursuant to the exercise of options.
(2) Includes 20,000 shares that Mr. John S. Winsauer has the right to acquire
pursuant to the exercise of options.
(3) Includes 3,000 shares that Mr. Blinten has the right to acquire pursuant to
the exercise of options.
(4) Includes 3,000 shares that Mr. Jones has the right to acquire pursuant to
the exercise of options.
(5) Includes 3,000 shares that Mr. Shuey has the right to acquire pursuant to
the exercise of options.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain transactions to which the Company
was or is a party and in which certain officers, directors or shareholders of
the Company had or have a direct or indirect material interest.
Historically, the Company and ABI, which is wholly-owned by William O.
Winsauer, have provided services for each other on a regular basis. In this
regard, the Company had net advances due from ABI as described below, which
funds were utilized by ABI prior to 1996 to cover expenses incurred in
connection with the management of ABI's investments in securitization trusts.
The Company and ABI entered into a management agreement dated as of January 1,
1996 (the "ABI Management Agreement") which provided for repayment of certain
advances made to William O. Winsauer and John S. Winsauer, the reimbursement of
expenses incurred on behalf of ABI and for an annual fee payable by ABI to the
Company for services rendered by it or the Company's employees on behalf of ABI.
The ABI Management Agreement stated that the Company shall provide the following
management services for ABI on an ongoing basis: (i) day-to-day management of
ABI's portfolio of partnership interests in the securitization trusts sponsored
by ABI between 1992 and 1994, including various monitoring and reporting
functions; (ii) certain cash management services, including the advancing of
funds to pay ABI's ordinary business expenses and (iii) advice as to regulatory
compliance. The ABI Management Agreement also provided that the Company will
perform certain accounting functions on behalf of ABI including (i) maintenance
of financial books and records, (ii) monitoring of cash management functions,
(iii) preparation of financial statements and tax returns and (iv) providing
advice in connection with retention of independent accountants. As compensation
for services rendered thereunder, the ABI Management Agreement provided that ABI
shall pay the Company an annual fee of $50,000, payable quarterly. In addition,
the ABI Management Agreement provided for the quarterly reimbursement of
advances made by the Company of out-of-pocket costs and expenses on behalf of
ABI. Amounts due to the Company under the ABI Management Agreement and certain
other advances for expenses as described above amounted to $204,325 at December
31, 1998. As of July 1, 1998, the Company no longer provided management
services, administrative services or accounting services for ABI. The Company
deemed the amounts owed to the Company the ABI Management Agreement
uncollectible in 1999 and recorded an allowance for the full amount.
In connection with the issuance of 1,125,000 shares of the Company's
15% Series A Cumulative Preferred Stock (the "Preferred Stock") on February 20,
1998, Tejas Securities Group, Inc. ("Tejas") acted as the underwriters'
representative. The Chief Executive Officer and Managing Director of Tejas at
the time of such issuance was Robert A. Shuey III, who was appointed as an
outside director of the Company in March 1998 and is a director-nominee. The
underwriters collectively received $900,000 as compensation for such offering
(including the subsequent exercise of 6 the overallotment option), of which
Tejas received $180,000. In connection with the Preferred Stock offering, the
Company also paid Tejas a non-accountable expense allowance of 2% of the amount
of such offering. To the extent that Tejas' expenses were ultimately less than
the non-accountable expense allowance, the excess constituted additional
compensation to Tejas. In addition, the Company sold to Tejas, for $100, a
representative's warrant (the "Representative's Warrant") to purchase up to
100,000 shares of the Company's Common Stock at an exercise price of $7.75 per
share. The Representative's Warrant is exercisable for a period of four years
commencing February 20, 1999 and may not be sold, transferred, pledged or
hypothecated for a period of one year from the date of the Preferred Stock
offering, except to the officers or partners of Tejas and dealers participating
in the
20
<PAGE>
offering and their respective partners and officers. The Representative's
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 Representative's
Warrant.
The Company has contracted with Institutional Equity Corporation
("IEC"), a registered broker-dealer located in Dallas, Texas, of which outside
director Robert Shuey is a principal to serve as placement agent for the
proposed offering of equity interests in the Agility Capital Fund. In September
2000, the Company paid $125,000 to IEC as a non-accountable expense allowance in
connection with the proposed placement by IEC. The Company has agreed with IEC
that IEC shall be entitled to 3% of the gross proceeds placed by IEC with
investors in the fund; for the first $25 million placed by IEC, the Company has
agreed to pay out of its own funds an additional placement fee of 2% of the
amount placed. For the next $25 million in investments placed, the Company has
agreed to pay IEC an additional 1% placement fee. To the extent that IEC places
in excess of $50 million, no additional fees will be paid by the Company,
thereby capping the Company's out-of-pocket commitment to $750,000. The
arrangement between the Company and IEC was approved by the disinterested
directors in accordance with Company policy.
On March 30, 1999, the Company and Stuart A. Jones, an outside director
of the Company, entered into a fee agreement (the "Fee Agreement") wherein Mr.
Jones agreed, on a non-exclusive, best efforts basis, to work toward (i) selling
the Company's existing portfolio of finance contracts, (ii) arranging a
warehouse line of credit to fund existing finance contracts and to facilitate
the resumption of origination operations, and (iii) arranging for new equity
capital to be contributed to the Company or a new venture including the Company
or for an outright sale of the Company. In return, the Company agreed to pay Mr.
Jones certain fees, in cash, in the following amounts: (i) 1% of the gross
amount of sale of all or any portion of finance contracts held by the Company as
of March 30, 1999 or originated by the Company thereafter; (ii) 1.5% of the
dollar amount of any new warehouse line of credit if $20,000,000 or less, or 1%
of the dollar amount of any new warehouse line of credit in excess of
$20,000,000; and (iii) 4% of (a) the dollar amount of any new equity contributed
to the Company or a new venture involving the Company, or (b) the gross sale
price of the Company. The Company also agreed to pay Mr. Jones a monthly
retainer equal to $10,000 on each of May 1, 1999, April 1, 1999 and June 1,
1999. Any fees payable under the Fee Agreement will first be reduced by the
amount of any previously paid retainer fees. The Fee Agreement was approved by
the disinterested directors in accordance with Company policy.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's policy is to have compensation determinations considered
and approved by a Compensation Committee composed of outside members of the
Board of Directors. The Compensation Committee has from time to time requested
the Company's executive officers to apprise the committee as to facts and
circumstances relevant to its decision-making.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation of the Company's executive officers for fiscal 1999 was
based upon the initial arrangements approved in connection with the Company's
initial public offering in 1996, reflecting the relative infancy of the Company,
its size and compensation packages made to executives at comparable competitors,
with a few towards fixing compensation at prudent, conservative levels.
Compensation for fiscal 2000 reflected the Compensation Committee's desire to
reward certain employees for their extraordinary efforts in settling the lawsuit
with Dynex, as well as the settlement of the indebtedness owed to Bank Boston.
Compensation levels under the Company's new business plan will be adjusted as
required by the market for executives involved in managing similar venture
capital funds.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements
Report of Independent Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.. DESCRIPTION OF EXHIBIT
------------ --------------------------------------------------------------------------
<S> <C>
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) . . Employment Agreement effective as of May 1, 1996 between
William O. Winsauer and the Company
10.2 (2) . . 1998 Stock Option Plan
21.1 . . . . Subsidiaries of the Company
27.1 . . . . Financial Data Schedule
</TABLE>
------------
1 Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No.333-05359).
2 Incorporated by reference to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1998
3 Incorporated by reference to the Company's quarterly report on form 10-Q for
the quarter ended September 30, 1998
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 2000. The Company filed on March 9, 2000 a Form 8-K advising investors as to
the jury verdict in the Company's lawsuit with Dynex.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William O. Winsauer
----------------------------
William O. Winsauer, Chairman of the Board
and Chief Executive Officer
Date: December 15, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ William O. Winsauer Chairman of the Board and December 15, 2000
----------------------- Chief Executive Officer
William O. Winsauer
/s/ A. Dale Henry Chief Financial Officer December 15, 2000
----------------------- (Principal Accounting Officer)
A. Dale Henry
/s/ John S. Winsauer Secretary and Director December 15, 2000
-----------------------
John S. Winsauer
/s/ Thomas Blinten President December 15, 2000
-----------------------
Thomas Blinten
</TABLE>
23
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 F-3
Consolidated Statements of Operations and Comprehensive Income (loss) for the
Years Ended December 31, 1998 and 1999 and for the nine months ended September 30, 2000
and 1999 (unaudited) F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1998 and 1999 and the nine months ended September 30, 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and
1999 and for the nine months ended September 30, 2000 and 1999 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
All schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes, or other schedules.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Autobond Acceptance Corporation
We have audited the accompanying consolidated balance sheets of
AutoBond Acceptance Corporation and subsidiaries (the "Company") as of September
30, 2000 and December 31, 1999 and the related consolidated statements of
operations and comprehensive income (loss), shareholders' equity (deficit) and
of cash flows for the nine months ended September 30, 2000 and for each of the
two years in the period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AutoBond
Acceptance Corporation and subsidiaries as of September 30, 2000 and December
31, 1999 and the results of their operations and their cash flows for the nine
months ended September 30, 2000 and for each of the two years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Dallas, Texas
October 18, 2000
F-2
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 835,300 $ 7,050,088
Finance contracts held for sale, net 208,292
Collateral acquired, net 107,513
Investments 100,000
Retained interest in securitizations-Trading 1,401,858
Debt issuance costs 224,477
Property, plant, and equipment, net 761,131
Other assets 84,535 125,000
--------------- ------------------
Total assets $ 3,623,106 $ 7,275,088
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Payables and accrued liabilities $ 1,547,519 $ 667,660
Notes payable 10,315,126
--------------- ------------------
Total liabilities 11,862,645 667,660
Commitments and Contingencies (Notes 11 and 12)
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; 1,125,000 and
1,073,500 shares of 15% Series A cumulative preferred stock, $10
liquidation preference, issued and outstanding, at December 31, 1998,
1999 and September 30, 2000 (Dividends in arrears of $2,817,938) 10,856,000 10,341,000
Common stock, no par value; 25,000,000 shares authorized; 6,531,311 and
5,962,561 shares issued and outstanding at December 31, 1999
and September 30, 2000 1,000 1,000
Capital in excess of stated capital 8,291,481 7,563,566
Due from shareholders (10,592) (10,592)
Accumulated deficit (26,849,513) (11,287,546)
Investment in common stock agreement (527,915)
--------------- ------------------
Total shareholders' equity (deficit) (8,239,539) 6,607,428
--------------- ------------------
Total liabilities and shareholders' equity $ 3,623,106 $ 7,275,088
=============== ==================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
December 31, Nine months Ended September 30,
--------------------------- ------------------------------
1998 1999 1999 2000
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 1,498,985 $ 746,052 $ 1,494,929 $ 237,390
Gain (loss) on sale of finance contracts 17,985,045 1,532,888 1,704,219 (8,099)
Servicing income 3,222,669 3,121,827 2,787,613
Gain on litigation settlement 750,000 750,000 22,583,122
Other income 347,779 349,865 148,598 34,692
------------- ------------- ----------------- ------------
Total revenues 23,054,478 6,500,632 6,885,359 22,847,105
Expenses:
Provision for credit loss 100,000 276,844 303,842
Interest expense 3,117,211 2,042,450 2,328,394 897,744
Salaries and benefits 10,471,615 8,272,196 7,529,900 1,757,280
General and administrative 6,782,015 8,051,697 6,298,051 6,191,783
Impairment of retained interest in
securitizations 9,932,169 8,907,970 4,672,698
Other operating expenses 3,422,260 2,843,186 2,253,326 242,676
------------- ------------- ----------------- ------------
Total expenses 33,825,270 30,394,343 23,386,211 9,089,483
------------- ------------- ----------------- ------------
(Loss) income before income taxes (10,770,792) (23,893,711) (16,500,852) 13,757,622
Benefit for income taxes (3,626,369) (101,800) (101,800)
------------- ------------- ----------------- ------------
(Loss) income before extraordinary gain (7,144,423) (23,791,911) (16,399,052) 13,757,622
Extraordinary gain on forgiveness of debt 1,804,345
------------- ------------- ----------------- ------------
Net (loss) income (7,144,423) (23,791,911) (16,399,052) 15,561,967
Income attributable to preferred shareholders (1,440,000) (1,687,500) (1,265,625) (1,207,688)
------------- ------------- ----------------- ------------
Net (loss) income available to common shareholders $ (8,584,423) $(25,479,411) $(17,664,677) $14,354,279
============= ============= ================= ============
Weighted average number of common shares:
Basic 6,531,311 6,531,311 6,531,311 6,292,938
Diluted 6,531,311 6,531,311 6,531,311 6,292,938
Earnings per common share - basic
(Loss) income before extraordinary gain $(1.31) $(3.90) $(2.70) $1.99
Extraordinary gain .29
------------- ------------- ----------------- ------------
Net (loss) income $(1.31) $(3.90) $(2.70) $2.28
============= ============= ================= ============
Earnings per common share - diluted
(Loss) income before extraordinary gain $(1.31) $(3.90) $(2.70) $1.99
Extraordinary gain .29
------------- ------------- ----------------- ------------
Net (loss) income $(1.31) $(3.90) $(2.70) $2.28
============= ============= ================= ============
Net (loss) income $ (7,144,423) $(23,791,911) $(16,399,052) $15,561,967
Other comprehensive loss, net of tax;
Unrealized loss on retained interest in
securitizations (1,049,256)
------------- ------------- ----------------- ------------
Other comprehensive loss (1,049,256)
------------- ------------- ----------------- ------------
Comprehensive (loss) income $ (8,193,679) $(23,791,911) $(16,399,052) $15,561,967
============= ============= ================= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-4
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999 2000
--------------- ---------------- ----------------
<S> <C> <C> <C>
Preferred stock (Shares):
Beginning balance 1,125,000 1,125,000
Issuance of preferred stock in public offering 1,125,000
Cancellation of preferred shares (51,500)
--------------- ---------------- ----------------
Ending balance 1,125,000 1,125,000 1,073,500
--------------
--------------- ---------------- ----------------
Common stock (Shares):
Beginning balance 6,531,311 6,531,311 6,531,311
Exercise of common stock warrants
Purchase of common stock (568,750)
--------------- ---------------- ----------------
Ending balance 6,531,311 6,531,311 5,962,561
--------------
--------------- ---------------- ----------------
Preferred stock:
Beginning balance $ $ 10,856,000 $ 10,856,000
Issuance of preferred stock in public offering 10,856,000
Purchase of preferred stock (515,000)
--------------- ---------------- ----------------
Ending balance 10,856,000 10,856,000 10,341,000
--------------
--------------- ---------------- ----------------
Common stock (stated capital):
Beginning balance 1,000 1,000 1,000
--------------- ---------------- ----------------
Ending Balance 1,000 1,000 1,000
--------------
--------------- ---------------- ----------------
Capital in excess of stated capital:
Beginning balance 8,781,669 8,291,481 8,291,481
Issuance of preferred stock (1,201,451)
Issuance of common stock warrants 711,263
Purchase and cancellation of common stock (200,000)
Termination of Common Stock Investment (527,915)
--------------- ---------------- ----------------
Ending balance 8,291,481 8,291,481 7,563,566
--------------
--------------- ---------------- ----------------
Due from shareholders:
Beginning balance (10,592) (10,592) (10,592)
--------------- ---------------- ----------------
Ending balance (10,592) (10,592) (10,592)
--------------
--------------- ---------------- ----------------
Accumulated other comprehensive income, net of tax:
Beginning balance 1,049,256
Other comprehensive income(loss) (1,049,256)
--------------- ---------------- ----------------
Ending balance
--------------- ---------------- ----------------
Accumulated deficit:
Beginning balance 5,526,821 (3,057,602) (26,849,513)
Dividends (1,440,000)
Net income (loss) (7,144,423) (23,791,911) 15,561,967
--------------- ---------------- ----------------
Ending balance (3,057,602) (26,849,513) (11,287,546)
--------------
--------------- ---------------- ----------------
Investment in common stock agreement:
Beginning balance (527,915) (527,915)
Investment in common stock agreement (527,915)
Termination of Common Stock Investment 527,915
--------------- ---------------- ----------------
Ending balance (527,915) (527,915)
--------------
--------------- ---------------- ----------------
Total shareholders' equity (deficit) $15,552,372 $ (8,239,539) $ 6,607,428
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-5
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, Nine months Ended September 30,
1998 1999 1999 2000
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES: (Unaudited)
Net Income (Loss) $ (7,144,423) $(23,791,911) $(16,399,052) $ 15,561,967
Adjustments to reconcile income (loss) to
Amortization of finance contract
acquisition discount and insurance (126,215)
Amortization of debt issuance costs and
discounts 794,840 692,208 394,178 185,051
Accretion of retained interest in
securitization (127,980)
Provision for credit loss 100,000 276,844 303,842
Provision for market impairment of
finance contracts 754,551 1,070,737
Depreciation and amortization 484,237 520,868 410,421 126,577
Impairment of retained interests in
securitizations 9,932,169 8,907,970 4,672,698
Gain on sale of finance contracts (17,985,045) (1,532,888) (1,704,219) (8,099)
Gain on forgiveness of debt (1,804,345)
Loss on disposal of property, plant &
equipment 634,554
Deferred income taxes (2,861,923) (101,800) (101,800)
Changes in operating assets and liabilities
Restricted funds 6,904,264
Finance contracts held for sale, net 18,510,304 1,163,697 1,104,751 216,391
Retained interest in securitizations 6,749,327 359,888 292,474 1,401,858
Receivable from Dynex (6,573,107) 6,573,107 6,573,107
Due from affiliates (219,052) 184,153 (20,172)
Other assets (1,100,794) 1,366,724 97,486 (40,465)
Payables and accrued liabilities (2,061,734) 222,568 (548,659) 151,391
Payable to affiliates (554,233)
------------- --------------- ------------- --------------
CASH PROVIDED (USED) BY OPERATIONS 4,720,635 (4,404,021) (3,854,208) 16,424,880
------------- --------------- ------------- --------------
INVESTING ACTIVITIES:
Proceeds from disposal of collateral 79,951 176,397 107,513
Purchases of property, plant and
equipment (87,308) (197,308)
Purchase of investments (100,000)
------------- --------------- ------------- --------------
CASH PROVIDED BY INVESTING 79,951 89,089 (197,308) 7,513
------------- --------------- ------------- --------------
FINANCING ACTIVITIES:
Net proceeds (payments) on revolving
credit facilities (7,639,201)
Payments for debt issue costs (608,170)
Proceeds from notes payable 10,500,000
Payments on notes payable (7,162,148) (20,737) (17,136) (9,502,605)
Increase (decrease) in bank overdraft (2,936,883)
Proceeds from public offering of
preferred stock, net 9,631,407
Repurchase of preferred stock (515,000)
Dividends paid on preferred stock (1,440,000)
Proceeds from issuance of common stock
warrants 394,000
Purchase of common stock (200,000)
Investment in common stock agreement (527,915)
------------- --------------- ------------- --------------
CASH PROVIDED BY (USED IN) FINANCING 211,090 (20,737) (17,136) (10,217,605)
------------- --------------- ------------- --------------
INCREASE (DECREASE) IN CASH 5,011,676 (4,335,669) (4,068,652) 6,214,788
BEGINNING CASH BALANCE 159,293 5,170,969 5,170,969 835,300
------------- --------------- ------------- --------------
ENDING CASH BALANCE $ 5,170,969 $ 835,300 $ 1,102,317 $ 7,050,088
============= =============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
AutoBond Acceptance Corporation (the "Company") was incorporated in June 1993
and commenced operations August 1, 1994. The Company and its wholly-owned
subsidiaries (collectively, the "Company"), were engaged primarily in the
business of acquiring, financing and servicing automobile installment loan
contracts ("finance contracts") originated by franchised automobile dealers. The
Company specialized in contracts to consumers who generally have limited access
to traditional financing, such as that provided by commercial banks or captive
finance companies of automobile manufacturers. The Company purchased contracts
directly from automobile dealers or from other originators, and financed these
purchases through whole loan sales or securitizations.
The Company's primary source for funding its finance contracts from June 1998
was Dynex Capital, Inc. ("Dynex"). The last finance contract funded by Dynex was
on January 29, 1999, whereafter Dynex ceased funding the Company. The Company
ceased originating loans in February 1999. In response to Dynex' failure to fund
the Company's finance contracts, the Company filed suit in District Court of
Travis County demanding performance and damages. In May 2000, the Company
prevailed in its lawsuit and in June 2000 settled all disputes with Dynex. The
Company was awarded damages by the court. The Company received $20 million cash.
In addition, the Company was released from its $3 million note payable plus
accrued and unpaid interest to Dynex and received 51,500 shares of preferred
stock held by Dynex. The Company transferred its interests (including a $1.1
million subordinated note) in its AutoBond Master Funding V and AutoBond Funding
Corporation 1997-A securitization trusts to Dynex. (See Note 12)
In July 2000, the Company settled its indebtedness to Bank Boston by payment of
$6.5 million to Bank Boston.
In July 2000, the Board of Directors of the Company approved changing the
Company's name to Agility Capital, Inc. ("Agility Capital") and the adoption of
a new business plan. As Agility Capital, the Company plans to generate income by
acting as an advisor to, and investor in, new economy ventures through the
establishment of one or more investment funds. The Company is in the process of
raising, pursuant to a private placement, a $50,000,000 venture capital
investment fund with a projected 10-year term, to be called the Agility Capital
Fund, LLC (the "Fund"). The Fund will sell and issue membership interests to
accredited and institutional investors. The Company will invest up to $500,000
in such interests and will also serve as the managing member and the initial
advisor to the Fund. The Fund will primarily invest in early stage, privately
held companies operating in the e-commerce business services/internet,
information technology and services, new media, enterprise and application
software, and communications industries. On a select basis, later stage
companies in other industries may also be considered. The Fund's business model
is to invest in companies that can benefit from the collective operating and
financial experience of the Fund's managers and its advisors. The management and
advisory team's business and industry experience and professional relationships
will be relevant to the industries targeted and will be used to help the Fund
achieve significant and timely venture capital rates of returns.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Pervasiveness of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company recorded the present value of estimated future cash flows in
connection with its determination of the carrying value of its retained interest
in securitizations. Since such assumptions did not predict actual performance,
the carrying value of the retained interest in securitizations was adjusted
periodically in 1998 and 1999, resulting in adverse effects on the Company's
results of operations.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months
or less when purchased to be cash equivalents.
F-7
<PAGE>
Finance Contracts Held for Sale
Finance contracts held for sale were stated at the lower of amortized cost or
market value. Market value was determined based on the estimated value of the
finance contracts as if securitized and sold. The Company generally acquired
finance contracts at a discount, and (except for loans sold to Dynex) purchased
loss default and vender single interest physical damage insurance on the finance
contracts. The purchase discount and insurance were amortized as an adjustment
to the related finance contract's yield and operating expense, respectively,
utilizing the same basis as that used to record income on the finance contracts,
over the contractual life of the related finance contracts. At the time of sale,
any remaining unamortized amounts were netted against the finance contract's
principal amounts outstanding to determine the resultant gain or loss on sale.
Allowance for credit losses on the finance contracts was based on the Company's
historical default rate, the liquidation value of the underlying collateral in
the existing portfolio, estimates of repossession costs and probable recoveries
from insurance proceeds. The allowance was increased by provisions for estimated
future credit losses, which were charged against income. The allowance account
was reduced for direct charge-offs using the specific identification method, and
for estimated losses upon repossession of automobiles which was netted against
the related finance contracts and transferred to collateral acquired.
The Company wrote down to zero the value of the remaining finance contracts held
as of September 30, 2000.
Collateral Acquired.
Automobiles repossessed and held for sale were initially recorded at the
carrying value of the finance contracts on the date of repossession less an
allowance. This value approximated the expected cash proceeds from the sale of
the assets and applicable insurance payments, net of all disposition costs. Due
to the relatively short time period between acquisition and disposal of the
assets, discounting of the expected net cash proceeds to determine fair value
was not utilized.
Subsequent impairment reviews were performed quarterly on a disaggregated basis.
A valuation allowance was established if the carrying amount was greater than
the underlying fair value of the assets. Subsequent increases and decreases in
fair value resulted in an adjustment of the valuation allowance, which was
recorded in earnings during the period of adjustment. Adjustments for subsequent
increases in fair value were limited to the existing valuation allowance amount,
if any.
The Company did not have any finance contract collateral as of September 30,
2000.
Investments.
In August 2000, the Company made an investment in an emerging company as part of
its new business plan. In October 2000, the Company made two additional
investments in software companies of $500,000 and $75,000. The Company records
its investments at fair value. The fair value of investments is determined based
upon market value of the security.
Retained interest in securitizations
In connection with the financing of its finance contracts after 1996, the
Company followed FAS 125, and (1) recognized the financial and servicing assets
it controlled and the liabilities it incurred, (2) derecognized financial assets
when control was surrendered, and (3) derecognized liabilities once they were
extinguished. Control was considered to have been surrendered only if: (i) the
transferred assets had been isolated from the transferor and its creditors, even
in bankruptcy or other receivership (ii) the transferee had the right to pledge
or exchange the transferred assets, or, was a qualifying special-purpose entity
(as defined) and the holders of beneficial interests in that entity had the
right to pledge or exchange those interests; and (iii) the transferor did not
maintain effective control over the transferred assets through an agreement
which both entitles and obligates it to repurchase or redeem those assets prior
to maturity, or through an agreement which both entitled and obligated it to
repurchase or redeem those assets if they were not readily obtainable elsewhere.
If any of these conditions were not met, the Company accounted for the transfer
as a secured borrowing.
Pursuant to certain securitization transactions, the related trusts issued Class
B certificates to the Company which are subordinate to the Class A Certificates
and senior to the retained interest in securitizations with respect to cash
distributions from the trust. The Company accounted for the Class B certificates
as trading securities with any unrealized gain or loss recorded in the
statements of operations in the period of the change in fair value.
All other retained interests in securitizations were accounted for as investment
securities classified as "available for sale". Accordingly, any unrealized gain
or loss in the fair value was included in accumulated other income, a component
of equity, net of the income tax effect. Any impairment deemed permanent was
recorded as a charge against earnings. The fair value of retained interest in
securitizations was calculated based upon the present value of the
F-8
<PAGE>
estimated future cash flows after considering the effects or estimated
prepayments, defaults and delinquencies. The discount rate utilized was based
upon assumptions that market participants would use for similar financial
instruments subject to prepayments, defaults, and collateral value and interest
rate risks.
The Company estimates that, due to the uncertainties in the amount of insurance
claim proceeds and prior servicer reimbursements obtainable, the retained
interests in securitizations have no value as of September 30, 2000.
Debt Issuance Costs
The costs related to the issuance of debt are capitalized and amortized into
interest expense over the lives of the related debt. Debt issuance costs related
to warehouse credit facilities are amortized using the approximate interest
method over the term of commitment. All debt associated with the debt issuance
costs was paid off at September 30, 2000.
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost less accumulated depreciation.
Expenditures for additions and improvements are capitalized while minor
replacements, maintenance and repairs, which do not improve or extend the life
of such assets, are charged to expense. Gains or losses on disposal of fixed
assets are reflected in operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets,
ranging from 3 to 5 years. Leasehold improvements are depreciated over the term
of the lease.
In the event that facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation of impairment were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value is required. As a result of its change in business activities, most of the
Company's equipment was no longer utilized. At September 30, 2000 the Company
compared the carrying amount of its assets to the estimated future undiscounted
cash flows associated with the asset and determined a write down was required.
Advertising
Advertising costs are expensed as incurred. Advertising costs were $459,652 and
$116,262 for the years ended December 31, 1998 and 1999, respectively. The
Company incurred no advertising costs for the nine months ended September 30,
2000.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the year in deferred tax assets and
liabilities. The Company files a consolidated federal income tax return.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities 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.
Interest Income
The Company generally uses the simple interest method to determine interest.
Other Comprehensive Income
Other comprehensive income consisted of unrealized gain (loss) on retained
interest in securitizations.
2. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133,"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires that 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
F-9
<PAGE>
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, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company plans to comply with the provisions of SFAS No. 133 upon its initial
use of derivative instruments. As of September 30, 2000 the Company was
utilizing no such instruments.
3. Finance Contracts Held for Sale
The following amounts are included in finance contracts held for sale as of:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------------- -----------------
<S> <C> <C>
Unpaid principal balance $ 954,065 $ 85,227
Allowance for market losses (745,773) (85,227)
----------------- -----------------
Finance contracts held for sale $ 208,292 $ -
================= =================
</TABLE>
4. Retained interest in securitizations
The changes in retained interest in securitizations follow:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------------ -----------------
<S> <C> <C>
Beginning balance $13,873,351 $ 1,401,858
Changes from securitization and sale
transactions (3,199,533)
Transfer of retained interest in
accordance with Dynex
settlement agreement (1,401,858)
Proceeds from retained interests (363,990)
Impairment charge (8,907,970)
------------------ -----------------
Ending balance $ 1,401,858 $ -
================== =================
</TABLE>
The Company periodically reviewed the fair value of the retained
interests in securitizations. The difference in the fair value of securities
available for sale and the historical carrying value on a disaggregated basis,
where any reduction in value did not result in an impairment that was other than
temporary, was recognized as an adjustment to accumulated other comprehensive
income, a separate component of shareholders' equity. The Company recorded a
charge against earnings for permanent impairment of retained interest in
securitizations, determined on a disaggregated basis, of $8,907,970 for the year
ended December 31, 1999. The Company transferred its interest in its 1997-A
securitization of $1,401,858 to Dynex as part of its settlement agreement with
Dynex.
The Company's retained interests in securitizations represented the
present value of expected future cash flows to the Company from sales of finance
contracts. The amount of these retained interests were increased by additional
sales or securitizations. The amount of these retained interests of finance
contracts may decrease due to the Company's receipt of cash flows from their
investment. Retained interests in securitizations will also decrease in the case
of impairments caused by a revaluation of the future cash flows.
The Company's term securitizations 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 were estimated based on the
historical static pool results. Repossession recovery ratios, with deficiency
insurance proceeds reflected, typically ranged from 80% to 90% through the time
the Company serviced the loans.
Three primary causes led to the impairment charges to retained
interest in securitizations in 1998 and 1999. The first cause was the delay
and/or cessation of insurance payments on eligible defaulted finance contracts
within the Company's securitization portfolios. In six securitizations for which
Interstate Fire and Casualty ("Interstate") has provided deficiency balance
policies, insurance payments have been refused and/or delayed by the insurer.
Moreover, the Company's surrender of servicing adversely affected the claims
payment process, since the Company was not permitted to continue negotiating
payments with Interstate. With respect to two other securitizations in 1997, 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 early stages of
the dispute, Progressive continued to pay claims. However, in April
F-10
<PAGE>
1998 Progressive stopped paying claims. The loss of claims cash flow from
Interstate and Progressive necessitated drawing funds from the applicable cash
reserves to pay senior investors. The depletion of cash reserves and shortfalls
in cash available to pay subordinated investors (resulting in the capitalization
of accrued interest on their securities), increased the expected delay in
receiving any ultimate cash flows, and reduced the value of the related retained
interests. The Company continued to model the expected cash flows from
Progressive in the revaluation of the retained interest, until the completion of
the year-ended 1999, for which it was concluded, with the hindsight provided by
the loss at the Progressive trial, that future cash flows from the Progressive
policies was uncertain to the point where further write downs were warranted.
The second primary factor was the transfer of servicing functions to
the Company from a third party service provider, Loan Servicing Enterprise
("LSE"). After assuming all servicing functions from LSE, the Company
accelerated the rate at which finance contracts were charged off as compared
with prior periods. LSE also was unable to allocate collected funds to various
securitization trusts, and this problem resulted in certain of those funds being
withheld from distribution by the trustee. Accelerated charge-offs and reduced
cash flows resulted in the diversion of any available cash flow to the senior
investors that otherwise would flow to subordinated investors or to the benefit
of the Company, resulting in accretion of the subordinated holders' principal
and a corresponding impairment of the Company's retained interest.
Other factors adversely impacting the retained interest valuation was
the transfer of servicing in 1999 to servicers with less experience in
collecting deficiency balance insurance claims and with different collection
approaches, the increase in 1999 of VSI insurance deductible on the Dynex
portfolio, and a change in 1998 to a more conservative revenue recognition
model.
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 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 of $6.5 million at December 31, 1998 was collected in January and
February 1999. The Funding Agreement was unilaterally terminated by Dynex
February 8, 1999. (See "Organization")
6. Notes Payable and Non-Recourse Debt
Notes payable:
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------------- ----------------
<C> <C> <C>
12% Convertible notes payable $ 3,000,000 $ -
15% Subordinated convertible notes payable 7,500,000 -
Other notes payable 2,605 -
Discount on convertible notes payable (187,479) -
------------------- ----------------
$10,315,126 $ -
=================== ================
</TABLE>
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 Company stopped making payments due on the Senior Notes
in September 1999. The Senior Notes together with accrued interest have been
settled according to the terms of the settlement agreement dated June 6, 2000.
(See "Note 12")
In January 1998, the Company privately placed with Bank Boston
Investments, Inc. ("Bank Boston") $7,500,000 in aggregate principal amount of
its 15% senior subordinated convertible notes (the "Subordinated Notes").
Interest on the Subordinated Notes were payable quarterly until maturity on
February 1, 2001. The Subordinated Notes were convertible at the option of the
holder for up to 368,462 shares of common stock of the Company, at a conversion
price of
F-11
<PAGE>
$3.30 per share, subject to adjustment under standard anti-dilution
provisions. The Company also granted Bank Boston a warrant to purchase company
stock exercisable to the extent the debt is not converted (See Note 10). The
Subordinated Notes were issued pursuant to an Indenture, dated as of January 30,
1998 (the "Indenture") between the Company and Bank Boston, N.A., as agent. The
Indenture contained certain restrictive covenants. 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
discounts was being amortized as interest expense on the interest method through
February 2001. At December 31, 1999 the Company did not meet certain of its
financial covenants. The Company and Bank Boston entered into an agreement on
July 27, 2000 whereby Bank Boston accepted $6.5 million in full settlement of
the debt and all unpaid interest of approximately $1.1 million. The Company
recorded an extraordinary gain of $1,804,345 from settlement of this debt. As a
result of the Company's tax net operating loss carryforwards, there was no tax
expense recognized on the settlement.
Non-Recourse Debt:
Prior to the adoption of SFAS No. 125, the Company securitized loans
through special purpose entities, however, the structure resulted in the Company
retaining Class B certificates that were then financed directly by the Company
rather than through related trusts. The Company obtained non-recourse financing
from several finance companies with terms substantially identical to the Class B
certificates, which are pledged to the debt. The effect was to grant the
non-recourse note-holder, the economic benefit of the Class B certificates. The
Company recorded the Class B certificates and the non-recourse financing on its
balance sheet. The non-recourse loans bear interest at 15% per annum and have
stated terms of six years. Principal and interest payments are paid by the
related securitization trustee directly to the financing company consisting of
all funds available to be paid to the Class B certificate holders. No interest
payments were made in 2000 or 1999.
During 1998 the Class B certificates were deemed to be impaired and
were marked to market. As the non-recourse debt holders are only entitled to
receive amounts attributable to the Class B certificates, their value and
ultimate settlement is based on such Class B certificate and are also
marked-to-market.
The following summarizes the non-recourse debt outstanding at December
31, 1999 and September 30, 2000.
<TABLE>
<CAPTION>
Origination Date Stated Rate Original Amount December 31, September 30,
---------------- ------- ---- --------------- ------------ -------------
Terms 1999 2000
----- ---- ----
<S> <C> <C> <C> <C> <C>
April 8, 1996 6 years 15% 2,585,757 $ 1,120,300 $ 1,120,300
March 28, 1996 6 years 15% 2,059,214 1,205,733 1,205,733
June 27, 1996 6 years 15% 2,066,410 1,480,957 1,480,957
September 30, 1996 6 years 15% 2,403,027 1,660,140 1,660,140
December 27, 1996 6 years 15% 2,802,891 2,221,356 2,221,356
Valuation adjustment (7,688,486) (7,688,486)
--------------- ----------------
Carrying value at end of period $ - $ -
=============== ================
</TABLE>
7. Income Taxes
The provision for income taxes for the nine months ended September 30, 2000 and
for the years ended December 31, 1998 and 1999 consisted of a provision for
deferred taxes and the Company had no current tax liability. The reconciliation
between the provision (benefit) for income taxes and the amounts that would
result from applying the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999 2000
--------------- ---------------- ----------------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate of 34% $(3,662,069) $(8,123,861) $ 5,291,069
Nondeductible expenses 35,700 11,692 2,457
Change in valuation allowance related to Net
Operating Loss 8,010,369 (5,293,526)
--------------- ---------------- ----------------
Provision (benefit) for income taxes $ (3,626,369) $ (101,800) $ -
=============== ================ ================
</TABLE>
Deferred income tax assets and liabilities reflect the tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. Significant components of the
Company's net deferred tax liability are as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------------- ------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 8,659,265 $ 1,041,792
Gain on securitizations - 2,119,158
Other 87,040
------------------- ------------------
Gross deferred tax assets 8,746,305 3,160,950
------------------- ------------------
Deferred tax liabilities
Gain on securitizations 291,829 -
Other 444,107 444,107
------------------- ------------------
Gross deferred tax liabilities $ 735,936 $ 444,104
=================== ==================
Net deferred tax liabilities (assets) $(8,010,369) $(2,716,843)
Valuation allowance 8,010,369 2,716,843
------------------- ------------------
Net deferred tax liabilities (assets) $ - $ -
=================== ==================
</TABLE>
At September 30, 2000 the Company had tax net operating loss
carryforwards of approximately $3,064,093 expiring in fiscal year 2020.
8. Shareholders' Equity
Stock Based Compensation Plan
The Company grants stock options under a stock-based incentive
compensation plan (the "Option Plan"). The Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for the Option
Plan. In 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") was issued, which, if fully adopted by the Company, would change the
methods the Company applies in recognizing the cost of the Option Plan. Adoption
of the cost recognition provisions of SFAS 123 is optional and the Company has
elected not to adopt these provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the expense recognition provisions of SFAS
123 are required by SFAS 123 and are presented below.
Under the Option Plan, the Company is authorized to issue shares of
Common Stock pursuant to "Awards" granted in various forms, including incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended), non-qualified stock options, and other similar
stock-based Awards. The Company granted stock options in 1996 through 1998 under
the Option Plan in the form of non-qualified stock options.
Stock Options
The Company has granted stock options to employees and directors. The
stock options granted have contractual terms of 5 to 10 years. All options
granted to the employees and directors have an exercise price not less than the
fair market value of the stock at the grant date. The options granted vest
33.33% per year beginning on the first anniversary of the date of grant. In
accordance with APB 25, the Company has not recognized any compensation cost for
the stock options granted.
A summary of the status of the Company's stock options for the period
January 1, 1998 through September 30, 2000 is presented below:
<TABLE>
<CAPTION>
Shares of Underlying Weighted Average
Options Exercise Price
------------------------------- ---------------------------
<S> <C> <C>
Outstanding at January 1, 1998 271,000 8.85
Granted 330,000 5.85
Exercised - -
Forfeited (52,668) 7.44
------------------------------- ---------------------------
Outstanding at December 31, 1998 548,332 7.18
Granted - -
Exercised - -
Forfeited (165,006) 6.78
------------------------------- ---------------------------
Outstanding at December 31, 1999 383,326 7.35
Granted -
Exercised -
Forfeited (47,002) 4.22
------------------------------- ---------------------------
Outstanding at September 30, 2000 336,324 7.79
Options exercisable at end of period 336,324 7.79
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; risk-free interest rates of
5.5%, the expected lives of options of 5 years; and a volatility of 45% for all
grants in 1998. There were no grants in 1999 or 2000.
<TABLE>
<CAPTION>
Range of exercise price Shares of underlying options Weighted average Weighted average
remaining life exercise price
<S> <C> <C> <C> <C>
2.00 to 2.99 5,333 6.66 2.42
3.00 to 3.99 71,332 7.27 3.74
4.00 to 4.99 18,331 6.78 4.37
5.00 to 5.99 6,666 7.98 5.50
6.00 to 6.99 3,333 7.36 6.13
7.00 to 7.99 49,999 7.51 7.32
8.00 to 8.99 5,333 7.21 8.33
9.00 to 9.99 79,331 6.23 9.82
10.00 to 10.99 96,666 6.14 10.48
------------------------------- --------------------- ----------------------
Total 336,324 6.64 7.79
</TABLE>
F-13
<PAGE>
Pro Forma Net Income and Net Income Per Common Share
Had the compensation cost for the Company's Option Plan been
determined consistent with SFAS 123, the Company's net income and net income per
common share for 1998, 1999 and through September 30, 2000 would approximate the
pro forma amounts below:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999 2000
--- --------------- ----------------- ----------------
<S> <C> <C> <C>
Net (loss) income attributable to common shareholders:
As reported (8,584,423) (25,479,411) 14,354,279
Pro Forma (8,811,364) (25,743,941) 14,319,632
Net (loss) income per common share (basic):
As reported (1.31) (3.90) 2.28
Pro Forma (1.35) (3.94) 2.28
Net (loss) income per common share (diluted):
As reported (1.31) (3.90) 2.28
Pro Forma (1.35) (3.94) 2.28
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
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 considered 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 Bank Boston a warrant (the "Subordinated
Note Warrant"). The Subordinated Note Warrant entitled the holder, upon exercise
of the Warrant, to purchase from the Company that number of shares of the
Company's common stock, up to 368,462, which were available for conversion at
the maturity of the Subordinated Notes on February 1, 2001. The holder could
either convert the debt or exercise the warrant but not both. If certain major
corporate events (such as a change in control or major stock offering) do not
occur prior to February 1, 2001, then the holder will have the right to put the
Warrant to the Company at the difference between the current market price and
the warrant exercise price. Based on the market price at December 31, 1999, no
amount would be payable at such date. The Subordinated Note Warrant was to
expire on January 31, 2005. The warrant was valued at $375,831 which was
recorded as a discount on the debt. On July 27, 2000 the Company and Bank Boston
reached a settlement. The debt was paid and the warrants were canceled.
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 Bank Boston pursuant to which the Principals granted to Bank Boston 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 warrant expires January
30, 2005.
The Company's remaining outstanding warrant is held by Infinity
Investors Limited and is exercisable for 100,000 shares of common stock of the
Company at a price of $8.73 per share. The warrant expires March 31, 2002.
Preferred Stock
Pursuant to the Company's amended articles of incorporation; the
Company is authorized to issue from time to time up to 5,000,000 shares of
preferred stock, in one or more series. The Board of Directors is authorized to
fix the dividend rights, dividend rates, any conversion rights or right of
exchange, any voting right, any rights and terms of redemption (including
sinking fund provisions), the redemption rights or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any series of preferred stock and the number of shares constituting such series
and the designation thereof.
F-14
<PAGE>
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.
Cumulative unpaid dividends at September 30, 2000 were $2,817,938.
The Company has not paid the quarterly dividend on its Preferred Stock
since December 31, 1998. 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. Two of the Company's directors are
designated as representing the Preferred Stock holders. 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. There have been no directors elected by the Preferred Shareholders. The
Preferred Stock ranks senior to the common stock with respect to the payment of
dividends and amounts upon liquidation, dissolution or winding up. In the event
of liquidation, dissolution or winding up of the Company, the amount required to
satisfy the preferred shareholders is $13.7 million at September 30, 2000.
The Company received 51,500 shares of its Preferred Stock as part of
its settlement from Dynex. These shares have been cancelled.
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") whereby Promethean agreed to purchase, subject to certain
conditions, from the Company up to $20 million (subject to increase up to $25
million at Promethean's option) of the Company's common stock. 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. The agreement expired August 20, 2000.
Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share differs from basic earnings per share for 1997 due to
the assumed conversions of dilutive options, warrants and convertible debt that
were outstanding during the period.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999 2000
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net (loss) income available to common shares (basic) $(8,584,423) $(25,479,411) $14,354,279
---------------- ----------------- ----------------
Net (loss) income available to common shares (diluted) $(8,584,423) $(25,479,411) $14,354,279
================ ================= ================
Weighted average shares outstanding (basic) 6,531,311 6,531,311 6,292,938
---------------- ----------------- ----------------
Weighted average shares outstanding (dilutive) 6,653,311 6,531,311 6,292,938
================ ================= ================
</TABLE>
As the Company posted a net loss for the years ended December 31, 1998
and 1999, the effects of stock options and contingently issuable shares for the
years ended December 31, 1998 and 1999 are anti-dilutive and not included in the
computation of diluted loss per share. The Company's market price for shares of
its stock remains below all option and warrant prices and therefore all options
and warrants are anti-dilutive and not included in the computation of diluted
earnings per share for the nine months ended September 30, 2000.
9. Related Party Transactions
The Company and AutoBond, Inc. ("ABI"), which was founded and is 100%
owned by the Chief Executive Officer ("CEO") of the Company entered into a
management agreement dated as of January 1, 1996 (the "ABI Management
Agreement") which requires ABI to pay an annual fee of $50,000 to the Company
for services rendered by it or the Company's employees on behalf of ABI as
follows: (i) monitoring the performance of certain partnership interests owned
by ABI and
F-15
<PAGE>
its sole shareholder, (ii) certain cash management services, including the
advancing of funds to pay ABI's ordinary business expenses and (iii) providing
advice as to regulatory compliance. The ABI Management Agreement also provides
that the Company will perform certain accounting functions on behalf of ABI
including (i) maintenance of financial books and records, (ii) monitoring of
cash management functions, (iii) preparation of financial statements and tax
returns and (iv) providing advice in connection with retention of independent
accountants. The ABI Management Agreement further provides for the reimbursement
of advances made by the Company for out-of-pocket costs and expenses incurred on
behalf of ABI. Amounts due to the Company under the ABI Management Agreement
amounted to $204,325 at December 31, 1998. As of July 1, 1998, the Company no
longer provided management services, administrative services or accounting
services for ABI. The Company deemed the amount uncollectible in 1999 and
recorded an allowance for the full amount.
10. Employment Agreements
The Company and its chief executive officer ("CEO") entered into an
employment agreement dated May 31, 1996 and effective from such date for five
years. The agreement provides for compensation at a base salary of $240,000 per
annum, which may be increased and may be decreased to an amount of not less than
$240,000, at the discretion of the Board of Directors. The agreement entitles
the CEO to receive the benefits of any cash incentive compensation as may be
granted by the Board to employees, and to participate in any executive bonus or
incentive plan established by the Board of Directors. The agreement also
provides the CEO with certain additional benefits. The agreement automatically
terminates upon (i) the death of the CEO, (ii) disability of the CEO for six
continuous months together with the likelihood that the CEO will be unable to
perform his duties for the following continuous nine months, as determined by
the Board of Directors, (iii) termination of the CEO "for cause" (which
termination requires the vote of a majority of the Board) or (iv) the occurrence
of the five-year expiration date provided, however, the agreement may be
extended for successive one-year intervals unless either party elects to
terminate the agreement in a prior written notice.
The CEO may terminate his employment for "good reason" as defined in
the agreement. In the event of the CEO's termination for cause, the agreement
provides that the Company shall pay the CEO his base salary through the date of
termination and the vested portion of any incentive compensation plan to which
the CEO may be entitled. Other than following a change in control, if the
Company terminates the CEO in breach of the agreement, or if the CEO terminates
his employment for good reason, the Company must pay the CEO: (i) his base
salary through the date of termination; (ii) a severance payment equal to the
base salary multiplied by the number of years remaining under the agreement; and
(iii) in the case of breach by the Company of the agreement, all other damages
to which the CEO may be entitled as a result of such breach, including lost
benefits under retirement and incentive plans. In the event of the CEO's
termination following a change in control, the Company is required to pay the
CEO an amount equal to three times the sum of (i) his base salary, (ii) his
annual management incentive compensation and (iii) his planned level of annual
perquisites. The agreement also provides for indemnification of the CEO for any
costs or liabilities incurred by the CEO in connection with his employment.
The Company entered into an employment agreement, dated as of January
1, 1998, with a former outside director to serve as a consultant to the Company
until February 1, 1998, whereupon he agreed to become President of the Company
for a period of three years. The agreement provides for compensation at a base
salary of $200,000 per annum, with a one time signing bonus of $100,000 and
additional performance bonuses of up to $25,000 per quarter, as approved by the
CEO and the Compensation Committee. In addition, the President received options
under the Option Plan to purchase 100,000 shares of the Company's common stock,
along with an agreement to grant additional options to purchase 50,000 of the
Company's common stock on December 1, 1998. In June 2000, the Company released
the President and paid him $90,000 for the remainder of his contract.
11. Leases
The Company leases property under capital leases as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- --------------------
<S> <C> <C>
Furniture $ 49,606 $ 49,606
Equipment 515,891 515,891
Accumulated depreciation (374,961) (565,497)
------------- --------------------
Net $ 190,536 $ -
============= ====================
</TABLE>
Future minimum lease payments under capital leases together with the
present value of the future minimum lease payments included in accounts payable
and accrued expenses as of September 30, 2000 follow:
F-16
<PAGE>
<TABLE>
<S> <C>
Year ending September 30, 2001 $147,284
--------------------
Total minimum lease payments 147,284
Less amounts representing interest (10,694)
--------------------
Present value of future minimum lease payments $136,590
====================
</TABLE>
The Company currently has no operating leases, which extend beyond one
year.
12. Commitments and Contingencies
The Company is the plaintiff or the defendant in several legal
proceedings generally related to the repossession of vehicles that its
management considers to be the normal kinds of actions to which an enterprise of
its size and nature might be subject. The outcomes are not expected to be
material to the Company's overall business or financial condition, results of
operations or cash flows.
On June 9, 1998, the Company entered into a series of agreements with
Dynex Capital, Inc. ("Dynex") whereby Dynex agreed to provide financing to the
Company, with such financing to be secured by auto loans underwritten and
acquired by the Company. Further, the Company was to service all such loans for
a fee. Additionally, the three principal shareholders of the Company granted to
an affiliate of Dynex, Dynex Holding, Inc., an option to acquire their stock. In
February 1999, Dynex informed the Company that certain alleged "Funding
Termination Events" had occurred and that Dynex would no longer honor its
obligation to fund the Company as per the parties June 9, 1998, agreements. The
Company vigorously disputed Dynex's allegations and, on February 8, 1999, filed
suit against Dynex in the Texas case seeking to enforce Dynex's contractual
obligations and/or to recover damages resulting from the breach thereof. After a
four week jury trial, on March 9, 2000 the jury returned a verdict in favor of
the Company. Specifically, the jury found that (a) the Company made no material,
knowing or reckless misrepresentations to induce Dynex to enter in the June 9,
1998 agreements between the parties, (b) the Company did not breach its June 9,
1998 agreements with Dynex prior to Dynex's cessation of funding, and (c) Dynex
maliciously or negligently made defamatory statements about the Company. Based
on these findings, the jury awarded the Company $18.7 million in direct lost
profits and approximately $50 million in consequential lost profits. After
numerous motions by both parties, the court entered judgment reducing the amount
of damages owed to the Company to $23.3 million. Thereafter, on June 9, 2000 the
Company entered into a settlement agreement with Dynex, pursuant to which (a)
Dynex and the Company released all claims against each other; (b) Dynex paid $20
million to the Company (of which $3.3 million was paid to the Company's Texas
trial counsel pursuant to a contingency fee and expense arrangement), (c) Dynex
surrendered to the Company 51,500 shares of the Company's preferred stock, (d)
Dynex cancelled the Company's indebtedness to Dynex under a $3 million note, and
(e) the Company assigned to Dynex (i) a $1.4 million subordinated note from a
securitization in which Dynex held the senior debt, and (ii) the common stock in
two securitization subsidiaries in which Dynex held the senior debt.
In 1998, the Company initiated suit in state court in Houston, Texas
against Progressive Northern Insurance Co. arising out of insurance policies
issued by Progressive affiliates to the Company. The policies provided
deficiency balance coverage and physical damage coverage on automobile loans
acquired by the Company and sold into certain securitizations. Progressive
contended that there was a cumulative limit on claims under the Deficiency
Balance Policy of 88% of the total premiums paid on that Policy, which was
contrary to the Company's position. On this point, the Company's position was
confirmed by the court. Progressive also contended that it had the right to
cancel the Policies, without any refund of the fully-paid premiums, at any time
pursuant to 30 days' notice and in fact did so in March 1998. The Company and
the securitization trustees disputed this termination as contrary to the terms
and understandings reached with Progressive and relied upon by the parties in
interest, including the securitization market. This issue was submitted by the
court to the jury. After a three week trial in January 2000, the Company failed
to win a verdict against Progressive. The Company filed a motion to set aside
the verdict based on various legal issues and the court denied this motion and
entered a take nothing judgment against the Company. The Company is currently
appealing this verdict.
The Company and Tejas Securities Group, the lead underwriter of the
sale in February 1998 of the Company's 15% Series A Cumulative Preferred Stock,
have been sued by a former holder of the Preferred Stock. Plaintiff claims that
he purchased the Preferred Stock from Tejas in reliance upon alleged
representations made by both the Company and Tejas that the financing the
Company had in place with Dynex was "secure". Plaintiff has alleged violations
of the Texas Securities Act, fraud, negligent misrepresentation, civil
conspiracy and violations of the Texas Business and Commerce Code. Plaintiff had
previously filed a similar suit in Federal Court against the Company which was
dismissed. The Company is vigorously defending this case and anticipates a
favorable outcome.
In connection with the 1997-B and 1997-C securitizations, $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.
As of September 30, 2000, such trigger event has not been notified to the
Company.
F-17
<PAGE>
In August 2000, the trustee for the Company's securitizations in 1995
and 1996 made demand, on behalf of the certificate holders, on the Company that
it repurchase approximately $4.5 million in defaulted loans for which the
trustee claimed Interstate Insurance was refusing to pay claims. The trustee
claimed such refusal constituted a breach of representation by the Company
regarding the insurance coverage on the finance contracts. The Company has
vigorously disputed the trustee's claim and expects that any liability for
unpaid claims will be posited with the insurer.
The Company has made a capital commitment of $500,000 to an investment
fund that co-invests in private venture-stage companies with whom the principals
of the fund have business or professional relationships. $75,000 of the
commitment was paid in October 2000.
13. Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company,
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
would realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and Cash Equivalents and Restricted Cash
The carrying amount approximates fair value because of the short
maturity of those investments.
Finance Contracts Held for Sale
The fair value of finance contracts held for sale is based on the
estimated proceeds expected on sale or securitization of the finance contracts
held for sale.
Investments
The fair value of investments is determined based upon market value of
the security.
Retained interest in securitizations
The fair value on retained interest in securitizations is determined
based on discounted future net cash flows utilizing a discount rate that market
participants would use for financial instruments with similar risks.
Notes Payable and Non-recourse debt
The fair value of the Company's debt is based upon the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities and characteristics. The
revolving credit lines are variable rate loans, resulting in a fair value that
approximates carrying value. The Company has no notes payable at September 30,
2000.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and September 30, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
Carrying Fair Value Carrying Fair Value
Amount Amount
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 835,300 $ 835,300 $7,050,088 $7,050,088
Finance contracts held for
sale 208,292 208,292 - -
Investments 100,000 100,000
Retained interest in
securitizations-trading 1,401,858 1,401,858 - -
Retained interest in
securitizations-available
for sale - - - -
Notes payable &
non-recourse debt 10,315,126 10,315,126 - -
</TABLE>
F-18
<PAGE>
14. Supplemental Cash Flow Disclosures
Supplemental cash flow information with respect to payments of interest
and warrants issued for services is as follows:
<TABLE>
<CAPTION>
Year ended December 31, September 30,
1998 1999 2000
-------------- ---------------- ----------------
<S> <C> <C> <C>
Interest paid $2,212,748 $1,032,677 $17
Warrants issued for services 335,432 - -
</TABLE>
No income taxes were paid during fiscal 1998, 1999 or 2000.
15. Quarterly Information (unaudited)
The following financial data summarizes quarterly results for the Company for
the years ended December 31, 1999 and for the nine months ended September 30,
2000
<TABLE>
<CAPTION>
Three months ended
Fiscal 1999 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Total revenues $ 3,784,939 $ 1,888,659 $ 1,211,762 $ (384,728)
Net loss (2,460,671) (7,288,693) (6,649,686) (7,392,861)
Net loss available to common
shareholders (2,882,546) (7,710,568) (7,071,561) (7,814,736)
Loss per common share basic and
diluted (0.44) (1.18) (1.08) (1.20)
</TABLE>
<TABLE>
<CAPTION>
Fiscal 2000 March 31 June 30 September 30
<S> <C> <C> <C>
Total revenues $ 36,087 $22,675,598 $ 135,420
Net (loss) income (1,678,171) 15,714,635 1,525,503
Net (loss) income available to
common shareholders (2,100,046) 15,337,791 1,116,534
Earnings per common share basic and
diluted (0.32) 2.41 .19
F-19
</TABLE>
