<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 33-5144-D
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2669147
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1120 N.W. 63RD , SUITE G-106
OKLAHOMA CITY, OKLAHOMA 73116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 843-3135
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At December 31, 1997, an aggregate of 1,000 shares of the registrant's
Common Stock, par value $1.00 each (being the registrant's only class of common
stock), were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. BUSINESS
GENERAL
U.S. Automobile Acceptance SNP-III, Inc. (the "Company") was
incorporated as a Texas Corporation in June, 1996. The Company is a limited
purpose corporation engaged in the financial services business specializing in
the purchase, management and collection of used motor vehicle sub- prime credit
receivables (the "Contracts"). The Company purchases Contracts, at a discount,
created by the sale of used automobiles and light trucks. The Company has
financed its business through the securitization of the Contracts that it
purchases. A public note offering, began in late 1996, was completed in March,
1998, when the maximum of $24,000,000 was reached.
The Company is considered to be in the "development stage" as
substantially all of its efforts have been expended in establishing the new
business, raising capital and purchasing initial finance contracts. The Company
began purchasing finance contracts in the late first quarter of 1997 and expects
to be fully operational by the third quarter of 1998.
The Company's offices are located at 1120 N.W. 63rd, Suite G-106,
Oklahoma City, Oklahoma 73116.
SECURITIZATION ACTIVITIES
Pursuant to an Indenture Agreement between the Company and Chase Bank
of Texas, formerly Texas Commerce Bank National Association, the Company has
issued Notes Due December 31, 2001 (the "Notes"). The Notes require monthly
interest payments at a rate of 11% per annum.
The Notes are secured by the Contracts (and the related motor vehicle
collateral) purchased by the Company. In addition, the net proceeds of the
offering and the Company's excess cash flow after payment of interest and
allowed expenses secures the Notes. The Indenture Agreement requires that all of
the Company's excess cash flow must be deposited after January 1, 2001 into a
note redemption bank account held by the trustee for payment of the Notes. The
Company may redeem the Notes in whole or in part at any time.
The Company has paid certain note offering and organizational fees and
costs out of the gross proceeds from the issuance of the Notes. The Company pays
Contract servicing fees to U.S. Automobile Acceptance Corporation (the
"Servicer"), an affiliate of the Company, which consist of monthly payments of
$21.50 per Contract, limited to a maximum of $85,000 per month.
2
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CONTRACT PURCHASING AND COLLECTING ACTIVITIES
The Company's Contracts are purchased, usually at a discount, from used
automobile dealerships and used car divisions of new car dealerships. The
Company's Contract collecting activities are conducted through services provided
by the Servicer pursuant to an agreement with the Company. The Contracts
generally consist of retail installment sales contracts that are secured by
liens on the related motor vehicles. As of December 31, 1997, the Company was
actively purchasing contracts from automobile dealers, substantially all located
in the states of Oklahoma and Texas.
The Contracts are generally purchased at discounts ranging from 2% to
25% below the total future net principal balance owed on such Contracts. The
average discount for Contracts purchased to date has been in excess of 10% of
the net principal balance of the Contracts purchased.
The purchase discount varies depending on the credit worthiness of
the borrower and on the availability and financial strength added by additional
recourse or credit support agreements provided by the automobile dealer. These
dealer credit support agreements are in the form of contract replacement
guarantees, direct dealer recourse, limited guaranty agreements or some other
form of cash hold-back arrangement.
The Company does not participate in the retail sales by the automobile
dealers of the financed vehicles from which the Contracts arise. Automobile
dealers are expected to continue to sell non-prime credit Contracts to the
Company at a discount for several reasons, including (I) the 1986 repeal of the
installment sale tax treatment for such Contracts, (ii) the lack of availability
of financing from traditional financing sources, and (iii) the currently
expanding market for used automobiles.
The Company anticipates that all Contracts purchased by the Company
will continue to relate primarily to financed used vehicles where consumer
retail prices range from $2,000 to $20,000.
The Contracts are purchased by the Company and serviced on behalf of
the Company under a Contract Servicing Agreement. The Servicing Agreement allows
the Servicer to subcontract with industry-qualified third parties to perform its
obligations thereunder. Any such subcontract will not relieve the Servicer from
liability for its obligations under the Servicing Agreement. The Company has
granted a security interest in the Servicing Agreement to the Trustee as
additional security for the Notes of the Company.
The Company and the Servicer presently utilize independent commission
agents as well as employees of the Servicer and Company to assist in locating
eligible Contracts.
The Company purchases the Contracts at substantial discounts to their
aggregate remaining unpaid principal balances. In addition, the Company seeks to
obtain Contracts whose maturities are less than the remaining useful lives of
the financed vehicles and which require substantial down payments by the
obligers.
Under the Servicing Agreement, the Servicer is obligated to exercise
discretionary powers involved in the management, administration and collection
of the Contracts and to bear all costs and expenses incurred in connection
therewith. The Servicer presently subcontracts certain of its collecting
functions to certain automobile dealers and other third party subcontractors
(the "Subcontracting Servicer").
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The Servicer or Subcontracting Servicer must contact any obligor on a
past due Contract within fifteen (15) days after the payment due date to pursue
collections. Any material extensions, modifications, or acceptances of partial
payments by obligers, and any related necessary Contract amendments or default
waivers by the Servicer, must be approved by the chief credit officer or
president of the Company. When a contract becomes over 30 days past due, the
Servicer or the Company will take immediate appropriate action to enforce dealer
contract replacement guarantees and other dealer recourse agreements on behalf
of the Company. The Servicer will, when necessary, pursue repossession, subject
to compliance with state and federal laws relating thereto.
The Servicer is entitled under the Servicing Agreement to receive a
monthly fee (the "Servicing Fee"). The Servicing Fee is intended to compensate
and reimburse the Servicer for administering the collection of the Contracts,
including collecting and posting all payments, responding to inquiries of
obligers on the Contracts, investigating delinquencies, sending payment coupons
to obligers, and reporting any required tax information to obligers. The
Servicing Fee also compensates the Servicer for furnishing monthly and annual
statements to the Company with respect to collections and proceeds, and
generating information necessary for the Company to prepare all required federal
and state tax returns.
The Servicer will be entitled to reimbursement of its costs and
expenses incurred in repossession, preparation for sale and resale of any
financed vehicle and reimbursement of costs of enforcement of dealer recourse
agreements.
COMPETITION
Numerous companies are engaged in the business of buying used motor
vehicle receivables. The Company, however, has relatively fewer competitors
seeking to purchase individual sub-prime credit receivables for low to
medium-priced, used motor vehicles originated in the Company's primary markets.
National or regional rental car companies, finance companies, used car
companies, auction houses, dealer groups or other firms with equal or greater
financial resources than the Company could elect in the future to compete with
the Company in its primary market. While the Company believes that its
operations are competitive and sustainable, future competitive factors could
have a material adverse effect upon the future operations of the Company.
REGULATION
Numerous federal and state consumer protection laws impose requirements
upon the origination and collection of consumer receivables. State laws impose
finance charge ceilings and other restrictions on consumer transactions and may
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In addition, certain of these laws make an
assignee of such contract liable to the obligor thereon for any violations by
the assignor. The Company may be unable to enforce some of its receivables or
may be subject to liability to the obligers under some of its receivables if
such receivables do not comply with such laws.
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In the event of default by an obligor on a receivable, the Company has
all the remedies of a secured party under the Uniform Commercial Code ("UCC").
The UCC remedies of a secured party include the right to repossession by
self-help means, unless such means would constitute a breach of the peace.
Self-help repossession is accomplished by taking possession of the motor
vehicle. If a breach of the peace is likely to occur, or if applicable state law
so requires, the Servicer must obtain a court order on behalf of the Company
from the appropriate state court and repossess the vehicle in accordance with
that order. None of the states from which the Company does or intends to
purchase receivables have state laws that would require the Company, in the
absence of a probable breach of peace, to obtain a court order before it
attempts to repossess a motor vehicle.
In most jurisdictions, including those states from which the Company
presently does or intends to purchase receivables, the UCC and other state laws
require the secured party to provide the obligor with reasonable notice of the
date, time and place of any public sale or the date after which any private sale
of the collateral may be held. Unless the obligor waives his rights after
default, the obligor has the right to redeem the collateral prior to actual sale
by paying the secured party the unpaid installments (less any required discount
for prepayment) of the receivable plus reasonable expenses for repossessing,
holding, and preparing the collateral for disposition and arranging for its
sale, plus in some jurisdictions, reasonable attorneys fees, or, in some states,
by payment of delinquent installments. Vehicles repossessed on behalf of the
Company, will generally be sold at wholesale auctions which are attended
principally by dealers.
ITEM 2. PROPERTIES
Not applicable
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
equity. All of the Company's outstanding common stock is owned or beneficially
controlled by Michael R. Marshall, President, sole officer and director of the
Company.
5
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Development Stage Enterprise - The Company is considered to be in the
"development stage" as substantially all of its efforts have been expended in
establishing the new business, raising capital and purchasing initial Contracts.
The Company began purchasing Contracts in the late first quarter of 1997 and
expects to be fully operational by the third quarter of 1998. The Company has
incurred operating losses from inception through December 31, 1997 which
resulted substantially from payment of interest on investor notes prior to
purchase of interest yielding finance contracts from automobile dealers. This is
referred to as negative interest spread. The Company's business plan projects
investing $1-2 million dollars of investor funds in automobile finance contracts
until all investor funds are fully utilized. The Company expects to incur
continued negative interest spread until the initial purchase of the finance
contract portfolio is substantially completed in mid 1998. Accordingly, the
Company expects finance operations will become profitable in the third or fourth
quarter of 1998.
INCOME AND LOSS RECOGNITION
The Company purchases Contracts at discounts ranging from 2% to 25% of
the remaining net principal balance of each Contract. The difference between the
estimated future cash collections and the cost of the Contract is unearned
interest income and unearned discount. Over the life of the receivable
portfolio, this unearned interest and unearned discounts are recognized as
interest revenue. Interest expense represents interest paid, or accrued on the
Company's borrowing during the life of the receivable portfolio. The Company
charges uncollectible receivable amounts to unearned interest and discounts
account as losses are incurred.
The Company's high yield from its Contracts is the result of the
negotiated purchase discounts obtained at time of the purchase of the Contract
and the interest rates generally charged on the Contracts, often at the
statutory ceiling rates for the states of Oklahoma and Texas.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of servicing
fees, bank, accounting, attorney, and trustee fees.
TAX EXPENSE
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes". The
Company has incurred a net operating loss through December 31, 1997 and
accordingly has no income tax liability.
6
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICE, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The name, age, background and principal occupation of the sole
director and executive officer of the Company is set forth below:
Mr. Michael R. Marshall, age 48, is Chairman of the Board and
President of the Company, and its Servicer, U.S. Automobile Acceptance
Corporation. Mr. Marshall is also Chairman of the board of Directors and
President of U.S. Automobile Acceptance 1995-1, Inc. ("USAA 1995-1"), a limited
purpose corporation with business activities similar to the activities of the
Company. USAA 1995-1 began operations and purchasing Contracts in October 1995.
Mr. Marshall holds a Bachelor of Business Administration Degree in Accounting
which he obtained in 1971 from Texas A & M University. From 1971 through 1977
Mr. Marshall was employed at Coopers & Lybrand, Certified Public Accountants,
which he served in various positions including general practice manager of its
Oklahoma City office. Mr. Marshall was self-employed from 1977 to 1982 as a
practicing Certified Public Accountant and as a corporate financial consultant
and since 1982 has been President and Chief Executive Officer of Settlers
Capital Corporation, an Oklahoma corporation, which specialized in assisting
companies in the placement, collection and liquidation of debt finance
transactions. Additionally, from 1981 through 1988, Mr. Marshall was the
President of Settlers Energy Corporation, an independent oil and gas company
located in Oklahoma, which specialized in purchasing, managing and liquidation
of secured oil and gas industry loans of distressed financial institutions. Mr.
Marshall has been in the automobile finance business since early 1994.
The Company has no equity securities registered pursuant to Section 12
of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
None of the directors or executive officers received any compensation
from the Company during 1997. The director and executive officer does not
anticipate receipt of any compensation from the Company, prior to the
satisfaction in full of the 11% Notes due December 31, 2001.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31,
1997, relating to the beneficial ownership of the Company's capital stock by any
person or "group", as that term is used
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<PAGE> 8
in Section 13(d)(3) of the Securities and Exchange Act of 1934 (the "Exchange
Act"), known to the Company to own beneficially five percent (5%) or more of the
outstanding shares of Common Stock, and known to the Company to be owned by each
director of the Company and by all officers and directors of the Company as a
group. Except as otherwise noted, each of the persons named below is believed by
the Company to possess sole voting and investment power with respect to the
shares of Common Stock beneficially owned by each person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
NAME AND ADDRESS OF NUMBER OWNERSHIP PERCENTAGE OF
BENEFICIAL OWNER OF SHARES CLASS OUTSTANDING (1)
---------------- --------- -----------------
<S> <C> <C>
U.S. Automobile Acceptance Corporation (1)
1120 N.W. 63rd, Suite G-106
Oklahoma City, OK 73116 1,000 100%
Mr. Michael R. Marshall (1)
1120 N.W. 63rd, Suite G-106
Oklahoma City, OK 73116 -0-
</TABLE>
- --------------------------------------------------------------------------------
(1) Mr. Marshall owns 100% of the outstanding common stock of USAAC and thereby
beneficially controls 100% of the common stock of the Company.
- --------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
U.S. Automobile Acceptance Corporation is the owner 100% of the issued
and outstanding common stock of the Company.
The Company's contracts will be administrated, serviced and collected
on behalf of the Company by U.S. Automobile Acceptance Corporation, an
affiliate. The Servicer subcontracts a portion of the servicing of the contracts
to qualified automobile dealers and other qualified subcontractors.
The Servicer is paid a servicing fee of $21.50 per month, per contract,
limited to maximum of $85,000 per month. In addition, the Company's Parent will
be paid a purchase administration fee of $125 per Contract purchased, paid
monthly, and will be paid a monthly investor administration fee of 1/12th of 1%
of the aggregate principal amount of the Notes outstanding, and 1/12th of 1% of
aggregate funds held in investment accounts.
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PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules:
The financial statements listed in the Index to
Financial Statements are filed as part of this annual
report. No financial statement schedules are required
to be filed as part of this annual report because all
information otherwise included in schedules has been
incorporated into the Notes to Financial Statements.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the three month
period ended December 31, 1997.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
3.1 - Articles of Incorporation of U.S. Automobile Acceptance SNP-III, Inc.(1)
3.2 - Bylaws of U.S. Automobile Acceptance SNP-III, Inc. (1)
4.1 - Indenture Agreement between U.S. Automobile Acceptance SNP-III, Inc.
and Texas Commerce Bank National Association, as
Trustee, with respect to the 11% Automobile Contract
Notes due December 31, 2001(1)
4.2 - Form of 11% Automobile Contract Note due December 31, 2001 (1)
10.3 - Servicing Agreement between U.S. Automobile Acceptance SNP-III,
Inc. and U.S. Automobile Service Corporation (1)
27 - Financial Data Schedule
</TABLE>
(d) Financial Statements excluded by Rule 14a-3(b): None.
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Form SB-2 Registration Statement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1998
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
By:
---------------------------------
Michael R. Marshall, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: President and Director March 26, 1998
----------------------- (Principal Executive Officer
Michael R. Marshall and Principal Financial Officer)
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant hereby undertakes to file with the Commission four
copies of any annual report to its security holders when it is sent to such
security holders.
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U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report F-2
Balance Sheet as of December 31,
1996 and 1997 F-3
Statement of Operations for the
years ended December 31, 1996
and 1997 F-4
Statement of Stockholders' Equity
for the years ended December 31,
1996 and 1997 F-5
Statement of Cash Flows for the
years ended December 31, 1996
and 1997 F-6
Notes to Financial Statements F-7
</TABLE>
All financial statement schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is included in
the financial statements or the notes thereto.
F-1
<PAGE> 12
[TYSON HOPKINS CERTIFIED PUBLIC ACCOUNTANT LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
U.S. Automobile Acceptance SNP-III, Inc.
I have audited the balance sheets of U.S. Automobile Acceptance SNP-III, Inc.
(the Company) as of December 31, 1996, and December 31, 1997 and the related
statements of operations, stockholders' equity and cash flows for the period
from incorporation on June 7, 1996 through December 31, 1996 and for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of U.S. Automobile Acceptance SNP-III,
Inc. as of December 31, 1996 and December 31, 1997 and the results of its
operations, changes in stockholders' equity and cash flows for the periods then
ended in conformity with generally accepted accounting principles.
TYSON HOPKINS
Oklahoma City, Oklahoma
February 27, 1998
F-2
<PAGE> 13
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
BALANCE SHEET
As of December 31, 1996 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,511,517 $ 6,454,253
Contracts receivable -0- 12,935,075
Capitalized note offering and
organization costs 273,372 2,344,155
Other 12,925 1,971
------------ ------------
TOTAL ASSETS $ 1,797,814 $ 21,735,454
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accrued interest payable $ 11,542 $ 166,397
Notes payable 1,739,000 18,983,000
Unearned interest, contract purchase
discounts and allowance for losses -0- 3,004,083
Other 13,700 13,700
------------ ------------
TOTAL LIABILITIES 1,764,242 22,167,180
------------ ------------
Commitments
Stockholders' equity:
Common Stock $1.00 par value 3,000
shares authorized, 1,000 shares 1,000 1,000
issued and outstanding
Additional paid-in capital 49,000 49,000
Retained earnings (deficit) (16,428) (481,726)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) 33,572 (431,726)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,797,814 $ 21,735,454
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 14
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
For the period from incorporation on June 7, 1996 through
December 31, 1996 and for the year ended December 31, 1997
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Interest income $ 195 $ 725,477
Interest expense 12,603 983,789
--------- ---------
Net interest expense (12,408) (258,312)
Gain from sale of contracts -0- 14,338
--------- ---------
Net (12,408) (243,974)
General and administrative expenses 4,020 221,324
--------- ---------
Net loss $ (16,428) $(465,298)
========= =========
Net loss per share of common stock $ (16.43) $ (465.30)
========= =========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 15
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
For the period from incorporation on June 7, 1996 through
December 31, 1996 and for the year ended December 31, 1997
<TABLE>
<CAPTION>
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance prior to
incorporation on
June 7, 1996
June 1996, issuance of
common stock for cash,
par value $1.00, sales
price $50.00 per share 1,000 $ 1,000 $ 49,000 $ -0- $ 50,000
Net loss 1996 (16,428) (16,428)
----- --------- --------- --------- ---------
Balances, December 31,
1996 1,000 1,000 49,000 (16,428) 33,572
Net loss 1997 (465,298) (465,298)
----- --------- --------- --------- ---------
Balances, December 31,
1997 1,000 $ 1,000 $ 49,000 $(481,726) $(431,726)
===== ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 16
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
For the period from incorporation on June 7, 1996 through
December 31, 1996 and for the year ended December 31, 1997
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (16,428) $ (465,298)
Adjustments to reconcile net income
(loss)to cash provided by operating
activities:
(Increase) decrease in other assets (12,925) 10,954
Increase in accrued interest
payable and other liabilities 25,242 154,855
------------ ------------
Cash used by operating
activities (4,111) (299,489)
------------ ------------
Cash flows from investing activities:
Finance contracts purchased -0- (14,850,171)
Finance contracts collections -0- 1,915,096
Unearned interest, discounts and deferred
dealer collection fees -0- 3,004,083
------------ ------------
Cash used by investing
activities -0- (9,930,992)
Cash flows from financing activities:
Issuance of common stock 50,000
Proceeds from issuance of notes payable 1,739,000 17,244,000
Capitalized offering and organization
costs (273,372) (2,070,783)
------------ ------------
Cash provided by financing
activities 1,515,628 15,173,217
------------ ------------
Increase in cash and cash
equivalents 1,511,517 4,942,736
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -0- 1,511,517
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,511,517 $ 6,454,253
============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 17
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
GENERAL - U.S. Automobile Acceptance SNP-III, Inc. (herein referred to as
"Company" or "SNP-III") was incorporated on June 7, 1996 as a Texas Corporation.
The Company was formed to purchase, collect and service retail installment sale
financing contracts created by the sale of used automobiles and light trucks
("Contracts"). The Company targets automobile purchasers who are typically
unable to obtain credit from traditional sources (sub-prime credit customers).
The contracts generally have APR interest rates at or near the maximum rate
allowed by the state in which the automobile sale was originated and the payment
terms are generally from 24 to 60 months. The Contracts are originated by used
car divisions of new car dealerships and by independent used car dealerships
("Dealers"), with the Company's type financing arrangement generally being
referred to as indirect consumer lending.
To date, all contract purchases have been financed through the issuance of
publicly registered notes ("Notes") of the Company. The Notes are collateralized
by individual motor vehicle retail installment Contracts. The Contracts are
secured by liens on used automobile and light trucks and are generally purchased
at discounts ranging from 2% to 25% below the total future net principal balance
owed on such Contracts. Purchase discounts vary depending on the credit
worthiness of the individual borrower and financial strength added by additional
credit support agreements provided by the Dealers from which Contracts have been
purchased. The Dealer credit support agreements are usually in the form of
Contract replacement agreements, direct dealer recourse agreements, limited
guarantee agreements or some other form of cash hold-back arrangement.
DEVELOPMENT STAGE ENTERPRISE - The Company is considered to be in the
"development stage" as substantially all of its efforts have been expended in
establishing the new business, raising capital and purchasing initial Contracts.
The Company began purchasing Contracts in the late first quarter of 1997 and
expects to be fully operational by the third quarter of 1998.
ASSET-BACKED NOTE OFFERING - The Company filed a Registration Statement in 1996
with the Securities and Exchange Commission and various state security boards
with respect to its offering of up to $24,000,000 of 11% Promissory Notes due
December 31, 2001. The $100,000 minimum required subscription amount was reached
in November 1996 and the offering became effective. Subscriptions of $18,983,000
had been received at 1997 year end. The offering was fully subscribed for
$24,000,000 in mid March 1998.
The Notes are issued under the terms of an Indenture Agreement between the
Company and Chase Bank of Texas (formerly Texas Commerce Bank National
Association), as Trustee. The Notes are secured by the Contracts and proceeds
thereof.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to general practices
within the finance industry.
F-7
<PAGE> 18
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES - The preparation of 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, the
disclosures regarding contingent assets and liabilities at the date of the
financial statements, and the amounts of revenues and expenses reported during
the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all investments with a
maturity of three months or less, when purchased, to be cash equivalents.
RESTRICTED CASH - The use of cash of SNP-III is restricted by the terms of an
indenture agreement between the Company and Chase Bank of Texas, as Indenture
Trustee, to initially purchase Contracts and for payment of allowed Expenses,
trustee's fees and expenses, interest paid by transfers to Note Redemption
Account for payment to Noteholders and before Note Redemption Date (January 1,
2001), any remaining proceeds used to purchase additional eligible Contracts,
and After Note Redemption Trigger Date, any remaining proceeds deposited into
Note Redemption Account for payment of Notes.
FINANCE CONTRACTS AND INCOME RECOGNITION - Upon purchase of a Contract, the
Company records the gross amount of the Contract as a contract receivable and
the difference between gross contract receivable and cost of the Contract is
recorded as unearned interest, discounts and dealer hold- backs. Income from
finance contracts is recognized using the effective interest method.
CAPITALIZED NOTE OFFERING AND ORGANIZATION COSTS - Costs directly related to
note offering are capitalized and will be amortized over the period benefited
after completion of the Note offering. Organization costs will be amortized over
60 months.
CREDIT LOSSES - The company believes that amounts included in unearned interest,
discounts and dealer hold-back accounts are sufficient to cover any loan losses
that will be incurred in the future. If management determines that additional
loss reserves are necessary in the future they will be established at that time.
FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS No. 107, Disclosure About Fair Value
of Financial Instruments, requires the disclosure, to the extent practicable, of
the fair value of financial instruments which are recognized or unrecognized in
the balance sheet. In Management's opinion, the fair value of finance contracts
and Notes payable is approximately the same as the carrying value reflected in
the financial statements.
INCOME TAXES - The Company has adopted SFAS No. 109, Accounting for Income
Taxes, whereby deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting
purposes, and (b) net operating loss carry forwards. The Company has incurred
tax and financial reporting losses through year
F-8
<PAGE> 19
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
end 1997 and accordingly has no income tax liability as of December 31, 1997.
3. CONTRACTS RECEIVABLE
At December 31, 1997 contracts receivable were as follows:
<TABLE>
<S> <C>
Cost of Contracts purchased $ 9,930,992
Unearned interest, purchase
discounts and dealer hold-
backs
3,004,083
-----------
TOTAL ANTICIPATED CONTRACT
PAYMENTS
$12,935,075
===========
</TABLE>
Use of proceeds of contract receivable collections is restricted to repayment of
Notes payable described in Note 4, payment of certain allowed expenses of the
Company and the purchase of additional contracts.
4. NOTES PAYABLE
At December 31, 1996 and December 31, 1997 the Company had outstanding notes
payable of $1,739,000 and $18,983,000 respectively. The Notes bear interest at
11% payable monthly, and the principal is due December 31, 2001.
The Notes have been issued under the terms of an Indenture Agreement between
SNP-III and Chase Bank of Texas, as trustee. The Notes are collateralized by the
Contracts and proceeds thereof. SNP-III holds vehicle titles and/or liens on the
vehicles as collateral for Contracts until they are paid in full. Use of
proceeds of contract collections of SNP-III is restricted to payments on the
Notes, payment of certain allowed expenses of SNP-III and the purchase of
additional contracts.
Under the terms of the various agreements Chase holds a security agreement for
the benefit of the noteholders, serves as paying agent, note registrar, controls
the note redemption bank account and serves as escrow agent, initially receiving
all funds received as Note subscriptions from the noteholders of SNP-III. In the
event of non payment of principal or interest on the Notes, the Indenture
Trustee may declare the principal and interest payable immediately and may
pursue any available remedies by proceeding at law or in equity to collect or to
enforce the performance of any provision of the Notes or the security agreement.
Noteholders may incur risks and uncertainties including concentration of assets
since SNP-III is not expected to have any significant assets other than
automobile finance contracts and since most of the borrowers and the related
automobile collateral are expected to be located in the states of Oklahoma and
F-9
<PAGE> 20
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Texas. Other risks include limited operating history of the Servicer and SNP-
III, possible decline in future availability and quality of finance Contracts to
be purchased due to increased competition, possible conflicts of interest
between SNP-III and affiliate entities.
5. STOCKHOLDERS' EQUITY (DEFICIT)
The Company has issued 1,000 shares of common stock to U.S. Automobile
Acceptance Corporation for $50,000 in connection with the organization of the
Company.
The Company has incurred operating losses through December 31, 1997, and expects
to continue to incur losses until purchase of the initial contract portfolio of
SNP-III is completed. Management expects the finance operations of SNP-III will
become profitable in third or fourth quarter of 1998.
6. RELATED PARTY TRANSACTIONS - COMMITMENT
U.S. Automobile Acceptance Corporation ("USAAC") contractually administers,
services and collects contracts on behalf of USAA SNP-III and subcontracts a
portion of the servicing and collection functions to certain Automobile Dealers
and other subcontractors. The amount paid to USAAC for such services is
restricted by the terms of various agreements.
Five percent (5%) of the proceeds of the Asset-Backed Note offering are paid to
USAAC as reimbursement of registration, legal, accounting, printing, trustee,
marketing, and other out of pocket fees and expenses and allocated general and
administrative and overhead expenses related to the offering and organization of
the Company.
The Servicer will be paid a servicing fee of $21.50 per month, per contract,
limited to maximum of $85,000 per month. In addition, USAAC will be paid a one
time purchase administration fee of $125 per contract purchased, paid monthly,
and will be paid a monthly investor administration fee of 1/12th of 1% of the
aggregate principal amount of the Notes outstanding, and 1/12th of 1% of
aggregate funds held in investment accounts.
F-10
<PAGE> 21
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
3.1 - Articles of Incorporation of U.S. Automobile Acceptance SNP-III, Inc.(1)
3.2 - Bylaws of U.S. Automobile Acceptance SNP-III, Inc. (1)
4.1 - Indenture Agreement between U.S. Automobile Acceptance SNP-III, Inc.
and Texas Commerce Bank National Association, as
Trustee, with respect to the 11% Automobile Contract
Notes due December 31, 2001(1)
4.2 - Form of 11% Automobile Contract Note due December 31, 2001 (1)
10.3 - Servicing Agreement between U.S. Automobile Acceptance SNP-III,
Inc. and U.S. Automobile Service Corporation (1)
27 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Form SB-2 Registration Statement.
<TABLE> <S> <C>
<ARTICLE> CT
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1993 DEC-31-1997
<PERIOD-END> DEC-31-1993 DEC-31-1997
<TOTAL-ASSETS> 14,963,000 21,735,454
0 0
19,000 0
<COMMON> 717,000 1,000
<OTHER-SE> 3,565,000 0
<TOTAL-LIABILITY-AND-EQUITY> 14,963,000 21,735,454
<TOTAL-REVENUES> 14,624,000 739,765
<INCOME-TAX> 514,000 0
<INCOME-CONTINUING> 883,000 (465,298)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 883,000 (465,298)
<EPS-PRIMARY> 4.29 (465.30)
<EPS-DILUTED> 4.13 (465.30)
</TABLE>
