<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, 1998
[ ] 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-108
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, 1998, 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 early
1998, with total subscriptions of $23,996,000.
The Company's offices are located at 1120 N.W. 63rd, Suite G-108,
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.
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.
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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 often 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 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 utilizes 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").
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
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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. 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.
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
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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. The
Company has in the ordinary course of business filed numerous legal proceedings
against various automobile dealers for breach of contract and failure to honor
dealer recourse agreements.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company was deemed to be in the development stage until early 1998
as substantially all its efforts were expended in establishing the new
business, raising capital and purchasing initial contracts. During 1998 the
Company has incurred substantial operating losses resulting principally from
poor performance of its contract receivable portfolio additionally resulting in
the write-off of approximately $2,700,000 of contract receivable, increased
operating, legal, administrative and collateral disposition costs and decreased
interest revenues related to the defaulted contracts. Many automobile dealers
have failed to honor dealer recourse agreement resulting in legal actions
against many dealers.
The contract receivables of the Company have not performed as
expected, accordingly, the Company is presently reviewing future alternatives
including possibly orderly liquidation and early payment of the Company's
secured notes. Continued future poor performance of the contract receivable
portfolio could ultimately result in the Company being unable to fully pay its
debt obligations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
ITEM. 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 49, 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
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Certified Public Accountant and as a corporate financial consultant and since
1982 has 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.
ITEM 10. EXECUTIVE COMPENSATION
None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31,
1998, relating to the beneficial ownership of the Company's capital stock by
any person or "group", as that term is used 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-108
Oklahoma City, OK 73116 1,000 100%
</TABLE>
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. 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. All other general and
administrative expenses of the Company are paid by the Company or reimbursed to
USAAC.
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ITEM 13. EXHIBITS 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, 1998.
(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: April 14, 1999
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
By: /s/ Michael R. Marshall
------------------------------------
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: /s/ Michael R. Marshall President and Director April 14, 1999
---------------------------- (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.
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U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report F-2
Balance Sheet as of December 31,
1997 and 1998 F-3
Statement of Operations for the
years ended December 31, 1997
and 1998 F-4
Statement of Stockholders' Equity
for the years ended December 31,
1997 and 1998 F-5
Statement of Cash Flows for the
years ended December 31, 1997
and 1998 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> 11
TYSON HOPKINS
CERTIFIED PUBLIC ACCOUNTANT
P.O. BOX 12127
OKLAHOMA CITY, OKLAHOMA 73157
(405) 789-3617
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, 1997, and December 31, 1998 and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. 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, 1997 and December 31, 1998 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
April 7, 1999
F-2
<PAGE> 12
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
As of December 31, 1997 and December 31, 1998
ASSETS
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 4,577,315 $ 6,454,253
Contracts receivable 13,748,067 12,935,075
Capitalized note offering and
organization costs less
accumulated amortization of
$572,567 2,290,266 2,344,155
Other 7,074 1,971
------------ ------------
TOTAL ASSETS $ 20,622,722 $ 21,735,454
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accrued interest payable $ 219,918 $ 166,397
Notes payable 23,996,000 18,983,000
Unearned interest, contract purchase
discounts and allowance for losses 2,147,765 3,004,083
Other -0- 13,700
------------ ------------
TOTAL LIABILITIES 26,363,683 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) (5,790,961) (481,726)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (5,740,961) (431,726)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 20,622,722 $ 21,735,454
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 13
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 1997 and December 31, 1998
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Interest income $ 2,644,886 $ 725,477
Interest expense 2,576,148 983,789
----------- -----------
Net interest income (expense) 68,738 (258,312)
Other income 18,938 14,338
----------- -----------
Net 87,676 (243,974)
General and administrative expenses 2,121,644 221,324
Amortization of offering and
organization costs 572,567 -0-
Write-off of contracts receivable 2,702,700 -0-
Net loss $(5,309,235) $ (465,298)
=========== ===========
Net loss per share of common stock $ (5,309.24) $ (465.30)
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 14
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997 and December 31, 1998
<TABLE>
<CAPTION>
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
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)
Net loss 1998 (5,309,235) (5,309,235)
----------- ----------- ----------- ----------- -----------
Balances, December 31,
1998 1,000 $ 1,000 $ 49,000 $(5,790,961) $(5,740,961)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 15
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
STATEMENT OF CASH FLOWS For the
years ended December 31, 1997 and December 31, 1998
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (5,309,235) $ (465,298)
Adjustments to reconcile net income
(loss)to cash provided by operating
activities:
Write-off of contracts receivable 2,702,700
Amortization of capitalized note
offering costs 572,567
(Increase) decrease in other assets (5,103) 10,954
Increase in accrued interest
payable and other 39,821 154,855
------------ ------------
Cash used by operating
activities (1,999,250) (299,489)
------------ ------------
Cash flows from investing activities:
Finance contracts purchased (7,456,026) (14,850,171)
Finance contracts collections 3,940,334 1,915,096
Unearned interest, discounts and deferred
dealer collection fees increase (decrease) (856,318) 3,004,083
------------ ------------
Cash used by investing
activities (4,372,010) (9,930,992)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 5,013,000 17,244,000
Capitalized offering and organization
costs (518,678) (2,070,783)
------------ ------------
Cash provided by financing
activities 4,494,322 15,173,217
------------ ------------
Increase (decrease) in cash
and cash equivalents (1,876,938) 4,942,736
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,454,253 1,511,517
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,577,315 $ 6,454,253
============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 16
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
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 in June 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 often 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.
ASSET-BACKED NOTES - 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. The offering was
completed with subscriptions totaling $23,996,000 in early 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> 17
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
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 certain allowed
Expenses, trustee's fees and expenses, interest 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 allowances for losses. Income from
finance contracts is recognized using the effective interest method.
CAPITALIZED NOTE OFFERING AND ORGANIZATION COSTS - Costs directly related to
note offering and organization costs are capitalized and amortized over the
period benefited after completion of the Note offering in early 1998.
CREDIT LOSSES - The Company had credit losses of approximately $2,700,000 in
1998. The Company advises that these resulted principally from failure of
automobile dealers to honor their recourse and contract replacement agreements.
The Company has taken legal action against defaulting dealers which is their
policy, but does not expect any significant future recovery. The Company
charges off contracts receivable as an individual contract is determined to be
uncollectible.
The Company believes that amounts included in unearned interest, discounts and
allowance for loss accounts are sufficient to cover 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.
F-8
<PAGE> 18
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
NOTES TO 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 end 1998 and accordingly has no
income tax liability as of December 31, 1998.
3. CONTRACTS RECEIVABLE
At December 31, 1998 contracts receivable consist of aggregate amounts due of
approximately $13,700,000. Contracts receivable written off during 1998 totaled
approximately $2,700,000. Dealer recourse agreements have generally not
performed as expected during 1998 resulting in substantially higher than
anticipated loan losses.
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, 1997 and December 31, 1998 the Company had outstanding notes
payable of $18,983,000 and $23,996,000 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 Bank holds a security agreement
for the benefit of the noteholders, serves as indenture trustee, paying agent,
note registrar, and initially as subscription escrow agent. 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.
F-9
<PAGE> 19
U.S. AUTOMOBILE ACCEPTANCE SNP-III, INC.
NOTES TO FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS
U.S. Automobile Acceptance Corporation ("USAAC") contractually administers,
services and collects contracts on behalf of SNP-III and subcontracts a portion
of the servicing and collection functions to certain Automobile Dealers and
other subcontractors.
Five percent (5%) of proceeds of the Asset-Backed Note offering have been 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 is paid a servicing fee of $21.50 per month, per contract, limited
to maximum of $85,000 per month. In addition, USAAC is paid a purchase
administration fee of $125 per contract purchased, paid monthly, and is 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. All other general and administrative expenses of the
Company are paid by SNP-III or reimbursed to USAAC.
F-10
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C> <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% Automoble 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> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR
ENDED DECEMBER 31, 1998 FINANCIAL STATEMENTS OF U.S. AUTOMOBILE ACCEPTANCE SNP
III, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DECEMBER 31,
1998 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,622,722
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (5,740,961)
<SALES> 0
<TOTAL-REVENUES> 2,644,886
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,309,235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,309,235)
<EPS-PRIMARY> (5,309.24)
<EPS-DILUTED> (5,309.24)
</TABLE>
