<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 33-49261-D
TRANSITION AUTO FINANCE II, INC.
(Exact name of registrant as specified in charter)
Texas 75-2753067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5422 ALPHA ROAD, SUITE 100, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 404-0042
Securities registered pursuant to section 12(b) of the Act:
Title of Class Name of each exchange on which registered
NONE NONE
---- ----
Securities registered pursuant to section 12(g) of the Act:
NONE
----
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $78,803
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: None of the issuer's securities are, or have been, publicly traded.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 31, 1998, the
issuer had 1,000 shares of common stock outstanding.
Transitional Small Business Disclosure
Format (Check one): Yes No X
--- ---
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PAGE
<S> <C>
PART I 3
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 3
ITEM 3. LEGAL PROCEEDINGS 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 3
PART II 3
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 3
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION 3
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 4
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 13
PART III 13
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 13
ITEM 10. EXECUTIVE COMPENSATION 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
As of July 17, 1998, the Company's offering (the "Offering") of 11%
Redeemable Secured Notes (the "Notes") was declared effective by the United
States Securities & Exchange Commission (the "Commission"). As of December 31,
1998, the end of the period covered by this Report, (i) the Company had sold
Notes in an aggregate principal amount of $4,780,000 and (ii) the Company's
operating assets consisted of 41 leased vehicles and the lease contracts related
thereto, and 2 vehicles were held in inventory following repossession. All of
the vehicles and lease contracts were purchased with the proceeds of the
Offering. The Company is a wholly-owned single purpose subsidiary of Transition
Leasing Management, Inc. and is engaged in the business of purchasing new or
late model vehicles (the "Leased Vehicles") and concurrently therewith entering
into leases (the "Contracts") of such vehicles to customers.
The Company was incorporated under the laws of the State of Texas on
March 17, 1998. The Company is a subsidiary of Transition Leasing. As of the
end of the period covered by this Report, the Company had no other
subsidiaries.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1998, the Company's principal executive offices were
located within the offices of Transition Leasing at 5422 Alpha Rd., Suite 100,
Dallas, Texas 75240, and its telephone number is (972) 404-0042.
As of the end of the period covered by this Report the Company had, and
as of the date of this Report the Company has, no employees and its operations
are conducted through Transition Leasing, which services the vehicle leases
pursuant to which the Company leases and will lease vehicles.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and no
material legal proceedings have been threatened by or, to the best of the
Company's knowledge, against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's sole stockholder
during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
There is no market for the Company's common stock (the "Common
Stock"). All shares of the Common Stock are owned by Transition Leasing. No cash
dividends have ever been declared with respect to the Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
At December 31, 1998, the Company had sold notes totaling $4,780,000.00
and had 41 vehicles under lease. Average cost of the vehicles leased as of
12-31-98 was $21,729.00 with an average monthly payment of $582.00.
The Company's use of the net collection proceeds from the contracts
will be restricted to payments on the Notes and, so long as there is no event of
default, to payments of Allowed Expenses and, until the date of which the
Company is obligated, under the terms of the Trust Indenture, to deliver all
proceeds from the contracts to a sinking fund for payment of the Notes (the
"Sinking Fund Trigger Date"), to the purchase or acquisition of additional
eligible Contracts.
The Company's primary source of funds for repayment of the Notes will
be proceeds from the contracts, any income on the reinvestment of such proceeds,
and any proceeds from sale or refinancing of the remaining contracts at the
maturity of the Notes. The Company does not have, nor is it expected to have in
the future, any significant source of capital for payment of the Notes and the
expenses incurred by it other than such sources. Payment of the principal or
interest on the Notes is not guaranteed by any other person or entity. Although
management of the Company believes that the Company will realize sufficient
proceeds from the foregoing sources to pay all installments of interest when due
on the Notes and to satisfy the principal amount of the Notes in full prior to
or at maturity, there can be no assurance that such sources will be sufficient
to repay the notes in full.
RESULTS OF OPERATIONS
At December 31, 1998, Transition Auto Finance, II, Inc. (TAF II) had
total assets of $4,752,916 and total liabilities of $5,065,992 resulting in a
negative net worth of $313,076 . The negative net worth was a result of the net
loss recorded on the Company's Statement of Income for the period from March 17,
1998 (inception) to December 31, 1998.
The Company's audit is prepared according to General Accepted Accounting
Principles (GAAP) which does not always reflect a Company's activities from a
cash standpoint. Fiscal '98 operations produced an accrual loss in the amount of
$198,163. This operating loss was primarily the result of the following (i)
depreciation expense (a non-cash charge) on the income statement of $108,400,
and (ii) the GAAP treatment of the $168,337 in down payments that were collected
during fiscal '98. GAAP's requirement that down payments be amortized over the
life of the lease resulted in $157,548 in down payments be capitalized as
deferred revenue on the balance sheet and the recognition of only $10,790 as
income. The combination of these two items was $265,948 and exceeded the
reported operating loss by $67,785.00.
3
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included beginning immediately
following the index to the consolidated financial statements.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report
Balance Sheet at December 31, 1998
Statement of Income for the Period March 17, 1998 (Inception)
through December 31, 1998
Statement of Stockholders' Equity for the Period
March 17, 1998 (Inception) through December 31, 1998
Statement of Cash Flows for the Period
March 17, 1998 (Inception) through December 31, 1998
Notes to Financial Statements
</TABLE>
All schedules have been omitted because they are not applicable or not
required, because the information is shown in the consolidated financial
statements or the notes thereto, or because the information is immaterial.
4
<PAGE> 5
BOARD OF DIRECTORS
Transition Auto Finance II, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Transition Auto Finance II,
Inc. (the Company) as of December 31, 1998, and the related statements of
income, stockholders' equity, and cash flows for the period March 17, 1998
(inception) through December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998, and the results of their operations and their cash flows for the period
March 17, 1998 (inception) through December 31,1998 in conformity with
generally accepted accounting principles.
SPROUSE & WINN, L.L.P.
Austin, Texas
February 5, 1999
5
<PAGE> 6
TRANSITION AUTO FINANCE II, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,227,839
Vehicles held for sale 142,542
-----------
Total Current Assets 3,370,381
-----------
PROPERTY, at cost
Vehicles leased 950,236
Less accumulated depreciation (40,813)
-----------
Net Property 909,423
-----------
OTHER ASSETS
Debt issuance costs, net of amortization of $67,587 473,112
-----------
TOTAL ASSETS $ 4,752,916
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accrued liabilities $ 43,817
-----------
OTHER LIABILITIES
Due to affiliate 84,627
Deferred revenue 157,548
Investor notes payable 4,780,000
-----------
Total Other Liabilities 5,022,175
-----------
TOTAL LIABILITIES 5,065,992
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.10 par value, 1,000 shares authorized,
issued and outstanding 100
Additional paid-in capital 900
Retained earnings (deficit) (314,076)
-----------
Total Stockholders' Equity (Deficit) (313,076)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 4,752,916
===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
6
<PAGE> 7
TRANSITION AUTO FINANCE II, INC.
STATEMENT OF INCOME
FOR THE PERIOD MARCH 17, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
REVENUES
<S> <C>
Vehicle monthly lease payments $ 46,752
Amortization of down payments 10,790
---------
Total Revenues 57,542
---------
OPERATING EXPENSES
Operating costs 127,079
General and administrative 20,226
Depreciation and amortization 108,400
---------
Total Operating Expenses 255,705
---------
Operating Loss (198,163)
---------
OTHER INCOME (EXPENSE)
Investment income 21,261
Interest expense (137,174)
---------
Total Other Income (Expense) (115,913)
---------
Provision for Federal Income Taxes -0-
---------
Net Loss $(314,076)
=========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
7
<PAGE> 8
TRANSITION AUTO FINANCE II, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD MARCH 17, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
COMMON STOCK PAID-IN CAPITAL (DEFICIT) EQUITY (DEFICIT)
---------------------------------- --------------- -------- ----------------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C>
Balance at March 17, 1998 0 $ -0- -0- $ -0- $ -0-
(inception)
Issued 1,000 shares at
$.10 par value 1,000 100 900 -0- 1,000
Net loss 0 -0- -0- (314,076) (314,076)
----- ----- ---- --------- ---------
Balance at December 31, 1998 1,000 $ 100 $900 $(313,076) $(313,076)
===== ===== ==== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
8
<PAGE> 9
TRANSITION AUTO FINANCE II, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 17, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net loss $ (314,076)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 108,400
Amortization of down payments (10,790)
Net changes in operating assets and liabilities:
Accrued liabilities 43,817
Deferred revenue 168,337
-----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (4,312)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets 1,092,778)
-----------
NET CASH (USED) BY INVESTING ACTIVITIES (1,092,778)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,000
Advance from affiliate 84,628
Debt issuance costs (540,699)
Proceeds from notes payable 4,780,000
-----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 4,324,929
-----------
NET INCREASE IN CASH 3,227,839
CASH AND CASH EQUIVALENTS, beginning of period -0-
-----------
CASH AND CASH EQUIVALENTS, end of period $ 3,227,839
===========
CASH PAID DURING THE PERIOD FOR
Interest $ 93,358
===========
Income taxes $ -0-
===========
NON-CASH INVESTING ACTIVITIES
Vehicles purchased during 1998 with a net book value of
$142,542 were reclassified from vehicles leased to vehicles
held for sale at December 31, 1998.
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
9
<PAGE> 10
TRANSITION AUTO FINANCE II, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1: BUSINESS ACTIVITY
The Company was established to purchase motor vehicles and automobile
lease contracts, collect and service automobile lease contracts and
remarket motor vehicles upon termination of their leases. A summary of
the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Transition Leasing Management, Inc. (TLMI) owns 100% of the Company's
common stock.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
The Company maintains cash balances at financial institutions in
Dallas, Texas. Accounts at the institutions are insured by the Federal
Deposit Insurance Corporation up to $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
Revenue
The vehicles are leased to individuals under leases with terms ranging
from thirty-six to forty-two months. The leases are considered to be
operating leases. At the end of the lease period, the lessee may
purchase the equipment at the contractual residual value. Monthly
lease payments are recognized as revenue in the month that the
payments are due. The vehicle leases require a down payment from the
lessee at the inception of the lease.
The down payments are initially recorded as deferred revenue and then
recognized as income over the term of the leases on a straight-line
basis.
Vehicles Held for Sale
Vehicles held for sale are leased vehicles in which the lease term has
expired or that have been repossessed. Vehicles held for sale are
valued at the lower of book value or market value. Generally these
vehicles will be sold at auction by the Company.
Equipment and Leased Vehicles
Equipment and leased vehicles are stated at cost less accumulated
depreciation. Depreciation is provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated
service lives using the straight-line-method. Leased vehicle
depreciation is calculated over the term of the vehicle lease, using
the cost of the vehicle less the estimated residual value of the
vehicle at the end of the lease. Present leases have terms ranging
from thirty-six to forty-two months.
The Company adopted Financial Accounting Standards Board issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, which requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. There has been no impairment recorded in the current
year financial statements.
10
<PAGE> 11
TRANSITION AUTO FINANCE II, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1998
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Other Assets
Other assets include debt issuance costs incurred in connection with
the Company's offering of securities filed with the Securities and
Exchange Commission. These costs are being amortized, on a
straight-line basis, over the term of the debt securities which mature
on June 30, 2002.
Deferred Revenue
Deferred revenue consists of down payments made by leasees at the
inception of the lease. The down payments are amortized over the lease
term. Lease terms range from thirty-six to forty-two months.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated to approximate the
related book value, unless otherwise indicated, based on market
information available to the Company.
Use of Estimates
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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 these estimates.
Concentration of Credit Risk
At present all of the lessees are residents of the Dallas/Fort Worth
Metroplex. Vehicles are used as collateral for leases.
NOTE 3: INVESTOR NOTES PAYABLE
The Company issued $4,780,000 of floating rate redeemable asset-backed
notes (Investor Notes) during 1998. These Investor Notes were issued
pursuant to a public offering on Form SB-2 under the Securities Act of
1933.
The Investor Notes bear interest at the rate of 11%. Interest is
payable quarterly on the 15th day of each month.
The Investor Notes were issued at various times during 1998, however
the maturity date for all of the Investor Notes is June 30, 2002. The
Investor Notes are collateralized by the following:
1. Automobile contracts for the leasing of new or late model
automobiles.
2. The leased vehicles.
11
<PAGE> 12
TRANSITION AUTO FINANCE II, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1998
NOTE 3: INVESTOR NOTES PAYABLE (CONTINUED)
The following table represents Investor Notes outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Origination Date Number of Notes Note Amount
---------------- --------------- -----------
<S> <C> <C>
July 1998 44 $ 493,000
August 1998 154 1,564,000
September 1998 65 474,000
October 1998 65 717,000
November 1998 141 1,129,000
December 1998 37 403,000
--- -----------
TOTALS 506 $ 4,780,000
=== ===========
</TABLE>
NOTE 4: INCOME TAXES
The Company is a corporation subject to federal and state income
taxes. The Company and its parent intend to file a consolidated tax
return. Each company in the consolidated group determines its taxable
income or loss, on a separate company basis, and the consolidated tax
liability is allocated to each company with taxable income in
proportion to the total of the taxable income amounts.
The Company has a deferred tax asset as of December 31, 1998
(primarily from net operating loss carryforward), which has been
completely offset by recognition of a valuation allowance.
The Company has a net operating loss (NOL) carryforward of
approximately $260,000. The Company's NOL carryforward expires on
December 31, 2012.
NOTE 5: RELATED PARTIES
The Company has entered into a Servicing Agreement with TLMI. TLMI
will be entitled to a servicing fee of $20 per month per contract and
a payment of $150 per contract purchased. TLMI will receive, as a
marketing fee, 57.5% of the down payment made by the customers with
respect to contracts it originates. TLMI will receive from the Company
a Releasing Fee of 15% of the down payment with respect to a new
contract following repossession of a leased vehicle.
NOTE 6: DEFERRED REVENUE
Current year deferred revenue is as follows:
<TABLE>
<S> <C>
Down payments as of March 17, 1998 (inception) $ -0-
Down payments received 182,375
Net forfeitures of down payments (14,037)
Current year amortization of down payments (10,790)
--------
Down payments as of December 31, 1998 $157,548
========
</TABLE>
12
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information concerning the directors
and executive officers of the Company and their age and position with the
Company. Each director holds office until the next annual stockholders' meeting
and thereafter until the individual's successor is elected and qualified.
Officers serve at the pleasure of the board of directors.
The names, ages, backgrounds and principal occupations of the
directors and executive officers of the Company as of December 31, 1998 are set
forth below:
Kenneth C. "Ken" Lowe, age 63, has served as a director, Vice
President and Secretary of the Company from October 1994 until July 1996 and as
a director, President and Secretary of the Company since July 1996. Since 1993,
Mr. Lowe has been Vice President of Young & Lowe, Inc., a private investment
banking firm. From 1990 to 1992, Mr. Lowe was President of Custom Data
Services, a company that specialized in financial data processing and from 1988
to 1990, Mr. Lowe was President of Westside Communications, which provided
telephone equipment service to commercial customers. Mr. Lowe has a Master's of
Business Administration from Southern Methodist University and over 20 years of
experience in investment banking. Mr. Lowe's total compensation from the
Company for 1998 and 1997 was $80,500 and $40,030, respectively.
Terry Scharig, age 43, has served as Vice President of the Company
since April 1998. From 1994 to 1997 Mr. Scharig was employed by CKS Securities
as a wholesaler of syndicated public offerings. From 1985 to 1994 Mr. Scharig
was employed by A.B. Culbertson as a licensed representative specializing in
the sale of fixed income securities. Mr. Scharig holds a Bachelors Degree of
Science from Kansas State University.
Randall K. Lowe, age 30, has served as Vice President of the Company
since July 1998. Prior to joining the Company and since 1994, Mr. Lowe served
as a credit analyst for Bank One in New Orleans, Louisiana and Dallas, Texas.
From 1991 to 1994 Mr. Lowe was a credit analyst and branch office manager for
Whitney National Bank, N.A. in New Orleans. Mr. Lowe holds a Bachelor of
Science degree from Tulane University. Randall Lowe is the son of Ken Lowe.
Lori Chauvin, age 37 has served as Manager of Customer Service for the
Company since September 1998. Prior to joining the Company and since 1991, Ms.
Chauvin was a paralegal for a Dallas law firm. Ms. Chauvin is responsible for
lease payment collections and supervises all repossessions.
None of the directors or the executive officers receives any
compensation from the Company, other than reimbursement of their expenses
incurred on behalf of the Company. All the officers and directors are paid by
Transition Leasing.
Except as disclosed above, there are no family relationships among the
directors and any of the executive officers of the Company. The Company's
directors do not hold any directorship in any Company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to
the requirements of Section 15(d) of the Exchange Act or any company registered
as an investment Company under the Investment Company Act of 1940, as amended.
Except for the officers set forth above, there are no employees of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The executive officers and sole director of the Company receive no
compensation, cash or otherwise, from the Company. The executive officers and
sole director of the Company are employed by Transition Leasing.
13
<PAGE> 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of March 31, 1998,
relating to the beneficial ownership of the Company's Common Stock by any
person or "group," as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), known to the Company to
own beneficially 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
indicated, 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 such person.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Shares of Common Stock Percentage of Common
Name of Shareholder (1) Stock
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transition Leasing Management, Inc. 1000 100%
5422 Alpha Road
Suite 100
Dallas, Texas 75240
---
Kenneth C. Lowe 0(2)(3) 1
Terry Scharig 0 0
Randall K. Lowe 0 0
Lori Chauvin (3) 0 0
---- ---
Total 1000 100%
All officers and directors as a group (4 persons) 0 100%
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of
the Company.
(2) The directors of Transition Leasing could be deemed to share voting
and investment powers over the shares of Common Stock owned of record
by Transition Leasing. The sole director of Transition Leasing is Ken
Lowe. Mr. Lowe owns 240 shares of Transition Leasing's capital stock,
which represents of 14% of all of the capital stock. Transition
Leasing has the option to acquire from certain of its shareholders
all of the shares of the Company's capital stock owned by such
shareholders. If these options are exercised, Mr. Lowe will own 72%
of Transition Leasing's capital stock. See "Certain Relationships and
Related Transactions." Gibson, age 59, has been the Chairman and
Chief Executive Officer of Gibson Merchandising since 1980. Gibson is
also a member of the Board of Trustees of Harding College located in
Search, Arkansas.
(3) This amount excludes shares of Common Stock owned directly by
Transition Leasing. Mr. Lowe owns 14% of the capital stock of
Transition Leasing and serves as a director of Transition Leasing.
14
<PAGE> 15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transition Leasing owns l00% of the Company's Common Stock. The
officers of the Company are also officers of Transition Leasing. Mr. Lowe is
President and Secretary and a director of Transition Leasing and a director and
the President, Chief Financial Officer and Secretary of the Company. These
officers will devote so much of their time to the business of the Company as,
in their judgment, is reasonably required. The Company and Transition Leasing
have real and ongoing conflicts of interest in allocating management time,
services, overhead and functions among the Company and Transition Leasing.
Management of Transition Leasing intends to resolve any such conflicts in a
manner that is fair and equitable to the Company, particularly in light of the
fact that the Company is presently the only subsidiary of Transition Leasing.
However, there can be no assurance that Transition Leasing will not form
additional subsidiaries engaged in the same business as the Company or that any
particular conflict may be resolved in a manner that adversely affects
Noteholders. Transition Leasing has not guaranteed or is not otherwise liable
for the debts and liabilities of the Company. Transition Leasing has agreed to
purchase certain contracts from the Company, including the contracts which are
defaulted contracts.
The terms of the agreement (the "Servicing Agreement") pursuant to
which Transition Leasing provides lease purchasing, administration and
collection services to the Company were not negotiated at arm's-length but were
determined unilaterally by the management of Transition Leasing. Thus, there
are real and ongoing conflicts of interest with respect to the Servicing
Agreement. The Company did not and does not intend to seek competitive bids
from other providers of lease purchasing, administration and collection
services. There has been no independent determination of the fairness and
reasonableness of the terms of these transactions and relationships. Thus,
there is no assurance that such services could not have been obtained from an
unaffiliated third party in arm's-length negotiations on terms more favorable
to the Company. Under the terms of the Servicing Agreement, Transition Leasing
will be paid a servicing fees and a releasing fee and be entitled to
reimbursement for its expenses incurred in connection with the repossession,
remarketing, repair and resale of leased vehicles out of the proceeds from such
resales. Transition Leasing will retain the fees as compensation and
reimbursement for its services in administering the purchase of contracts and
Noteholder relations. The Company may terminate the Servicing Agreement, but it
is unlikely that the Company will do so in light of the control of the Company
by Leasing.
In addition, the terms of the new contracts to be purchased or
acquired by the Company that are originated by Transition Leasing will not be
negotiated at arm's-length but will be determined unilaterally by Transition
Leasing. With respect to such new contracts originated by Transition Leasing,
Transition Leasing will receive 57.5% of each customer's down payment with
respect to the Contract as a Marketing Fee.
Transition Leasing does not currently provide purchase and collection
services for any other party, including affiliates. Transition Leasing,
however, may agree in the future, to purchase and service contracts for itself,
its affiliates and other unrelated parties. The Company has the right to
purchase additional contracts originated by Transition Leasing from the net
collection proceeds on its existing contracts until an Event of Default or the
Sinking Fund Trigger Date. Management of Transition Leasing will have real and
ongoing conflicts of interest in determining whether to make available to the
Company any automobile lease contracts that it originates or to retain or
acquire the contracts for its own benefit or for the benefit of affiliated
parties, including future subsidiaries to be engaged in the same business as
the Company. Transition Leasing has determined that all automobile lease
contracts purchased or originated by it that satisfy the Company's contract
criteria will be made available to the Company, to the extent that the Company
has funds available for such purchases.
The Company will use up to 1.5% of the gross proceeds from the
Offering to reimburse Transition Leasing, the Company's parent, for offering
and organizational expenses paid by it. The maximum reimbursement will range
from $3,417 for the minimum offering of $250,000 to $150,000 for the maximum
offering of $10,000,000. Transition Leasing has agreed to pay any such expenses
to the extent they exceed 1.5% of the gross proceeds from the sale of the
Notes. It is expected that such expenses will exceed 1.5% of the gross proceeds
from the sale of the Notes, even if the maximum offering is achieved.
The Company has joined in a Tax Sharing Agreement with Transition
Leasing. In general, under the terms of this agreement, Transition Leasing is
responsible for making all payments of federal income taxes due with respect to
the Affiliated Group to the Internal Revenue Service and all payments of state
and local consolidated, combined and unitary income taxes due with respect to
the Affiliated Group to the applicable state and local authorities. Under
applicable federal tax laws; however, if Transition Leasing fails to make such
payments of tax, the other members of the Affiliated Group, including the
Company, would be responsible for making such payments.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
15
<PAGE> 16
a) 1. Financial Statements
The following financial statements are filed as a part of this Form
10-KSB:
The Index to Consolidated Financial Statements is set out in Item 7 herein.
The following exhibits are filed as exhibits to this report on Form
10-KSB:
3.1 Articles of Incorporation of Transition Auto Finance II, Inc. *
3.2 Bylaws of Transition Auto Finance II, Inc. *
4.1 Form of Indenture between Transition Auto Finance II, Inc. and Trust
Management, Inc., as Trustee ***
4.2 Form of Secured Note Due June 30, 2002 (included in Article Two of
Indenture filed as Exhibit 4.1)
10.1 Form of Master Contract Purchase Agreement between Transition Auto
Finance II, Inc. and Transition Management Leasing, Inc. **
10.2 Form of Servicing Agreement between Transition Leasing Management,
Inc. and Transition Auto Finance II, Inc. **
24.1 Consent of Sprouse & Winn, L.L.P. ****
27 Financial Data Schedule ****
- ----------------------------------------
* Incorporated by reference from Registration Statement on Form SB-2 of
Transition Auto Finance II, Inc. Registration No. 33-49261-D filed
April 2, 1998.
** Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-49261-D filed June 19, 1998.
*** Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-49261-D filed July 9, 1998.
**** Filed electronically herewith.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) Transition Leasing Management, Inc.
----------------------------------------------
By /s/ Kenneth C. Lowe
-----------------------------------------
Kenneth C. Lowe, President/Chief Operating
Officer
Date April 15, 1999
16
<PAGE> 17
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By /s/ Kenneth C. Lowe
----------------------------------------
Kenneth C. Lowe, Chief Financial Officer
Date April 15, 1999
By /s/ Kenneth C. Lowe
----------------------------------------
Kenneth C. Lowe, Director
Date April 15, 1999
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Incorporation of Transition Auto Finance II, Inc. *
3.2 Bylaws of Transition Auto Finance II, Inc. *
4.1 Form of Indenture between Transition Auto Finance II, Inc. and Trust
Management, Inc., as Trustee ***
4.2 Form of Secured Note Due June 30, 2002 (included in Article Two of
Indenture filed as Exhibit 4.1)
10.1 Form of Master Contract Purchase Agreement between Transition Auto
Finance II, Inc. and Transition Management Leasing, Inc. **
10.2 Form of Servicing Agreement between Transition Leasing Management,
Inc. and Transition Auto Finance II, Inc. **
24.1 Consent of Sprouse & Winn, L.L.P. ****
27.1 Financial Data Schedules ****
- ----------------------------------------
* Incorporated by reference from Registration Statement on Form SB-2 of
Transition Auto Finance II, Inc. Registration No. 33-49261-D filed
April 2, 1998.
** Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-49261-D filed June 19, 1998.
*** Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-49261-D filed July 9, 1998.
**** Filed electronically herewith.
</TABLE>
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Form 10-KSB of our report included
herein dated February 5, 1999, relating to the financial statements of
Transition Auto Finance II, Inc.
/s/ Sprouse & Winn, L.L.P.
----------------------------------
Sprouse & Winn, L.L.P.
Austin, Texas
April 15, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSITION
AUTO FINANCE II, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-17-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,227,839
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 142,542
<CURRENT-ASSETS> 3,370,381
<PP&E> 950,236
<DEPRECIATION> 40,813
<TOTAL-ASSETS> 4,752,916
<CURRENT-LIABILITIES> 0
<BONDS> 4,780,000
0
0
<COMMON> 100
<OTHER-SE> (313,176)
<TOTAL-LIABILITY-AND-EQUITY> 4,752,916
<SALES> 57,542
<TOTAL-REVENUES> 78,803
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 255,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,174
<INCOME-PRETAX> (314,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (314,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (314,076)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
