As filed with the Securities and Exchange Commission on December 13, 2000
Registration No. 333-47404
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AutoFund Servicing, Inc.
(Name of small business issuer in its charter)
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<S> <C> <C>
Nevada 0000 88-0465858
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3201 Cherry Dr., Suite 314-San Antonio, TX 78230 (210) 979-0840
(Address of principal executive offices) Telephone Number
Nevada Legal Forms & Books, Inc.
3020 W. Charleston Blvd., Las Vegas, NV 89102
(Name, address and phone number for agent for service)
Copies to:
Orsini & Rose Law Firm, P.A.
3800 Central Avenue
St. Petersburg, FL 33731
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [x]
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CALCULATION OF REGISTRATION FEE
------------------------ ----------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Title of each class of Amount to be Proposed maximum Proposed maximum Registration Fee
securities to be registered offering price aggregate offering
registered per share(1) price(1)
PREFERRED STOCK 1,000,000 shares $1.644 $1,644,000 $434.02
------------------------ ----------------- ------------------ ------------------- ------------------
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Note (1) Estimated solely for calculating the registration fee.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<CAPTION>
PROSPECTUS
AutoFund Servicing, Inc. ("AutoFund") whose principal place of business is
located at 3201 Cherry Ridge Drive, Suite 314, San Antonio, Texas 78230 is a
third party collection and recovery services provider to auto loan companies,
banks, buy here pay here companies and auto finance companies who have bad debt
accounts. The accounts have, for the most part, been written off or charged off
and the debt is still owed by a customer whose vehicle has been repossessed.
AutoFund aggressively seeks accounts from these companies to process for
recovery.
The company also provides transactional data warehousing for its clients on a
local area network software application licensed on a long-term agreement.
References to the data are intended to mean file information specific to the
transaction that creates a loan or account with the company or its clients.
Investor/client reports are generated from the archives maintained by the
company. Ostensibly all accounts are in delinquent status and considered
deficiency balance receivables. The accounts are termed deficiency accounts
because the balance owed is the portion left owing after the account has gone
bad, the collateral disposed of without producing funds sufficient to pay off
the entire balance. A physical file as well as electronic documentation
represents the accounts. Any reference to accounts also refers to the credit
information of the borrower and all information used to create the indebtedness.
The company also purchases portfolios, at pennies on the dollar, from companies
that wish to liquidate certain delinquent accounts from their portfolio.
AUTOFUND SERVICING, INC.
1,000,000 shares of 10% Convertible Preferred Stock
$ 1.644 per share
<S> <C> <C>
AutoFund Servicing, Inc. We are in the collection service business of
3201 Cherry Ridge Drive acquiring, servicing and collecting
San Antonio, Tx. 78230 sub-prime automobile finance paper
with deficiency balances, charged off
balances, performing and non-performing
The Offering contracts.
Per Share Total Each share is convertible
--------- ----- into three shares
of common and
Public price...... $1.644 $1,644,000 yields a 10% per annum
Selling stock dividend for three years.
Fees...... $0.219 $ 219,000
AutoFund
Servicing, Inc. $1.425 $1,425,000 The offering price may not
reflect the market price of our
shares after the offering.
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This investment involves Risk, and you should read the "Risk Factors" to
consider on page 12.
Neither the Securities and Exchange Commission nor any State Regulatory Body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
September 29, 2000
1
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September 15,2000
The Registration
This Registration Statement and Prospectus is being filed on Form SB-2
of the 1933 Securities Act. Prior to this filing, none of the securities have
been publicly traded as no public market has existed. On July 11, 2000, The
Company authorized a capitalization of 50,000,000 common shares, par value
$0.001 and 1,000,000 preferred shares, par value $0.001. On July 25,2000, the
Board of Directors of the Corporation passed a resolution to accept an agreement
for the exchange of common stock between AutoFund Servicing, Inc., a Nevada
corporation and AutoFund, Inc. a Texas Corporation. The Board of directors also
authorized the Transfer Agent to issue to share holders of the Texas Corporation
18,000,000 shares of the common stock of AutoFund Servicing, Inc., a Nevada
corporation, $0.001 par value from its treasury so the amount of shares then
issued would be equal to 90% of the combined total of 20,000,000 outstanding
shares, in exchange for 100% of the issued and outstanding shares of AutoFund,
Inc., a Texas corporation, such that AutoFund, Inc.(Texas), shall become a
wholly owned subsidiary of AutoFund Servicing, Inc., a Nevada corporation.
2
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TABLE OF CONTENTS
Prospectus Summary ...................................................... 4
The Offering ............................................................ 4
Use of Proceeds ......................................................... 4
Determination of Offering Price ......................................... 5
Description of Convertible Preferred Stock .............................. 5
Plan of distribution .................................................... 6
Price Range of Price of Stock ........................................... 7
Dividend Policy ......................................................... 7
Corporate Overview ...................................................... 8
Capitalization .......................................................... 11
Risk Factors ............................................................ 12
Disclosure Regarding Forward Looking Statements ......................... 13
Management .............................................................. 27
Management's discussion and Analysis and Plan of Operations ............. 30
Selected Financial Information .......................................... 38-60
Legal Matters ........................................................... 61
Experts ................................................................. 61
3
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PROSPECTUS SUMMARY
Before investing, you should read this prospectus summary together with
the entire prospectus, including the more detailed information in our financial
statements and accompanying notes appearing elsewhere in this prospectus. Unless
otherwise indicated, all information contained in this prospectus relating to
our shares of common and preferred stock is based upon information as of July
25, 2000
This is an offer to sell 1,000,000 shares of the 10% convertible
preferred stock of AutoFund Servicing, Inc. ( A Nevada Corporation). Each share
is convertible into a total of three shares of common. The preferred stock
offering price is $ 1.644 per share and yields a 10% per annum dividend paid in
common stock at the market upon conversion.
THE OFFERING
The net proceeds to be received by AutoFund from the sale of 1,000,000 Preferred
Shares offered by the company is approximately $1,425,000 after deducting
approximately $219,000 in offering expenses to be paid by the company. The
company believes that the net proceeds of this offering will be sufficient to
fund its plan of operation. Operation plans include but are not limited to
expansion of its current client network as well as the purchase and acquisition
of products, businesses and existing technologies that compliment and enhance
the companies position in the core business of the company.
4
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Determination of Offering Price
The Board of Directors determined the public offering price of the
preferred by adding the debt to be retired, plus the offering fees and operating
capital and dividing by the shares offered.
Offering Fees $ 219,000
Operating capital $1 ,425,000
-----------
Total $ 1,644,000
$ 1,644,000
-----------
Shares offered 1,000,000 =$1.644 per share
Description of Convertible Preferred Stock
This is a three year convertible preferred stock offering. One
preferred share is convertible into three shares of the Company's common stock
at any time during the three year period at the option of the shareholder. The
conversion is automatic on the third year record date if not converted earlier
by the shareholder.
The preferred shares yield a 10% per annum dividend, which is paid in
common shares at the market upon conversion.
The 10% annual common stock dividend is determined by multiplying the
preferred share offering price ($1.644) by a factor of ten ($16.44) and dividing
it by the market price per share. This will determine the number of common
shares to the shareholder upon conversion.
The Charter authorizes the issuance of 1,000,000 shares of Preferred
Stock, par value $0.001per share ("Preferred Stock"). No other series of
Preferred Stock has been authorized or issued. The Preferred Stock will rank
senior to the Common stock with respect to the payment of dividends and amounts
upon liquidation, dissolution or winding up of the Company without the consent
of any holder of Preferred Stock.
While any shares of Preferred stock are outstanding, the Company may
not authorize, create or increase the authorized amount of any class or series
of stock that ranks senior to the Preferred Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of the Company.
However, the Company may increase the authorized number of shares of Preferred
Stock or issue a series of Preferred Stock ranking junior to or on a parity with
the Preferred stock with respect, in each case, to the payment of dividends and
amounts upon liquidation, dissolution and winding up of the Company without the
consent of any holder of Preferred Stock.
5
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Plan of Distribution
The company may sell Securities through underwriters or dealers, through
agents or through a combination of any such methods of sale. The Prospectus with
respect to the Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers, or agents,
the initial public offering price, any underwriting discounts and other items
constituting underwriters compensation, any discounts or concessions allowed or
reallowed or paid to dealers, and any securities exchanges on which the
Securities may be listed.
Securities may be sold directly by the Company through agents by the
Company from time to time at fixed prices, which may be changed, or at varying
prices determined at the time of sale. Any agent involved in the offer of sale
of the securities will be named, and any commissions payable by the Company to
such agent will be set forth, in the Prospectus relating thereto. Unless
otherwise indicated in the Prospectus, any agent will be acting on a best effort
basis for the period of its appointment.
In connection with the sale of securities, underwriters of agents receive
compensation from the Company or from purchasers of Securities, for whom they
act as agents, in the form of discounts, concessions of commissions.
Underwriters may sell securities to or through dealer and such dealers may
receive compensation in the form of discounts, concessions or commissions they
receive from the Company and any profit on the resale of Securities they realize
may be deemed to be underwriting discounts and commissions under the Securities
Act. Any such underwriter or agent will be identified, and any such compensation
received from the Company will be described in the applicable Prospectus. Unless
otherwise set forth in the Prospectus relating thereto, the obligations of the
underwriters will be obligated to purchase all the Securities if any are
purchased. The initial public offering price and any discounts of concessions
allowed or reallowed or paid to dealers may be changed from time to time.
Unless otherwise specified in the related Prospectus, each series of
Securities will be a new issue with no established trading market, other than
the Preferred stock, which is to be traded on the NASDAQ Bulletin Board. Any
shares of Common Stock sold pursuant to a Prospectus Supplement will be approved
for trading, upon notice of issuance, on the NASDAQ. The Company may elect to
list any series of Debt Securities on an exchange, but is not obligated to do
so. It is possible that one or more underwriters may make a market in a series
of Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of or the trading market for, the Securities.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption form the registration or
qualification requirement is available and complied with.
6
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Price Range of Class of Stock
Our common or preferred stock is not presently quoted on any NASDAQ market.
Dividend Policy
To date, we have not paid any cash dividends on our common stock. We currently
intend to retain all of our future earnings for use in our business, and
therefore, do not expect to pay dividends in the near future.
7
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Corporate Overview
James D. Haggard is the President and Chief Executive Officer of AutoFund
Servicing, Inc. ("AutoFund") a Nevada corporation. He is also the President of
AutoFund, Inc. ("AFI") a Texas corporation formed in August 1997. AFI recognized
an opportunity to bid for the purchase of a group of loans being sold at auction
by the Delaware Bankruptcy Trustee on behalf of the creditors of Reliance
Acceptance Corporation. While the 1998 bid for this portfolio of loans was
ultimately unsuccessful the company ultimately forged a business relationship
and recovery agreement with the post-bankruptcy surviving management of Reliance
Acceptance Corporation. The agreement allowed AFI to perform collection,
recovery and servicing duties for Reliance Acceptance Corporation under a
portfolio servicing agreement. During the time that AFI performed its duties, it
grew from to a work force of 40 employees who managed the recovery efforts on
approximately 16,000 individual accounts. The employees of the company are not
represented by a union or organized under a collective bargaining agreement.
In September 1998 Mr. Haggard formed AutoFund Servicing, Inc. ("AutoFund") for
the specific purpose of expanding the core business of AFI and to explore
acquisition opportunities resident in the marketplace. Mr. Haggard is currently
the sole shareholder of AutoFund. The formation of AutoFund and its merger with
AFI created the company as it is today. The management and staff of the company
are poised to accept the challenges of future expansion.
AutoFund is currently registered as an "S Corporation" but it is the opinion of
management that that election should be amended during the fiscal year 2000.
Future discussions include establishing a common stock employee distribution
plan and profit sharing incentive for certain key officers and employees of the
company.
AutoFund maintains its corporate office at 3201 Cherry Ridge Drive Suite 314 San
Antonio, Texas 78230. This is the only office of the company and as such its
entire business strategy is deployed from this location. Operations consist
mainly of the performance of the following efforts; capitalization, corporate
banking, corporate accounting, financial auditing, legal compliance, human
resource functions, employee training, client custodial services, client data
base maintenance, and financial reporting to clients and governmental agencies.
The facility is a contiguous space on one floor that is adjacent to vacant space
to accommodate future expansion. From the facility, all activities of the
company are performed on-site and include coordination of third party services
such as repossession assignment, vehicle recovery, vehicle transportation,
auction disposal, insurance product administrative activities, borrower
litigation and compliance to all pertinent State Laws and Federal Statutes.
AutoFund manages loan portfolios that are geographically diverse and is subject
to numerous State and Federal laws in each jurisdiction including but not
limited to; Federal Truth in Lending Act, Federal Equal Opportunity Act, Federal
Fair Debt Collection Practices Act and the Federal Trade Commission Act. Other
requirements mandated by law are licensing, qualification and regulation that
govern maximum finance charges, collection and recovery practices, selling and
administration of ancillary elective and lender imposed insurance products,
investigation and skip tracing efforts with regards to borrowers and the
location, recovery and disposal of collateral through repossession and auction
procedures.
The company has employed experienced personnel with experience in multi-state
lending and recovery environments. Periodic training and testing insure that
regulations and industry practices are adhered to. Competent legal
representation advises on all matters regarding policies, procedures and
compliance.
8
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Business of the Corporation
AutoFund is a third party collection and recovery services provider to
investors, auto loan companies, banks, buy-here-pay here companies and auto
finance related companies who have bad debt accounts. The debt is referred to,
as 'deficiency' or 'charged-off' as it is the determination of the holder of
these accounts that the account is not collectible by normal methods. The
accounts, for the most part, have been written off or charged off and the debt
is still owed by a customer whose vehicle has been repossessed. Because the bulk
of the accounts are no longer secured by collateral, normal recovery efforts are
not effective. The company also performs services for other finance related
industries such as credit card issuers.
AutoFund aggressively seeks accounts from these companies to process for
recovery. The company also provides transactional data warehousing for its
clients on a local area network software application licensed on a long-term
agreement. Ostensibly all accounts under agreements are delinquent and
considered deficiency balance receivables. The company also purchases
portfolios, at pennies on the dollar, from companies that wish to liquidate
certain delinquent accounts from their portfolio.
The company generated 100% of its 1999 revenue from an agreement with Reliance
Acceptance Corporation and its warehouse lender Bank of America that initially
called for AutoFund to recover delinquent debt from 16,000 borrowers on a
contingency plus expenses agreement that compensated AutoFund at a rate of 29%
of the recovery amount plus expenses. The company and its client renegotiated
this agreement in February 2000 to a 29% contingency on secured accounts (those
with collateral still in the possession of the borrower) and a 45% contingency
on accounts with no collateral that were referred to as deficiency balance
receivables.
To date the company has generated gross revenues of $6,000,000 for this client
over the preceding 18-month period. This performance is a direct result of the
dedication shown by the company's seasoned staff and the direction, leadership
and comprehensive management techniques and practices.
Early in 2000 the company negotiated an agreement to collect deficiency balance
receivables on a group of credit card accounts. This agreement produced
approximately 9% of the company's income through second quarter 2000. This
agreement compensates the company on a contingency basis at a rate of 50% plus
reimbursement for related expenses.
In June 2000 AutoFund negotiated an agreement with All American Acceptance
Corporation ("All American") to collect debt from a portfolio of approximately
15,500 accounts representing $86,000,000 in remaining principal balance. This
agreement is a 50% contingency agreement where AutoFund retains 50% of the
collected amount on all recoveries. This agreement also gives AutoFund the
option at its sole discretion to purchase, at any time, the portfolio of loans
for the sum of $1,395,000 or $0.01622 on the dollar.
9
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The company is debt free and has, through this date, been capitalized through
cash flow and capital contributions by its founder. The capital contributions by
its founder are categorized as long term debt and as such are to be repaid over
time. It is not the plan of the company to repay these contributions with funds
received from this offering.
The company occupies 21,000 square feet of leased space on a three-year term at
a rate consistent with local rates for office space. The company has negotiated
options to expand its current lease holdings and extend its leases for two
additional terms of three years each at a cost reflecting current rates.
The vast market segment served by AutoFund and other collection and servicing
companies is a specialized market niche requiring defined focus and an
aggressive approach to exact performance. There are many instances reported in
major publications such as the Wall Street Journal that detail the failures of
companies attempting to collect their own bad debts. The inability or
unwillingness of companies to address their seriously delinquent accounts
provides opportunity for AutoFund and companies in the collection and recovery
business.
Many consumer finance companies turn to a third party provider such as AutoFund
in an effort to streamline their operations and reduce overhead. By contracting
with outside providers these companies utilize economies of scale and allow
their infrastructure to return their focus to profit opportunities.
10
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<CAPTION>
AUTOFUND SERVICING, INC.
CAPITALIZATION
JULY 31, 2000
PREFERRED
HISTORICAL STOCK PRO FORMA STOCK PRO FORMA
OFFERING ADJUSTED CONVERSION ADJUSTED
-------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
SHORT TERM DEBT (NONE) 0 0 0
LONG TERM DEBT (NONE) 0 0 0
SHAREHOLDERS' EQUITY
PREFERRED SHARES - 1,000,000
SHARES AUTHORIZED, 0.001 PAR VALUE
NO SHARES ISSUED AND OUTSTANDING 0 0 0
COMMON SHARES - 50,000,000
SHARES AUTHORIZED, 20,000,000
SHARES ISSUED AND OUTSTANDING
32,000,000 SHARES AVAILABLE 10 0.0005 0.0005 0 0.005
ADDITIONAL PAID IN CAPITAL 0
RETAINED EARNINGS 215 0.0108 0.0108 0 0.0108
--- ------ ------ - ------
TOTAL SHAREHOLDERS' EQUITY 225 0.0113 0.0113 0 0.0113
--- ------ ------ - ------
</TABLE>
TOTAL CAPITILIZATION
(1) HISTORICAL FUGIURES REFLECT THE FACT THAT COMPANY HAS NO DEBT
(2) PREFERRED SHARES HAVE NO CONVERSION FEATURE INTO COMMON SHARES
11
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RISK FACTORS
THE SECURITIES BEING OFFERED HEREIN ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE
INVESTORS SHOULD GIVE CAREFUL ATTENTION TO THE FOLLOWING RISK FACTORS INHERENT
IN AND AFFECTING THE BUSINESS OF THE COMPANY.
- The company was formed on March 7, 1997 and acquired AutoFund
Servicing, Inc. on July 25, 2000. This factor in itself is not
indicative of substantial risk except that the company is to be
considered a development stage company.
- Minimal historical data: With just over two years of operating history
and relatively low earnings, future profitability is uncertain.
- Dependence on select customers: The company generated 100% of 1999
revenue from collection efforts for one client. While the company has a
long-term agreement with this client there is no guarantee that the
client will remain loyal to the company. The company had 3 clients in
2000.
- Shareholders rights: Shareholders have no right to take part in the
management of the company except through the exercise of voting rights
on certain specified matters. The Board of Directors of the company is
responsible for managing the company. The future success of the company
and the implementation of its growth strategy are substantially
dependent on the active participation of its president, Mr. James D.
Haggard. The loss of services provided by this individual could have a
material adverse effect on the company.
- Federal and State Laws: Government intervention on regulations and new
law enactment's that could interfere with activities of the company.
There have long been consumer and advocate motions that would have the
Federal and State governments generate new legislation and enact new
laws that could change the methods of borrower locating , skip tracing,
reference interview and collateral disposal. New laws may require a
court order where one is not now required.
- Product Liability: There is a growing trend for litigants to sue all
parties remotely involved in a transaction. As an example: A borrower
may assert that the automobile dealer from whom they bought and
financed the vehicle discriminated against them and named, in an
action, the bank or finance company (AutoFund clients) as well as
AutoFund claiming that damage was done to their personal credit rating
and mental anguish was suffered as a result of the purchase. The
company would be burdened with the additional debt of defense. While
the company specifically seeks indemnification from these actions in
its agreements with clients, there is no guarantee that the client
will, in fact, provide such indemnification.
- Competition and the relative ease with which new competitors can enter
the market place. As the industry shows signs of success there is the
potential for new companies forming to take advantage of that
opportunity. The availability of dedicated employees may tend to
decrease and the compensation levels to keep key employees may tend to
increase.
12
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Disclosure Regarding Forward Looking Statements
This Prospectus includes forward looking statements within the meaning of
Section 27A the Securities Act of 1933, as amended, and Section 12E of the
Securities Exchange Act of 1934, as amended. Although the company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved.
The financial position of AFS was a key consideration in determining value.
Following are financial highlights of AFS.
FINANCIAL ANALYSIS
o Historical sales were $968,000 in the fiscal year just
completed.
o Sales for the base year are estimated to be $2,600,000. This
estimate is supported by 6 months interim sales of $1,267,000
o Sales are projected to grow at an average of 44.0% per year
over the next five years to $16,000,000.
[GRAPH OMITTED]
Base Year Pro Forma Years %Growth
13
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Profitability Trends
o EBIT for fiscal 1999 was $81,000, which was 8.4% of sales.
o EBFF for the base year 2000 is expected to be $968,000, which
is 37.2% of expected sales.
o Over the next five years EBIT is expected to increase relative
to sales.
[GRAPH OMITTED]
BASE YEAR PRO FORMA YEARS %OF SALES
*Earnings before interest and taxes
14
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Adjusted Income Statements
AFS' historical income statements have been adjusted to present the business as
if it had been managed to maximize profitability. Since privately owned
companies tend to keep reported profits and resulting taxes as low as possible,
adjusting the financial statements is an important element to understanding the
true earning capacity of the business. This allows for meaningful comparisons
with other investment opportunities.
Schedule 1 shows the adjustments made to AFS' historical income statements.
15
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<CAPTION>
AutoFund Servicing, Inc.
Historical Income Statements with Adjustments Details for the Fiscal Years
ended December 31 ($000) and the Six Months Ended June 30, 2000
Schedule I 1999 June 30, 2000
Note PerBooks Adj. Revised PerBooks Adj. Revised
<S> <C> <C> <C> <C> <C> <C>
Revenue 968 - 968 1,267 - 1,267
Operating Expenses
Collection Expenses 10 - 10 2 - 2
Employee Benefits 36 - 36 (2) - (2)
Postage 11 - 11 8 - 8
Telephone Expense 51 - 51 53 - 53
Computer Expense 13 - 13 12 - 12
Conference & Meetings 5 - 5 2 - 2
Contract Labor 4 - 4 5 - 5
Employee Expenses 2 - 2 2 - 2
Insurance 12 - 12 28 - 28
Leased Equipment 5 - 5 2 - 2
Meals & Entertainment (1) 4 (3) 1 2 - 2
Office Expenses 15 - 15 69 - 69
Professional Fees (2) 26 - 26 19 (19) 0
Rent 56 - 57 41 - 41
Travel 6 - 6 7 - 7
Vehicle Expense (3) 3 (2) 1 2 - 2
Wages & Salaries 575 - 575 445 - 445
Payroll Taxes 45 - 45 21 - 21
Other 15 - 15 39 - 39
Temp Staff 0 - 0 78 - 78
Loan Reports 0 - 0 3 - 3
Reimbursable Expenses (28) - (28) 42 - 42
Depreciation 25 - 25 8 - 8
Total Operating Expense 892 (5) 887 888 (19) 869
Other Expense 0 - 0 0 - 0
EBIT 76 5 81 379 19 398
Interest 0 - 0 0 - 0
Pretax Income 76 5 81 379 19 398
</TABLE>
16
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Notes and Adjustment Details to Schedule 1
1999 Interim
------------
Operating Expenses
(1) Meals & Entertainment
Recast Owner Discretionary Expense (3) -
(2) Professional Fees
Recast Geneva Fee - (19)
(3) Vehicle Expense
Recast Owner Discretionary Expense (2) -
17
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Adjusted Income Statement, Common-sized
Once the historical income statements have been adjusted to reflect the true
earnings history of the Company, it is possible to analyze the statements over
time.
The following schedule shows the adjusted income statements (from Schedule 1)
for each historical year.
AutoFund Servicing, Inc.
Adjusted and common-sized Income Statements for the Fiscal Years ended
December 31 ($000) and the Six Months Ended June 30, 2000
Schedule 2
1999 6/30/00
---------------------------------------------
Revised % of Sales Revised % of Sales
Revenue 968 100.0% 1,267 100.0%
Operating Expenses 887 91.6% 869 68.6%
Operating Income (Loss) 82 8.4% 398 31.4%
EBIT 81 8.4% 398 31.4%
Pretax Profits 81 8.4% 398 31.4%
18
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Pro Forma Income Statements
Using the adjusted historical statements as the starting point, we developed the
following pro forma income statements to indicate the revenue and profit
potential of AFS. In developing the pro formas, we considered that they must be
credible to potential buyers. Aggressive growth projections, when not well
supported, are perceived to be of high risk and will affect the buyer's opinion
of value. Well-supported projections, on the other hand, are considered lower in
risk and more acceptable to buyers.
In Schedule 3 we further adjusted the statements presented in Schedule 2 to
remove depreciation and amortization from cost of goods sold and operating
expenses. These items were left in Schedule 2, as depreciation and amortization
are required for a meaningful ratio comparison to other industry companies.
However, we find that most buyers prefer seeing depreciation and amortization
removed from cost of goods sold and operating expenses, and shown separately so
the relationship to capital expenditures is obvious. Therefore depreciation and
amortization have been moved in Schedule 3 to separate lines just before the
Operating Income (Loss) subtotal.
19
<PAGE>
<TABLE>
<CAPTION>
AutoFund Servicing, Inc.
Revised and Proforma Income Statements for the Fiscal Years
ended December 31 ($000) and the Six Months Ended June 30, 2000
Schedule 3
Revised Pro Forma
6 Months Est.
---------------------------------------------
1999 6/30/00 2000 2001 2002 2003 2004 2005
---- ------- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
Revenue 968 1,267 2,600 4,700 7,100 9,900 12,900 16,100
% Growth 168.6% 80.8% 51.1% 39.4% 30.3% 24.8%
Operating Expenses 862 861 1,560 2,829 4,260 5,920 7,740 9,660
% of Sales 89.0% 68.0% 60.0% 60.0% 60.0% 60.05 60.0% 60.0%
Depreciation 25 8 72 99 124 91 107 109
Operating Income(Loss) 81 398 968 1,781 2,716 3,869 5,305 6,331
% of Sales 8.4% 31.4% 37.2% 37.9% 38.3% 39.1% 39.2% 39.3%
EBIT 81 398 968 1,781 2,716 3,869 5,053 6,331
% of Sales 8.4% 31.4% 37.2% 37.9% 38.35 39.15 39.2% 39.3%
Interest Expense 0 0 0 0 0 0 0 0
Pretax Profits 81 398 968 1,781 2,716 3,869 5,053 6,331
% of Sales 8.4% 31.4% 37.2% 37.9% 38.3% 39.1% 32.2% 39.3%
Taxes 16 329 606 923 1,315 1,718 2,153
Net Income 65 639 1,175 1,793 2,554 3,335 4,178
% of Sales 6.7% 24.6% 25.0% 25.3%% 25.8% 25.9% 26.0%
EBITDA 106 406 1,040 1,880 2,840 3,960 5,160 6,440
% of Sales 11.0% 32.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%
</TABLE>
20
<PAGE>
ANALYSIS OF INCOME STATEMENTS
The assumptions that form the basis for the pro forma income statements, and our
analysis of the historical statements which underlies those assumptions follow.
Sales
In the first year of operations, sales totaled $968,000 from the servicing of
the Reliant Acceptance Corp/Bank of America (RAC) portfolio. During the interim
period ending June 30,2000, sales totaled over $1.26 million. During the first
half of 2000 the Company continued to grow its infrastructure and service its
existing portfolio. The Company renegotiated its contract with RAC in 2000 to
increase its collection retention from 29% to an average of 37%. AFS also added
a $3 million portfolio of credit card debt in February 2000. The Company began
servicing an $86 million dollar portfolio in June on which the AFS receives a
50% retention. Based on these factors, sales are expected to grow 168.6% to $2.6
million during the base year 2000. Management expects sales to increase between
24.8% and 51.1% annually during the remainder of the pro forma period based upon
the Company continuing to build infrastructure and obtain new portfolios.
Operating Expenses
Operating expenses were 89% of sales in 1999, based on a 29% retention on
collections for RAC. Since this contract was renegotiated in 2000, to an average
of 37% retention, operating expenses dropped to 68% of sales for the interim
period ending June 30, 2000. Management expects operating expenses to be 60% of
sales in the base year and throughout the pro forma period. This decrease (as a
percentage of sales) in operating expenses is due to higher margins created by
increased retention rates on recent contracts.
Management Compensation
Management estimates that one replacement manager to be paid $200,000 annually
will be adequate to fulfill the duties and functions of the current owner. The
owner is currently receiving this salary for year 2000. In 1999 the owner
received $75,000 in salary. Due to the start-up nature of the Company1 the
difference between this salary and the estimated fair market salary was not
recast.
Special Recasting
Management perquisite recasts totaling $5,000 in 1999 include owner travel and
entertainment and auto expenses.
Non-recurring recasts include $19,000 in 1999 for a consulting fee.
21
<PAGE>
Depreciation and Capital Expenditures
Depreciation on existing fixed assets was calculated using the straight-line
method over the estimated useful lives of the assets. The following shows the
Company's fixed asset base and associated pro forma depreciation expense ($000):
Recast Net Estimated
Book Value Remaining Depreciation
Fixed Assets 12/31/99 Depreciable Life Per Year
------------ -------- ---------------- --------
Operational Equipment 181 3 60
To provide for future growth, we have provided for capital expenditures during
the pro forma period. Depreciation on fixed assets acquired during the pro forma
period is included using the half-year convention. Full-year depreciation for
the additional capital expenditures is calculated on the following table ($000):
Capital Depreciable Annual
Year Description Expenditure Life Depreciation
-------------------------------------------------------------------------------
2000 Operational Equipment 100 4 25
2001 Operational Equipment 103 4 26
2002 Operational Equipment 106 4 27
2003 Operational Equipment 109 4 27
2004 Operational Equipment 113 4 28
2005 Operational Equipment 116 4 29
Taxes
Income taxes were calculated using the current combined federal and state income
tax rates.
22
<PAGE>
<TABLE>
<CAPTION>
Balance Sheets
We have adjusted the most recent fiscal year-end balance sheet to
reflect the operating assets and liabilities of the Company that would be
accounted for in a sale. We then developed pro forma balance sheets to determine
the future requirements for working capital.
Auto Fund Servicing Inc.
Balance Sheets for Fiscal Years ended December 31 ($000)
Schedule 4
-------------------------------------------------------------------------------------------------------------------------------
FY Adjust- Revised Est 2000 Pro Forma 2005
1999 ments 1999 2001 2002 2003 2004
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash (and cash equivalents) 17 0 17 31 44 55 66 76 86
Accounts Receivable 1 0 1 299 541 817 1139 1484 1853
Prepaid Expenses 0 0 0 8 14 21 30 39 48
Deposits 3 0 3 8 14 21 30 39 48
- - - - -- -- -- -- --
Total Current Assets 21 0 21 346 613 914 1265 1638 2035
Non-current Assets
Fixed Assets-Net 181 0 181 209 213 195 213 219 226
Total non-current assets 181 0 181 209 213 195 213 219 226
Total Assets 202 0 202 555 826 1109 1478 1857 2261
------------ --- - --- --- --- ---- ---- ---- ----
Liabilities & Equities
Current Liabilities
Accounts Payable 5 0 5 78 141 213 297 387 483
Advances, Accrued Expenses 16 0 16 26 47 71 99 129 161
-- - -- -- -- -- -- --- ---
Total Current Liabilities 21 0 21 104 18 284 396 516 644
Non-current liabilities
Long-term debt 36 (36) 0 0 0 0 0 0 0
Shareholder Loans 59 (59) 0 0 0 0 0 0 0
Deferred Income Taxes 18 (18) 0 0 0 0 0 0 0
-- ---- - - - - - - -
Total Non-current Liabilities 0 0 0 0 0 0 0
- - - - - - -
113 (113)
Total Liabilities 134 (113) 21 104 188 284 396 516 644
--- ----- -- --- --- --- --- --- ---
Stockholders' Equity 68 113 181 451 638 825 1082 1341 1617
-- --- --- --- --- --- ---- ---- ----
Total Liabilities & Equity 202 0 202 555 826 1109 1478 1857 2261
--- - --- --- --- ---- ---- ---- ----
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
--------------------------------------------------------------------------------
Notes and Adjustment Details to Schedule 4
--------------------------------------------------------------------------------
(1) Long term debt
Eliminate debt as this is a predebt analysis (36)
(2) Shareholder Loans
Recast Shareholder Loans (59)
(3) Deferred Income Taxes
Eliminate deferred taxes (and recast to equity) (18)
24
<PAGE>
Analysis of Balance Sheets
Cash
Cash is projected to increase incrementally, relative to sales growth, to
support working capital requirements.
Accounts Receivable
Accounts Receivable were 42 days outstanding during the interim period and are
projected at 42 days throughout the pro forma period.
Prepaid Expenses
Prepaid expenses were 0.3% of sales during the interim period and are
projected at 0.3% of sales throughout the pro forma period.
Accounts Payable
Accounts Payable were 3.0% of sales during the interim period and are
projected at 3.0% of sales throughout the pro forma period.
Fixed Assets
The recast net book value of fixed assets at December 31, 1999 was
$181,000. The net book value of $181,000 approximates the fair market value of
the assets as estimated by management. Management estimated these values
considering the age, usefulness and condition of the assets.
Capital Expenditures
Capital expenditures totaled $206,000 in 1999 for software and purchase
of office and operational equipment. To support growth projections, annual
capital expenditures are estimated at $50,000 in the base year and are expected
to increase 3% annually to account for inflationary factors during the pro forma
period.
The fixed asset balances on the Pro Forma Balance Sheets for each year
are the net of the balance for the prior year plus pro forma capital
expenditures for the current year less pro forma depreciation expense.
Stockholders' Equity
The net difference between the projected growth of the total assets and
total liabilities of the Company during the pro forma period results in the
increase to stockholders' equity. Each year's stockholders' equity is calculated
as follows: the current year's net income (Income Statements - Schedule 3) is
added to the previous year's stockholders' equity. The current year's net cash
flows are then deducted, resulting in the current year's stockholders' equity.
Net cash flows (Pro forma Cash Flow Statements- Schedule 5) are not reflected in
equity, as they are assumed to be paid out to the owners of the Company as
dividends. As a result, stockholders' equity increases only slightly each year,
as net cash flows are not retained in the Company.
25
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
Schedule 5 presents the cash flows resulting from the adjustments and
projections made in the preceding schedules.
Auto Fund Servicing, Inc.
Statement of Cash Flows for Fiscal Years ended December 31 ($000)
Schedule 5
<S> <C> <C> <C> <C> <C> <C>
Change in Other Current Assets -5 -6 -7 -9 -9 -9
Change in Accounts Payable 73 63 72 84 90 96
Change in accrued Expenses 10 21 24 28 30 32
--- ---- ---- ---- ---- ----
Total Cash Flow from Operations 798 1697 2635 3721 4907 6171
Cash Flow from Investing
Capital Expenditures -100 -103 -106 -109 -113 -116
Total cash Flow from Investing -100 -103 -106 -109 -113 -116
---- ---- ---- ---- ---- ----
Pre-tax Cash Flow 698 1594 2529 3612 4794 6055
Less Income Tax 329 606 923 1315 1718 2153
Less Financing Tax Benefit 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
Predebt, Aftertax (Free) Cash Flow 369 988 1606 2297 3076 3902
</TABLE>
26
<PAGE>
Management
James Haggard 51 President / Chief Executive Officer
John Polgar 50 Executive Vice President / Chief Operating Officer
Edward Aleman 29 Vice President / Operations Director
Kathie Bewley 47 Human Resources Director
Daniel Masterson 42 Vice President / Marketing Director
Rick Allen 47 Collections Director
Wendill Blair 60 Corporate Assets Director
James Tankersley 53 Information Systems Manager
Robert Bernholtz 55 Collection Manager
Sharon Canfield 61 Collection Manager
Management Biographies
James Haggard has been involved in the automobile finance related industry for
over 20 years. Prior to founding AutoFund Mr. Haggard was employed as Senior
Vice President by Reliance Acceptance Corporation, a San Antonio Texas auto
finance company that made indirect auto loans to borrowers, through auto dealers
throughout the United States. Mr. Haggard was responsible for the development
and profitability of 8 branch offices and over 100 employees. Prior to joining
Reliance Acceptance Corporation in 1993 he was employed as a Business
Development Manager with Mercury Finance Corporation. Mr. Haggard has been
involved in all phases of finance company operations from marketing through
collections, training, legal, compliance, recovery and management reporting.
John Polgar came to AutoFund in January 1999. His position with AutoFund
includes developing strategy, the development of performance review parameters,
due diligence and management oversight of all operations. Mr. Polgar formerly
held the position of Director of Operations at Reliance Acceptance Corporation
where since mid 1994 he was responsible for the operational concerns of 56
regional loan offices and 7 regional collection centers. Reporting directly to
the office of the president and the board of directors, Mr. Polgar made
recommendations regarding strategy, goal setting, compliance, performance and
personnel issues. Prior to joining Reliance Acceptance Corporation, Mr. Polgar
held positions of management for over 10 years at consumer finance companies.
Edward Aleman also joined AutoFund in January 1999. Mr. Aleman is currently
responsible for day to day operations of the company as well as the oversight of
the various department heads involved in the daily collection, recovery and
customer interface functions of the company. He is also involved in the
sourcing, hiring, training and review of employees directly under his direction.
Prior to joining AutoFund Mr. Aleman was a branch manager responsible for all
phases of business and reporting at Reliance Acceptance Corporation. He held
this position since 1995 and was involved in sales and customer service prior to
his employment at Reliance Acceptance Corporation.
27
<PAGE>
Daniel Masterson was hired in January 2000. As the director of marketing he is
responsible for establishing contact with potential clients and to investigate
physical file attributes of portfolios offered to the company for collections.
His duties also include the performance of due diligence and ensure licensing
compliance in each state that the company transacts business. Mr. Masterson also
assists the information technology and information systems department to
facilitate uninterrupted system service. Prior to joining the company Mr.
Masterson was, for 2 years, the director of finance for a large import
automobile dealership in San Antonio. Mr. Masterson was employed, for 3 years,
as marketing director and regional operations manager for Reliance Acceptance
Corporation. Immediately prior to this Mr. Masterson was employed in a
management capacity in the retail automobile dealership environment for 15
years.
Kathie Bewley is the director of human resources who joined the company in July
1999. Her duties include the administration of company employment policies,
health, medical, dental and other insurance programs, maintenance of physical
employment files performance reviews and employee handbook creation and
distribution. Ms. Bewley also performs accounts payable functions and is
responsible for timesheet review. Prior to joining AutoFund Ms. Bewley was a
student at the University of Texas at San Antonio where she was on the Dean's
List with a GPA of 3.9.
Richard Allen joined AutoFund 7/31/00 in his current role as director of
deficiency collections and is responsible for a group of employees whose sole
purpose is to effectively negotiate settlement agreements with borrowers within
their workbook. Prior to joining AutoFund Mr. Allen spent 6 years with a
collection company in San Antonio as a collection manager. His negotiation and
interpersonal skills qualify him to manage the core functions of his department.
Mr. Allen has a total of 25 years experience in finance company, collection
company and bank collection.
Windell Blair brings nearly 30 years of automobile finance related experience to
AutoFund. Prior to joining AutoFund in 3/1/99 Mr. Blair was the sole proprietor
of a lender services company in San Antonio. His focus on developing profitable
programs for lenders to assist in strategy and planning for delinquency
resolution is a welcome addition to the management team. With his knowledge and
personal experience Mr. Blair is a natural mentor to employees and an asset to
the organization.
28
<PAGE>
James Tankersley joined the company in February 2000 as the company information
systems manager. His primary responsibility is insuring that the servicing
platform is up and running at all times so that the collection personnel are not
experiencing any downtime. He also initiates and follows up on changes in the
company telecommunication systems and runs back up for daily and month-end
business activity. Previously, Jim had held the same position with Reliance
Acceptance Corporation for 5 years.
Robert Bernholtz joined the company in February 2000 as a collection manager in
the deficiency balance collection department. He is directly responsible for the
daily work activity of 7 to 10 collectors. This includes involvement in
sourcing, hiring, and training and evaluating individual/group results. Robert
brings 20 years of related experience having served collection manager positions
with Reliance Acceptance Corporation and ITT Financial Services.
Sharon Canfield joined the company on 1/14/99 as an hourly employee assigned to
the deficiency balance collection department based on her hard work, dedication
and positive monthly results. She was promoted to her current position as
collection manager on 6/1/00. Prior to joining AutoFund Servicing, Inc, she was
employed as a collector for 2 1/2 years. She is currently responsible for the
training and results of 7 to 10 collectors under her direct supervision.
29
<PAGE>
Management's Discussion and Analysis and Plan of Operations
-----------------------------------------------------------
The business environment in which AFS operates has a considerable
impact on value. Buyers will be influenced by the growth prospects for AFS'
industry, as well as the competitive and operating risks inherent in the
industry. Collection agencies are experiencing multiple conditions that are
fueling their business including, deregulation, an increasing trend towards
outsourcing and improved technology. As these trends continue and more debt is
massed, competitive forces will fuel acquisitions in order for third party
collection agencies to gain scale advantages and additional collection markets.
Industry Structure
With an estimated 6,500 firms, totaling $6.5 billion in annual
revenues, the collection services industry is highly fragmented and ripe for
consolidation. The following facts support the fragmented structure and the
sustainability of the collection industry.
o By year end 1998, the largest collection agency accounted for only 5% of
the total industry's revenues and the top 100 agencies combined for just
32% of all industry revenues.(1) Consumer debt is at an all high and
growing at a rapid rate. In the last five years, consumer debt has
increased from 4.7 trillion to a current level (1999) of $6.0 trillion, a
5% compound annual growth rate (CAGR). (2)
Illustrated in the chart below, over 60% of delinquent collection
revenues are collected by agencies with less than $5 million in annual revenue
while 10% of revenues are collected y firms who have between $5-$20 million in
revenues and the remaining 30% representing agencies grossing over $20 million
annually.
Collection Revenues by Agency Size
----------------------------------
(Graph Omitted)
*Source: Sun Trust Equitable Securities
The debt collection industry can be divided into four main groups:
health care, including hospitals and doctor's offices; retail businesses,
including department stores and credit-card companies; utilities; and businesses
to business debts. Generally hospitals and credit cards generate more than 50%
of the amount of over-due and delinquent debt placements.(3)
------------------------
(1) Kaulkin & Associates
(2) Kaulkin & Associates
(3) "The Kaulkin Report- State of the Industry" Kaulkin & Associates, Inc.,
December 1999
30
<PAGE>
The clear industry leader in all sub-segments of debt collection is NCO Group.
This public consolidator controls five percent of the market share and is the
most active acquire in the industry.
o NCO Group has acquired 17 companies between 1994 and 19999 and has grown
its revenues from $30.76 million in 1996 to $492.35 million in 1999.(4)
o The company employs 8,800 people serving 11,500 clients in the U.S.,
Canada, the U.K. and Puerto Rico from 80 call centers.(5)
o In 1998, approximately 32.7% of the company's clients were financial
institutions; 10.8% were retailers or commercial entities; 22.7% were
healthcare organizations; 17.5% were educational organizations; 6.9% were
utilities; 5.0% were government entities; and 4.4% were telecommunications
companies.(6)
o Analysis estimate that NCO group will experience a 3-5 year EPS growth rate
of 25% on its core services due to the favorable industry conditions that
exist.(7)
--------------------------------------------------------------------------------
(4) Bloomberg
(5) "NCO Group, Inc." Salomon Smith Barney, June 1999
(6) Ibid
(7) "NCO Group, Inc." Deutsche Banc Alex Brown, June 1999
31
<PAGE>
Industry Growth
Growing at near double-digit growth for the last two years,
debt collection revenues total $6.5 billion in 1999, up from $5.5 billion in
1997. 8 Consumer debt ultimately drives the debt collection business. Industry
experts predict that fearless consumers and a stable economy will push consumer
debt to $9 trillion by the year 2007, a 5.7% CAGR.
(Graph Omitted)
CAGR 92-07 = 6.37%
The following trends and factors are driving a greater percentage of
collection revenues from the grossly increasing sum of consumer debt within the
United States.
o The average number of credit cards per U.S. household has been increasing
at a 7% CAGR for the last several years, growing from 2.9 cards per
household in 1992 to 5 cards per household in 1999.9 Morgan Stanley Dean
Witter predicts that by the year 2005, 39% of consumer payment transaction
will involve the use of a credit card.(10)
o An increasing trend towards outsourcing dept collection by corporations as
a cost savings and revenue generating initiative that avoids the hassles
and complexities of debt collection. The Nilson Report estimates that 8% of
delinquent accounts were outsourced in 1998, and suggests that this figure
could reach 25% by 2005.(11)
o Advances in technology, such as sophisticated telephones and computer and
software systems, have allowed for collections agencies to develop cost
efficient methods for collecting accounts receivables.(12)
o Regulatory changes have created new outsourcing opportunities in various
markets. For instance, the Debt Collection Improvement Act gives collection
agencies access to an additional $51.3 billion in nontax delinquencies owed
to the federal Government.
------------------------
(8) Kaulkin & Associates, Inc.
(9) "Financial Business Services." Usbancorp Piper Jaffray, October 1999
(10) "Equifax-Value of Information." Morgan Stanley Dean Witter, July 1999
(11) "Equifax-Value of Information." Morgan Stanely Dean Witter, July 1999
(12) "Outsourced Contract services." SunTrust Equitable Securities, January 1999
32
<PAGE>
Auto Debt Industry
According to research compiled by SMR Research Corporation, there is
$465 billion of automobile debt currently outstanding. SMR expects this level of
debt will grow in excess of the rate of inflation for the next 10 years.(14)
Automotive News cited in their 2000 Market Data Book that the average
new-auto loan reached $19,880 and the average used-auto loan was $13,642 in
1999. These figures represent a 10% and 11% increase respectively for new and
used auto loans since 1997.(15)
A robust economy, consumer confidence, relatively low interest rates
and controlled pricing is fueling the automotive industry. Coming off a peak
year in 1999, North American auto sales are forecast to grow steadily for the
next four years, increasing from an estimated 17.8 million units in 2000 to 18.4
million units in 2004.
M&A Activity
Excluding the rapid growth of the largest agencies, the majority of the
debt collection industry is still controlled (approximately 60%) by relatively
small agencies. This fragmentation indicates that the consolidation trend for
this industry is still in its earlier stages.(17) However, large public
consolidators, such as NCO Group, are actively acquiring more market share as
increased outsourcing and better collection technologies emerge. These and other
factors are compounding competitive forces for agencies to gain economies of
scale and broaden collection markets, thus driving a spur of merger and
acquisition activity.
Industry Margins
The Company has an operating profit margin that is comparable to the industry
average for SIC 7322 - Adjustment and Collections Services. A breakdown of how
the Company compares to Robert Morris Associates (RMA) data is listed below:
-------------------------------------------------------------------
AFS FYE 1999 RMA SIC #7322
Recast ($500,000-$2MM
In Revenue)
-------------------------------------------------------------------
Operating Profit 8.4% 8.1%
Sales to Total Assets 4.8% 3.1%
-------------------------------------------------------------------
Source: RMA
------------------------
(14) "American Collectors Association Sees Continued Growth in Collection
Industry Through 2006". American Collectors Association, February 2000
(15) "2000 Market Data Book". Automotive News, May 2000
(17) SunTrust Equitable Securities Research
33
<PAGE>
Market Factors
The strength of the U. S. economy as a whole will effect the Company.
As such, the outlook for the U.S. economy is positive. Market conditions include
a healthy economy, low interest rates and favorable financing conditions. As the
United States continues to experience economic prosperity, the debt collection
industry should continue to grow.
In addition to the factors driving growth and acquisitions, below are
market factors that are shaping and driving this dynamic industry.
o According to the Healthcare Financing Administration, healthcare spending
is projected to increase. Average annual increases are expected to reach
6.4% between 1998 and 2007, compared to average increases of 4.5% between
1992 and 1997.(18)
o Lenders and credit grantors have reduced the time they seek assistance
after a debt becomes delinquent. The odds of collecting this delinquent
debt depreciates approximately 1/2 % each day.(19)
o Debt collection is relatively stable through all economic conditions.
During a strong economy, consumers increase their borrowings and lenders
take on more risk. Even though defaults are less likely in this period,
debts become larger and easier to collect. In an economic downturn, lending
may be tighter, however, defaults become more frequent.(20)
o Business bankruptcy filings are coming off a peak and decreasing quite
substantially. Given bankruptcy protection negatively impacts debt
collection, the reduction in filings is a favorable condition for the
industry.(21)
o Currently there are various legislative initiatives before Congress that
would make consumer bankruptcy filings more difficult.(22)
------------------------
(18) "Healthcare Recoveries, Inc." BT Alex Brown, December 1998
(19) Kaulkin & Associates
(20) "NCO" Group, Inc." Salomon Smith Barney, June 1999
(21) "NCO" Group, Inc." Deutsche Banc Alex, Brown, June 1999
(22) Ibid
34
<PAGE>
Geographic Markets
The Company services portfolios with charges-off accounts located
across the United States. The following graph illustrates the Company's
geographic account mix:
Accounts as a Percent of Sales
------------------------------
(graph omitted)
Northeast 5%
Southwest 15%
Northwest 5%
Midwest 25%
South 50%
Ownership
The Company is owned entirely by its President, James D Haggard, who
manages the daily operations of the business.
Number of Employees
AFS employs a highly trained, non-union staff of 59 full-time
employees. The following table lists the departmental/functional breakdown of
the Company's staff:
----------------------------------------------------
Department/Function Number of Employees
------------------- -------------------
Deficiency Collection 31
Bankruptcies & Cancellations 8
Repossession & Disposal 5
Marketing 2
Administration 13
Total 59
----------------------------------------------------
35
<PAGE>
Facilities
The Company occupies one building, leased through an unrelated party at
a fair market lease rate. The facilities are large enough to support growth
through 2002 of the pro forma period and can be expanded when the need arises.
The following table summarizes AFS' facilities:
-----------------------------------------------------------------------
Location Date Established Use Sq. Footage Employees
-----------------------------------------------------------------------
San Antonio, TX 1999 Offices 8,000 59
-----------------------------------------------------------------------
Value Enhancers
FINANCIAL
o Rising sales: Revenue is expected to increase 168% in the base year 2000.
o Favorably compares to industry ratios: The Company's interim 2000 operating
profit at 31.4% of sales exceeds industry averages, as reported in RMA
data.
o Backlog of signed contracts: AFS has contracts with three companies to
collect on approximately $180 million in charged-off debt.
OPERATIONAL
o Propriety expertise: The Company has developed a superior method of
collecting on charges-off auto debt including obtaining refunds on
insurance and warranties.
o Excellent location: The Company's location in San Antonio, Texas provides
low overhead costs and availability to a bilingual labor pool.
o Business is easily relocatable: Continuing operation of the Company is not
location specific.
o National reach: The Company generated 1999 revenue from charged off
accounts distributed across the United States.
o Documented systems and procedures: AFS has developed and documented its
collection methods.
EXTERNAL
o Favorable market trends: Consumer debt is at an all time high and growing
at a rapid rate. In the last five years, consumer debt has increased from
4.7 trillion to a current level (1999) of $6.0 trillion, a 5% compound
annual growth rate (CAGR).(23)
------------------------
(23) Kaulkin & Associates, Inc.
36
<PAGE>
MARKETING PLAN
--------------
The Industry
Tremendous changes have occurred during the past 12 months in the Bad
Debt industry. Lenders are selling their charged off debt (estimated at 3
trillion dollars in the United States) more rapidly and for more money than at
any time in history. Thee primary focus, currently, is credit card debt. We,
however, prefer auto loan charge offs because of our experience. General
Electric, Capital One and Integrated Services are three of the largest debt
buyers and their focus is on credit card portfolios, not auto portfolios. The
industry is moving toward securitization of assets, according to numerous
published reports.
Status of Discussions
Currently we have an opportunity to purchase Joint Venture or service
several different sub-prime auto charge off portfolios with a book value of
$200+million. We are in the primary negotiation phase to acquire the servicing
rights on approximately $25 million of a performing sub-prime auto portfolio.
Timing and Diligence of Bids URGENT!
Time is of the essence. The faster we can complete our due diligence
and negotiate an offer, the better chance we have at purchasing the portfolio at
a very attractive price. AFSI will enhance its opportunity to acquire portfolios
in a timely and efficient manner. Most portfolios today are placed under a
bidding constraint and due diligence is limited until an intermediate price can
be established. Upon due diligence it may be determined that a portfolio pricing
needs to be renegotiated or restructured to limit or share in the liability.
Approach to Diligence and Valuation
AFSI requests an electronic file that includes loan level detail for
all accounts in the portfolio. There are about 30 fields of information with
totals and averages available. AFSI has a detailed bulk purchase manual to guide
us in the step-by-step approach in purchasing the portfolio.
Based on account file information, AFSI can agree on a preliminary
price and risk limiting structure subject to an onsite due diligence review. We
intend to price the accounts to yield a minimum of 5% after taxes, losses and
all expenses for interest and operations. AFSI believes that funding on a
portfolio of this quality can be obtained with a debt to equity ratio of at
least 4:1. At this ratio a minimum return on equity would be 25%.
Following acceptance of the preliminary price, key individuals of AFSI
would spread the accounts on site and finalize negotiations with the client.
This process could be completed in about two weeks.
After all collateral refunds and cancellations are resolved we will
have a deficiency balance portfolio. Not unlike defaulted credit card accounts
these accounts present another opportunity, which is with professional
persistent collection procedures these accounts can be flipped to create credit
card customers enhancing the performance of the portfolio.
Market Place
With our experience and performance on existing portfolios we will have
continuing opportunities for new business. We will remain flexible in our
approach to new business (purchase, joint venture or servicing), allowing our
prospective clients to consider options that our competitors do not offer.
37
<PAGE>
FINANCIAL
STATEMENTS
38
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(Formerly GRUBSTAKE, INC.)
(A Development Stage Company)
FINANCIAL STATEMENTS
July 24, 2000
December 31, 1999
December 31, 1998
39
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE #
INDEPENDENT AUDITORS REPORT 41
----------------------------------------------------------------------
ASSETS 42
----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 43
----------------------------------------------------------------------
STATEMENT OF OPERATIONS 44
----------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY 45
----------------------------------------------------------------------
STATEMENT OF CASH FLOWS 46
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 47-51
----------------------------------------------------------------------
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors July 27, 2000
AUTOFUND SERVICING, INC.
Las Vegas, Nevada
I have audited the accompanying Balance Sheets of AUTOFUND SERVICING,
INC., (Formerly Sphinx Industries, Inc.), (a Development Stage Company) as of
July 24, 2000, December 31, 1999, and December 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the period
January 1, 2000 to July 24, 2000, and the two years ended December 31, 1999, and
December 31, 1998. 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 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.
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 AUTOFUND SERVICING,
INC., (Formerly Sphinx Industries, Inc.), (Formerly GRUBSTAKE, INC.), (a
Development Stage Company), as of July 24, 2000, December 31, 1999, and December
31, 1998, and the related statements of operations, stockholders' equity and
cash flows for the period January 1, 2000 to July 24, 2000, and the two years
ended December 31, 1999, and December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note #5 to the
Financial Statements, the Company has had no operations and has no established
source of revenue. This raises substantial doubt about its ability to continue
as a going concern. Management's plan in regard to these matters is described in
Note #5. These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Barry L. Friedman
---------------------------
Barry L. Friedman
Certified Public Accountant
1582 Tulita Drive
Las Vegas, NV 89123
(702) 361-8414
41
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
BALANCE SHEET
ASSETS
July December December
24, 2000 31, 1999 31, 1998
-------------- -------------- ----------------
CURRENT ASSETS $ 0 $ 0 $ 0
--------------- --------------- ----------------
TOTAL CURRENT ASSETS $ 0 $ 0 $ 0
--------------- --------------- ----------------
OTHER ASSETS $ 0 $ 0 $ 0
--------------- --------------- ----------------
TOTAL OTHER ASSETS $ 0 $ 0 $ 0
--------------- --------------- ----------------
TOTAL ASSETS $ 0 $ 0 $ 0
--------------- --------------- ----------------
The accompanying notes are an integral part of these financial statements
42
<PAGE>
<TABLE>
<CAPTION>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
July December December
24, 2000 31, 1999 31, 1998
--------------- -------------- ---------------
<S> <C> <C> <C> <
CURRENT LIABILITIES
Officers' Advances (Note #8) $ 450 $ 0 $ 0
---------------- --------------- ----------------
TOTAL CURRENT LIABILITIES $ 450 $ 0 $ 0
---------------- --------------- ----------------
STOCKHOLDERS' EQUITY (Note #4)
Common stock
No par value
Authorized 25,000 shares
Issued and outstanding at
December 31, 1998 -
1,365 shares $ 4,000
December 31, 1999 -
1,365 shares $ 4,000
Common stock
Par value $0.0001
Authorized 50,000,000 shares
Issued and outstanding at
July 24, 2000 -
2,000,000 shares $ 2,000
Additional Paid-In Capital 2,000 0 0
Deficit accumulated during
the development stage -4,450 -4,000 -4,000
---------------- --------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ -450 $ 0 $ 0
---------------- --------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 0 $ 0 $ 0
---------------- --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
43
<PAGE>
<TABLE>
<CAPTION>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
STATEMENT OF OPERATIONS
Jan. 1, Year Year Mar. 7, 1997
2000 to, Ended Ended (Inception)
Jul. 24, Dec. 31, Dec. 31, to Jul. 24,
2000 1999 1998 2000
--------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
INCOME
Revenue $ 0 $ 0 $ 0 $ 0
--------------- --------------- --------------- ------------------
EXPENSES
General, Selling and
Administrative $ 450 $ 0 $ 0 $ 4,450
--------------- --------------- --------------- ------------------
TOTAL EXPENSES $ 450 $ 0 $ 0 $ 4,450
--------------- --------------- --------------- ------------------
NET PROFIT/LOSS (-) $ -450 $ 0 $ 0 $ -4,450
--------------- --------------- --------------- ------------------
Net Loss per share -
Basic and diluted
(Note #2) $ -.0002 $ NIL $ NIL $ -.0022
--------------- --------------- --------------- ------------------
Weighted average
Number of common
shares outstanding 2,000,000 2,000,000 2,000,000 2,000,000
--------------- --------------- --------------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
44
<PAGE>
<TABLE>
<CAPTION>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Accumu-
Common Stock paid-in lated
Shares Amount Capital Deficit
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1997 1,365 $ 4,000 0 $ -4,000
Net loss year ended
December 31, 1998 $ 0
-------------- --------------- ---------------- ----------------
Balance,
December 31, 1998 1,365 $ 4,000 $ 0 $ -4,000
Net loss year ended
December 31, 1999 0
-------------- --------------- ---------------- ----------------
Balance,
December 31, 1999 1,365 $ 4,000 $ 0 $ -4,000
July 11, 2000
Changed par value
From no par value
to $0.001 -3,999 +3,999
July 11, 2000
Forward Stock Split
1,465.2 for 1 1,998,635 +1,999 -1,999
Net Loss
January 1, 2000 to
July 24, 2000 -450
-------------- --------------- ---------------- ----------------
Balance,
July 24, 2000 2,000,000 $ 2,000 $ 2,000 $ -4,450
-------------- --------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
45
<PAGE>
<TABLE>
<CAPTION>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
STATEMENT OF CASH FLOWS
Jan. 1, Year Year Mar. 7, 1997
2000 to, Ended Ended (Inception)
Jul. 24, Dec. 31, Dec. 31, to Jul. 24,
2000 1999 1998 2000
--------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities
Net Loss $ -450 $ 0 $ 0 $ -4,450
Adjustment to
Reconcile net loss
to net cash provided
by operating activities
Issue common stock
for services 0 0 0 +4,000
Changes in assets
And liabilities
Officers' Advances +450 0 0 +450
-------------- --------------- ---------------- ----------------
Net cash used in
Operating activities $ 0 $ 0 $ 0 $ 0
Cash Flows from
Investing Activities 0 0 0 0
Cash Flows from
Financing Activities
Issuance of Common
Stock for Cash 0 0 0 0
-------------- --------------- ---------------- ----------------
Net Increase (decrease) $ 0 $ 0 $ 0 $ 0
Cash,
Beginning of period 0 0 0 0
-------------- --------------- ---------------- ----------------
Cash, End of Period $ 0 $ 0 $ 0 $ 0
-------------- --------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
46
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
July 24, 2000, December 31, 1999, and December 31, 1998
NOTE 1 - HISTORY AND ORGANIZATION OF THE COMPANY
The Company was organized March 7, 1997, under the laws of the State of
Nevada as SPHINX INDUSTRIES, INC. The Company currently has no
operations and, in accordance with SFAS #7, is considered a development
stage company. On July 11, 2000, the Company changed its name to
AUTOFUND SERVICING, INC.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
-----------------
The Company records income and expenses on the accrual method.
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 and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and equivalents
--------------------
The Company maintains a cash balance in a non-interest-bearing
bank that currently does not exceed federally insured limits.
For the purpose of the statements of cash flows, all highly
liquid investments with the maturity of three months or less
are considered to be cash equivalents. There are no cash
equivalents as of July 24, 2000.
Income Taxes
------------
Income taxes are provided for using the liability method of
accounting in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS #109) "Accounting for
Income Taxes". A deferred tax asset or liability is recorded
for all temporary difference between financial and tax
reporting. Deferred tax expense (benefit) results from the net
change during the year of deferred tax assets and liabilities.
47
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
July 24, 2000, December 31, 1999, and December 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reporting on Costs of Start-Up Activities
-----------------------------------------
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities" which provides guidance on the
financial reporting of start-up costs and organization costs.
It requires most costs of start-up activities and organization
costs to be expensed as incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. With the
adoption of SOP 98-5, there has been little or no effect on
the company's financial statements.
Loss Per Share
--------------
Net loss per share is provided in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS #128) "Earnings
Per Share". Basic loss per share is computed by dividing
losses available to common stockholders by the weighted
average number of common shares outstanding during the period.
Diluted loss per share reflects per share amounts that would
have resulted if dilative common stock equivalents had been
converted to common stock. As of July 24, 2000, the Company
had no dilutive common stock equivalents such as stock
options.
Year End
--------
The Company has selected December 31st as its fiscal year-end.
Year 2000 Disclosure
--------------------
The Y2K issue had no effect on this Company.
Policy in Regards to Issuance of Common Stock in a Non-Cash Transaction
-----------------------------------------------------------------------
The Company's accounting policy for issuing shares in a
non-cash transaction is to issue the equivalent amount of
stock equal to the fair market value of the assets or services
received.
48
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
July 24, 2000, December 31, 1999, and December 31, 1998
NOTE #3 - INCOME TAXES
There is no provision for income taxes for the period ended July 24,
2000, due to the net loss and no state income tax in Nevada, the state
of the Company's domicile and operations. The Company's total deferred
tax asset as of December 31, 1999 is as follows:
Net operation loss carry forward $ 4,000
Valuation allowance $ 4,000
Net deferred tax asset $ 0
The federal net operating loss carry forward will expire between 2018
and 2019.
This carry forward may be limited upon the consummation of a business
combination under IRC Section 381.
NOTE #4 - STOCKHOLDERS' EQUITY
Common Stock
------------
The authorized common stock of the corporation consists of 50,000,000
shares with a par value $0.001 per share.
Preferred Stock
---------------
AutoFund Servicing, Inc. has no preferred stock.
On March 20, 1997, the Company issued 1,365 shares of its no par value
common stock for services valued at $4,000.00.
On July 11, 2000, the State of Nevada approved the Company's restated
Articles of Incorporation, which increased its capitalization from
25,000 common shares to 50,000,000 common shares, and changed the par
value from no par value to $0.001.
On July 11, 2000, the Company approved a forward stock split on the
basis of 1465.20 for 1, thus increasing the common stock from 1,365
shares 2,000,000 shares.
49
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
July 24, 2000, December 31, 1999, and December 31, 1998
NOTE #5 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. However, the Company does not have
significant cash or other material assets, nor does it have an
established source of revenues sufficient to cover its operating costs
and to allow it to continue as a going concern.
NOTE #6 - WARRANTS AND OPTIONS
There are no warrants or options outstanding to acquire any additional
shares of common stock.
NOTE #7 - RELATED PARTY TRANSACTIONS
The Company neither owns nor leases any real or personal property. An
officer of the corporation provides office services without charge.
Such costs are immaterial to the financial statements and accordingly,
have not been reflected therein. The officers and directors of the
Company are involved in other business activities and may in the
future, become involved in other business opportunities. If a specific
business opportunity becomes available, such persons may face a
conflict in selecting between the Company and their other business
interests. The Company has not formulated a policy for the resolution
of such conflicts.
NOTE #8 - OFFICERS ADVANCES
While the Company is seeking additional capital through a merger with
an existing company, an officer of the Company has advanced funds on
behalf of the Company to pay for any costs incurred by it. These funds
are interest free.
50
<PAGE>
AutoFund Servicing, Inc.
(Formerly Sphinx Industries, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------
July 24, 2000, December 31, 1999, and December 31, 1998
NOTE #9 - SUBSEQUENT EVENTS (UNAUDITED)
On July 25, 2000, the Company bought 100% of the issued and outstanding
shares of AutoFund Servicing, Inc., a Texas corporation, such that
AutoFund Servicing, Inc., a Texas corporation shall become a
wholly-owned subsidiary of AutoFund Servicing, Inc., a Nevada
corporation, for 18,000,000 common shares of AutoFund Servicing, Inc.,
a Nevada corporation. AutoFund Servicing, Inc., a Texas corporation, is
a contract-servicing business which acquires, services, and collects
sub-prime and prime automobile paper with deficiency balances,
charged-off balances, non-performing and performing contracts. This
transaction is valued at $559,058.92, which represents the total assets
of AutoFund Servicing, Inc., the Texas corporation, as of May 31, 2000,
and does not take into consideration the total liabilities of
$203,401.28.
At a Board of Directors' meeting on July 7, 2000, the Company's
intention was to amend the Company's Articles of Incorporation. Among
the things the Company wanted to do was to add 1,000,000 preferred
stock with a par value of $0.001. In the Certificate of Amendment
submitted to the State of Nevada, the provision for the preferred
shares was unintentionally omitted. It is the Company's intention to
resubmit an additional amendment to its Articles of Incorporation
creating the above-referenced preferred stock.
51
<PAGE>
To Whom It May Concern: July 27, 2000
The firm of Barry L. Friedman, P.C., Certified Public Accountant consents to the
inclusion of their report of July 27, 2000, on the Financial Statements of
AutoFund Servicing, Inc., (Formerly Sphinx Industries, Inc.), (a Development
Stage Company), as of July 24, 2000, in any filings that are necessary now or in
the near future with the U.S. Securities and Exchange Commission.
Very truly yours,
/s/ Barry L. Friedman
---------------------------
Barry L. Friedman
Certified Public Accountant
52
<PAGE>
AUTOFUND SERVICING, INC.
Financial Statements
July 31, 2000
Table of Contents
Financial Statements Page
-----
Independent Auditor's Report .......................................... 54
Balance Sheet ......................................................... 55
Statement of Income and Retained Earnings ............................. 56
Statement of Cash Flows ............................................... 57
Notes to Financial Statements ......................................... 58-60
53
<PAGE>
WESLEY F. CROWLEY
CERTIFIED PUBLIC ACCOUNTANT
11202 DISCO DRIVE, SUITE 118*SAM AMTPMOP. TEXAS 78216
(210) 495-9777 FAX (210) 499-4217
Independent Auditor's Report
----------------------------
To the Board of Directors
Autofund Servicing, Inc.
3201 Cherry Ridge, Suite 314
San Antonio, Texas 78230
I have audited the accompanying balance sheet of Autofund Servicing, Inc. (a
Texas Corporation) as of July 31, 2000 and the related statement of income and
retained earnings and statement of cash flows for the seven month period 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 Autofund Servicing, Inc. as of July
31, 2000, and the results of its operations and its cash flows for the seven
month period then ended, in conformity with generally accepted accounting
principles.
/s/ Wesley F. Crowley
--------------------------
Wesley F. Crowley, CPA
September 16, 2000
54
<PAGE>
<TABLE>
<CAPTION>
AUTOFUND SERVICING, INC.
Balance Sheet
July 31, 2000
Assets
<S> <C> <C>
Current Assets
Cash $ 37,057
Accounts receivable 250,554
----------
Total Current Assets $ 287,611
Property and Equipment
Building Improvements 23,897
Furniture & fixtures 171,902
Equipment 49,618
Software 23,404
Less: Accumulated Depreciation (46,250)
-----------
Net Property and Equipment 222,571
-----------
Total Assets $ 510,182
-----------
Liabilities and Stockholder's Equity
Current Liabilities
Accounts payable $ 115,458
Accrued liabilities 73,798
Income taxes payable 33,250
----------
Total Current Liabilities $ 222,506
Long Term Liabilities
Accounts payable-shareholder 24,832
----------
Total Long Term Liabilities 24,832
Deferred Credit
Deferred Federal income taxes 38,001
----------
Total Deferred Credit 38,001
Stockholder's Equity
Common stock-1, 000,000 authorized,
750,000 shares issued and
outstanding; on par value 10,000
Retained earnings 214,843
----------
Total Stockholder's Equity 224,843
-----------
Total Liabilities and
Stockholder's Equity $ 510,182
-----------
55
<PAGE>
AUTOFUND SERVICING, INC.
Statement of Income and Retained Earnings
Seven Month Period Ended July 31, 2000
Income
<
Servicing income $ 1,405,800
Direct Costs
Salaries & wages $ 567,369
Temporary staff 114,428
Payroll taxes 31,116
Telephone 55,231 768,144
----------- -----------
Gross Profit 637,656
Operating Expenses
Officer & office salaries 119,458
Rent 57,166
Insurance 34,504
Professional fees 78,170
Depreciation 20,413
Computer expenses 13,976
Office 12,081
Repairs 3,471
Travel 13,163
State franchise taxes 3,471
Payroll taxes 8,225
Equipment lease 3,234
Dues & subscriptions 2,728
Contract labor 7,106
Fees & permits 8,389
Employee training 744
Conferences 2,329
Advertising 2,483
Auto expense 2,096
Licenses and taxes 14,983
Entertainment 3,636 412,013
----------- -----------
Operating Income 225,643
Income Tax Expense
Current 33,250
Deferred 38,001 71,251
----------- -----------
Net Income 154,392
Retained Earnings - December 31, 1999 60,451
-----------
Retained Earnings - July 31, 2000 $ 214,843
-----------
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
AUTOFUND SERVICING, INC.
Statement of Cash Flows
For the Seven Month Period Ended July 31, 2000
<S> <C>
Cash Flows from operating Activities:
Net Income $ 154,392
Adjustments to reconcile net income to net
Cash provided (used) by operating activities
Deferred income taxes 38,001
Depreciation 20,413
Change in operating assets and liabilities:
Accounts receivable (249,308)
Accounts payable 74,052
Federal income taxes payable 33,250
Accrued liabilities 42,912
----------------
Net Cash Provided (Used) by
Operating Activities 113,712
Cash Flows from Financing Activities:
Equipment purchases (63,197)
----------------
Net Cash Provided (Used) by
Investing Activities (63,197)
Cash Flows from Financing Activities:
Payment on long term payable (34,000)
----------------
Net Cash Provide (Used) for
Financing Activities (34,000)
----------------
Net Increase in Cash 16,515
Cash - December 31, 1999 20,542
----------------
Cash - July 31, 2000 $ 37,057
----------------
Supplemental Disclosures of Cash Flow Information:
Interest paid $ -0-
----------------
Federal income taxes paid $ 15,000
----------------
</TABLE>
57
<PAGE>
AUTOFUND SERVICING, INC.
Notes to Financial Statements
July 31, 2000
NOTE A- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------
Nature of Business: The company services deficient portfolios for leaders
nationwide. These portfolios are a combination of written off accounts,
bankruptcy accounts and other accounts placed for collection. The company
currently provides these services on a fee basis. Future plans include a direct
acquisition of these portfolios purchased at a discount.
Management Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounts Receivable: The balance in accounts receivable is considered by
management to be collectible in full. Uncollectible accounts are charged to
operations when management deems them to be bad debts.
Property and Equipment: Property and equipment is started at cost. Depreciation
is expensed using straight-line and accelerated methods over the estimated
useful lives of the assets. The estimated useful lives are building-30 to 40
years; equipment and tools-5 to 7 years; software-5 years; furniture and
fixtures-5 to 7 years.
Federal Income Taxes: These statements have been prepared on the accrual, basis.
For Federal income tax purposes, the Company reports income on the cash method.
Deferred income taxes are provided for differences in timing in reporting
certain income and expenses for financial statement and tax purposes.
NOTE B - FEDERAL INCOME TAX
The company complies with Statement of Financial Accounting Standards No. 109
(FAS 109) Accounting for Income Taxes. A FA 109 recognizes deferred taxes on the
liability method using currently enacted tax rates scheduled to be in effect
when the temporary differences reverse. No charge or credit to income was
recognized by the Company as a result of its compliance with FAS 109.
Depreciation expense for financial statements is $20,413. For Federal income tax
purposes depreciation expense is $32,998.
58
<PAGE>
AUTOFUND SERVICING, INC.
Notes to Financial Statements
July 31, 2000
For the period ended July 31, 2000, entertainment expenses in the amount of
$3,363 was not deductible for Federal tax purposes. This is a permanent timing
difference and does not require an adjustment for deferred income tax.
NOTE C - CONCENTRATION OF CREDIT RISK
The company complies with statement of Financial Accounting Standards #105. This
statement requires disclosure of information regarding financial instruments
with off balance sheet risk and financial statements with concentration of
credit risk. Autofund Servicing, Inc. trade territory covers substantially the
entire Untied States. The corporation grants credit to customers whose
businesses are located in that area.
NOTE D - FAIR VALUE OF FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash - The carrying account reported in the balance sheet approximates
its fair value.
Accounts Receivable and Accounts Payable - The carrying account
reported in the balance sheet approximates its fair value.
NOTE E - COMMITMENTS
The Company has a lease agreement in place covering office facilities. This
agreement expires September 30, 2005. However, the agreement contains two
renewal options every three years, each with a term of three years. The
following is a schedule of future rent commitments for the next five years:
Year Ended July 31,
2001 $ 226,376
2002 240,597
2003 240,597
2004 240,597
2005 240,597
-----------
$ 1,188,764
59
<PAGE>
AUTOFUND SERVICING, INC.
Notes to Financial Statements
July 31, 2000
NOTE F - RISKS AND UNCERTAINTIES
The company's future operating results may be affected by a number of factors.
Currently, the company is servicing a portfolio for a major banking customer
under an agreement, which is modified from time to time. The most recent
amendment increased the company's fee structure from 29% f collections to 45% of
collections. The customer also reimburses the company for out of pocket
expenses. Company management is continually seeking additional business either
in the form of a fee based collection service or in a circumstance whereby the
company will purchase a portfolio at a substantially discount and will then own
any proceeds collected on those accounts. At the balance sheet date, management
was in negotiation with several potential customers to provide service or
structure a direct purchase of accounts.
NOTE G - RLATED PARTY TRANSACTIONS
The sole shareholder has advanced funds to the company. Payments are made
periodically when cash flow allows. Because actual repayments are uncertain,
management has categorized this balance as a long-term liability.
On July 25, 2000 the sole shareholder of the company entered into an agreement
with Autofund Servicing, Inc., a Nevada Corporation, to exchange 100% of the
issued and outstanding shares of Autofund Servicing, Inc., a Texas Corporation,
for 18 million shares (90% of the outstanding shares) of the Nevada Corporation.
Accordingly, Autofund Servicing, Inc., a Texas Corporation, will become a wholly
owned subsidiary of Autofund Servicing, Inc., a Nevada Corporation.
NOTE H - SUBSEQUENT EVENTS
As part of the company's continuing efforts to expand business operations,
management has entered into discussions with several investors and lending
institutions to provide capital or lines of credit to purchase portfolios and
cover operating expenses during the transition period from the time portfolios
are acquired for servicing until such time as operations have sufficient cash
flow. This cycle normally requires approximately 90 days to mature.
As of the date of this report, management has signed a servicing agreement with
a new lender. The new portfolio has 15,500 customers with a total value of
$86,000,000. The service rate if 50% of collections. According to the terms of
the contract the company will absorb all collection expenses. The company will
have the option to purchase this portfolio in 90 days for $1,395,000 or $.016 on
the dollar, which ever is less.
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Legal Matters
The validity of the securities will be passed upon for the Corporation by this
Orsini & Rose Law Firm, P.A. St. Petersburg, Florida. The Orsini & Rose Law Firm
will rely upon other counsel in all matters involving Texas law.
Experts
All financial statements included in this prospectus have been audited by Barry
L. Friedman, CPA and Wesley F. Crowley, CPA. The Corporation has relied on the
reports and audits of both of these independent accountants, given on their
authority as experts in accounting and auditing, and being in accordance with
generally accepted accounting principles.
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