<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER: 33-93492
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TRANSITION AUTO FINANCE, INC.
(Exact name of registrant as specified in charter)
TEXAS 75-257965
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5422 ALPHA ROAD, SUITE 100, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 404-0042
Securities registered pursuant to section 12(b) of the Act:
Title of Class Name of each exchange on which registered
None None
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $16,072
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: None of the issuer's securities are, or have been, publicly traded.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 1, 1998, the issuer had
1,000 shares of common stock outstanding.
Transitional Small Business Disclosure
Format (Check one): Yes No X
Exhibit index appears on page
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TABLE OF CONTENTS
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ITEM NUMBER AND CAPTION PAGE
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PART I 3
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 3
ITEM 3. LEGAL PROCEEDINGS 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 4
PART II 4
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION 4
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 5
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 5
PART III 6
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 6
ITEM 10. EXECUTIVE COMPENSATION 7
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 7
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 8
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 9
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
As of December 17, 1996, fourteen days before the end of the period covered
by this Report, the Company's offering (the "Offering") of Floating Rate
Redeemable Asset-Backed Notes (the "Notes") was declared effective by the United
States Securities & Exchange Commission (the "Commission"). As of December 31,
1996, the end of the period covered by this Report, (i) the Company had sold no
Notes and (ii) the Company's operating assets consisted of ten leased vehicles
and the lease contracts related thereto (the "Contributed Contracts"), which
vehicles and lease contracts had been contributed to the Company by Transition
Leasing Management, Inc. ("Transition Leasing"). The Company is a wholly-owned
single purpose subsidiary of Transition Leasing and, with the proceeds of the
Offering, will be engaged in the business of purchasing new or late model
vehicles (the "Leased Vehicles") and concurrently therewith entering into leases
(the "Contracts") of such vehicles to customers. Transition Leasing, the parent
of the Company, contributed (i) three (3) of the Contributed Contracts and the
related Leased Vehicles to the Company as of August 19, 1996 and (ii) the
remaining seven (7) of the Contributed Contracts and related Leased Vehicles to
the Company as of December 17, 1996, plus cash in the amount of the cash
proceeds of each Contributed Contract subsequent to October 31, 1996. See,
"Certain Relationships and Related Transactions." One Contributed Contract went
in default, and the vehicle leased thereunder was wholesaled with the proceeds
thereof paid to the Company.
The Company was incorporated under the laws of the State of Texas on
December 8, 1994. The Company is a subsidiary of Transition Leasing. As of the
end of the period covered by this Report, the Company had no other subsidiaries.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1996, the Company's principal executive offices were
located within the offices of Transition Leasing at 5520 LBJ Freeway, Dallas,
Texas 75240 and its telephone number was (214) 490-4788. In 1998, the Company
moved its executive offices, together with Transition Leasing, to 5422 Alpha
Rd., Suite 100, Dallas, Texas 75240, and its telephone number is (972)
404-0042.
As of the end of the period covered by this Report the Company had, and as
of the date of this Report the Company has, no employees and its operations are
conducted through Transition Leasing, which services the vehicle leases pursuant
to which the Company leases and will lease vehicles.
ITEM 3. LEGAL PROCEEDINGS
On May 17, 1996, Ronald Craig ("Craig"), a 1/3 shareholder and one of the
original officers and directors of Transition Leasing, brought a suit (the
"Craig Litigation")in the 14th District Court of Texas, individually and
derivatively on behalf of Transition Leasing, against Transition Leasing, the
Company and other defendants, challenging, among other things, two transfers to
Prime Choice Incorporated ("Prime Choice"). Prime Choice, an affiliate of the
Company, was engaged in the automobile leasing business and was owned by
Kenneth C. Lowe (one of the defendants, a 1/3 shareholder, director and an
officer of Transition Leasing and a director and officer of the Company), and
another person who was then a 1/3 shareholder, director, and officer of
Transition Leasing. One challenged transfer was of all the stock of the
Company. The other challenged transfer was of automobile leasing contracts,
including the Contributed Contracts, acquired by Transition Leasing with
financing from Gibson Merchandising Group, Inc. ("Gibson Merchandising"), a
company controlled by defendant Richard Gibson ("Gibson"), which were assigned
first to Gibson Merchandising in cancellation of the financing debt and then to
Prime Choice in exchange for stock of Prime Choice. The suit alleged mainly
that the transfers were for inadequate consideration, in breach of fiduciary
duty and without adequate notice to Craig. The suit sought an injunction
against the transfers; a receiver for the Contributed Contracts, the stock of
the Company, and other former assets of Transition Leasing that had been
transferred; damages and other relief. The court appointed a receiver and then
terminated the receiver conditioned on reversal of the challenged transfers and
payment of Craig's attorneys' fees by Transition Leasing. The parties entered
into an agreement, dated as of July 10, 1996 agreeing to these terms and carried
out the reversal. As a result, all of the Company's stock and the Contributed
Contracts have been returned to Transition Leasing and Transition Leasing's debt
to Gibson Merchandising has been acknowledged. See "Certain Relationships and
Related Transactions."
The remainder of the Craig Litigation was settled in 1997. Pursuant to a
Compromise Settlement Agreement and Release (the "Settlement Agreement")
relating to the litigation, Transition Leasing agreed (i) to pay Craig $20,000
by cashier's check promptly after execution of the Settlement Agreement and (ii)
to deliver to Craig a promissory note (the "Craig Note") in the principal amount
of $80,000, payable in monthly installments of $5,000 per month for sixteen (16)
months. Craig agreed to transfer his stock in Transition Leasing to Transition
Leasing. Transition Leasing advised the Company that it entered into the
Settlement Agreement to obtain Craig's stock in Transition Leasing and to avoid
the additional expenses of protracted litigation if the litigation has not been
settled and not because it believed that Craig's claims had merit. The Company
is not required to make any payments pursuant to the Settlement Agreement.
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Except as set forth in the foregoing paragraph, the Company is not a party
to any material legal proceedings, and no material legal proceedings have been
threatened by or, to the best of the Company's knowledge, against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's sole stockholder
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Common Stock
There is no market for the Company's common stock (the "Common Stock").
All shares of the Common Stock are owned by Transition Leasing. No cash
dividends have ever been declared with respect to the Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
General
As of the date of this Report, the Company has had no operating history.
The net proceeds of the Offering (excluding a loan loss reserve of 3% of the
gross offering proceeds (the "Reserve")) will be employed to purchase Leased
Vehicles and Contracts. While the Notes remain outstanding, the Company will be
prohibited from engaging in any business other than the purchase or other
acquisition of leased vehicles and contracts, collection and servicing of the
Contracts (including possession and resale of the leased vehicles) and the
remarketing of the Leased Vehicles upon termination of the Contracts, and from
incurring any additional indebtedness other than expenses allowed under the
terms of the Trust Indenture pursuant to which the Notes are issued (the
"Allowed Expenses") and any other amounts incurred in the ordinary course of its
business.
The Company's use of the net collection proceeds from the contracts will be
restricted to payments on the Notes and, so long as there is no event of
default, to payments of Allowed Expenses and, until the date on which the
Company is obligated, under the terms of the Trust Indenture, to deliver all
proceeds from the contracts to a sinking fund for payment of the Notes (the
"Sinking Fund Trigger Date"), to the purchase or acquisition of additional
eligible Contracts.
Capital Resources and Liquidity
The Company's primary sources of funds for repayment of the Notes will be
proceeds from the contracts, any income on the reinvestment of such proceeds,
any proceeds from sale or refinancing of the remaining contracts at the
maturity of the Notes and the Reserve. The Company does not have, nor is it
expected to have in the future, any significant source of capital for payment of
the Notes and the expenses incurred by it other than such sources. Payment of
the principal or interest on the Notes is not guaranteed by any other person or
entity. Although management of the Company believes that the Company will
realize sufficient proceeds from the foregoing sources to pay all installments
of interest when due on the Notes and to satisfy the principal amount of the
Notes in full prior to or at maturity, there can be no assurance that such
sources will be sufficient to repay the Notes in full.
The foregoing paragraph contains forward-looking information that is based
on a number of assumptions. These assumptions include certain risks and
uncertainties. A principal risk is that the Company has had no operations to
date, and Transition Leasing, the Company's parent, which is responsible for the
acquisition and servicing of the Company's Contracts, has limited operating
history to date upon which to base these assumptions. A variation in any single
assumption could materially alter the ability of the Company to cover the
Allowed Expenses and pay all principal and interest due on the Notes. There is
no assurance that these assumptions, including, without limitation, an expected
implicit interest rate of 18% per annum with respect to the Contracts, will be
achieved. Accordingly, the ability of the Company to cover the Allowed Expenses
and pay all principal and interest on the Notes may differ materially from this
forward-looking information due to such risks and uncertainties.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included beginning immediately
following the index to the consolidated financial statements.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants F-1
Balance Sheets at December 31, 1996 F-2
Statements of Operations for the Four Months
ended December 31, 1996 F-4
Statement of Stockholders' Equity for the Four Months
ended December 31, 1996 F-5
Statements of Cash Flows for the Four Months
ended December 31, 1996 F-6
Notes to Financial Statements F-7
All schedules have been omitted because they are not applicable or not
required, because the information is shown in the consolidated financial
statements or the notes thereto, or because the information is immaterial.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In 1997, the Company dismissed Lane Gorman Trubitt, L.L.P. ("LGT"),
certified public accountants, as the Company's independent auditor and
selected Sprouse & Winn, L.L.P., to audit and report on the Company's
financial statements for the four months ended December 31, 1996, which date
is the end of the Company's fiscal year. See Item 7. "Financial Statements
and Supplementary Data."
The board of directors has approved the change of auditors.
The report of LGT on the Company's financial statements, consisting of
consolidated balance sheets as of December 1995 and 1994, and August 31, 1996
and the related statements of operations, statements of owners' equity, and
cash flows for each of the two years in the period ended December 31, 1995,
and for the eight months ended August 31, 1996, did not contain an adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
There were no disagreements with LGT on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which if not resolved to LGT's satisfaction, would have caused LGT
to make reference to the subject matter of the disagreements in connection
with its report.
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No consultations occurred between the Company and Sprouse & Winn, L.L.P.
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or other information
considered by the Company in reaching a decision as to an accounting,
auditing, or financial reporting issue.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
The following table sets forth information concerning the directors and
executive officers of the Company and their age and position with the Company.
Each director holds office until the next annual stockholders' meeting and
thereafter until the individual's successor is elected and qualified. Officers
serve at the pleasure of the board of directors.
The names, ages, backgrounds and principal occupations of the
directors and executive officers of the Company as of December 31, 1996 are set
forth below:
Gregory R. Grazioli, age 45, has served as Vice President-General
Manager of Prime Choice since October 1995. Mr. Grazioli served as President of
the Company and a director of the Company from October 1995 until July 1996.
Mr. Grazioli has served as Director of Independent Leasing of Transition Leasing
and the Company since July 1996. Mr. Grazioli was Vice President/General Manager
of Superior Leasing, a division of VanTuyl Enterprises, in Richardson, Texas,
from October 1993 to September 1995. Mr. Grazioli also serves on the Board for
the National Vehicle Leasing Association, Texas Chapter, as Treasurer from June
1994 to present. Mr. Grazioli has held various positions in the last 20 years of
his experience in dealerships from General Sales Manager to Used Car Manager.
Mr. Grazioli was credit manager and sales trainer for Autoflex Leasing from June
1992 to October 1993. From August 1991 to June 1992, Mr. Grazioli was lease
manager for Bankston Nissan, Irving, Texas.
Ken Lowe, age 61, has served as President and Secretary and a director
of Prime Choice since April 1995 and as a director and the Chief Financial
Officer and Secretary of the Company since December 1994 and as President of the
Company since August 1996. Mr. Lowe has served as a director, Vice President and
Secretary of Transition Leasing from October 1994 until July 1996 and as a
director, President and Secretary of Transition Leasing since July 1996. Since
1993, Mr. Lowe has been Vice President of Young & Lowe, Inc., a private
investment banking firm. From 1990 to 1992, Mr. Lowe was President of Custom
Data Services, a company that specialized in financial data processing and from
1988 to 1990, Mr. Lowe was President of Westside Communications, which provided
telephone equipment service to commercial customers. Mr. Lowe has a Master's of
Business Administration from Southern Methodist University and over 20 years of
experience in investment banking.
Robert P. Kyker, age 45, has served as Vice President Sales and
Marketing for Transition Leasing and the Company since July 1996. From 1982 Mr.
Kyker has been the owner of R&D Sales & Leasing, which is engaged in the sale
and leasing of automobiles, includes sales and leases to people with non-prime
credit ratings. Mr. Kyker will assist the Company and Transition Leasing in
developing business with independent automobile dealers. Mr. Kyker has a Masters
of Education from Abilene Christian University.
Neither the directors nor the executive officers anticipate receipt of
any compensation to be paid directly by the Company, other than reimbursement of
their reasonable Allowed Expenses incurred on behalf of the Company, prior to
satisfaction in full of the Notes.
There are no family relationships among the directors and any of the
executive officers of the Company. Except as disclosed above, the Company's
directors do not hold any directorship in any Company with a class of securities
registered pursuant to Section 12 of the Exchange Act or subject to the
requirements of Section 15(d) of the Exchange Act or any company registered as
an investment Company under the Investment Company Act of 1940, as amended.
Except for the officers set forth above, there are no employees of the Company.
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ITEM 10. EXECUTIVE COMPENSATION
The executive officers and sole director of the Company receive no
compensation, cash or otherwise, from the Company. The executive officers and
sole director of the Company are employed by Transition Leasing.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of July 31, 1996, relating
to the beneficial ownership of the Company's Common Stock by any person or
"group," as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), known to the Company to own
beneficially 5% or more of the outstanding shares of Common Stock, and known to
the Company to be owned by each director of the Company and by all officers and
directors of the Company as a group. Except AS otherwise indicated, each of the
persons named below is believed by the Company to possess sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by such person.
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Amount and Nature of Beneficial Ownership (1)
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NAME OF DIRECTOR OR EXECUTIVE
OFFICER OR NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF CLASS
BENEFICIAL OWNER OUTSTANDING
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Transition Leasing Management, 1,000 (2) 100%
Inc.
5422 Alpha Road
Suite 100
Dallas, Texas 75240
0
Gregory R. Grazioli 0 (2) (3)
Kenneth C. Lowe 0
Byron Dobbs 0
Robert Kyker 0 (2) (3)
All current executive officers and
directors as a group (4 persons)
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</TABLE>
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of the
Company.
(2) The directors of Transition Leasing could be deemed to share voting and
investment powers over the shares of Common Stock owned of record by
Transition Leasing. The sole director of Transition Leasing is Ken Lowe.
Mr. Lowe owns 33.3% of Transition Leasing's capital stock. Pursuant to an
agreement with Gibson Merchandising Group, Inc. ("Gibson Merchandising")
and Richard Gibson ("Gibson"), the principal shareholder and president of
Gibson Merchandising, Transition Leasing has issued preferred stock to
them such that Gibson Merchandising and Gibson own in the aggregate 50%
of Transition Leasing's capital stock, Ken Lowe owns 16.7% of Transition
Leasing's capital stock, and Richard Gibson has been elected to the Board
of Directors of Transition Leasing. See "Certain Relationships and
Related Transactions." Gibson, age 59, has been the Chairman and Chief
Executive Officer of Gibson Merchandising since 1980. Gibson is also a
member of the Board of Trustees of Harding College located in Search,
Arkansas.
(3) This amount excludes shares of Common Stock owned directly by Transition
Leasing. Mr. Lowe owns 33.3% of the common stock of Transition Leasing
and serves as a director of Transition Leasing.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transition Leasing owns l00% of the Company's Common Stock. The officers
of the Company (except for Mr. Lowe) are also vice presidents of Prime Choice
and Transition Leasing. Mr. Lowe is President and Secretary and a director of
Prime Choice and Transition Leasing and a director and the President, Chief
Financial Officer and Secretary of the Company. These officers will devote so
much of their time to the business of the Company as, in their judgment, is
reasonably required. The Company, Prime Choice and Transition Leasing have real
and ongoing conflicts of interest in allocating management time, services,
overhead and functions among the Company, Prime Choice and Transition Leasing.
Management of Prime Choice and Transition Leasing intends to resolve any such
conflicts in a manner that is fair and equitable to the Company, particularly in
light of the fact that the Company is presently the only subsidiary of
Transition Leasing. However, there can be no assurance that Transition Leasing
will not form additional subsidiaries engaged in the same business as the
Company or that any particular conflict may be resolved in a manner that
adversely affects Noteholders. Neither Prime Choice nor Transition Leasing has
guaranteed or is otherwise liable for the debts and liabilities of the Company.
Transition Leasing has agreed to contribute the Contributed Contracts to the
Company. In addition, Transition Leasing has agreed to purchase certain
contracts from the Company, including the contracts which were the Defaulted
contracts.
The terms of the agreement (the "Servicing Agreement") pursuant to which
Transition Leasing provides lease purchasing, administration and collection
services were not negotiated at arm's-length but were determined unilaterally by
the management of Transition Leasing. Thus, there are real and ongoing conflicts
of interest with respect to the Servicing Agreement The Company did not and does
not intend to seek competitive bids from other providers of lease purchasing,
administration and collection services. There has been no independent
determination of the fairness and reasonableness of the terms of these
transactions and relationships. Thus, there is no assurance that such services
could not have been obtained from an unaffiliated third party in arm's-length
negotiations on terms more favorable to the Company. Under the terms of the
Servicing Agreement, Transition Leasing will be paid a servicing fees and a
releasing fee and be entitled to reimbursement for its expenses incurred in
connection with the repossession, remarketing, repair and resale of leased
vehicles out of the proceeds from such resales. Transition Leasing will retain
the fees as compensation and reimbursement for its services in administering the
purchase of contracts and Noteholder relations. The Company may terminate the
Servicing Agreement, but it is unlikely that the Company will do so in light of
the control of the Company by Leasing.
The terms of the existing Prime Choice contracts that may be purchased
by the Company from Prime Choice have not been negotiated at arm's length but
have been determined unilaterally by the management of Prime Choice. Prime
Choice may use certain funds received from the Company to purchase the Prime
Choice contracts, which will use such funds to make payments with respect to
the principal of and interest on a line of credit facility provided by a
financial institution.
In addition, the terms of the new contracts to be purchased or acquired
by the Company that are originated by Transition Leasing will not be negotiated
at arm's-length but will be determined unilaterally by Transition Leasing. With
respect to such new contracts originated by Transition Leasing, Transition
Leasing will receive 57.5% of each customer's down payment with respect to the
Contract as a Marketing Fee.
In May 1995, Prime Choice acquired all of the issued and outstanding
common stock of the Company from Transition Leasing for $1,000. Mr. Lowe, a
shareholder, director and officer of Prime Choice, is a shareholder and officer
of Transition Leasing. Initially, the Contributed Contracts were owned by
Transition Leasing. In March 1996, Transition Leasing agreed to transfer the
Contributed Contracts to Gibson Merchandising in exchange for the cancellation
of a loan in the principal amount of $350,000 by Gibson Merchandising to
Transition Leasing in connection with the acquisition of such Contributed
Contracts. In March 1996, Gibson Merchandising agreed to transfer the
Contributed Contracts to Prime Choice in exchange for certain shares of capital
stock of Prime Choice. As a result of certain litigation, Prime Choice has
transferred all of the issued and outstanding common stock of the Company to
Transition Leasing and the agreement by Transition Leasing to transfer the
Contributed Contracts to Gibson was rescinded. See "Litigation."
In August 1996, Gibson made an unsecured loan in the principal amount of
$50,000 to Transition Leasing pursuant to a convertible note. In August 1996,
Transition Leasing executed a new convertible note to Gibson Merchandising in
the principal amount of $350,000 in consideration for Gibson Merchandising
waiving certain defaults by Transition Leasing with respect to its previous loan
to Transition Leasing and forgiving past due interest with respect thereto. The
new note to Gibson Merchandising was collateralized by
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all of the assets of Transition Leasing, including the Contributed Contracts.
The notes (collectively, the "Gibson Notes") issued to Gibson Merchandising and
to Gibson bear interest at the annual rate of 10% and are due on August 1, 1997.
The Gibson Notes automatically converted into 666 shares and 333 shares
respectively, of Transition Leasing's Series A Redeemable Convertible Preferred
Stock (the "Preferred Stock") upon the filing with the Commission of Amendment
No.2 to the Registration Statement relating to the Offering. Transition
Leasing, which has 999 shares of common stock, par value $.0 1 per share,
outstanding, has the right to redeem from funds legally available for such
purpose, up to 666 shares of the Preferred Stock at a per share price of
$1,126.13. Transition Leasing has agreed with Gibson not to redeem his shares of
Preferred Stock without his consent. At the time when Transition Leasing has
redeemed 666 shares of Preferred Stock, each remaining share of Preferred Stock
shall automatically convert to one share of Transition Leasing common stock. The
holders of the Preferred Stock have the right to nominate and elect one director
to the Transition Leasing Board of Directors. As of August 19, 1996, pursuant to
the terms of the Notes, the Notes automatically converted into 999 shares of
Preferred Stock, which represented 50% of the capital stock of Transition
Leasing upon the filing of Amendment No.2 to the Registration Statement with the
Commission, and Gibson, the President and principal shareholder of Gibson
Merchandising, was elected as a director of Transition Leasing. See "Security
Ownership of Certain Beneficial Owners and Management."
Upon the automatic conversion of the Gibson Note held by Gibson
Merchandising to Preferred Stock as described above, the security interest of
Gibson Merchandising in the assets of Transition Leasing, including the
Contributed Contracts, terminated. Simultaneously with such conversion and
termination of the security interest in the Contributed Contracts, Transition
Leasing transferred the three (3) initial Contributed Contracts to the Company
pursuant to the Contribution Agreement.
Transition Leasing does not currently provide purchase and collection
services for any other party, including affiliates. Transition Leasing, however,
may agree in the future, to purchase and service contracts for itself, its
affiliates and other unrelated parties. The Company has the right to purchase
additional contracts originated by Transition Leasing from the net collection
proceeds on its existing contracts until an Event of Default or the Sinking
Fund Trigger Date. Management of Transition Leasing will have real and ongoing
conflicts of interest in determining whether to make available to the Company
any automobile lease contracts that it originates or to retain or acquire the
contracts for its own benefit or for the benefit of affiliated parties,
including future subsidiaries to be engaged in the same business as the Company.
Transition Leasing has determined that all automobile lease contracts purchased
or originated by it that satisfy the Company's contract criteria will be made
available to the Company, to the extent that the Company has funds available for
such purchases.
The Company will use up to 1.5% of the gross proceeds from the sale of
the Notes to reimburse Transition Leasing, the Company's parent, for offering
and organizational expenses paid by it. The maximum reimbursement will range
from $11,250 for the minimum offering of $750,000 to $150,000 for the maximum
offering of $10,000,000. Transition Leasing has agreed to pay any such expenses
to the extent they exceed 1.5% of the gross proceeds from the sale of the Notes.
It is expected that such expenses will exceed 1.5% of the gross proceeds from
the sale of the Notes, even if the maximum offering is achieved.
The Company has joined in a Tax Sharing Agreement with Transition
Leasing. In general, under the terms of this agreement, Transition Leasing is
responsible for making all payments of federal income taxes due with respect to
the Affiliated Group to the Internal Revenue Service and all payments of state
and local consolidated, combined and unitary income taxes due with respect to
the Affiliated Group to the applicable state and local authorities. Under
applicable federal tax laws; however, if Transition Leasing fails to make such
payments of tax, the other members of the Affiliated Group, including the
Company, would be responsible for making such payments.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this
Form 10-KSB:
The Index to Consolidated Financial Statements is set out in Item 7 herein.
The following exhibits are filed as exhibits to this report on
Form 10-KSB:
<TABLE>
<C> <S>
3.1* - Articles of Incorporation of Transition Auto Finance Inc.
3.2* - Bylaws of Transition Auto Finance Inc.
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<CAPTION>
<C> <S>
4.1** - Form of Indenture between Transition Auto Finance Inc. and
Texas Commerce Bank National Association, as Trustee
4.2** - Form of Floating Rate Secured Note Due __________,1999
(included in Article Two of Indenture filed as Exhibit 4.1)
10.1** - Form of Master Contract Purchase Agreement between Y&L Auto
Leasing, Inc. and Transition Auto Finance Inc.
10.2** - Form of Servicing Agreement between Y&L Auto Leasing, Inc.
and Transition Auto Finance Inc.
10.3** - Form of Tax Sharing Agreement by and between Y&L Auto
Leasing and Transition Auto Finance Inc.
10.4** - Form of Custodial Agreement between Transition Auto
Finance, Inc. and Texas Commerce Bank National Association
10.5** - Contribution Agreement between Transition Leasing
Management, Inc. and Transition Auto Finance, Inc.
27.1 ***- Financial Data Schedules
</TABLE>
- -----------------------------------------
* Incorporated by reference from Registration Statement on Form SB-2 of
Transition Auto Finance, Inc., Registration No. 33-93492-D filed June
15, 1995.
** Incorporated by reference from Amendment No. 4 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-93492-D filed December 16, 1996.
*** Filed electronically herewith.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) TRANSITION LEASING MANAGEMENT, INC.
------------------------------------------
By /s/ Kenneth C. Lowe
-------------------
Kenneth C. Lowe, President/ Chief Operating Officer
Date September 3, 1998
------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
-10-
<PAGE>
By /s/ Kenneth C. Lowe
-------------------
Kenneth C. Lowe, Chief Financial Officer
Date September 3, 1998
------------------------------------------
By /s/ Kenneth C. Lowe
-------------------
Kenneth C. Lowe, Director
Date September 3, 1998
------------------------------------------
-11-
<PAGE>
Board of Directors
Transition Auto Finance, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Transition Auto Finance,
Inc. (the Company) as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the period September 1,
1996 through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996, and the results of their operations and their cash flows for the four
months then ended in conformity with generally accepted accounting principles.
SPROUSE & WINN, L.L.P.
August 31, 1998
F-1
<PAGE>
TRANSITION AUTO FINANCE, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS $ 110
--------
Cash
PROPERTY COST
Vehicles leased 199,304
Less accumulated depreciation (60,418)
--------
Net Property 138,886
--------
OTHER ASSETS
Debt pre-issuance costs 151,105
--------
TOTAL ASSETS $290,101
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
OTHER LIABILITIES
Due to parent $135,866
Deferred revenue 11,098
--------
Total Other Liabilities 146,964
--------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000,000 shares authorized;
10
999 shares issued and outstanding
Additional paid-in capital 143,596
Retained earnings (deficit) (469)
--------
Total Stockholders' Equity 143,137
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,101
--------
--------
</TABLE>
F-2
<PAGE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
F-3
<PAGE>
TRANSITION AUTO FINANCE, INC.
STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES
Vehicle monthly lease payments $ 13,334
Amortization of down payments 2,738
--------
Total Revenues 16,072
OPERATING EXPENSES
Operating costs 32,588
Depreciation and amortization 6,512
--------
Total Expenses 39,100
Operating Loss (23,028)
Provision for Federal Income Taxes -0-
Net Loss $(23,028)
--------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
F-4
<PAGE>
TRANSITION AUTO FINANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
COMMON STOCK PAID-IN STOCK (DEFICIT) EQUITY
------------------------------------ --------------- ----------- -----------------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1996 999 $10 $ 21,514 $22,559 $ 44,083
Contributed vehicles -0- -0- 122,082 -0- 122,082
Net loss -0- -0- -0- (23,028) (23,028)
---- ---- -------- ------- --------
Balance at December 31, 1996 999 $10 $143,596 $ (469) $143,137
---- ---- -------- ------- --------
</TABLE>
F-5
<PAGE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
TRANSITION AUTO FINANCE, INC.
STATEMENT OF CASH FLOWS
FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(23,028)
Adjustments to reconcile net to net cash provided
by operating activities
Depreciation and amortization 6,512
Amortization of deferred revenue (2,738)
(Gain) loss on sale of vehicles 19,164
NET CASH PROVIDED BY OPERATING ACTIVITIES (90)
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets
Proceeds from vehicle sales
NET CASH (USED) BY INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Due to parent (800)
--------
NET INCREASE (DECREASE) IN CASH (890)
CASH AND CASH EQUIVALENTS, beginning of period 1,000
--------
F-6
<PAGE>
<CAPTION>
<S> <C>
CASH AND CASH EQUIVALENTS, end of period $ 110
--------
--------
CASH PAID DURING THE YEAR FOR
Interest $ -0-
--------
--------
Income taxes $ -0-
--------
--------
</TABLE>
NON-CASH ACTIVITIES:
Debt pre-issuance costs of $151,105 were paid by parent company,
resulting in a due to parent liability
Vehicles with a net book value of $122,082 were contributed as of
October 31, 1996.
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS
TRANSITION AUTO FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1: BUSINESS ACTIVITY
The Company was established to purchase motor vehicles and automobile
lease contracts, collect and service automobile lease contracts and
remarket motor vehicles upon termination of their leases. A summary of
the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Transition Leasing Management, Inc. (TLMI) owns 100% of the Company's
common stock.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
REVENUE
F-7
<PAGE>
The vehicles are leased to individuals under leases with terms ranging
from thirty-six to forty-two months. The leases are considered to be
operating leases. At the end of the lease period, the lessee may
purchase the equipment at the contractual residual value. Monthly
lease payments are recognized as revenue in the month that the
payments are due. The vehicle leases require a down payment from the
lessee at the inception of the lease.
The down payments are recognized as income over the term of the leases
on a straight-line basis.
EQUIPMENT AND LEASED VEHICLES
Equipment and leased vehicles are stated at cost less accumulated
depreciation. Depreciation is provided in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line-method. For equipment
service lives range from three to five years. For leased vehicles,
depreciation is calculated over the term of the vehicle lease, using
the cost of the vehicle less the estimated residual value of the
vehicle at the end of the lease. Present leases have terms ranging
from thirty-six to forty-two months.
F-8
<PAGE>
TRANSITION AUTO FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company adopted Financial Accounting Standards Board issued
Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. There has been no impairment recorded in the current
year financial statements.
OTHER ASSETS
Other assets include debt pre-issuance costs incurred in connection
with the Company's offering of securities by Registration
No. 33-393492-D filed with the Securities and Exchange Commission.
These costs are being amortized, on a straight-line basis over
the term of the debt securities which mature on December 31, 2000.
DEFERRED REVENUE
Deferred revenue consists of down payments made by leasees at the
inception of the lease. The down payments are amortized over the
lease term. Lease terms range from thirty-six to forty-two months.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated to approximate the
related book value, unless otherwise indicated, based on market
information available to the Company.
USE OF ESTIMATES
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial
F-9
<PAGE>
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
F-10
<PAGE>
TRANSITION AUTO FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Concentration of Credit Risk
At present all of the lessees are residents of the Dallas Fort Worth
Metroplex.
NOTE 3: INCOME TAXES
The Company is a corporation subject to federal and state income
taxes. The Company and its parent intends to file a consolidated tax
return. Each company in the consolidated group determines its taxable
income or loss, on a separate company basis, and the consolidated tax
liability is allocated to each company with taxable income in
proportion to the total of the taxable income amounts. To date, the
Company has had no federal taxable income. Also, under a tax
allocation agreement signed by TLMI and the Company, TLMI has agreed
to pay all federal income tax liability of the affiliated group as it
becomes due and payable. If TLMI fails to make such payments, the
Company would be responsible for making such payments.
The Company has a net loss carryforward (NOL) of approximately $400.
The Company's NOL carryforward expires on December 31, 2011.
NOTE 4: RELATED PARTIES
The Company has entered into a Servicing Agreement with TLMI. TLMI
will be entitled to a servicing fee of $20 per month per contract and
a payment of $150 per contract purchased. TLMI will receive, as a
marketing fee, 57.5% of the down payment made by the customers with
respect to contracts it originates. TLMI will receive from the
Company a Releasing Fee of 15% of the down payment with respect to a
new contract following repossession of a leased vehicle.
NOTE 5: SUBSEQUENT EVENT
F-11
<PAGE>
The Company issued $2,883,000 of floating rate redeemable asset-backed
notes (Investor Notes) during 1997. These Investor Notes were issued
pursuant to a public offering on Form SB-2 under the Securities Act of
1933.
The Investor Notes bear interest at the initial interest rate of 12%,
but are subject to adjustment. Interest is payable quarterly on the
15th day of each month.
F-12
<PAGE>
TRANSITION AUTO FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1996
The Investor Notes were issued at various times during 1997, however
the maturity date for all of the Investor Notes is December 31, 2000.
The Investor Notes are collateralized by the following:
_____________________________________ Automobile contracts for
the leasing of new or late model automobiles.
_____________________________________ The leased vehicles.
The following table represents Investor Notes outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Origination Date
Number of Notes Note Amount
<S> <C> <C>
April 1997 84 $ 934,000
May 1997 25 436,000
June 1997 19 173,000
July 1997 14 128,000
August 1997 13 75,000
September 1997 33 352,000
October 1997 20 156,000
November 1997 21 212,000
December 1997 43 417,000
Totals 272 $2,883,000
--- ----------
</TABLE>
F-13
<PAGE>
EXHIBIT INDEX TO FORM 10KSB
of
TRANSITION AUTO FINANCE, INC.
<TABLE>
<C> <S>
3.1* - Articles of Incorporation of Transition Auto Finance Inc.
3.2* - Bylaws of Transition Auto Finance Inc.
4.1** - Form of Indenture between Transition Auto Finance Inc.
and Texas Commerce Bank National Association, as Trustee
4.2** - Form of Floating Rate Secured Note Due __________,1999
(included in Article Two of Indenture filed as
Exhibit 4.1)
10.1** - Form of Master Contract Purchase Agreement between Y&L
Auto Leasing, Inc. and Transition Auto Finance Inc.
10.2** - Form of Servicing Agreement between Y&L Auto Leasing,
Inc. and Transition Auto Finance Inc.
10.3** - Form of Tax Sharing Agreement by and between Y&L Auto
Leasing and Transition Auto Finance Inc.
10.4** - Form of Custodial Agreement between Transition Auto
Finance, Inc. and Texas Commerce Bank National
Association
10.5** - Contribution Agreement between Transition Leasing
Management, Inc.and Transition Auto Finance, Inc.
27.1 *** - Financial Data Schedules
</TABLE>
- -----------------------------------------
* Incorporated by reference from Registration Statement on Form SB-2 of
Transition Auto Finance, Inc., Registration No. 33-93492-D filed June
15, 1995.
** Incorporated by reference from Amendment No. 4 to Registration
Statement on Form SB-2 of Transition Auto Finance, Inc., Registration
No. 33-93492-D filed December 16, 1996.
*** Filed electronically herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 110
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 110
<PP&E> 199,304
<DEPRECIATION> (60,418)
<TOTAL-ASSETS> 290,101
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 143,127
<TOTAL-LIABILITY-AND-EQUITY> 290,101
<SALES> 16,072
<TOTAL-REVENUES> 16,072
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (23,028)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,028)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
