-- i --

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-21673

AutoBond Acceptance Corporation

(Exact name of registrant as specified in its charter)

TEXAS . . . . . 75-2487218

(State or other jurisdiction . (I.R.S. Employer
of incorporation or organization) . Identification No.)

100 CONGRESS AVENUE, AUSTIN, TEXAS . . . 78701

(Address of principal executive offices) (Zip Code)

(512) 435-7000

Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes ___X___ No _____

As of August 16, 1999, there were 6,531,311 shares of the registrant's Common
Stock, no par value, outstanding.

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities and use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 34
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
EXHIBIT 27.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, JUNE 30,
1998 1999
-------------- -------------
(UNAUDITED)
ASSETS
- ------------------------------------------------------------

Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 5,170,969 $ 372,374
Receivable from Dynex Capital, Inc.. . . . . . . . . . . . . 6,573,107 -
Finance contracts held for sale, net . . . . . . . . . . . . 867,070 5,680,606
Collateral acquired, net . . . . . . . . . . . . . . . . . . 70,957 106,700
Retained interest in securitizations - Trading . . . . . . . 4,586,908 3,419,684
Retained interest in securitizations - Available for Sale. . 9,286,443 6,421,763
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . 729,206 552,824
Due from affiliates. . . . . . . . . . . . . . . . . . . . . 396,015 416,187
Property, plant, and equipment, net. . . . . . . . . . . . . 1,187,421 1,117,358
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,463,046 1,060,255
-------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 30,331,142 $ 19,147,751
============== =============

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------

Liabilities:
Notes Payable. . . . . . . . . . . . . . . . . . . . . . . $ 10,166,969 $ 10,239,641
Non-recourse debt. . . . . . . . . . . . . . . . . . . . . 3,185,050 2,017,826
Payables and accrued liabilities . . . . . . . . . . . . . 1,324,951 1,087,278
Deferred income taxes. . . . . . . . . . . . . . . . . . . 101,800 -
-------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . $ 14,778,770 $ 13,344,745
-------------- -------------

Commitments and contingencies

Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;. $ 10,856,000 $ 10,856,000
1,125,000 shares of 15% Series A cumulative preferred
stock, $10 liquidation preference, issued and outstanding,
(Dividends in arrears of $843,750)
Common stock, no par value; 25,000,000 shares authorized;. . 1,000 1,000
6,531,311 shares issued and outstanding
Capital in excess of stated capital. . . . . . . . . . . . . 8,291,481 8,291,481
Due from shareholders. . . . . . . . . . . . . . . . . . . . (10,592) (10,592)
(Accumulated deficit). . . . . . . . . . . . . . . . . . . . (3,057,602) (12,806,968)
Investment in common stock agreement . . . . . . . . . . . . (527,915) (527,915)
-------------- -------------
Total shareholders' equity. . . . . . . . . . . . . . . $ 15,552,372 $ 5,803,006
-------------- -------------

Total liabilities and shareholders' equity . . . . $ 30,331,142 $ 19,147,751
============== =============

<FN>

The accompanying notes are an integral part of the consolidated financial statements.

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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

THREE MONTHS ENDED JUNE30, SIX MONTHS ENDED JUNE 30,
------------ ------------ ------------ -------------
1998 1999 1998 1999
------------ ------------ ------------ -------------

Revenues:
Interest income . . . . . . . . . . . . . . . . . . . $ 527,284 $ 616,391 $ 1,665,782 $ 1,080,377
Gain on sale of finance contracts . . . . . . . . . . 2,768,879 215,099 6,636,820 1,754,285
Servicing income. . . . . . . . . . . . . . . . . . . 811,348 979,366 1,317,942 1,985,140
Other income. . . . . . . . . . . . . . . . . . . . . (205,864) 77,803 (79,716) 853,795
------------ ------------ ------------ -------------
Total revenues . . . . . . . . . . . . . . . . . . 3,901,647 1,888,659 9,540,828 5,673,597
------------ ------------ ------------ -------------
Expenses:
Provision for credit losses . . . . . . . . . . . . . - - 100,000 60,465
Interest expense. . . . . . . . . . . . . . . . . . . 1,085,401 804,750 2,375,806 1,518,120
Salaries and benefits . . . . . . . . . . . . . . . . 2,468,567 2,664,660 4,866,332 5,813,691
General and administrative. . . . . . . . . . . . . . 1,790,620 1,817,064 2,874,884 3,686,387
Impairment of retained interest in securitizations. . . 5,589,802 1,520,750 5,877,825 2,572,207
Other operating expenses. . . . . . . . . . . . . . . 879,815 873,028 1,528,869 1,873,893
------------ ------------ ------------ -------------
Total expenses . . . . . . . . . . . . . . . . . . 11,814,205 7,680,252 17,623,716 15,524,763
------------ ------------ ------------ -------------
Loss before income taxes. . . . . . . . . . . . . . . . (7,912,558) (5,791,593) (8,082,888) (9,851,166)
(Benefit) provision for income taxes. . . . . . . . . . (2,678,770) 1,497,100 (2,727,962) (101,800)
------------ ------------ ------------ -------------
Net loss. . . . . . . . . . . . . . . . . . (5,233,788) (7,288,693) (5,354,926) (9,749,366)

Income attributable to preferred stock. . . . . . . . . 411,318 421,875 596,250 843,750
------------ ------------ ------------ -------------
Net loss attributable to common shareholders. . . . . . $(5,645,106) $(7,710,568) $(5,951,176) $(10,593,116)
============ ============ ============ =============

Weighted average number of common shares:
Basic . . . . . . . . . . . . . . . . . . . 6,531,311 6,531,311 6,531,311 6,531,311
Diluted . . . . . . . . . . . . . . . . . . 6,531,311 6,531,311 6,531,311 6,531,311
Loss per common share:
Basic. . . . . . . . . . . . . . . . . . . . $ (0.86) $ (1.18) $ (0.91) $ (1.62)
Diluted. . . . . . . . . . . . . . . . . . . $ (0.86) $ (1.18) $ (0.91) $ (1.62)

Net Loss. . . . . . . . . . . . . . . . . . . . . . . . $(5,233,788) $(7,288,693) $(5,354,926) $ (9,749,366)
Other comprehensive income, net of tax:
Unrealized gain on retained interests in securitization 405,753 - 367,372 -
------------ ------------ ------------ -------------
Comprehensive loss. . . . . . . . . . . . . . . . . . . $(4,828,035) $(7,288,693) $(4,987,554) $ (9,749,366)
============ ============ ============ =============

<FN>
The accompanying notes are an integral part of the consolidated financial statements.

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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)

SIX MONTHS ENDED
JUNE 30, 1999
----------------

SHARES AMOUNT
---------------- -------------
Preferred stock:
Beginning balance . . . . . . . . . 1,125,000 $ 10,856,000
Ending balance. . . . . . . . . . . 1,125,000 10,856,000

Common stock:
Beginning balance . . . . . . . . . 6,531,311 1,000
Ending balance. . . . . . . . . . . 6,531,311 1,000

Capital in excess of stated capital:
Beginning balance 8,291,481
Ending balance 8,291,481

Due (from) shareholders:
Beginning balance (10,592)
Ending balance (10,592)

Accumulated Deficit:
Beginning balance (3,057,602)
Net loss (9,749,366)
-------------
Ending balance (12,806,968)

Investment in common stock agreement:
Beginning balance (527,915)
Ending balance (527,915)
-------------
Total shareholders' equity $ 5,803,006
=============

<FN>
The accompanying notes are an integral part of the consolidated financial statements.

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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
1998 1999
------------------ ------------

OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (5,354,926) $(9,749,366)
Reconcile net loss to net cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . . 897,659 493,123
Provision for credit losses . . . . . . . . . . . . . . 100,000 60,465
Market impairment of finance contracts held for sale. . - 878,886
Impairment of retained interest in securitizations. . . 5,589,801 2,572,207
Gain on sale of finance contracts . . . . . . . . . . . (6,636,820) (1,754,285)
Deferred income taxes . . . . . . . . . . . . . . . . . (2,727,962) (101,800)
Changes in operating assets and liabilities:
Increase in restricted funds. . . . . . . . . . . . . . 5,532,255 -
Receivable from Dynex . . . . . . . . . . . . . . . . . - 6,573,107
Finance contracts held for sale . . . . . . . . . . . . 5,103,550 (4,034,345)
Retained interest in securitizations. . . . . . . . . . (6,060,154) 334,327
Due to(from) affiliate. . . . . . . . . . . . . . . . . (868,095) (20,172)
Prepaids and other assets . . . . . . . . . . . . . . . (868,157) 395,521
Accounts payable and accrued liabilities. . . . . . . . (687,320) (237,673)
------------------ ------------
Cash used by operating activities. . . . . . . (5,980,169) (4,590,005)
INVESTING ACTIVITIES:
Decrease in due from shareholders . . . . . . . . . . . 176,963
Proceeds from disposal of collateral acquired . . . . . 120,010 -
Purchases of property, plant and equipment. . . . . . . - (197,308)
------------------ ------------
Cash provided (used) by investing activities . 296,973 (197,308)
FINANCING ACTIVITIES:
Net payments on revolving credit facilities . . . . . . (7,639,201) -
Payments for debt issuance costs. . . . . . . . . . . . (2,345,462) -
Proceeds from notes payable . . . . . . . . . . . . . . 10,650,000 -
Payments on notes payable . . . . . . . . . . . . . . . (3,451,001) (11,282)
Decrease in bank overdraft. . . . . . . . . . . . . . . (2,337,288) -
Proceeds from public offering of preferred stock, net . 9,631,407 -
Dividends paid on preferred stock . . . . . . . . . . . (596,250) -
Proceeds from issuance of common stock warrants . . . . 1,918,131 -
------------------ ------------
Cash provided (used) by financing activities 5,830,336 (11,282)
------------------ ------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . 147,140 (4,798,595)
Beginning cash balance. . . . . . . . . . . . . . . . . . . 159,293 5,170,969
------------------ ------------
ENDING CASH BALANCE . . . . . . . . . . . . . . . . . . . . $ 306,433 $ 372,374
================== ============

<FN>
The accompanying notes are an integral part of the consolidated financial statements.

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AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The consolidated financial statements of AutoBond Acceptance Corporation
(the "Company") included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to regulations. In the opinion of management, the financial statements
reflect all adjustments (consisting only of a normal and recurring nature) which
are necessary to present fairly the financial position, results of operations,
changes in shareholders' equity and cash flows for the interim periods. Results
for interim periods are not necessarily indicative of the results for a full
year. For further information, refer to the audited financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, (SEC File Number 000-21673). Certain data from the
prior year has been reclassified to conform to the 1999 presentation.

2. Earnings per Share

Basic earnings per share excludes potential dilution of potential shares
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company unless such issuance would be anti-dilutive.

3. Finance Contracts Held for Sale

The following amounts are included in finance contracts held for sale
as of:

December 31, 1998 June 30, 1999
------------------- ---------------

Unpaid principal balance . . . $ 944,830 $ 7,073,261
Contract acquisition discounts (64,067) (513,769)
Allowance for market loss. . . - (878,886)
Allowance for credit losses. . (13,693) 0
------------------- ---------------
$ 867,070 $ 5,680,606
=================== ===============

4. Retained Interests In Securitizations

The Company's retained interests in securitizations represent the present
value of expected future cash flows to the Company from sales of finance
contracts. The amount of these retained interests may be increased by
additional sales or securitizations. The amount of these retained interests may
decrease in the case of impairments caused by a revaluation of the future cash
flows. Retained interests in securitizations will also decrease due to the
Company's receipt of cash flows from their investment.

The Company utilizes a financial model to project the cash flows from a
pool of finance contracts. This model projects cash flows for contractual
parties including investors, trustees and servicers, as well as the Company's
retained interests. As is the case with most financial models, its
effectiveness is primarily driven by the performance over time of key financial
model assumptions, including: default rates; delinquency rates; prepayment

rates; discount rates; initial, ongoing and minimum cash reserve requirements;
the interest rates earned on cash reserves; recovery amounts for repossessions;
repossession recovery lags; insurance claims recovery amounts; insurance
recovery lags; and on-going servicing/trustee fees. Periodically, the Company's
financial models and related assumptions have been updated to reflect the actual
performance characteristics of the finance contracts. All valuations are
conducted on a disaggregated basis. Impairment of retained interest in
securitizations for the quarter ended June 30, 1999 was $1,520,750.

The Company's term securitizations have involved the placement of excess
spread backed notes, sometimes referred to as "B Pieces", with institutional
investors. All assumptions used to size and sell these "B Pieces" were
identical to the initial gain-on-sale assumptions the Company applied with
respect to retained interests. The discount rates applied for retained interests
ranged from 15% to 17%. The non-vector equivalent of annualized default rates
typically ranged from 10% to 12%. The default rate assumptions are estimated
based on the historical static pool results. Repossession recovery ratios, with
deficiency insurance proceeds reflected, typically ranged from 80% to 90%.

Three primary causes led to the impairment charges to retained interests in
securitizations. The Company has been engaged in litigation with Progressive
Northern Insurance Company ("Progressive") regarding the interpretation of
default insurance coverage the Company acquired to enhance recoveries. During
the earlier stages of the dispute, Progressive continued to pay claims.
However, in April 1998 Progressive stopped paying claims. The loss of cash flow
from Progressive necessitated drawing funds from the applicable trust cash
reserves to pay senior investors. The Company is the ultimate beneficiary of
the cash reserves, and such reserves will need to be replenished before cash
flows may resume to the other investors and ultimately to the Company. The
depletion and expected delay in receiving any ultimate cash flows reduced the
value of the retained interests. The Company has continued to include the
expected cash flows from Progressive in its cash flows models. Even though the
Company and its legal counsel are optimistic that the Company will prevail in
its litigation, at this time, Progressive has not resumed payment of claims.
Should the Company's interpretation be incorrect, the Company would need to
reassess the carrying value of its retained interests in securitizations under
new assumptions and the result of this revaluation could be material.

The second primary factor was the transfer of servicing functions to the
Company from a third party service provider, Loan Servicing Enterprise ("LSE").
In March 1998, the Company commenced litigation against LSE, alleging, in part,
that LSE breached its servicing obligations. After assuming all servicing, the
Company accelerated the rate of charge-offs as compared with prior periods.
Accelerated charge-offs resulted in the diversion of any available cash flow to
the senior investors that otherwise would flow to subordinate investors or to
the benefit of the Company. In attempting to resolve certain of these issues
with Moody's Investors Service ("Moody's"), the agency rating the senior
securities, the Company committed to Moody's in May 1998 that it would not
release monies to the "B Piece" investors until all charge-offs have been
reflected in the cash flows attributable to the senior investors. The delay of
payments to the subordinated investors causes accretion of the principal amount
of their high interest rate B Pieces and a corresponding impairment of the
Company's retained interest. The accelerated charge-offs and the Company's
decision in May 1998 to commit to Moody's to withhold monies from the B Piece
investors resulted in a direct impact on the valuation of the retained
interests. A total of eight securitizations were affected by this action.

The third primary factor was the change in the VSI deductible for the pool
of loans purchased by Dynex.

The Company has engaged counsel to perform a deal-by-deal analysis of the
structural and legal integrity of these transactions and resolve the concerns
raised by Moody's. In the meantime, the Company has been notified by the
trustees on certain of the securitizations that the action of Moody's and the
alleged causes constituted events of servicer termination under such
transactions. The trustees have threatened to remove the Company as servicer on
certain transactions, and have withheld administrator fees and expenses of
approximately $ 0.5 million as of June 30, 1999, due to the Company. Since the
Company is of the view that no events of servicing termination have occurred and
that the transactions documents did not intend for servicing compensation to the
Company to be cut off where the cause of an event of default is due to the
actions of Progressive and LSE (the former servicer), the Company is seeking to
resolve those issues to the
-- 5 --

satisfaction of all parties. See Note 8 below for a discussion of further
contingencies with respect to the Company's interests in securitizations.

5. Revolving Credit Facilities

On June 9, 1998, the Company and Dynex Capital, Inc. ("Dynex") entered into
an arrangement whereby the Company obtained a commitment from Dynex to purchase
all currently warehoused and future automobile finance contract acquisitions
through at least May 31, 1999 (the "Funding Agreement"). The terms of the
Funding Agreement were modified on June 30, October 20, and October 28, 1998.
Under the prior terms of the Funding Agreement, the Company transferred finance
contracts to AutoBond Master Funding Corporation V ("Master Funding V"), a
qualified unconsolidated special purpose subsidiary, and Dynex provided credit
facilities in an amount equal to 104% of the unpaid principal balance of the
finance contracts (the "Advance Rate"). The Company received the proceeds of
such credit facilities. The modified terms of the Funding Agreement reduced the
Advance Rate from 104% to 88% for an interim period (the "Interim Period")
ending December 31, 1998. At the end of the Interim Period, the Advance Rate
reverted to 104% and Dynex was to advance to Master Funding V an additional
amount equal to 16% of the unpaid principal balance of finance contracts
financed by Dynex during the Interim Period. This additional amount receivable
from Dynex totaled $6.5 million at December 31, 1998, and was collected in
January and February 1999. Advances under the Funding Agreement are evidenced by
Class A Notes and Class B Notes (collectively, the "Notes") issued by Master
Funding V to Dynex. The Class A Notes were issued in a principal amount equal
to 94.0% of the unpaid principal balance of the finance contracts (88.0% for
advances funded during the Interim Period) and bear interest at a rate equal to
190 basis points over the corporate bond equivalent yield on the three-year
U.S. Treasury note on the closing date for each such advance. The Class B Notes
were issued in a principal amount equal to 10.0% of the unpaid principal balance
of the finance contracts (0.0% for advances funded during the Interim Period)
and bear interest at a rate equal to 16% per annum. The Company retains a
subordinated interest in the pooled finance contracts. Transfers of finance
contracts to the qualified special purpose entity have been recognized as sales
under SFAS No. 125. No finance contracts were transferred by the Company during
the quarter ended June 30, 1999. At June 30, 1999, advances by Dynex under the
Funding Agreement totaled $ 169.2 million. See Note 8 for the status of the
Dynex Funding Agreement.

1. Notes Payable and Non-Recourse Debt

The following amounts are included in notes payable and non-recourse debt as of:

December 31, June 30,
1998 1999
(Unaudited)
------------- ------------
Non-recourse notes payable, collateralized by Class B Certificates $ 3,185,050 $ 2,017,826
Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . 7,500,000 7,500,000
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . . 23,342 12,060
Discount on subordinated notes payable . . . . . . . . . . . . . . (356,373) (272,419)
------------- ------------
$ 13,352,019 $12,257,467
============== ============

On June 9, 1998, the Company sold to Dynex at par $3 million of its 12%
Convertible Senior Notes due 2003 (the "Senior Notes"). Interest on the Senior
Notes is payable quarterly in arrears, with the principal amount due on June 9,
2003. The Senior Notes were convertible at the option of Dynex on or before May
31, 1999 into shares of the Company's common stock at a conversion price of
$6.00 per share. Demand and "piggyback" registration rights with respect to the
underlying shares of common stock were granted. The Company has made all
interest payments due on the Senior Notes and expects to continue to meet such
obligations. Dynex also has purported to accelerate the Senior Notes. The
Company disputes the validity of such acceleration.

the Subordinated Notes is payable quarterly, with the principal amount due on
February 1, 2001. The Subordinated Notes are convertible at the option of the
holder for up to 368,462 shares of the Company's common stock, at a conversion
price of $3.30 per share, subject to adjustment under standard anti-dilution
provisions. The Company also granted BancBoston a warrant to purchase common
stock exercisable to the extent the debt represented by the Subordinated Notes
is not converted (See Note 7). In the event of a change of control transaction,
the holder of the Subordinated Notes may require the Company to repurchase the
Subordinated Notes at 100% of the principal amount plus accrued interest. The
Subordinated Notes are redeemable at the option of the Company on or after July
1, 1999 at redemption prices starting at 105% of the principal amount, with such
premium reducing to par on and after November 1, 2000, plus accrued interest.
The Subordinated Notes were issued pursuant to an Indenture, dated as of January
30, 1998 (the "Indenture") between the Company and BankBoston, N.A., as agent.
The Indenture contains certain restrictive covenants including: (i) a
consolidated leveraged ratio not to exceed 2 to 1 (excluding non-recourse
warehouse debt and securitization debt); (ii) limitations on payments such as
dividends (but excluding, so long as no event of default has occurred under the
Indenture, dividends or distributions on the Preferred Stock (as defined below)
of the Company); (iii) limitations on sales of assets other than in the ordinary
course of business; and (iv) certain financial covenants, including a minimum
consolidated net worth of $12 million (plus proceeds from equity offerings), a
minimum ratio of EBITA to interest of 1.5 to 1, and a maximum cumulative
repossession ratio of 27%. Events of default under the Indenture include
failure to pay, breach of covenants, cross-defaults in excess of $1 million or
material breach of representations or covenants under the purchase agreement
with BancBoston. The Company capitalized debt issuance costs of $594,688, and
recorded a discount of $507,763 on the debt representing the value of the
warrants issued. The debt issuance cost and discount is being amortized as
interest expense on the interest method through February 2001. At June 30,
1999, the Company did not meet certain of its financial covenants, which
constitutes an event of default on the Subordinated Notes. The ability of the
Company to meet such covenants is dependent upon future earnings. To date, the
Company has made all payments due on its Subordinated Notes. The Subordinated
Notes have not been formally accelerated by BancBoston; however, if such
acceleration were made, BancBoston could declare such amounts immediately due.

1. Income taxes

Management has reduced the deferred tax asset by a valuation allowance due
to uncertainty of realizing certain tax loss carry-forwards and other deferred
tax assets. The valuation allowance has been increased by approximately
$3,050,000 in the three month period ended June 30, 1999.

2. Stockholders' Equity

Preferred Stock
In February 1998, the Company completed the underwritten public offering of
1,125,000 shares of its 15% Series A Cumulative Preferred Stock (the "Preferred
Stock"), with a liquidation preference of $10 per share. The price to the public
was $10 per share, with net proceeds to the Company of approximately $9,631,000.
Such net proceeds have been utilized for working capital purposes, including the
funding of finance contracts. Dividends on the Preferred Stock are cumulative
and payable quarterly on the last day of March, June, September and December of
each year, commencing on June 30, 1998, at the rate of 15% per annum. After
three years from the date of issuance, the Company may, at its option, redeem
one-sixth of the Preferred Stock each year, in cash at the liquidation price per
share (plus accrued and unpaid dividends), or, if in common stock, that number
of shares equal to $10 per share of Preferred Stock to be redeemed, divided by
85% of the average closing sale price per share for the common stock for the
five trading days prior to the redemption date. The Preferred Stock is not
redeemable at the option of the holder and has no stated maturity.

Because the Company is not in compliance with the certain of the financial
covenants of its Subordinated Notes, the Company did not pay the quarterly
dividend on its Preferred Stock, otherwise payable on each of March 31, 1999 and
June 30, 1999. Because dividends on the Preferred Stock are in arrears for two
quarterly dividend periods, holders of the Preferred Stock have exercised their
right to call a special meeting of the Preferred Stock holders for the purpose
of electing two additional directors to serve on the Company's Board of
-- 6 --

Directors until such dividend arrearage is eliminated. Such meeting is currently
scheduled for October 1, 1999. In addition, certain changes that could
materially affect the holders of Preferred Stock, such as a merger of the
Company, cannot be made without the affirmative vote of the holders of
two-thirds of the shares of Preferred Stock, voting as a separate class. The
Preferred Stock ranks senior to the common stock with respect to the payment of
dividends and amounts upon liquidation, dissolution or winding up.

Warrants
In connection with the issuance of Preferred Stock, the Company sold to
Tejas Securities Group, Inc. ("Tejas"), for $100, a warrant (the "Tejas
Warrant") to purchase up to 100,000 shares of the Company's common stock at an
exercise price equal to $7.75 per share. The Tejas Warrant is exercisable for a
period of four years commencing February 17, 1999. The Tejas Warrant includes a
net exercise provision permitting the holder, upon consent of the Company, to
pay the exercise price by cancellation of a number of shares with a fair market
value equal to the exercise price of such Tejas Warrant. The Tejas Warrant was
valued at $394,000, which was recorded as additional issuance cost of the
Preferred Stock.

In connection with the issuance of the Company's Subordinated Notes in
January 1998, the Company issued to BancBoston a warrant (the "Subordinated Note
Warrant"). The Subordinated Note Warrant entities the holder, upon the exercise
thereof, to purchase from the Company that number of shares of the Company's
common stock, up to 368,462 shares,, which were available for conversion at the
maturity of the Subordinated Notes on February 1, 2001. The holder may either
convert the debt represented by the Subordinated Notes or exercise the
Subordinated Note Warrant, but not both. The Subordinated Note Warrant contains
customary anti-dilution provisions, as well as certain demand and "piggyback"
registration rights. In addition, if certain major corporate events (such as a
change in control or major stock offering) do not occur prior to February 1,
2001, then the holder will have the right to put the Subordinated Note Warrant
to the Company at the difference between the current market price and the
exercise price of the Subordinated Note Warrant. Based on the market price at
June 30, 1999, no amount would be payable at such date. The Company has the
option to redeem the Subordinated Note Warrant under certain circumstances. The
Subordinated Note Warrant expires on January 31, 2005. The Subordinated Note
Warrant was valued at $375,831, which was recorded as a discount on the debt
represented by the Subordinated Note.

In connection with the placement of the Subordinated Notes and the
Subordinated Note Warrant, the Company, William O. Winsauer and John S.
Winsauer, as principals (the "Principals") entered into a Shareholders'
Agreement with BancBoston pursuant to which the Principals granted to BancBoston
certain "tag-along rights" in connection with sales of common stock by the
Principals. Also, the Company paid a placement fee of 5% of the principal
amount of the Subordinated Notes to Dresner Investment Services, Inc. and issued
to the placement agent a warrant to purchase 65,313 shares of common stock of
the Company at an exercise price of $6.30 per share.

The Company's remaining outstanding warrants are a warrant (expiring
January 12, 2000) held by an individual exercisable for 7,500 common shares at a
price of $4.00 per share, a warrant (expiring March 31, 2002) held by Infinity
Investors Limited exercisable for 100,000 common shares at a price of $8.73 per
share, a warrant held by an individual to purchase 30,000 common shares at a
price of $4.225 per share, and a warrant held by Infinity Investors Limited to
purchase 200,000 common shares at a price of $4.225 per share.

Common Stock Investment Agreement
On May 20, 1998, the Company and Promethean Investment Group, L.L.C.
("Promethean") entered into a common stock investment agreement (the "Investment
Agreement") and related registration rights agreement whereby Promethean agreed
to purchase from the Company, on the terms and conditions outlined below, up to
$20 million (subject to increase up to $25 million at Promethean's option) of
the Company's common stock. The Company must deliver a preliminary notice of its
intention to require Promethean to purchase its common shares at least ten but
not more than thirty days prior to the Company's delivery of its final notice.
The Company may deliver such final notice only if (i) the dollar volume-weighted
price of its common stock reported on the business day of such final notice is
at least $3.25 per share, (ii) at all times during the period beginning on the
date of delivery of the preliminary notice and ending on and including the
closing date (a) a registration statement covering the resale of no less than
-- 7 --

150% of the shares to be sold to Promethean under the Investment Agreement has
been declared and remains effective and (b) shares of the Company's common stock
are at such time listed on a major national securities exchange, and (iii) the
Company has not delivered another final notice to Promethean during the
preceding twenty-five business days preceding delivery of such final notice.
Following receipt of a final notice, Promethean's purchase obligation will equal
the lowest of (i) the amount indicated in such final notice, (ii) $5,000,000 and
(iii) 20% of the aggregate of the daily trading dollar volume on the twenty
consecutive business days following delivery of the put notice. Promethean may,
in its sole discretion, increase the amount purchasable in the preceding
sentence by 125%. Promethean must conclude all required purchases of common
shares within twenty-five business days of receipt of the final notice. The
purchase price for the Company's shares will be equal to 95% of the lowest daily
dollar volume-weighted average price during the six consecutive trading days
ending on and including the date of determination. Promethean's obligation to
purchase shares under the Investment Agreement shall end either upon the mutual
consent of the parties or automatically upon the earliest of the date (i) on
which total purchases by Promethean under the Investment Agreement total
$20,000,000, (ii) which is two years after the effective date of the
registration statement relating to the common stock covered by the Investment
Agreement, and (c) which is twenty-seven months from the date of the Investment
Agreement. In consideration of Promethean's obligations under the Investment
Agreement, the Company paid $527,915 in cash on August 19, 1998, which was
treated as an investment in a common stock agreement.

3. Commitments and Contingencies

On February 8, 1999, the Company, AutoBond Master Funding Corporation V, a
wholly-owned subsidiary of the Company ("Master Funding V"), William O.
Winsauer, the Chairman and Chief Executive Officer of the Company, John S.
Winsauer, a Director and the Secretary of the Company, and Adrian Katz, the
Vice-Chairman, Chief Financial Officer and Chief Operating Officer of the
Company (collectively, the "Plaintiffs") commenced an action in the District
Court of Travis County, Texas (250th Judicial District) against Dynex and James
Dolph (collectively, the "Defendants"). This action is hereinafter referred to
as the "Texas Action". The Company and the other Plaintiffs assert in the Texas
Action that Dynex breached the terms of the Funding Agreement. Such breaches
include delays and shortfalls in funding the advances required under the Funding
Agreement and ultimately the refusal by Dynex to fund any further advances under
the Funding Agreement. Plaintiffs also allege that Dynex and Mr. Dolph conspired
to misrepresent and mischaracterize the Company's credit underwriting criteria
and its compliance with such criteria with the intention of interfering with and
causing actual damage to the Company's business, prospective business and
contracts. The Plaintiffs assert that Dynex' funding delays and ultimate breach
of the Funding Agreement were intended to force the Plaintiffs to renegotiate
the terms of their various agreements with Dynex and related entities.
Specifically, the Plaintiffs assert that Dynex intended to force the Company to
accept something less than Dynex' full performance of its obligations under the
Funding Agreement. Further, Dynex intended to force the controlling shareholders
of the Company to agree to sell their stock in the Company to Dynex or an
affiliate at a share price substantially lower than the $6.00 per share price
specified in the Stock Option Agreement, dated as of June 9, 1998, by and among
Messrs. William O. Winsauer, John S. Winsauer and Adrian Katz (collectively, the
"Shareholders") and Dynex Holding, Inc. Plaintiffs in the Texas Action request
declaratory judgement that (i) Dynex has breached and is in breach of its
various agreements and contracts with the Plaintiffs, (ii) Plaintiffs have not
and are not in breach of their various agreements and contracts with Defendants,
(iii) neither the Company nor Master Funding V has substantially or materially
violated or breached any representation or warranty made to Dynex, including but
not limited to the representation and warranty that all or substantially all
finance contracts funded or to be funded by Dynex comply in full with, and have
been acquired by the Company in accordance with, the Company's customary
underwriting guidelines and procedures, and (iv) Dynex is obligated to fund the
Company in a prompt and timely manner as required by the parties' various
agreements. In addition to actual, punitive and exemplary damages. The Texas
Action has been set for trial in December 1999. Dynex's motion to dismiss the
Texas Action was denied by the court.

On March 1, 1999, the Company and the other Plaintiffs filed an application
in the Texas Action for a temporary injunction enjoining Dynex (i) from
continuing to suspend or withhold funding pursuant to the Funding Agreement,
(ii) from removing or attempting to remove the Company as servicer, and (iii)
from making any further false or defamatory public statements regarding the
Plaintiffs. A hearing was held on the Company's application during the week of
August 2, 1999. The court has denied the Company's application on points (i) and
-- 8 --

(iii) and has taken point (ii) under advisement, along with Dynex' request that
a temporary injunction be granted removing the Company as servicer. The court
has indicated that it will announce its ruling on August 30, 1999.

On February 9, 1999, Dynex commenced an action against the Company in the
United States District Court for the Eastern District of Virginia (Richmond
District) (the "Virginia Action") seeking declaratory relief that Dynex is (i)
not obligated to advance funds to Master Funding V under the Funding Agreement
because the conditions to funding set forth in the Funding Agreement have not
been met, and (ii) entitled to access to all books, records and other documents
of Master Funding V, including all finance contract files. Specifically, Dynex
alleges that as a result of a partial inspection of certain finance contract
files by Mr. Dolph and Virgil Baker & Associates in January 1999, Dynex
concluded that a significant number of such contracts contained material
deviations from the applicable credit criteria and procedures, an apparent
breach of the Funding Agreement. Dynex also alleges that on February 8, 1999,
the Company refused to permit Mr. Dolph and representatives from Dynex access to
the books, records and finance contract files of the Company. Dynex concludes
that as a result of such alleged breaches, it is not obligated to provide
advances under the Funding Agreement. Dynex also seeks to recover damages
resulting from the Company's alleged breach of the parties' various agreements,
which alleged breach the Company vigorously denies. The Company, Messrs. William
O. Winsauer, John S. Winsauer and Adrian Katz filed a responsive pleading on
March 25, 1999. The Virginia Action (including the matters transferred in the
New York Action (discussed below)), by a judge's order dated May 17, 1999, was
transferred to Texas federal court.

On February 22, 1999, the same day that Dynex notified the Company of a
purported servicing termination, Dynex filed another action against the Company
in the United States District Court for the Southern District of New York (the
"New York Action"), seeking damages and injunctive relief for the Company's
alleged breaches under the servicing agreement among the Company, Dynex and
Master Funding V. The Company was not notified of the New York Action until
March 1, 1999, when Dynex sought a temporary restraining order against the
Company. After hearing argument from counsel for both sides, the temporary
restraining order was denied. On March 23, 1999, the court issued an order
transferring the action to the Federal District Court in the Eastern District of
Virginia without prejudice. The Company remains the servicer and is performing
in its capacity as servicer.

Dynex has purportedly accelerated all amounts due under the Senior Note
Agreement dated June 9, 1998, by and between Dynex and the Company. The Company
disputes such purported acceleration.

In connection with the 1997-B and 1997-C securitizations, $5.8 million in
Class B Notes are exchangeable (at a rate of 117.5% of the principal amount of
Class B Notes exchanged) for the Company's 17% Convertible Notes, solely upon
the occurrence of a delinquency ratio trigger relating to the securitized pools.
As of June 30, 1999, such trigger event has not occurred.

In March 1998, after Progressive Northern Insurance ("Progressive")
purported to cancel the vendor's single interest ("VSI") and deficiency balance
insurance policies issued in favor of the Company (collectively, the
"Policies"), the Company sued Progressive, its affiliate United Financial
Casualty Co. and their agent in Texas, Technical Risks, Inc. in the District
Court of Harris County, Texas. The action seeks declaratory relief confirming
the Company's interpretation of the Policies as well as claims for damages based
upon breach of contract, bad faith and fraud. The Company has received the
defendants' answers, denying the Company's claims, and discovery is proceeding.
Progressive stopped paying claims during the second quarter of 1998. As a result
of the attempt by Progressive to cancel its obligations and its refusal to honor
claims after March 1998, the Company has suffered a variety of damages,
including impairment of its retained interests in securitizations. The Company
is vigorously contesting the legitimacy of Progressive's actions through
litigation. Although a favorable outcome cannot be assured, success in the
litigation could restore at least some of the value of the Company's interests
in such securitizations. Conversely, if the court were to uphold Progressive's
position, further impairment of the Company's interests could occur, resulting
in an adverse effect on the Company's financial position, results of operations
and cash flows. This matter is currently set for trial during the two-week
period beginning September 20, 1999.

action against the Company in Texas state court seeking recovery from the
Company of putative termination fees in connection with termination of LSE as
servicer. The Company expects the two actions to be consolidated. If the Company
prevails against LSE, some of the value of the Company's retained interests in
securitizations could be restored. Both suits have been voluntarily suspended
pursuant to an agreement negotiated by the parties.

The Company's carrier for the credit deficiency insurance obtained through
1996, Interstate Fire & Casualty Co. ("Interstate") determined in late 1996 to
no longer offer such coverage to the auto finance industry, including the
Company. In connection with Interstate's attempt to no longer offer credit
deficiency coverage for contracts originated after December 1996, the Company
commenced an action in the United States District Court for the Western District
of Texas, Austin Division, seeking a declaratory judgment that (i) the Company
was entitled to 180 days' prior notice of cancellation and (ii) Interstate was
not entitled to raise premiums on finance contracts for which coverage was
obtained prior to the effectiveness of such cancellation, as well as seeking
damages for Interstate's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. Both suits have been voluntarily dismissed, and
Interstate and the Company have to date acted on the basis of a cancellation
date of May 12, 1997 (i.e., no finance contracts presented after that date will
be eligible for credit deficiency coverage by Interstate, although all existing
contracts for which coverage was obtained will continue to have the benefits of
such coverage), no additional premiums have been demanded or paid, and the
claims-paying process has been streamlined. In particular, in order to speed the
claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate beneficiary for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.

The Company is the plaintiff or the defendant in several legal proceedings
that its management considers to be the normal kinds of actions to which an
enterprise of its size and nature might be subject, and not to be material to
the Company's overall business or financial condition, results of operations or
cash flows.

The Company has taken actions to provide that their computer systems are
capable of processing for the periods in the year 2000 and beyond. The costs
associated with this are not expected to significantly affect operating cash
flow; however, the nature of their business requires that they rely on external
vendors and services who may not be Year 2000 compliant. Therefore, there is no
assurance that the Company's actions in this regard will be successful.

On March 31, 1999, a suit naming as defendants the Company and William O.
Winsauer, Adrian Katz, and John S. Winsauer (in their capacities as controlling
shareholders of the Company), (collectively, the "Defendants") as defendants
(the "Defendants"), was filed on March 31, 1999 in the United States District
Court for the Western District of Texas (Austin Division) by Bruce Willis (the
"Plaintiff"), a holder of the Company's Preferred Stock. The suit alleges,
among other things, that the Defendants violated Section 10(b) of the Securities
and Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) in failing to
disclose adequately and in causing misstatements concerning the nature and
condition of the Company's financing sources. The suit also alleges that such
actions constituted statutory fraud under the Texas Business Corporation Act,
common law fraud and negligent misrepresentation. The Plaintiff seeks class
action certification. The Plaintiff also seeks, among other things, actual,
special, consequential, and exemplary damages in an unspecified sum, as well as
costs and expenses incurred in connection with pursuing the action against the
Company. The Company believes that it has consistently and accurately informed
the public of its business and operations, including the viability of its
funding sources, and, as a consequence believes the suit to be without merit and
intends to vigorously defend against this action.

-- 10 --

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto and the other financial data included
herein. Certain of the financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1998 (SEC File Number
000-21673).

The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
("finance contracts") originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ("sub-prime
consumers"). Sub-prime consumers generally are borrowers unable to qualify for
traditional financing due to one or more of the following reasons: negative
credit history (which may include late payments, charge-offs, bankruptcies,
repossessions or unpaid judgments); insufficient credit; sporadic employment or
residence histories; or high debt-to-income or payment-to-income ratios (which
may indicate payment or economic risk).

The Company acquires finance contracts generally from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company has securitized portfolios of these finance contracts to
efficiently utilize limited capital to allow continued growth and to achieve
sufficient finance contract volume to allow profitability. The Company markets a
single finance contract acquisition program to automobile dealers, which adheres
to consistent underwriting guidelines involving the purchase of primarily
late-model used vehicles.

The continued acquisition and servicing of sub-prime finance contracts by
an independent finance company under current market conditions is a capital and
labor intensive enterprise. Capital is needed to fund the acquisition of finance
contracts and to effectively securitize them so that additional capital is made
available for acquisition activity. While a portion of the Company's financing
has been obtained with investment grade ratings at relatively low interest
rates, the remainder is difficult to obtain and requires the Company to pay high
coupons, fees and other issuance expenses, with a negative impact on earnings.
The underwriting and servicing of a growing sub-prime finance contract portfolio
requires a higher level of experienced personnel than that required for a
portfolio of higher credit-quality consumer loans. Accordingly, the Company's
growth in finance contract volume since inception has corresponded with a
significant increase in expenses related to building the infrastructure
necessary for effective underwriting and servicing. The Company's assumption of
all servicing functions in late 1997 has increased servicing income. In view of
the Dynex situation and the high cost of capital, the Company does not expect to
see profitability until alternate funding is obtained. The Company has begun to
strategically reduce staff in order to conserve capital.

-- 11 --

REVENUES

The Company's primary sources of revenues consist of three components:
interest income, gain on sale of finance contracts and servicing fee income.

Interest Income. Interest income consists of the sum of two primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on retained interests in
securitizations. Other factors influencing interest income during a given
fiscal period include (i) the annual percentage rate of the finance contracts
acquired, (ii) the aggregate principal balance of finance contracts acquired and
funded through the Company's warehouse and other credit facilities prior to
securitization, and (iii) the length of time such contracts are funded by the
warehouse and other credit facilities.

Gain on Sale of Finance Contracts. For transfers of financial assets that
result in the recognition of a sale, the newly created assets obtained and
liabilities incurred by the transferor as a part of a transfer of financial
assets are initially measured at fair value. Interest in the assets that are
retained are measured by allocating the previous carrying amount of the assets
(e.g., finance contracts) between the interest sold (e.g., investor
certificates) and interest retained based on their relative fair values at the
date of the transfer. The amounts initially assigned to these financial
components are a determinant of the gain or loss from a securitization
transaction.

The retained interests in securitizations available for sale are carried at
estimated fair value with unrealized gains (losses) recorded in stockholders'
equity as part of accumulated other comprehensive income and those classified as
trading are carried at estimated fair value with unrealized gain (losses)
recorded currently in income. The fair value of the retained interests in
securitizations is determined by discounting expected cash flows at a rate based
on assumptions that market participants would use for similar financial
instruments subject to prepayment, default, collateral value and interest rate
risks. The Company's retained interests are subordinated to other trust
securities, consequently cash flows are paid by the securitization trustee to
the investor security holders until such time as all accrued interest together
with principal have been paid in full. Subsequently, all remaining cash flows
are paid to the Company.

An impairment review of the retained interests in securitizations is
performed quarterly by calculating the net present value of the expected future
excess spread cash flows after giving effect to changes in assumptions due to
market and economic changes and the performance of the loan pool to date.
Impairment is determined on a disaggregated basis consistent with the risk
characteristics of the underlying finance contracts as well as the performance
of the pool to date. To the extent that the Company deems the asset to be
permanently impaired, the Company would record a charge against earnings and
write down the asset accordingly. The Company recorded a charge to income of
$2,572,207 during the six months ended June 30, 1999 as a result of the
impairment review. See Note 4 to the Consolidated Financial Statements.

The Company's cost basis in finance contracts sold has varied from
approximately 92% to 103% of the value of the principal balance of such finance
contracts. This portion of recognized gain on sale varies based on the Company's
cost of insurance covering the finance contracts and the discount obtained upon
acquisition of the finance contracts. Generally, the Company has acquired
finance contracts from dealers at a greater discount than with finance contracts
acquired from third parties. Additionally, costs of sale reduce the total gain
recognized.

Further, the retained interest component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization.

-- 12 --

The gain on sale of finance contracts is affected by the aggregate
principal balance of contracts securitized and the gross interest spread on
those contracts. The following table illustrates the gross interest spread for
each of the Company's securitizations:

Finance Contracts(1) Senior Investor Certificates
-------------------- ----------------------------
Principal Weighted Balance
Amount Average June 30, Gross
Securitization Securitized Rate 1999 Rate Spread(2)
- -------------------------- ------------ --------- ------------ ------- ---------

AutoBond Receivables
Trust 1995-A . . . . . . $ 26,261,009 18.9% $ 3,709,394 7.2% 11.7%

Trust 1996-A . . . . . . 16,563,366 19.7% 3,673,925 7.2% 12.5%

Trust 1996-B . . . . . . 17,832,885 19.7% 4,676,091 7.7% 12.0%

Trust 1996-C . . . . . . 22,296,719 19.7% 7,344,277 7.5% 12.2%

Trust 1996-D . . . . . . 25,000,000 19.5% 8,542,587 7.4% 12.1%

Trust 1997-A (4) . . . . 28,037,167 20.8% 8,254,776 7.8% 13.0%

Trust 1997-B . . . . . . 34,725,196 19.9% 16,570,197 7.7% 12.2%

Trust 1997-C . . . . . . 34,430,079 20.0% 17,402,411 7.6% 12.4%
AutoBond Master Funding
Corporation V (Dynex)(3) 153,092,410 20.0% 115,631,352 7.4%(3) 12.6%
------------ ------------
Total. . . . . . . $358,238,831 $185,805,010
============ ============
- -------------------------------------------------------------------------------------
<FN>

1 Refers only to balances on senior investor certificates.
2 Difference between weighted average contract rate and investor certificate rate.
3 Includes $26 million of finance contracts from securitizations previously retired
4 Weighted average of senior investor coupon rates.

Servicing Income. The Company earns substantially all of its servicing fee
income on the contracts it services on behalf of securitization trusts.
Servicing fee income consists of: (i) contractual administrative fees received
through securitizations, equal to $7.00 per month per contract included in each
trust (excluding amounts paid to third-party servicers by the trust); (ii)
contractual servicing fees received through securitizations, equal to $8.00 per
month per contract included in each trust; and (iii) fee income earned as
servicer for such items as late charges and documentation fees, which are earned
whether or not a securitization has occurred.

In May 1999, the Company agreed to transfer servicing of the Company's
1997-B and 1997-C securitizations to a successor servicer. In return, the
Company received approximately $800,000 in past due servicing fees previously
withheld from the Company.

In June 1999, the trustee for the 1997-A securitization, at the purported
direction of the Class A Noteholder, attempted to terminate the Company as
servicer for the securitization. Pursuant to discovery obtained in the Company's
litigation with Dynex, the Company determined that the Class A Noteholder was in
fact a corporation wholly-owned by Dynex, and that a purchase money security
interest in the Class A Notes was given by the Dynex subsidiary to the previous
holder, Daiwa Finance Corporation. The Company has disputed this attempt to
terminate servicing, and in its capacity as the Class B Noteholder has, along
with the Class C Noteholder, instructed the trustee not to follow the Class A
Noteholder's instructions.

-- 13 --

In August 1999, the Company reached agreement with the trustee and the
investors in the Company's 1996 securitization transactions to amend the
relevant documents to provide for, among other things, the appointment of a
back-up servicer.

FINANCE CONTRACT ACQUISITION ACTIVITY

The following table sets forth information about the Company's finance contract
acquisition activity:

Six Months Ended
June 30,

1998 1999
----------- -----------

Number of finance contracts acquired . . . . . . 2,637 1,586
Principal balance of finance contracts acquired. $29,775,406 $20,336,852
Number of active dealerships (1) . . . . . . . . 578 466
Number of enrolled dealerships . . . . . . . . . 1,789 2,332
- --------------------------------------------------------------------------
<FN>

(1) Dealers who have sold at least one finance contract to the Company during
the period.

RESULTS OF OPERATIONS

Period-to-period comparisons of operating results may not be meaningful,
and results of operations from prior periods may not be indicative of future
results. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

NET LOSS

In the three months ended June 30, 1999, the net loss was $7,288,693 which
represents an increase of $2,054,905 over the three months ended June 30, 1998
net loss of $5,233,788. The increase in net loss was precipitated by the
cessation of funding by Dynex under the Funding Agreement which forced the
Company to discontinue acquisition of finance contracts as of February 9, 1999.
A valuation allowance was established for the Company's deferred tax assets of
$3,050,776.

Total Revenues

Total revenues for the three months ended June 30, 1999 of $1,888,659
represent a decrease of $2,012,988 from the three months ended June 30, 1998
revenues of $3,901,647. The decrease was due primarily to the reduction in
volume of finance contract sales activity for the second quarter.

Interest Income. Interest income for the three months ended June 30, 1999
of $616,391 represents a increase of $89,107 from the three months ended June
30, 1998 interest income of $527,284 due to the timing of finance contract
acquisitions and the period held before sale.

Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $215,099 during the three months ended June 30, 1999. The gain was the
result of final transactions related to the Dynex sales. The decrease of
$2,553,780 was due to the reduction in volume of sales as a result Dynex'
refusal to perform under the Funding Agreement.

Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized or sold. For the three months
ended June 30, 1999 servicing fee income was $979,366, consisting of contractual
administrative fees and servicer fees. Servicing fee income increased by
$168,018 from the three months ended June 30, 1998 servicing fee income of
$811,348 as a result of the increased volume of contracts being serviced.

-- 14 --

Other Income. For the three months ended June 30, 1999, other income
amounted to $77,803 compared with a loss of $205,864 for the comparable 1998
period.

Total Expenses

Total expenses for the three months ended June 30, 1999 of $7,680,252
represent a decrease of $4,133,953 from the three months ended June 30, 1998
total expenses of $11,814,205. Impairment of the Company's retained interests in
securitizations during the second quarter of 1998 was approximately $4,070,000
greater than the second quarter of 1999.

Interest Expense. Interest expense for the three months ended June 30, 1999
of $804,750 represents a decrease of $280,651 from the three months ended June
30, 1998 interest expense of $1,085,401. The decrease resulted from elimination
of borrowing under the revolving credit facilities.

Salaries and Benefits. Salaries and benefits for the three months ended
June 30, 1999 of $2,664,660 represent an increase of $196,093 from the three
months ended June 30, 1998 salaries and benefits of $2,468,567. The Company
began strategic layoffs during the second quarter of 1999 compared to increasing
staff during the second quarter of 1998. Despite such strategic staff
reductions, salaries and benefits increased due mainly to the increased health
claims by employees from the Company's employee benefit program.

General and Administrative Expenses. General and administrative expenses
for the three months ended June 30, 1999 of $1,817,064 represent an increase of
$26,444 from the three months ended June 30, 1998 general and administrative
expense of $1,790,620. Despite the Company's continuing efforts to reduce costs,
general and administrative expenses increased due to higher professional
expenses relating to the Company's retention of legal counsel to protect its
interest in its litigation with Dynex.

Impairment of Retained Interests in Securitizations. The Company
periodically reviews the carrying value of the retained interests in
securitizations. The Company recorded a charge against earnings for impairment
of these assets of $1,520,750 for the three months ended June 30, 1999 as
compared with an impairment of $5,589,802 for the three months ended June 30,
1998. This impairment reflects the revaluation of expected future cash flows to
the Company from securitizations. See Note 4 to the Consolidated Financial
Statements.

Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) for the
three months ended June 30, 1999 of 873,028 represent a decrease of $6,787 from
the three months ended June 30, 1998 other operating expenses of $879,815. The
decrease was mainly due to reimbursement of trust expenses and a reduction in
loan insurance premium which was offset by the establishment of a market
valuation allowance for finance contracts held for sale.

Income Tax. Income tax expense for the three months ended June 30, 1999 of
$1,497,100 represents an increase of $4,175,870 from the three months ended June
30, 1998 income tax benefit of $2,678,770 due to the establishment of a
valuation allowance for the Company's deferred tax assets of $3,050,776.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

NET INCOME

In the six months ended June 30, 1999, the net loss was $9,749,366 which
represents an increase in loss of $4,394,440 over the six months ended June 30,
1998 net loss of $5,354,926. The increase in net loss was precipitated by the
cessation of funding by Dynex under the Funding Agreement which forced the
Company to discontinue acquisition of finance contracts as of February 9, 1999.

-- 15 --

Total Revenues

Total revenues for the six months ended June 30, 1999 of $5,673,597
represent a decrease of $3,867,231 from the six months ended June 30, 1998
revenues of $9,540,828. The decrease was due primarily to the reduction in
volume of finance contract sales activity for the second quarter.

Interest Income. Interest income for the six months ended June 30, 1999 of
$1,080,377 represents a decrease of $585,405 from the six months ended June 30,
1998 interest income of $1,665,782 due to the timing of finance contract
acquisitions and the period held before securitization.

Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $1,754,285 during the six months ended June 30, 1999. The decrease of
$4,882,535 was primarily due to the reduction in volume of sales as a result of
the termination of the Dynex Funding Agreement.

Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized or sold. For the six months
ended June 30, 1999 servicing fee income was $1,985,140, consisting of
contractual administrative fees and servicer fees. Servicing fee income
increased by $667,198 from the six months ended June 30, 1998 servicing fee
income of $1,317,942 as a result of the increased volume of contracts being
serviced.

Other Income. For the six months ended June 30, 1999, other income
amounted to $853,795 compared with a loss of $79,716 for the comparable 1998
period. The increase was mainly attributable to settlement of litigation with
Charlie Thomas Ford, Inc. on favorable terms. See "Legal Proceedings".

Total Expenses

Total expenses for the six months ended June 30, 1999 of $15,524,763
represent a decrease of $2,098,953 from the six months ended June 30, 1998 total
expenses of $17,623,716. Impairment of the Company's retained interests in
securitizations during the second quarter of 1998 was approximately $4,070,000
greater than the second quarter of 1999.

Interest Expense. Interest expense for the six months ended June 30, 1999
of $1,518,120 represents a decrease of $857,686 from the six months ended June
30, 1998 interest expense of $2,375,806. The decrease resulted from elimination
of borrowing under the revolving credit facilities.

Salaries and Benefits. Salaries and benefits for the six months ended June
30, 1999 of $5,813,691 represent an increase of $947,359 from the six months
ended June 30, 1998 salaries and benefits of $4,866,332. The Company began
strategic layoffs during the second quarter of 1999 compared to increasing staff
during the second quarter of 1998. Despite such strategic staff reductions,
salaries and benefits increased due mainly to the increased health claims by
employees from the Company's employee benefit program.

General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 1999 of $3,686,387 represent an increase of
$811,503 from the six months ended June 30, 1998 general and administrative
expense of $2,874,884. Despite the Company's continuing efforts to reduce costs,
general and administrative expenses increased due to higher professional
expenses relating to the Company's retention of legal counsel to protect its
interest in its litigation with Dynex. The Company relocated its headquarters to
a larger facility June 15, 1998 and had a corresponding higher facilities
expense.

Impairment of Retained Interest in Securitizations. The Company
periodically reviews the carrying value of the retained interest in
securitizations. The Company recorded a charge against earnings for impairment
of these assets of $2,572,207 for the six months ended June 30, 1999 as compared
with an impairment of $5,877,825 for the six months ended June 30, 1998. This
impairment reflects the revaluation of expected future cash flows to the Company
from securitizations. See Note 4 to the Consolidated Financial Statements.

Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) for the
six months ended June 30, 1999 of $1,873,893 represent an increase of $345,024
from the six months ended June 30, 1998 other operating expenses of $1,528,869.
-- 16 --

The increase was mainly due to a market valuation allowance for finance
contracts held for sale.

Income Tax. Income tax benefit for the six months ending June 30, 1999 was
$101,800 which represents a decrease of $2,626,162 compared with an income tax
benefit of $2,727,962 for the six months ended June 30, 1998 due to the
establishment of a valuation allowance for the Company's deferred tax assets of
$3,050,776.

FINANCIAL CONDITION

Cash and Cash Equivalents. Cash and cash equivalents decreased $4,798,595
to $372,374 at June 30, 1999 from $5,170,969 at December 31, 1998. The decrease
in cash and cash equivalents was largely the result of an operating loss of
$6,145,274 primarily caused by the termination by Dynex of the Funding
Agreement. Other decreases in cash and cash equivalents were the result of
purchases of finance contracts. These declines were partially offset by the
receipt of $6,573,107 in the first quarter of 1999 from Dynex, which was
outstanding at December 31, 1998.

Finance Contracts Held for Sale. Finance contracts held for sale, net of
allowance for losses, increased $4.8 million to $5.7 million at June 30, 1999
from $0.9 million at December 31, 1998. The number and principal balance of
contracts held for sale are largely dependent upon the timing and size of the
Company's securitizations. The Company securitized finance contracts on a
regular basis through the Dynex Funding Agreement until February 9, 1999. The
balance in finance contracts held for sale outstanding at June 30, 1999
consisted of loans originated with intent to sell to Dynex. In July 1999,
$5,960,346 in outstanding finance contracts were sold for proceeds of
$5,006,690. Future acquisitions of finance contracts for securitization and sale
are uncertain.

The Company maintains an allowance for, and reports a provision for, losses
on finance contracts held for sale. Management evaluates the reasonableness of
the assumptions employed by reviewing credit loss experience, delinquencies,
repossession trends, the size of the finance contract portfolio and general
economic conditions and trends. If necessary, assumptions will be changed in the
future to reflect historical experience to the extent it deviates materially
from that which was assumed.

Other Assets. Other assets decreased $402,791 to $1,060,255 at June 30,
1999 from $1,463,046 at December 31, 1998. The Company received approximately
$0.8 million of withheld administrator fees and expenses. Certain trustees have
continued to withhold administrator fees and expenses and to deposit same into a
separate bank account earning interest. The total amount withheld and deposited
into a separate account is approximately $ 0.5 million as of June 30, 1999, due
to the Company.

Retained Interests in Securitizations. An impairment review of the retained
interests in securitizations is performed quarterly by estimating the net
present value of the expected future cash flows after giving effect to changes
in assumptions due to market and economic changes and the performance of the
loan pool to date. The discount rate used is an estimated market rate, currently
15% to 17%. To the extent that the Company deems the asset to be permanently
impaired, the Company records a charge against earnings. The Company recorded a
charge against earnings of $2,572,207 during the six months ended June 30, 1999
as a result of the impairment review of the retained interests in
securitizations.

Prior to the Dynex Funding Agreement, at the time a securitization closed,
the Company's securitization subsidiary was required to fund a cash reserve
account within the trust to provide additional credit support for the senior
investor securities. Additionally, depending on the structure of the
securitization, a portion of the future excess spread cash flows from the trust
is required to be deposited in the cash reserve account to increase the initial
deposit to a specified level. A portion of excess spread cash flows will
increase such reserves until they reach a target reserve level (initially 6%) of
the outstanding balance of the senior investor securities. The trust receivables
are ultimately payable to the Company as owner of retained interests and are
included in the estimated cash flow of such retained interests. (i.e., the "cash
out" method).
-- 17 --

The following amounts are included in retained interests in securitizations as
of:

December 31, 1998 June 30, 1999
------------------ --------------

Trust receivable . . . . . . . . . . . . . $ 2,236,362 $ 985,321
Class B notes receivable . . . . . . . . . 4,586,908 3,419,684
Interest only strip receivable . . . . . . 7,050,081 5,436,442
Total retained interest in securitizations $ 13,873,351 $ 9,841,447
================== ==============

Trading . . . . . . . . . . . . . $ 4,586,908 $ 3,419,684
Available for sale. . . . . . . . $ 9,286,443 $ 6,421,763

Notes Payable and Non-Recourse Debt

The following amounts are included in notes payable and non-recourse debt as of:

December 31, June 30,
1998 1999
------------- -----------

Non-recourse notes payable, collateralized by Class B Certificates $ 3,185,050 $ 2,017,826
Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes, net of discount. . . . . . . . . . 7,143,627 7,227,581
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . . 23,342 12,060
------------- -----------
$ 13,352,019 $12,257,467
============= ===========

DELINQUENCY EXPERIENCE

The following table reflects the delinquency experience of the Company's finance contract
portfolio:
December 31, 1998 June 30, 1999
----------------- -------------

Principal balance of finance contracts outstanding $210,947,939 $153,197,215
Delinquent finance contracts (1):
Two payments past due. . . . . . . . . . . . . . . $ 20,689,671 9.81% $13,161,950 8.59%
Three payments past due. . . . . . . . . . . . . . 7,901,166 3.75% 4,082,873 2.67%
Four or more payments past due . . . . . . . . . . 5,214,162 2.47% 2,524,413 1.65%
------------ ------ ----------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 33,804,999 16.03% $19,769,236 12.90%
============ ====== =========== ======
- ---------------------------------------------------------------------------------------------
<FN>

(1) Percentage based upon outstanding balance. Delinquency balances outstanding excludes finance
contracts where the underlying vehicle is repossessed, where a dealer (seller) buyback is expected,
where a skip claim is paid and where a primary insurance claim is filed.

CREDIT LOSS EXPERIENCE

If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary repossessions. In most jurisdictions, notice to the
borrower of the Company's intention to sell the repossessed vehicle is required,
whereupon the borrower may exercise certain rights to cure the default and
redeem the automobile. Following the expiration of the legally required notice
period, the repossessed vehicle is sold at a wholesale auto auction (or in
limited circumstances, through dealers), usually within 60 days of the
repossession. The Company closely monitors the condition of vehicles set for
auction, and procures an appraisal under the relevant VSI policy prior to sale.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the finance contract and insurance claims under the VSI policy and, if
applicable, the deficiency balance is then filed.

Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. This effect on the delinquency statistics can
be observed in the comparison of 1999 versus 1998 delinquency percentages.
Accordingly, delinquency and charge-off rates in the portfolio may not fully
-- 18 --

reflect the rates that may apply when the average holding period for finance
contracts in the portfolio is longer. Increases in the delinquency and/or
charge-off rates in the portfolio would adversely affect the Company's ability
to obtain credit or securitize its receivables.

REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS

Because the Company's finance contract portfolio is unseasoned, management
does not manage losses on the basis of a percentage of the Company's finance
contract portfolio, because percentages can be favorably affected by large
balances of recently acquired finance contracts. Management monitors actual
dollar levels of delinquencies and charge-offs and analyzes the data on a
"static pool" basis.

The following tables provide static pool repossession frequency analysis in
dollars of the Company's portfolio from inception through June 30, 1999. All
finance contracts have been segregated by quarter of acquisition. All
repossessions have been segregated by the quarter in which the repossessed
contract was originally acquired by the Company. Cumulative repossessions equals
the ratio of repossessions as a percentage of finance contracts acquired for
each segregated quarter. Annualized repossessions equals an annual equivalent of
the cumulative repossession ratio for each segregated quarter. This table
provides information regarding the Company's repossession experience over time.
For example, recently acquired finance contracts demonstrate very few
repossessions because properly underwritten finance contracts to sub-prime
consumers generally do not normally default during the initial term of the
contract. Between approximately one year and 18 months of seasoning, frequency
of repossessions on an annualized basis appear to reach a plateau. Based on
industry statistics and the performance experience of the Company's finance
contract portfolio, the Company believes that finance contracts seasoned in
excess of approximately 18 months will start to demonstrate declining
repossession frequency. The Company believes this may be due to the fact that
the borrower perceives that he or she has equity in the vehicle. The Company
also believes that the finance contracts generally amortize more quickly than
the collateral depreciates, and therefore losses and/or repossessions will
decline over time.

-- 19 --

ALL INCLUSIVE (3)

Repossession Frequency
----------------------

Principal Balance at
Default of Failed Original Principal
Year and Loans by Cumulative Annualized Balance of
Quarter of Acquisition Quarter Acquired Percentage (1) Percentage (2) Contracts Acquired
- -------------------------------------------------------------------------------------------------------

1994
1 Q3 . . . . . . . . . . $ 22,046 21.79% 4.36% $ 101,161
2 Q4 . . . . . . . . . . 636,413 26.11% 5.50% 2,437,674
1995
3 Q1 . . . . . . . . . . 1,935,911 30.68% 6.82% 6,310,421
4 Q2 . . . . . . . . . . 1,820,416 30.01% 7.06% 6,190,596
5 Q3 . . . . . . . . . . 2,243,380 30.99% 7.75% 7,239,813
6 Q4 . . . . . . . . . . 4,311,271 35.37% 9.43% 12,188,863
1996
7 Q1 . . . . . . . . . . 5,361,438 34.68% 9.91% 15,460,823
8 Q2 . . . . . . . . . . 6,968,381 37.63% 11.58% 18,520,410
9 Q3 . . . . . . . . . . 7,957,266 28.32% 9.44% 28,098,899
10 Q4 . . . . . . . . . . 8,892,738 36.38% 13.23% 24,442,500
1997
11 Q1 . . . . . . . . . . 12,552,449 35.99% 14.40% 34,875,869
12 Q2 . . . . . . . . . . 11,541,094 32.69% 14.53% 35,305,817
13 Q3 . . . . . . . . . . 9,778,673 28.24% 14.12% 34,629,616
14 Q4 . . . . . . . . . . 9,769,261 22.14% 12.65% 44,120,029
1998
15 Q1 . . . . . . . . . . 5,731,710 19.33% 12.89% 29,650,808
16 Q2 . . . . . . . . . . 3,839,579 16.76% 13.41% 22,911,290
17 Q3 . . . . . . . . . . 2,250,941 9.57% 9.57% 23,528,924
18 Q4 . . . . . . . . . . 2,250,171 5.23% 6.98% 43,006,049
1999
19 Q1 . . . . . . . . . . 677,154 3.33% 6.66% 20,336,852
<FN>

(1) For each quarter, cumulative loss frequency equals the gross principal loss divided by the
gross amount financed of the contracts acquired during that quarter.
(2) Annualized loss frequency converts cumulative loss frequency into an annual equivalent (e.g.,
for Q4 1997, principal balance of $9,769,261 in losses divided by $44,120,029 in amount financed of the
contracts acquired, divided by 7 quarters outstanding times 4 equals an annual loss frequency of
12.65%).

(3) Included are the loans that were repossessed, paid by customers' primary insurance, paid by
skip claim, paid by dealer and charged off due to certain reasons.

-- 20 --

REPO AND SKIP (3)

Repossession Frequency
----------------------

Year and Principal Balance at Cumulative Annualized Original Principal
Quarter of Default of Failed Loans Percentage (1) Percentage (2) Balance of
Acquisition by Quarter Acquired Contracts Acquired
- -----------------------------------------------------------------------------------------------

1994
1 Q3. . . . . $ 22,046 21.79% 4.36% $ 101,161
2 Q4. . . . . 628,707 25.79% 5.43% 2,437,674
1995
3 Q1. . . . . 1,727,566 27.38% 6.08% 6,310,421
4 Q2. . . . . 1,709,949 27.62% 6.50% 6,190,596
5 Q3. . . . . 2,002,237 27.66% 6.91% 7,239,813
6 Q4. . . . . 3,904,417 32.03% 8.54% 12,188,863
1996
7 Q1. . . . . 4,970,809 32.15% 9.19% 15,460,823
8 Q2. . . . . 6,261,014 33.81% 10.40% 18,520,410
9 Q3. . . . . 7,029,555 25.02% 8.34% 28,098,899
10 Q4. . . . . 8,012,253 32.78% 11.92% 24,442,500
1997
11 Q1. . . . . 11,303,310 32.41% 12.96% 34,875,869
12 Q2. . . . . 10,515,491 29.78% 13.24% 35,305,817
13 Q3. . . . . 8,825,061 25.48% 12.74% 34,629,616
14 Q4. . . . . 8,561,356 19.40% 11.09% 44,120,029
1998
15 Q1. . . . . 5,073,198 17.11% 11.41% 29,650,808
16 Q2. . . . . 3,404,642 14.86% 11.89% 22,911,290
17 Q3. . . . . 1,944,803 8.27% 8.27% 23,528,924
18 Q4. . . . . 1,838,142 4.27% 5.70% 43,006,049
1999
19 Q1. . . . . 542,360 2.67% 5.33% 20,336,852
<FN>

(1) For each quarter, cumulative loss frequency equals the gross principal loss divided by
the gross amount financed of the contracts acquired during that quarter.
(2) Annualized loss frequency converts cumulative loss frequency into an annual equivalent
(e.g., for Q4 1997, principal balance of $8,561,356 in losses divided by $44,120,029 in amount
financed of the contracts acquired, divided by 7 quarters outstanding times 4 equals an annual
loss frequency of 11.09%).
(3) Included are the loans that were repossessed, and paid by skip claim.

-- 21 --

NET LOSS PER REPOSSESSION

Upon initiation of the repossession process, it is the Company's intent to
complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. As less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
table demonstrates the net charge-off per repossessed automobile since
inception:

From August 1, 1994 (Inception) to June 30, 1999 Loans with Loans All Loans
Default Without
Insurance Default
Insurance
----------- ------------- -------------

Number of finance contracts acquired 34,967
Number of vehicles repossessed . . . . . . . . . . . . . . . . . . 6,670 3,093 9,763
Repossessed units disposed of. . . . . . . . . . . . . . . . . . . 4,021 2,404 6,425
Repossessed units awaiting disposition (1) . . . . . . . . . . . . 2,649 689 3,338
Cumulative gross charge-offs . . . . . . . . . . . . . . . . . . . $ 40,008,976 $ 24,934,329 $ 64,943,305
Costs of repossession. . . . . . . . . . . . . . . . . . . . . . . 1,859,105 1,056,317 2,915,422
Recoveries:
Proceeds from auction, physical damage insurance and refunds (2) (22,284,570) (14,111,805) (36,396,375)
Deficiency insurance settlement received . . . . . . . . . . . . (10,346,549) 0 (10,346,549)
------------- ------------- -------------
Net charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,236,962 $ 11,878,841 $ 21,115,803
============= ============= =============
Net charge-offs per unit disposed. . . . . . . . . . . . . . . . . $ 2,297 $ 4,941 $ 3,287
Net charge-offs as a percentage of cumulative gross charge-offs. . 23.09% 47.64% 32.51%
Recoveries as a percentage of cumulative gross charge-offs . . . . 81.56% 56.60% 71.97%
------------- ------------- -------------
<FN>

(1) The vehicles may have been sold at auction; however the Company might not have received all insurance
proceeds as of June 30, 1999.
(2) Amounts are based on actual liquidation and repossession proceeds (including insurance proceeds) received
on units for which the repossession process had been completed as of June 30, 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires access to significant sources and amounts of cash to
fund its operations and to acquire and securitize finance contracts. The
Company's primary operating cash requirements include the funding of (i) the
acquisition of finance contracts prior to securitization, (ii) the initial cash
deposits to reserve accounts in connection with the warehousing and
securitization of contracts in order to obtain such sources of financing, (iii)
fees and expenses incurred in connection with the warehousing and securitization
of contracts and (iv) ongoing administrative and other operating expenses. The
Company has traditionally obtained these funds in three ways: (a) loans and
warehouse financing arrangements, pursuant to which acquisition of finance
contracts are funded on a temporary basis; (b) securitizations or sales of
finance contracts, pursuant to which finance contracts are funded on a permanent
basis; and (c) general working capital, which if not obtained from operations,
may be obtained through the issuance of debt or equity. Failure to procure
funding from all or any one of these sources could have a material adverse
effect on the Company.

Since early February 1999, the Company's management has been attempting to
procure alternative sources of funding and other strategic alternatives, in
order to mitigate the situation with Dynex. The Company is currently in
discussions with several investment bankers and direct sources regarding such
alternatives, which may include joint ventures, or changes in control of the
Company. While management hopes that an alternative opportunity will be
consummated, the Company has suspended origination of finance contracts until
alternative funding sources are obtained. However, there can be no assurance
that such funding will be obtained. On July 19, 1999, the Company announced that
it had entered into an agreement to originate finance contracts on behalf of
-- 22 --

another company. The Company expects to receive $400 per originated contract.
The Company currently is finalizing the operational details of the agreement. As
a consequence, the Company is reporting a loss for the second quarter of 1999
and did not pay the quarterly dividend on its Preferred Stock otherwise payable
on each of March 31, 1999 and June 30, 1999. Until financing or other strategic
alternatives are consummated, the Company is taking steps to reduce its
personnel and operating expenses associated with origination activities. Also,
parties to the Company's various securitization transactions could request that
the Company surrender servicing, although management does not believe such
parties have the right to terminate servicing under the respective agreements.
The Company expects to continue its servicing operations. See "
Revenues-Servicing Income" above.

Management believes the Company has sufficient liquidity to meet its
current obligations and continue its servicing activities through year-end.
Subsequent liquidity will need to be obtained through alternative funding
sources or favorable results in the Company's litigations with Dynex and
Progressive.

Cash Flows. Significant cash flows related to the Company's operating
activities include the use of cash for purchases of finance contracts, and cash
provided by payments on finance contracts, collections on retained interests and
sales of finance contracts. Net cash used by operating activities totaled $4.6
million during the six months ended June 30, 1999. Significant activities
comprising cash flows used by investing activities consisted of purchases of
property, plant and equipment. There were no significant cash flows from
financing activities during the six months ended June 30, 1999.

Revolving Credit Facilities. The Company historically obtained a
substantial portion of its working capital for the acquisition of finance
contracts through revolving credit facilities. Under a warehouse facility, the
lender generally advances amounts requested by the borrower on a periodic basis,
up to an aggregate maximum credit limit for the facility, for the acquisition of
finance contracts or other similar assets. Until proceeds from a securitization
transaction are used to pay down outstanding advances, as principal payments are
received on the finance contracts the principal amount of the advances may be
paid down incrementally or reinvested in additional finance contracts on a
revolving basis.

On June 9, 1998, the Company and Dynex Capital, Inc. ("Dynex") entered into
an arrangement whereby the Company obtained a commitment from Dynex to purchase
all currently warehoused and future automobile finance contract acquisitions
through at least May 31, 1999 (the "Funding Agreement"). The terms of the
Funding Agreement were modified on June 30, October 20, and October 28, 1998.
Under the prior terms of the Funding Agreement, the Company transferred finance
contracts to AutoBond Master Funding Corporation V ("Master Funding V"), a
qualified unconsolidated special purpose subsidiary, and Dynex provided credit
facilities in an amount equal to 104% of the unpaid principal balance of the
finance contracts (the "Advance Rate"). The Company received the proceeds of
such facilities. The modified terms of the Funding Agreement reduced the Advance
Rate from 104% to 88% for an interim period (the "Interim Period") ending
December 31, 1998. At the end of the Interim Period, the Advance Rate reverted
to 104% and Dynex was to advance to Master Funding V an additional amount equal
to 16% of the unpaid principal balance of finance contracts financed by Dynex
during the Interim Period. This additional amount receivable from Dynex totaled
$6.5 million at December 31, 1998, and was collected in January and February
1999. Advances under the Funding Agreement are evidenced by Class A Notes and
Class B Notes (collectively, the "Notes") issued by Master Funding V to Dynex.
The Class A Notes were issued in a principal amount equal to 94.0% of the unpaid
principal balance of the finance contracts (88.0% for advances funded during the
Interim Period) and bear interest at a rate equal to 190 basis points over the
corporate bond equivalent yield on the three-year U.S. Treasury note on the
closing date for each such advance. The Class B Notes were issued in a principal
amount equal to 10.0% of the unpaid principal balance of the finance contracts
(0.0% for advances funded during the Interim Period) and bear interest at a rate
equal to 16% per annum. The Company retains a subordinated interest in the
pooled finance contracts. Transfers of finance contracts to the qualified
special purpose entity have been recognized as sales under SFAS No. 125. At
June 30, 1999 advances by Dynex under the Funding Agreement totaled $169.2
million. See "Legal Proceedings.

-- 23 --

William O. Winsauer, Chief Executive Officer and Chairman of the Board of
Directors of the Company (the "Board"), Adrian Katz, Chief Operating Officer,
Chief Financial Officer and Vice Chairman of the Board and John S. Winsauer,
Secretary and a member or the Board (collectively, the "Shareholders"), entered
into a Stock Option Agreement (the "Stock Option Agreement") with Dynex Holding,
Inc. ("Dynex Holding") wherein the Shareholders granted to Dynex Holding an
option (the "Option") to purchase all of the shares of the Company's common
stock owned by the Shareholders (approximately 85% of the Company's current
outstanding common stock) at a price of $6.00 per share. The Option was
exercisable in whole and not in part at anytime up to and including July 31,
1999. If the Company elected to exercise its option to extend the commitment
termination date under the Funding Agreement, the expiration date of the Option
would have been extended to match such commitment termination date. In the
event that Dynex Holding exercised its Option, the exercise price of the Option
would have been payable in shares of a newly issued series of convertible
preferred stock of Dynex Capital, Inc. ("Dynex Preferred"). The number of Dynex
Preferred shares to be issued would have been equal to the product of the number
of shares of the Company's common stock subject to the Option and $6.00, divided
by 115% of the average of the closing prices per share of the common stock of
Dynex Capital, Inc. ("Dynex Common") for the ten consecutive trading days ending
immediately prior to the exercise of the Option. Upon exercise of the Option,
Dynex Holding would have delivered to each of the Shareholders 80% of his pro
rata share of the Dynex Preferred shares, with the balance to be held by Dynex
Holding subject to certain terms and conditions contained in the Option
Agreement and in each Shareholder's employment agreement with Dynex. The Dynex
Preferred would have paid dividends at 9% per annum and would have been
convertible into shares of Dynex Common at an initial conversion rate of 1 to 1.
As a result of the termination by Dynex of its obligations under the Funding
Agreement, the Shareholders have terminated the Option granted under the Stock
Option Agreement. See "Legal Proceedings".

In January 1998, the Company privately placed with BancBoston Investments,
Inc. ("BancBoston") $7,500,000 in aggregate principal amount of its 15% Senior
Subordinated Convertible Notes due 2001 (the "Subordinated Notes"). Interest on
the Subordinated Notes is payable quarterly, with the principal amount due on
February 1, 2001. The Subordinated Notes are convertible at the option of the
holder for up to 368,462 shares of the Company's common stock, at a conversion
price of $3.30 per share, subject to adjustment under standard anti-dilution
provisions. In the event of a change of control transaction, the holder of the
Subordinated Notes may require the Company to repurchase the Subordinated Notes
at 100% of the principal amount plus accrued interest. The Subordinated Notes
are redeemable at the option of the Company on or after July 1, 1999 at
redemption prices starting at 105% of the principal amount, with such premium
reducing to par on and after November 1, 2000, plus accrued interest. The
Subordinated Notes were issued pursuant to an Indenture, dated as of January 30,
1998 (the "Indenture") between the Company and BankBoston, N.A., as agent. The
Indenture contains certain restrictive covenants including (i) a consolidated
leveraged ratio not to exceed 2 to 1 (excluding non-recourse warehouse debt and
securitization debt), (ii) limitations on payments such as dividends (but
excluding, so long as no event of default has occurred under the Indenture,
dividends or distributions on the Preferred Stock of the Company), (iii)
limitations on sales of assets other than in the ordinary course of business and
(iv) certain financial covenants, including a minimum consolidated net worth of
$12 million (plus proceeds from equity offerings), a minimum ratio of EBITDA to
interest of 1.5 to 1, and a maximum cumulative repossession ratio of 27%.
Events of default under the Indenture include failure to pay, breach of
covenants, cross-defaults in excess of $1 million or material breach of
representations or covenants under the purchase agreement with BancBoston. Net
proceeds from the sale of the Subordinated Notes were used to pay short-term
liabilities, with the remainder available to provide for the repayment of the
Company's 18% Convertible Secured Notes and for working capital. The Company
capitalized debt issuance costs of $594,688, and recorded a discount of $507,763
on the debt representing the value of warrants issued in connection therewith.
The debt issuance cost and discount is being amortized as interest expense on
the interest method through February 2001.

At June 30, 1999 the Company did not meet certain of its financial
covenants on the Subordinated Notes, which constitutes an event of default on
the Subordinated Notes. The ability of the Company to meet such covenants is
dependent upon future earnings. The Company has made all payments due on its
Subordinated Notes and expects to continue to meet such obligations. The
Subordinated Notes have not been formally accelerated by BancBoston; however if
such acceleration were made, BancBoston could declare such amounts immediately
due.

-- 24 --

On June 9, 1998, the Company sold to Dynex at par $3 million of its 12%
Convertible Senior Notes due 2003 (the "Senior Notes"). Interest on the Senior
Notes is payable quarterly in arrears, with the principal amount due on June 9,
2003. The Senior Notes were convertible at the option of Dynex on or before May
31, 1999 into shares of the Company's common stock at a conversion price of
$6.00 per share. Demand and "piggyback" registration rights with respect to the
underlying shares of common stock were granted. Dynex claims that the Senior
Notes are now in default due, among other things, to the impairment of the Stock
Option, an assertion which the Company disputes. To date, the Company has made
all interest payments due on the Senior Notes.

Securitization Program. In its securitization transactions through the end
of 1996, the Company sold pools of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to a trust in exchange for
cash and certain retained beneficial interests in future excess spread cash
flows. The trust issued two classes of fixed income investor certificates:
"Class A Certificates" which were sold to investors, generally at par with a
fixed coupon, and subordinated excess spread certificates ("Class B
Certificates"), representing a senior interest in excess spread cash flows from
the finance contracts, which were typically retained by the Company's
securitization subsidiary and which collateralize borrowings on a non-recourse
basis. The Company also funded a cash reserve account that provides credit
support to the Class A Certificates. The Company's securitization subsidiaries
also retained a "Transferor's Interest" in the contracts that is subordinate to
the interest of the senior certificate holders.

In the Company's March 1997, August 1997 and October 1997 securitization
transactions, the Company sold a pool of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to an indenture trustee.
Under the trust indenture, the special purpose subsidiary issued three classes
of fixed income investor notes, which were sold to investors, generally at par,
with fixed coupons. The subordinated notes represent a senior interest in
certain excess spread cash flows from the finance contracts. In addition, the
securitization subsidiary retained rights to the remaining excess spread cash
flows. The Company also funded cash reserve accounts that provide credit support
to the senior class or classes.

The retained interests entitle the Company to receive the future cash flows
from the trust after payment to investors, absorption of losses, if any, that
arise from defaults on the transferred finance contracts and payment of the
other expenses and obligations of the trust.

The Company has relied significantly on a strategy of periodically selling
finance contracts through asset-backed securitizations. The Company's ability to
access the asset-backed securities market is affected by a number of factors,
some of which are beyond the Company's control and any of which could cause
substantial delays in securitization including, among other things, the
requirements for large cash contributions by the Company into securitizations,
conditions in the securities markets in general, conditions in the asset-backed
securities market and investor demand for sub-prime auto paper. Additionally,
gain on sale of finance contracts represents a significant portion of the
Company's total revenues and, accordingly, net income. If the Company were
unable to sell finance contracts or account for any securitization as a sale
transaction in a financial reporting period, the Company would likely incur a
significant decline in total revenues and net income or report a loss for such
period. Moreover, the Company's ability to monetize excess spread cash flows has
been an important factor in providing the Company with substantial liquidity. If
the Company were unable to sell its finance contracts and did not have
sufficient credit available, either under warehouse credit facilities or from
other sources, the Company would have to sell portions of its portfolio directly
to whole loan buyers or curtail its finance contract acquisition activities.

On May 19, 1998, Moody's announced that the ratings on the senior
securities issued in the Company's term securitization were reduced to Bal (B2
for the 1997-B and 1997-C transactions), expressing concerns including (i) the
alleged non-adherence to the transaction documents with regard to charge-off
policy and the calculation of delinquency and loss triggers, (ii) the Company's
procedures for allocating prepaid insurance among the trusts, (iii) instances of
the Company waiving fees and making cash contributions to the transactions to
enhance their performance, and (iv) "instances of commingled collections."
While the Company was not requested by Moody's to provide legal guidance as to
whether or not these factors would as a matter of law "increase the uncertainty"
with respect to the transactions, the Company does note the following: (i) with
-- 25 --

the transfer of servicing from LSE now completed, the Company believes that it
is servicing in accordance with the documentation; (ii) the transaction
documents did not contemplate the allocation of prepaid insurance claims, a
phenomenon brought about by the Company's prevailing upon Interstate to speed up
the payment of claims for the benefit of the trusts in a manner the Company
believes is fair to the trusts; (iii) the transaction documents do not prohibit
fee waivers and explicitly permit the Company to make voluntary capital
contributions to the trusts; and (iv) at the insistence of the former servicer,
collections have always been directed to omnibus lockboxes in the name of, and
under the control of, the former servicer and the transaction trustees and, the
trustee is holding cash that is to be paid to certificate holders upon
reconciliation instructions from LSE.

The Company has engaged counsel who is presently performing the
deal-by-deal analysis of the structural and legal integrity of these
transactions to resolve the concerns raised by Moody's. In the meantime, the
Company has been notified by the trustees on certain of the securitizations that
the action of Moody's and the alleged causes constituted events of servicer
termination under such transactions. The trustees have threatened to remove the
Company as servicer on certain transactions, and have withheld servicing fees
due to the Company. Since the Company is of the view that no events of
servicing termination have occurred and that the transactions documents did not
intend for servicing compensation to the Company to be cut off where the cause
of an event of default is due to the actions of Progressive and LSE (the former
servicer), the Company is seeking to resolve those issues to the satisfaction of
all parties.

In June 1999, Moody's reaffirmed its ratings on the senior certificates in
the Company's outstanding rated securitizations as follows:

SECURITY RATING
- ------------------------------------------------------ ------

26,261,009 7.23% Class A Certificates, Series 1995-A B3

16,563,366 7.15% Class A Certificates, Series 1996-A Caa2
17,832,885 7.73% Class A Certificates, Series 1996-B Caa2
22,296,719 7.45% Class A Certificates, Series 1996-C Caa2
25,000,000 7.37% Class A Certificates, Series 1996-D Caa2

25,794,194 7.78% Class A Certificates, Series 1997-A B3

Whole Loan Sales On July 16, 1999, the Company sold 490 loans with a
principal balance of $5,960,346 to Crescent Bank at 84% of the outstanding
principal balance. Such loans were written down to market value prior to June
30, 1999 by a charge to other operating expenses. The purchase price was
$5,006,690. The Company received proceeds of $4,756,623 after deducting a 1%
commission of $50,067 and a $200,000 deposit to be withheld for 60 days.

Equity Offerings. In February 1998, the Company completed the underwritten
public offering of 1,125,000 shares of its 15% Series A Cumulative Preferred
Stock (the "Preferred Stock"), with a liquidation preference of $10 per share.
The price to the public was $10 per share, with net proceeds to the Company of
approximately $9,631,000. Such net proceeds have been utilized for working
capital purposes, including the funding of finance contracts. Dividends on the
Preferred Stock are cumulative and payable quarterly on the last day of March,
June, September and December of each year, commencing on June 30, 1998, at the
rate of 15% per annum. After three years from the date of issuance, the Company
may, at its option, redeem one-sixth of the Preferred Stock each year, in cash
at the liquidation price per share (plus accrued and unpaid dividends), or, if
in Common Stock, that number of shares equal to $10 per share of Preferred Stock
to be redeemed, divided by 85% of the average closing sale price per share for
the Common Stock for the 5 trading days prior to the redemption date. The
Preferred Stock is not redeemable at the option of the holder and has no stated
maturity.

-- 26 --

Because the Company is not in compliance with certain of the financial
covenants relating to its Subordinated Notes, the Company did not pay the
quarterly dividend on its Preferred Stock otherwise payable on each of March 31,
1999 and June 30, 1999. Because dividends on the Preferred Stock are in arrears
for two quarterly dividend periods, holders of the Preferred Stock have
exercised their right to call a special meeting of the Preferred Stock holders
for the purpose of electing two additional directors to serve on the Company's
Board until such dividend arrearage is eliminated. Such meeting is currently
scheduled for October 1, 1999. In addition, certain changes that could
materially affect the holders of Preferred Stock, such as a merger of the
Company, cannot be made without the affirmative vote of the holders of
two-thirds of the shares of Preferred Stock, voting as a separate class. The
Preferred Stock ranks senior to the Common Stock with respect to the payment of
dividends and amounts upon liquidation, dissolution or winding up.

On May 20, 1998, the Company and Promethean Investment Group, L.L.C.
("Promethean") entered into a common stock investment agreement (the "Investment
Agreement") and related registration rights agreement whereby Promethean agreed
to purchase from the Company, on the terms and conditions outlined below, up to
$20 million (subject to increase up to $25 million at Promethean's option) of
the Company's common stock. The Company must deliver a preliminary notice of its
intention to require Promethean to purchase its common shares at least ten but
not more than thirty days prior to the Company's delivery of its final notice.
The Company may deliver such final notice only if (i) the dollar volume-weighted
price of its common stock reported on the business day of such final notice is
at least $3.25 per share, (ii) at all times during the period beginning on the
date of delivery of the preliminary notice and ending on and including the
closing date (a) a registration statement covering the resale of no less than
150% of the shares to be sold to Promethean under the Investment Agreement has
been declared and remains effective and (b) shares of the Company's common stock
are at such time listed on a major national securities exchange, and (iii) the
Company has not delivered another final notice to Promethean during the
preceding twenty-five business days preceding delivery of such final notice.
Following receipt of a final notice, Promethean's purchase obligation will equal
the lowest of: (i) the amount indicated in such final notice, (ii) $5,000,000
and (iii) 20% of the aggregate of the daily trading dollar volume on the twenty
consecutive business days following delivery of the put notice. Promethean may,
in its sole discretion, increase the amount purchasable in the preceding
sentence by 125%. Promethean must conclude all required purchases of common
shares within twenty-five business days of receipt of the final notice. The
purchase price for the Company's shares will be equal to 95% of the lowest daily
dollar volume-weighted average price during the six consecutive trading days
ending on and including the date of determination. Promethean's obligation to
purchase shares under the Investment Agreement shall end either upon the mutual
consent of the parties or automatically upon the earliest of the date (i) on
which total purchases by Promethean under the Investment Agreement total
$20,000,000, (ii) which is two years after the effective date of the
registration statement relating to the common stock covered by the Investment
Agreement, or (iii) which is twenty-seven months from the date of the Investment
Agreement. In consideration of Promethean's obligations under the Investment
Agreement, the Company paid $527,915 in cash on August 19, 1998, which was
treated as an investment in a common stock agreement.

IMPACT OF INFLATION AND CHANGING PRICES

Although the Company does not believe that inflation directly has a
material adverse effect on its financial condition or results of operations,
increases in the inflation rate generally are associated with increased interest
rates. Because the Company borrows funds on a floating rate basis during the
period leading up to a securitization, and in many cases purchases finance
contracts bearing a fixed rate nearly equal but less than the maximum interest
rate permitted by law, increased costs of borrowed funds could have a material
adverse impact on the Company's profitability. Inflation also can adversely
affect the Company's operating expenses.

Because the Company is not currently originating or selling loans and
the Company's finance contracts and borrowing are fixed rate instruments, the
Company does not believe that inflation and changing prices has a material
effect on its financial condition or results of operations.

-- 27 --

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in its balance sheet and that it measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) is dependent upon the intended use of the
derivative and the resulting designation. SFAS No. 133 generally provides for
matching the timing of gain or loss recognition on the hedging instrument with
the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecast transaction. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, as amended, although
earlier application is encouraged. The Company plans to comply with the
provisions of SFAS No. 133 upon its initial use of derivative instruments. As
of June 30, 1999, no such instruments were being utilized by the Company. The
Company does not believe the implementation of SFAS No. 133 will have a material
effect on its consolidated financial statements.

YEAR 2000 COMPLIANCE

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
containing date-sensitive code could recognize a date ending with the digits
"00" as the year 1900 instead of the year 2000. This could result in a system
failure or in miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal activities.

As a specialty consumer finance company, the Company substantially depends
on its computer systems and proprietary software applications in underwriting,
acquiring, servicing and securitizing finance contracts. As a result of
initiatives undertaken in the development of its proprietary software systems,
all of the Company's systems and software applications have been designed around
a 'pivot' year, which effectively renders the transition to the year 2000 as
innocuous as any year change. The efficacy of certain of the Company's systems
and software applications in handling Year 2000 issues has been demonstrated
repeatedly in the system's ability to calculate payments streams accurately on
finance contracts with maturity dates that extend beyond December 31, 1999.
Based on its review of the likely impact of the Year 2000 on its business, the
Company believes that it is working constructively toward making its critical
and operational applications Year 2000 compliant.

Nevertheless, the Company may be exposed to the risk that other service
providers may not be in compliance. While the Company does not foresee that the
Year 2000 will pose significant operational problems, the failure of its
vendors, customers or financial institutions to become Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition
and results of operations. To date, the Company has not formulated any
contingency plans to address such consequences.

-- 28 --

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments. The Company's market risk management procedures include all market
risk sensitive financial instruments. The Company has no derivative financial
instruments, exposure to currency exchange rates or commodity prices.

All of the Company's debt is fixed rate and the Company's earnings and cash
flows from retained interests in securitization and finance contracts, which are
at fixed rates, are not impacted by changes in market interest rates. The
Company manages market risk by striving to balance its finance contract
origination activities with its ability to sell such contracts in a short period
of time. Changes in the market value of its finance contracts and retained
interests may increase or decrease due to pre-payments and defaults influenced
by changes in market conditions and the borrowers' financial condition.

RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS

The statements contained in this document that are not historical facts are
forward looking statements. Actual results may differ from those projected in
the forward looking statements. These forward looking statements involve risks
and uncertainties, including but not limited to the following risks and
uncertainties: changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's loan products, and in general
economic conditions, including interest rates, the presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies; and the continued availability to the
Company of adequate funding sources. Investors are also directed to other risks
discussed in documents filed by the Company with the SEC.

-- 29 --

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
In the normal course of its business, the Company is from time to time made
a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating dealer and name the Company
and/or its assignees as subsequent holders of the finance contracts. To date,
none of these actions have resulted in the payment of damages or any judgments
therefor, by the Company or its assignees, nor have any actions been certified
as eligible for class-action status.

On February 8, 1999, the Company, AutoBond Master Funding Corporation V, a
wholly-owned subsidiary of the Company ("Master Funding V"), William O.
Winsauer, the Chairman and Chief Executive Officer of the Company, John S.
Winsauer, a Director and the Secretary of the Company, and Adrian Katz, the
Vice-Chairman, Chief Financial Officer and Chief Operating Officer of the
Company (collectively, the "Plaintiffs") commenced an action in the District
Court of Travis County, Texas (250th Judicial District) against Dynex and James
Dolph (collectively, the "Defendants"). This action is hereinafter referred to
as the "Texas Action". The Company and the other Plaintiffs assert in the Texas
Action that Dynex breached the terms of the Funding Agreement. Such breaches
include delays and shortfalls in funding the advances required under the Funding
Agreement and ultimately the refusal by Dynex to fund any further advances under
the Funding Agreement. Plaintiffs also allege that Dynex and Mr. Dolph
conspired to misrepresent and mischaracterize the Company's credit underwriting
criteria and its compliance with such criteria with the intention of interfering
with and causing actual damage to the Company's business, prospective business
and contracts. The Plaintiffs assert that Dynex' funding delays and ultimate
breach of the Funding Agreement were intended to force the Plaintiffs to
renegotiate the terms of their various agreements with Dynex and related
entities. Specifically, the Plaintiffs assert that Dynex intended to force the
Company to accept something less than Dynex' full performance of its obligations
under the Funding Agreement. Further, Dynex intended to force the controlling
shareholders of the Company to agree to sell their stock in the Company to Dynex
or an affiliate at a share price substantially lower than the $6.00 per share
price specified in the Stock Option Agreement, dated as of June 9, 1998, by and
among Messrs. William O. Winsauer, John S. Winsauer and Adrian Katz
(collectively, the "Shareholders") and Dynex Holding, Inc. Plaintiffs in the
Texas Action request declaratory judgement that (i) Dynex has breached and is in
breach of its various agreements and contracts with the Plaintiffs, (ii)
Plaintiffs have not and are not in breach of their various agreements and
contracts with Defendants, (iii) neither the Company nor Master Funding V has
substantially or materially violated or breached any representation or warranty
made to Dynex, including but not limited to the representation and warranty that
all or substantially all finance contracts funded or to be funded by Dynex
comply in full with, and have been acquired by the Company in accordance with,
the Company's customary underwriting guidelines and procedures; and (iv) Dynex
is obligated to fund the Company in a prompt and timely manner as required by
the parties' various agreements. In addition to actual, punitive and exemplary
damages. The Texas Action has been set for trial in December 1999. Dynex' motion
to dismiss the Texas Action was denied by the court.

On March 1, 1999, the Company and the other Plaintiffs filed an application
in the Texas Action for a temporary injunction joining Dynex (i) from continuing
to suspend or withhold funding pursuant to the Funding Agreement, (ii) from
removing or attempting to remove the Company as servicer, and (iii) from making
any further false or defamatory public statements regarding the Plaintiffs. A
hearing was held on the Company's application during the week of August 2, 1999.
The court has denied the Company's application on points (i) and (iii) and has
taken point (ii) under advisement, along with Dynex' request that a temporary
injunction be granted removing the Company as servicer. The court has indicated
that it will announce its ruling on August 30, 1999.

breach of the Funding Agreement. Dynex also alleges that on February 8, 1999,
the Company refused to permit Mr. Dolph and representatives from Dynex access to
the books, records and finance contract files of the Company. Dynex concludes
that as a result of such alleged breaches, it is not obligated to provide
advances under the Funding Agreement. Dynex also seeks to recover damages
resulting from the Company's alleged breach of the parties' various agreements,
which alleged breach the Company vigorously denies. The Company, Messrs.
William O. Winsauer, John S. Winsauer and Adrian Katz filed a responsive
pleading on March 25, 1999. The Virginia Action (including the matters
transferred in the New York Action (discussed below)), by a judge's order dated
May 19, 1999, was transferred to Texas federal court.

On February 22, 1999, the same day that Dynex notified the Company of a
purported servicing termination, Dynex filed another action against the Company
in the United States District Court for the Southern District of New York (the
"New York Action"), seeking damages and injunctive relief for the Company's
alleged breaches under the servicing agreement among the Company, Dynex and
Master Funding V. The Company was not notified of the New York Action until
March 1, 1999, when Dynex sought a temporary restraining order against the
Company. After hearing argument from counsel for both sides, the temporary
restraining order was denied. On March 23, 1999, the court issued an order
transferring the action to the Federal District Court in the Eastern District of
Virginia. The Company remains the servicer and is performing in its capacity as
servicer.

In March 1998, after Progressive Northern Insurance ("Progressive")
purported to cancel the VSI and deficiency balance insurance policies issued in
favor of the Company (collectively, the "Policies"), the Company sued
Progressive, its affiliate, United Financial Casualty Co., and their agent in
Texas, Technical Risks, Inc., in the District Court of Harris County, Texas.
The action seeks declaratory relief confirming the Company's interpretation of
the Policies as well as claims for damages based upon breach of contract, bad
faith and fraud. The Company has received the defendants' answers, denying the
Company's claims, and discovery is proceeding. Progressive stopped paying
claims during the second quarter of 1998. As a result of the attempt by
Progressive to cancel its obligations and its refusal to honor claims after
March 1998, the Company has suffered a variety of damages, including impairment
of its retained interests in securitizations. The Company is vigorously
contesting the legitimacy of Progressive's actions through litigation. Although
a favorable outcome cannot be assured, success in the litigation could restore
at least some of the value of the Company's interests in such securitizations.
Conversely, if the court were to uphold Progressive's position, further
impairment of the Company's interests could occur, resulting in an adverse
effect on the Company's results of operations. This matter is currently set for
trial during the two-week period beginning September 20, 1999.

Also in March 1998, the Company commenced an action in Travis County,
Texas, against Loan Servicing Enterprise ("LSE"), alleging LSE's contractual
breach of its servicing obligations on a continuing basis. LSE has commenced an
action against the Company in Texas state court seeking recovery from the
Company of putative termination fees in connection with termination of LSE as
servicer. The Company expects the two actions to be consolidated. If the
Company prevails against LSE, some of the value of the Company's retained
interests in securitizations could be restored. Both suits have been voluntarily
suspended pursuant to an agreement negotiated by the parties.

claims-paying process having been streamlined. In particular, in order to speed
the claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate beneficiary for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.

In February 1997 the Company discovered certain breaches of representations
and warranties by certain dealers with respect to finance contracts sold into a
securitization. The Company honored its obligations to the securitization trust
and repurchased finance contracts totaling $619,520 from that trust during the
three months ended March 31, 1997. Of the total amount of these finance
contracts, $190,320 were purchased from one dealer. Although the Company has
requested that this dealer repurchase such contracts, the dealer refused. After
such dealer's refusal to repurchase, the Company commenced an action in the
157th Judicial District Court for Harris County, Texas against Charlie Thomas
Ford, Inc. to compel such repurchase. On favorable terms, the Company has
reached a settlement agreement with Charlie Thomas Ford, Inc. The Company has
received funds related to such settlement.

On March 31, 1999, a suit naming the Company and William O. Winsauer,
Adrian Katz and John S. Winsauer (in their capacities as controlling
shareholders of the Company) as defendants (the "Defendants") was filed in the
United States District Court for the Western District of Texas (Austin Division)
by Bruce Willis (the "Plaintiff"), a holder of the Company's Preferred Stock.
The suit alleges, among other things, that the Defendants violated Section 10(b)
of the Securities and Exchange Act of 1934 (and Rule 10b-5 promulgated
thereunder) in failing to disclose adequately and in causing misstatements
concerning the nature and condition of the Company's financing sources. The
suit also alleges that such actions constituted statutory fraud under the Texas
Business Corporation Act, common law fraud and negligent misrepresentation. The
Plaintiff seeks class action certification. The Plaintiff also seeks, among
other things, actual, special, consequential, and exemplary damages in an
unspecified sum, as well as costs and expenses incurred in connection with
pursuing the action against the Company. The Company believes that it has
consistently and accurately informed the public of its business and operations,
including the viability of its funding sources, and, as a consequence believes
the suit to be without merit and intends to vigorously defend against this
action.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At June 30, 1999 the Company did not meet certain of its financial
covenants, which failure constitutes an event of default on the Subordinated
Notes. The ability of the company to meet such covenants is dependent upon
future earnings. To date, the Company has made all payments due on its
Subordinated Notes. BancBoston has not formally accelerated the Subordinated
Notes, however if such acceleration were made, BancBoston could declare such
amounts immediately due.

Dynex has purportedly accelerated all amounts due under the Senior Note
Agreement dated June 9, 1998, by and between Dynex and the Company. The Company
disputes such purported acceleration.

Because dividends on the Preferred Stock are in arrears for two quarterly
dividend periods, holders of the Preferred Stock have exercised their right to
call a special meeting of the Preferred Stock holders for the purpose of
electing two additional directors to serve on the Company's Board of Directors
until such dividend arrearage is eliminated. Such meeting is currently
scheduled for October 1, 1999. In addition, certain changes that could
materially affect the holders of Preferred Stock, such as a merger of the
Company, cannot be made without the affirmative vote of the holders of
two-thirds of the shares of Preferred Stock, voting as a separate class. The
Preferred Stock ranks senior to the Common Stock with respect to the payment of
dividends and amounts upon liquidation, dissolution or winding up.

-- 32 --

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of shareholders was held on May 11, 1999 at
the Company's headquarters in Austin, Texas. At the meeting, William O.
Winsauer, Adrian Katz, John S. Winsauer, Thomas I. Blinten, Stuart A. Jones and
Robert Shuey III each were elected to additional one-year terms as directors of
the Company. In addition, the annual appointment of Deloitte and Touche, LLP as
the Company independent public accountants was ratified

A total of 5,530,750 shares (representing a quorum of 84% of the Company's
outstanding common stock) were voted at the meeting. 5,527,200 shares voted
"FOR" and 3,500 shares voted "AGAINST" the election of each William O. Winsauer,
Adrian Katz, John S. Winsauer, Thomas I. Blinten, and Robert Shuey III.
5,529,700 shares voted "FOR" the election of Stuart A. Jones while 3,500 shares
voted "AGAINST" and 2,500 shares were withheld. 5,528,400 shares voted "FOR" the
ratification of the independent public accountants, 850 shares voted "AGAINST"
such ratification and 1,500 shares were withheld

On July 13, 1999, the Company's Board of Directors approved an amendment to
the Company's by-laws, increasing the maximum number of directors to nine, in
order to accommodate the right of the holders of the Company's Preferred Stock
to designate two additional directors, for so long as two quarterly dividend
payments on such Preferred Stock remain unpaid. As of June 30, 1999, the Company
had not paid quarterly dividends due on each of March 31, 1999 and June 30,
1999.

ITEM 5. OTHER INFORMATION

On August 10, 1999, the Company received notice from NASDAQ-AMEX that the
Company may have fallen below certain of the AMEX' continued listing guidelines.
As a result, AMEX is reviewing the Company's listing eligibility.

-- 33 --

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

3.1 (1) Restated Articles of Incorporation of the Company
3.2 (1) Amended and Restated Bylaws of the Company
4.1 (1) Specimen Common Stock Certificate
10.1 (1) Amended and Restated Loan Origination, Sale and Contribution Agreement dated as of
December 15, 1995 by and between the Company and AutoBond Funding Corporation I
10.2 (1) Security Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II,
the Company and Norwest Bank Minnesota, National Association
10.3 (1) Credit Agreement and Side Agreement, dated as of May 21, 1996 among AutoBond
Funding Corporation II, the Company and Peoples Life Insurance Company
10.4 (1) Servicing Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II,
CSC Logic/MSA L.L.P., doing business as "Loan Servicing Enterprise", the Company
and Norwest Bank Minnesota, National Association
10.5 (1) Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and
between the Company and AutoBond Funding Corporation II
10.6 (1) Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31,
1995 between Sentry Financial Corporation and the Company
10.7 (1) Management Administration and Services Agreement dated as of January 1, 1996 between
the Company and AutoBond, Inc.
10.8 (1) Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9 (1) Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the
Company
10.10 (1) Vendor's Comprehensive Single Interest Insurance Policy and Endorsements, issued by
Interstate Fire & Casualty Company
10.11 (1) Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12 (1) Employee Stock Option Plan
10.13 (1) Dealer Agreement dated November 9, 1994, between the Company and Charlie Thomas
Ford, Inc.
10.14 (1) Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company,
First Fidelity Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15 (2) Servicing Agreement, dated as of January 29, 1997, between CSC LOGIC/MSA L.L.P.,
doing business as "Loan Servicing Enterprise" and the Company
10.16 (2) Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II,
the Company and Daiwa Finance Corporation
10.17 (2) Security Agreement, dated as of February 1, 1997, by and among AutoBond Funding
Corporation II, the Company and Norwest Bank Minnesota, National Association
10.18 (2) Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.19 (3) Automobile Loan Sale Agreement, dated as of March 26, 1997, by and between Credit
Suisse First Boston Mortgage Capital L.L.C., a Delaware limited liability company, and the
Company
10.20 (4) Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding
Corporation, the Company and Daiwa Finance Corporation
10.21 (4) Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond
Master Funding Corporation, the Company and Norwest Bank
Minnesota, National Association.
10.22 (4) Securities Purchase Agreement, dated as of June 30, 1997, by and among the Company,
Lion Capital Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23 (6) Credit Agreement, dated as of December 31, 1997, by and among AutoBond Master Funding
Corporation II, the Company and Credit Suisse First Boston Mortgage Capital L.L.P
10.24 (6) Trust Indenture, dated as of December 31, 1997, among AutoBond Master Funding
Corporation II, the Company and Manufacturers and Traders Trust Company
10.25 (6) Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse
First Boston Mortgage Capital L.L.P and the Company
10.26 (6) Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond
Master Funding Corporation II and Manufacturers and Traders Trust Company
10.27 (6) Indenture and Note, dated January 30, 1998, between the Company and BankBoston, N.A.
10.28 (6) Warrant, dated January 30, 1998, issued to BancBoston Investments, Inc.
10.29 (6) Purchase Agreement, dated January 30, 1998, between the Company and BancBoston
Investments, Inc.
10.30 (5) Warrant, dated February 2, 1998, issued to Dresner Investments Services, Inc.
10.31 (5) Warrant Agreement, dated February 2, 1998, issued to Tejas Securities Group, Inc.
10.32 (5) Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A.
Gonzalez and the Company
10.33 (5) Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the
Company
10.34 (7) 1998 Stock Option Plan
10.35 (7) Third Amendment to the Secured Revolving Credit Agreement dated May 5, 1998 between
Sentry Financial Corporation and the Company
10.36 (7) Warrant, dated March 31, 1998, issued to Infinity Investors Limited
10.37 (7) Credit Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.38 (8) Servicing Agreement, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company, and Dynex Capital, Inc.
10.39 (8) Trust Indenture, dated as of June 9, 1998, by and among AutoBond Master Funding
Corporation V, the Company and Dynex Capital, Inc.
10.40 (9) Letter Agreement, dated June 30, 1998 by and between the Company and Dynex Capital,
Inc.
10.41 (9) Letter Agreement dated October 20, 1998 by and between the Company and Dynex Capital,
Inc.
10.42 (9) Letter Agreement dated October 28, 1998 by and between the Company, Dynex Holding,
Inc., and Dynex Capital, Inc.
21.1 (4) Subsidiaries of the Company
21.2 (6) Additional Subsidiaries of the Company
21.3 (10) Additional Subsidiaries of the Company
27.1 Financial Data Schedule
- ---------
<FN>

1 Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-05359).
2 Incorporated by reference to the Company's 1996 annual report on Form 10-K for the year ended
December 31, 1996.
3 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997.
4 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended June
30, 1997.
5 Incorporated by reference to the Company's 1997 annual report on Form 10-K for the year ended
December 31, 1997.
6 Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-41257).
7 Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1998.
8 Incorporated by reference to the Company's report on Form 8-K filed on June 24, 1998.
9 Incorporated by reference to the Company's quarterly report on form 10-Q for the quarter ended
September 30, 1998.
10 Incorporated by reference to the Company's 1998 annual report on Form 10-K for the year ended
December 31, 1998.
- -----------------------------------------------------------------------------------------------------

-- 34 --

(B) Reports of Form 8-K

None.

-- 35 --

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 16, 1999.

AUTOBOND ACCEPTANCE CORPORATION
-------------------------------

BY:__/S/ WILLIAM O. WINSAUER__________
------------------------------------

WILLIAM O. WINSAUER, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER

BY:__/S/ ADRIAN KATZ _____________
------------------------------------------

ADRIAN KATZ, VICE CHAIRMAN OF THE BOARD,
CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER

-- 36 --