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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 March 31, 1999
OR
[ ] 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 November 15, 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 11
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities and use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EXHIBIT 27.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- ---------------
(UNAUDITED)
ASSETS
- ------------------------------------------------------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 5,170,969 $ 1,102,317
Receivable from Dynex Capital, Inc.. . . . . . . . . . . . . 6,573,107 -
Finance contracts held for sale, net . . . . . . . . . . . . 867,070 318,240
Collateral acquired, net . . . . . . . . . . . . . . . . . . 70,957 88,053
Retained interest in securitizations - Trading . . . . . . . 4,586,908 2,684,151
Retained interest in securitizations - Available for Sale. . 9,286,443 4,321,271
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . 729,206 461,328
Due from affiliates. . . . . . . . . . . . . . . . . . . . . 396,015 204,325
Property, plant, and equipment, net. . . . . . . . . . . . . 1,187,421 981,578
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,463,046 1,326,775
-------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 30,331,142 $ 11,488,038
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------
Liabilities:
Notes Payable. . . . . . . . . . . . . . . . . . . . . . . $ 10,166,969 $ 10,276,133
Non-recourse debt. . . . . . . . . . . . . . . . . . . . . 3,185,050 1,282,293
Payables and accrued liabilities . . . . . . . . . . . . . 1,324,951 776,292
Deferred income taxes. . . . . . . . . . . . . . . . . . . 101,800 -
-------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . $ 14,778,770 $ 12,334,718
-------------- ---------------
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 $1,265,625)
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) (19,456,654)
Investment in common stock agreement . . . . . . . . . . . . (527,915) (527,915)
-------------- ---------------
Total shareholders' equity. . . . . . . . . . . . . . . $ 15,552,372 $ (846,680)
-------------- ---------------
Total liabilities and shareholders' equity . . . . $ 30,331,142 $ 11,488,038
============== ===============
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------ ------------- -------------
1998 1999 1998 1999
------------ ------------ ------------- -------------
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . $ 468,726 $ 414,552 $ 2,134,509 $ 1,494,929
Gain on sale of finance contracts . . . . . . . . . . 3,456,303 (50,066) 10,093,123 1,704,219
Servicing income. . . . . . . . . . . . . . . . . . . 798,368 802,473 2,116,310 2,787,613
Other income. . . . . . . . . . . . . . . . . . . . . - 44,803 (79,716) 898,598
------------ ------------ ------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . 4,723,397 1,211,762 14,264,226 6,885,359
------------ ------------ ------------- -------------
Expenses:
Provision for credit losses . . . . . . . . . . . . . - 243,377 100,000 303,842
Interest expense. . . . . . . . . . . . . . . . . . . 1,015,794 810,274 3,391,600 2,328,394
Salaries and benefits . . . . . . . . . . . . . . . . 2,601,865 1,716,209 7,468,197 7,529,900
General and administrative. . . . . . . . . . . . . . 1,523,132 2,611,664 4,398,016 6,298,051
Impairment of retained interest in securitizations. . 1,637,191 2,100,491 7,515,015 4,672,698
Other operating expenses. . . . . . . . . . . . . . . 1,044,852 379,433 2,573,723 2,253,326
------------ ------------ ------------- -------------
Total expenses . . . . . . . . . . . . . . . . . . 7,822,834 7,861,448 25,446,551 23,386,211
------------ ------------ ------------- -------------
Loss before income taxes. . . . . . . . . . . . . . . . (3,099,437) (6,649,686) (11,182,325) (16,500,852)
(Benefit) provision for income taxes. . . . . . . . . . (1,047,961) - (3,775,923) (101,800)
------------ ------------ ------------- -------------
Net loss. . . . . . . . . . . . . . . . . . (2,051,476) (6,649,686) (7,406,402) (16,399,052)
Income attributable to preferred stock. . . . . . . . . 421,875 421,875 1,018,125 1,265,625
------------ ------------ ------------- -------------
Net loss attributable to common shareholders. . . . . . $(2,473,351) $(7,071,561) $ (8,424,527) $(17,664,677)
============ ============ ============= =============
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. . . . . . . . . . . . . . . . . . . . $ (0.38) $ (1.08) $ (1.29) $ (2.70)
Diluted. . . . . . . . . . . . . . . . . . . $ (0.38) $ (1.08) $ (1.29) $ (2.70)
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . $(2,051,476) $(6,649,686) $ (7,406,402) $(16,399,052)
Other comprehensive income, net of tax:
Unrealized loss on retained interests in securitization 1,416,628 - 1,049,256 -
------------ ------------ ------------- -------------
Comprehensive loss. . . . . . . . . . . . . . . . . . . $(3,468,104) $(6,649,686) $ (8,455,658) $(16,399,052)
============ ============ ============= =============
<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)
NINE MONTHS ENDED
SEPTEMBER 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. . . . . . . . . . . . . . (16,399,052)
--------------------
Ending balance. . . . . . . . . . . (19,456,654)
Investment in common stock agreement:
Beginning balance . . . . . . . . . (527,915)
Ending balance. . . . . . . . . . . (527,915)
--------------------
Total shareholders' equity. . . . . . $ (846,680)
====================
<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)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
------------------- -------------
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (7,406,402) $(16,399,052)
Reconcile net loss to net cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . . 1,111,826 804,599
Provision for credit losses . . . . . . . . . . . . . . 100,000 303,842
Market impairment of finance contracts held for sale. . - 1,070,737
Impairment of retained interest in securitizations. . . 7,515,015 4,672,698
Gain on sale of finance contracts . . . . . . . . . . . (10,093,123) (1,704,219)
Deferred income taxes . . . . . . . . . . . . . . . . . (3,775,923) (101,800)
Changes in operating assets and liabilities:
Increase in restricted funds. . . . . . . . . . . . . . 6,904,111 -
Receivable from Dynex . . . . . . . . . . . . . . . . . - 6,573,107
Finance contracts held for sale . . . . . . . . . . . . 5,702,007 1,104,751
Retained interest in securitizations. . . . . . . . . . (6,451,412) 292,474
Due from affiliate. . . . . . . . . . . . . . . . . . . (294,759) (20,172)
Prepaids and other assets . . . . . . . . . . . . . . . (247,828) 97,486
Accounts payable and accrued liabilities. . . . . . . . (2,447,875) (548,659)
Payable to affiliates . . . . . . . . . . . . . . . . . (554,233) -
------------------- -------------
Cash (used) provided by operating activities . . . . . 2,964,228 (3,854,208)
INVESTING ACTIVITIES:
Proceeds from disposal of collateral acquired . . . . . 128,569 -
Purchases of property, plant and equipment. . . . . . . - (197,308)
------------------- -------------
Cash provided (used) by investing activities . . . . . 128,569 (197,308)
FINANCING ACTIVITIES:
Net payments on revolving credit facilities . . . . . . (7,639,201) -
Payments for debt issuance costs. . . . . . . . . . . . (1,110,261) -
Proceeds from notes payable . . . . . . . . . . . . . . 10,650,000 -
Payments on notes payable . . . . . . . . . . . . . . . (6,241,810) (17,136)
Decrease in bank overdraft. . . . . . . . . . . . . . . (1,137,409) -
Proceeds from public offering of preferred stock, net . 9,631,407 -
Dividends paid on preferred stock . . . . . . . . . . . (1,018,125) -
Proceeds from issuance of common stock warrants . . . . 1,918,131 -
Payment for common stock agreement. . . . . . . . . . . (500,000) -
------------------- -------------
Cash provided (used) by financing activities. . . . . 4,552,732 (17,136)
------------------- -------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . 7,645,529 (4,068,652)
Beginning cash balance. . . . . . . . . . . . . . . . . . . 159,293 5,170,969
------------------- -------------
ENDING CASH BALANCE . . . . . . . . . . . . . . . . . . . . $ 7,804,822 $ 1,102,317
=================== =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
-- 4 --
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, September 30,
1998 1999
--------- -----------
Unpaid principal balance . . . $944,830 $1,266,597
Contract acquisition discounts (64,067) -
Allowance for market loss. . . - (948,357)
Allowance for credit losses. . (13,693) -
--------- -----------
$867,070 $ 318,240
========= ===========
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;
-- 5 --
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 September 30, 1999
was $ 4,672,698.
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 first cause was the delay and cessation of insurance
payments on defaulted finance contracts. 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 early 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 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 until a claim is made and not paid 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
Progressive matter is set for trial in late November, 1999. Delays in payments
under the Interstate insurance policy have also contributed to the impairment of
retained interests.
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 subordinated 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 increased the deductible on the VSI for
the pool of loans funded by Dynex after cessation of funding by Dynex.
-- 6 --
5. Notes Payable and Non-Recourse Debt
The following amounts are included in notes payable and non-recourse debt as of:
December 31, September 30,
1998 1999
(Unaudited)
- ------------------------------------------------------------------------------------------------
Non-recourse notes payable, collateralized by Class B Certificates. $ 3,185,050 $ 1,282,293
Convertible Senior Notes. . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes. . . . . . . . . . . . . . . . . . . 7,500,000 7,500,000
Other notes payable . . . . . . . . . . . . . . . . . . . . . . . . 23,342 6,206
Discount on subordinated notes payable. . . . . . . . . . . . . . . (356,373) (230,073)
------------ ------------
$13,352,019 $11,558,426
============ ============
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 Company has made all interest payments due on the Senior Notes to date
but is uncertain whether it can continue to meet such obligations. Dynex also
has purported to accelerate the Senior Notes. The Company disputes the validity
of such acceleration.
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"). At September
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. On August 20,
1999 BancBoston demanded immediate payment in full of all amounts outstanding
under the Subordinated Notes. Thereafter BancBoston sued the Company for such
payment. A settlement of this suit is currently being negotiated.
6. 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 increase in net deferred tax assets during the three month
period ended September 30, 1999 was offset by a corresponding increase in the
valuation allowance. Accordingly no tax benefit was recognized for the net loss.
7. Stockholders' Equity
Preferred Stock
Because the Company is not in compliance with 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,
June 30, 1999 and September 30, 1999. Because dividends on the Preferred Stock
are in arrears for three 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 was held on October 1, 1999; however, because a quorum of preferred
shareholders did not attend or provide proxies for the meeting, no additional
directors were elected. See Part II, Item 3 "Submission of Matters to a Vote of
Security Holders." 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.
-- 7 --
8. 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 January 2000. Dynex's motion to dismiss the
Texas Action was denied by the court.
On March 1, 1999, the 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. On August 26,
1999, the court denied the Company's application on points (i), (ii) and (iii)
while granting Dynex's request for a temporary injunction removing the Company
as servicer. Following the posting by Dynex of a bond in the amount of
$1,000,000, the Company surrendered servicing on those contracts financed by
Dynex. The Company did receive servicing fees on the loans through September 30,
1999. Discovery is ongoing and trial is set for January 24, 2000.
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
-- 8 --
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.
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 September 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 month of
November, 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.
As a consequence of the Company's efforts to reduce expenses, the Company
contacted Norwest Bank, National Association, ("Norwest") and initiated dialogue
to voluntarily transfer servicing on several of its outstanding securitizations.
As part of its voluntary process the Company wanted to receive all appropriate
fees and expenses due to it in its capacity as servicer. Negotiations to that
end were underway when on October 21, 1999, Norwest in its capacity as trustee
of the four securitization trusts sponsored by the Company during 1996 (the
"1996 Trusts"), commenced an action against the Company in the District Court of
Travis County, Texas (126th Judicial District) (the "Norwest Action"). Norwest,
as trustee, alleged that the Company had breached the terms of its various
agreements among the Company, each of the 1996 Trusts and Norwest relating to
the Company's role as servicer, administrator and collection agent.
Specifically, Norwest alleged that the Company failed to cooperate fully in the
transfer of servicing, administration, and collection responsibilities to a
successor servicer. Norwest sought injunctive relief requiring the Company to
(i) cease all servicing, administration and collection activities with respect
to the 1996 Trusts, (ii) turn over all records and files relating to the 1996
Trusts and the finance contracts pledged thereto to the successor servicer and
(iii) notify all obligors under the individual finance contracts pledged
-- 9 --
to the 1996 Trusts that effective immediately, all payments and inquiries
regarding the finance contracts should be directed to the successor servicer and
not to the Company. Thereafter, the Company reached agreement with Norwest as to
the voluntary transfer of servicing under the 1996 Trusts, and an agreement with
respect to the appropriate payment of fees and expenses to the Company by
Norwest.
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.
-- 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. Until funding was
terminated by Dynex, the Company was 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).
Prior to its decision to cease origination efforts early in the third
quarter, the Company acquired finance contracts generally from franchised
automobile dealers, made credit decisions using its own underwriting guidelines
and credit personnel and performed the collection function for finance contracts
using its own collections department. The Company also acquired finance
contracts from third parties other than dealers, for which the Company
reunderwrote and collected such finance contracts in accordance with the
Company's standard guidelines. The Company had 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 acquisition and servicing of sub-prime finance contracts by an
independent finance company under past and current market conditions was and 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 sub-prime
finance contract portfolio requires a higher level of experienced personnel than
that required for a portfolio of higher credit-quality consumer loans.
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 ceased to originate or acquire additional finance contracts. The
Company has reduced staff in order to conserve capital.
The Company has transferred servicing of its securitized loans to third
party servicers.
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.
-- 11 --
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
$4,672,698 during the nine months ended September 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.
The Company is relying on information provided by a third party servicer to
assess the value of the retained interest in its securitizations.
-- 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 September 30, Gross
Securitization Securitized Rate 1999 Rate Spread(2)
- -------------------------- ------------ --------- -------------- ------- ---------
AutoBond Receivables
Trust 1995-A . . . . . . $ 26,261,009 18.9% $ 2,847,497 7.2% 11.7%
Trust 1996-A . . . . . . 16,563,366 19.7% 2,496,105 7.2% 12.5%
Trust 1996-B . . . . . . 17,832,885 19.7% 3,204,126 7.7% 12.0%
Trust 1996-C . . . . . . 22,296,719 19.7% 5,354,429 7.5% 12.2%
Trust 1996-D . . . . . . 25,000,000 19.5% 6,326,456 7.4% 12.1%
Trust 1997-A (4) . . . . 28,037,167 20.8% 7,140,855 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% 109,449,869 7.4%(3) 12.6%
------------ --------------
Total. . . . . . . $358,238,831 $ 170,791,945
============ ==============
- --------------------------------------------------------------------------------------
<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. The Company transferred servicing to the third party
servicer.
In August 1999, the Company transferred servicing of its Dynex
portfolio of loans to a successor servicer. By agreement, the company continued
to receive servicing fees on this portfolio through September, 1999.
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. The Company transferred servicing to the back-up servicer in
October, 1999.
-- 13 --
As a consequence of the Company's efforts to reduce expenses, the
Company contacted Norwest Bank, National Association, ("Norwest") and initiated
dialogue to voluntarily transfer servicing on several of its outstanding
securitizations. As part of its voluntary process the Company wanted to receive
all appropriate fees and expenses due to it in its capacity as servicer.
Negotiations to that end were underway when on October 21, 1999, Norwest in its
capacity as trustee of the four securitization trusts sponsored by the Company
during 1996 (the "1996 Trusts"), commenced an action against the Company in the
District Court of Travis County, Texas (126th Judicial District) (the "Norwest
Action"). Norwest, as trustee, alleged that the Company had breached the terms
of its various agreements among the Company, each of the 1996 Trusts and Norwest
relating to the Company's role as servicer, administrator and collection agent.
Specifically, Norwest alleged that the Company failed to cooperate fully in the
transfer of servicing, administration, and collection responsibilities to a
successor servicer. Norwest sought injunctive relief requiring the Company to
(i) cease all servicing, administration and collection activities with respect
to the 1996 Trusts, (ii) turn over all records and files relating to the 1996
Trusts and the finance contracts pledged thereto to the successor servicer and
(iii) notify all obligors under the individual finance contracts pledged to the
1996 Trusts that effective immediately, all payments and inquiries regarding the
finance contracts should be directed to the successor servicer and not to the
Company. Thereafter, the Company reached agreement with Norwest as to the
voluntary transfer of servicing under the 1996 Trusts, and an agreement with
respect to the appropriate payment of fees and expenses to the Company by
Norwest.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance contract
acquisition activity:
Nine Months Ended
September 30,
1998 1999
----------- -----------
Number of finance contracts acquired(1). . . . . 6,723 1,586
Principal balance of finance contracts acquired. $76,330,699 $20,336,852
Number of active dealerships (2) . . . . . . . . 840 466
Number of enrolled dealerships . . . . . . . . . 1,797 2,332
- --------------------------------------------------------------------------------
<FN>
(1) There have been no finance contracts acquired since the first quarter of
1999.
(2) 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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
NET LOSS
In the three months ended September 30, 1999, the net loss was $6,649,686
which represents an increase of $4,598,210 over the three months ended September
30, 1998 net loss of $2,051,476. 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.
In addition, there is an impairment to the retained interests in securitization
of $2,100,491 for the three months ended September 30, 1999.
-- 14 --
Total Revenues
Total revenues for the three months ended September 30, 1999 of $1,211,762
represent a decrease of $3,511,635 from the three months ended September 30,
1998 revenues of $4,723,397. The decrease was due primarily to the reduction in
volume of finance contract sales activity for the third quarter.
Interest Income. Interest income for the three months ended September 30,
1999 of $414,552 represents a decrease of $54,174 from the three months ended
September 30, 1998 interest income of $468,726 due to the timing of finance
contract acquisitions and the period held before sale.
Gain on Sale of Finance Contracts. The Company realized loss on sales
totaling $50,066 during the three months ended September 30, 1999. The loss was
the result of additional costs related to the finance contract sale. The
decrease of $3,506,069 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 September 30, 1999 servicing fee income was $802,473, consisting of
contractual administrative fees and servicer fees. Servicing fee income
increased by $4,105 from the three months ended September 30, 1998 servicing fee
income of $798,368.
Other Income. For the three months ended September 30, 1999, other income
amounted to $44,803 compared with $-0- for the comparable 1998 period.
Total Expenses
Total expenses for the three months ended September 30, 1999 of $7,861,448
represent an increase of $38,614 from the three months ended September 30, 1998
total expenses of $7,822,834. Impairment of the Company's retained interests in
securitizations during the third quarter of 1999 was $463,300 greater than the
third quarter of 1998.
Provision for Credit Losses The provision for credit losses for the three
months ended September 30, 1999 of $243,377 represents the charge-off of
advances that are not collectible from the various trusts. There was no
provision for credit losses for the three months ended September 30, 1998.
Interest Expense. Interest expense for the three months ended September 30,
1999 of $810,274 represents a decrease of $205,520 from the three months ended
September 30, 1998 interest expense of $1,015,794. The decrease resulted from
the elimination of borrowings under the revolving credit facilities.
Salaries and Benefits. Salaries and benefits for the three months ended
September 30, 1999 of $1,716,209 represent a decrease of $885,656 from the three
months ended September 30, 1998 salaries and benefits of $2,601,865. The
Company continued strategic layoffs during the third quarter of 1999 compared to
increasing staff during the third quarter of 1998. Staff has been reduced to 40
full time personnel as of September 30, 1999.
General and Administrative Expenses. General and administrative expenses
for the three months ended September 30, 1999 of $2,611,664 represent an
increase of $1,088,532 from the three months ended September 30, 1998 general
and administrative expense of $1,523,132. 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 and Progressive.
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 $2,100,491 for the three months ended September 30, 1999 as
compared with an impairment of $1,637,191 for the three months ended September
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.
-- 15 --
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports, communications and insurance) for the
three months ended September 30, 1999 of $379,433 represent a decrease of
$665,419 from the three months ended September 30, 1998 other operating expenses
of $1,044,852. The decrease was mainly due to reimbursement of trust expenses,
a reduction in loan insurance premium, and the reduction in the level of
operations.
Income Tax. No Income tax expense or benefit for the three months ended
September 30, 1999 was recorded which represents a change of $ 1,047,961 from
the three months ended September 30, 1998 income tax benefit of $1,047,961 due
to the establishment of a valuation allowance for the Company's deferred tax
assets.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET INCOME
In the nine months ended September 30, 1999, the net loss was $16,399,052
which represents an increase in loss of $8,992,650 over the nine months ended
September 30, 1998 net loss of $7,406,402. 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 and the impairment of the Company's retained interest in
securitization of $4,672,698.
Total Revenues
Total revenues for the nine months ended September 30, 1999 of $6,885,359
represent a decrease of $7,378,867 from the nine months ended September 30, 1998
revenues of $14,264,226. The decrease was due primarily to the reduction in
volume of finance contract sales activity.
Interest Income. Interest income for the nine months ended September 30,
1999 of $1,494,929 represents a decrease of $639,580 from the nine months ended
September 30, 1998 interest income of $2,134,509 due to the timing of finance
contract acquisitions and the period held before securitization or sale.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $1,704,219 during the nine months ended September 30, 1999. The
decrease of $8,388,904 from the nine months ended September 30, 1998 gain on
sale of $10,093,123 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 nine months
ended September 30, 1999 servicing fee income was $2,787,613 consisting of
contractual administrative fees and servicer fees. Servicing fee income
increased by $671,303 from the nine months ended September 30, 1998 servicing
fee income of $2,116,310 as a result of the increased volume of contracts being
serviced. The Company's surrender of nearly all servicing functions in the third
quarter of 1999 can be expected to reduce future servicing fee income.
Other Income. For the nine months ended September 30, 1999, other income
amounted to $898,598 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 Part II, Item 1-"Legal
Proceedings".
Total Expenses
Total expenses for the nine months ended September 30, 1999 of $23,386,211
represent a decrease of $2,060,340 from the nine months ended September 30, 1998
total expenses of $25,446,551. Impairment of the Company's retained interests
in securitizations for the nine months ended September 30, 1999 was $2,842,317
less than the nine months ended September 30, 1998.
Provision for Credit Losses The provision for credit losses for the nine
months ended September 30, 1999 of $303,842 represents the charge off of
advances that are not collectible from the various trusts. There was a $100,000
provision for credit losses for the nine months ended September 30, 1998.
-- 16 --
Interest Expense. Interest expense for the nine months ended September 30,
1999 of $2,328,394 represents a decrease of $1,063,206 from the nine months
ended September 30, 1998 interest expense of $3,391,600. The decrease resulted
from elimination of borrowing under the revolving credit facilities.
Salaries and Benefits. Salaries and benefits for the nine months ended
September 30, 1999 of $7,529,900 represent an increase of $61,703 from the nine
months ended September 30, 1998 salaries and benefits of $7,468,197. 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. The Company
continued layoffs during the third quarter and began to realize associated
savings.
General and Administrative Expenses. General and administrative expenses
for the nine months ended September 30, 1999 of $6,298,051 represent an increase
of $1,900,035 from the nine months ended September 30, 1998 general and
administrative expense of $4,398,016. 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 interests in its litigations with Dynex and Progressive. 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 $4,672,698 for the nine months ended September 30, 1999 as
compared with an impairment of $7,515,015 for the nine months ended September
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
nine months ended September 30, 1999 of $2,253,326 represent a decrease of
$320,397 from the nine months ended September 30, 1998 other operating expenses
of $2,573,723. The decrease was mainly due to the Company reducing its
operations as a result of the termination of the Dynex Funding Agreement.
Income Tax. Income tax benefit for the nine months ending September 30,
1999 was $101,800 which represents a decrease of $3,674,123 from the income tax
benefit of $3,775,923 for the nine months ended September 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 $4,068,652
to $1,102,317 at September 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 $15,071,797 primarily caused by the termination by Dynex of the Funding
Agreement. 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
and $4,956,623 in the third quarter from the sale of finance contracts.
Finance Contracts Held for Sale. Finance contracts held for sale, net of
allowance for losses, decreased $548,830 to $318,280 at September 30, 1999 from
$867,070 at December 31, 1998. The number and principal balance of contracts
held for sale was 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 September 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
-- 17 --
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 $136,271 to $1,326,775 at September
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 September 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 $4,672,698 during the nine months ended September 30,
1999 as a result of the impairment review of the retained interests in
securitizations.
-- 18 --
The Company is relying on information provided by a third party servicer to
assess the value of the retained interest in its securitizations.
Notes Payable and Non-Recourse Debt
The following amounts are included in notes payable and non-recourse debt as of:
December 31, September 30,
1998 1999
----------- -----------
Non-recourse notes payable, collateralized by Class B Certificates $ 3,185,050 $ 1,282,293
Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,000,000
Convertible Subordinated Notes, net of discount. . . . . . . . . . 7,143,627 7,269,927
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . . 23,342 6,206
----------- -----------
$13,352,019 $11,558,426
=========== ===========
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's finance contract
portfolio:
December 31, 1998 September 30, 1999
----------------- ------------------
Principal balance of finance contracts outstanding $210,947,939 $22,170,034
Delinquent finance contracts (1):
Two payments past due. . . . . . . . . . . . . . . $ 20,689,671 9.81% $3,415,392 15.41%
Three payments past due. . . . . . . . . . . . . . 7,901,166 3.75% 898,650 4.05%
Four or more payments past due . . . . . . . . . . 5,214,162 2.47% 919,440 4.15%
------------ ------ ---------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 33,804,999 16.03% 5,233,482 23.61%
============ ====== ========== ========
- -----------------------------------------------------------------------------------------------
<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
-- 19 --
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
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 September 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 appears 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.
-- 20 --
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% 4.15% $ 101,161
2 Q4 . . . . . . . . . . 636,413 26.11% 5.22% 2,437,674
1995
3 Q1 . . . . . . . . . . 1,936,858 30.69% 6.46% 6,310,421
4 Q2 . . . . . . . . . . 1,887,469 30.49% 6.78% 6,190,596
5 Q3 . . . . . . . . . . 2,270,295 31.36% 7.38% 7,239,813
6 Q4 . . . . . . . . . . 4,347,902 35.67% 8.92% 12,188,863
1996
7 Q1 . . . . . . . . . . 5,447,885 35.24% 9.40% 15,460,823
8 Q2 . . . . . . . . . . 7,116,534 38.43% 10.98% 18,520,410
9 Q3 . . . . . . . . . . 8,113,827 28.88% 8.88% 28,098,899
10 Q4 . . . . . . . . . . 9,165,788 37.50% 12.50% 24,442,500
1997
11 Q1 . . . . . . . . . . 13,205,109 37.86% 13.77% 34,875,869
12 Q2 . . . . . . . . . . 12,581,784 35.64% 14.25% 35,305,817
13 Q3 . . . . . . . . . . 10,788,201 31.15% 13.85% 34,629,616
14 Q4 . . . . . . . . . . 10,756,033 24.38% 12.19% 44,120,029
1998
15 Q1 . . . . . . . . . . 6,551,828 22.10% 12.63% 29,650,808
16 Q2 . . . . . . . . . . 4,555,499 19.88% 13.26% 22,911,290
17 Q3 . . . . . . . . . . 2,983,294 12.68% 10.14% 23,528,924
18 Q4 . . . . . . . . . . 4,087,894 9.51% 9.51% 43,006,049
1999
19 Q1 . . . . . . . . . . 1,317,196 6.48% 8.64% 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 $10,756,033 in losses divided by $44,120,029 in amount financed of
the contracts acquired, divided by 8 quarters outstanding times 4 equals an annual loss frequency of
12.19%).
(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.
-- 21 --
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% 4.15% $ 101,161
2 Q4. . . . 628,707 25.79% 5.16% 2,437,674
1995
3 Q1. . . . 1,727,566 27.38% 5.76% 6,310,421
4 Q2. . . . 1,723,444 27.84% 6.19% 6,190,596
5 Q3. . . . 2,016,888 27.86% 6.55% 7,239,813
6 Q4. . . . 3,930,527 32.25% 8.06% 12,188,863
1996
7 Q1. . . . 5,057,256 32.71% 8.72% 15,460,823
8 Q2. . . . 6,376,630 34.43% 9.84% 18,520,410
9 Q3. . . . 7,159,992 25.48% 7.84% 28,098,899
10 Q4. . . . 8,261,982 33.80% 11.27% 24,442,500
1997
11 Q1. . . . 11,814,159 33.87% 12.32% 34,875,869
12 Q2. . . . 11,551,374 32.72% 13.09% 35,305,817
13 Q3. . . . 9,812,973 28.34% 12.59% 34,629,616
14 Q4. . . . 9,483,352 21.49% 10.75% 44,120,029
1998
15 Q1. . . . 5,857,550 19.76% 11.29% 29,650,808
16 Q2. . . . 4,077,032 17.79% 11.86% 22,911,290
17 Q3. . . . 2,640,322 11.22% 8.98% 23,528,924
18 Q4. . . . 3,544,650 8.24% 8.24% 43,006,049
1999
19 Q1. . . . 1,158,944 5.70% 7.60% 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 $9,483,352 in losses divided by $44,120,029 in amount
financed of the contracts acquired, divided by 8 quarters outstanding times 4 equals an annual
loss frequency of 10.75%).
(3) Included are the loans that were repossessed, and paid by skip claim.
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.
-- 22 --
The following table demonstrates the net charge-off per repossessed automobile
since inception:
From August 1, 1994 (Inception) to September 30, 1999 Loans with Loans All Loans
Default Without
Insurance Default
Insurance
------------- ------------- -------------
Number of finance contracts acquired 34,967
Number of vehicles repossessed . . . . . . . . . . . . . . . . . . 7,058 4,177 11,235
Repossessed units disposed of. . . . . . . . . . . . . . . . . . . 4,458 2,823 7,281
Repossessed units awaiting disposition (1) . . . . . . . . . . . . 2,600 1,354 3,954
Cumulative gross charge-offs . . . . . . . . . . . . . . . . . . . $ 43,858,580 $ 29,455,155 $ 73,313,736
Costs of repossession. . . . . . . . . . . . . . . . . . . . . . . 2,052,457 1,327,429 3,379,886
Recoveries:
Proceeds from auction, physical damage insurance and refunds (2) (23,914,490) (16,238,446) (40,152,936)
Deficiency insurance settlement received . . . . . . . . . . . . (11,555,297) 0 (11,555,297)
------------- ------------- -------------
Net charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,441,250 $ 14,544,138 $ 24,985,388
============= ============= =============
Net charge-offs per unit disposed. . . . . . . . . . . . . . . . . $ 2,342 $ 5,152 $ 3,432
Net charge-offs as a percentage of cumulative gross charge-offs. . 23.81% 49.38% 34.08%
Recoveries as a percentage of cumulative gross charge-offs . . . . 80.87% 55.13% 70.53%
------------- ------------- -------------
<FN>
(1) The vehicles may have been sold at auction; however the Company might not have received all insurance
proceeds as of September 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 September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
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. In addition, due to adverse court rulings in
the Dynex matter, the Company has, at least temporarily, lost the right to
service (and thus earn fees related to such servicing) contracts financed by
Dynex. The Company is reporting a loss for the third quarter of 1999 and did not
pay the quarterly dividend on its Preferred Stock otherwise payable on each of
March 31, 1999 , June 30, 1999 and September 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 and servicing
activities.
Management believes the Company has sufficient liquidity to meet its
current obligations 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 included 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 $3.9
million during the nine months ended September 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 nine months ended September 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
-- 23 --
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.
Term Financing Facilities. 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"). At September 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 did not make the
interest payment due on its Subordinated Notes on November 1, 1999. On August
20, 1999 BancBoston demanded immediate payment in full of all amounts
outstanding under the Subordinated Notes. Thereafter BancBoston sued the Company
for such payment. A settlement of this suit is currently being negotiated.
On June 9, 1998, the Company sold to Dynex at par $3 million of its 12%
Convertible Senior Notes due 2003 (the "Senior Notes"). 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.
On June 9, 1998, 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.
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 Part II, Item 1-"Legal Proceedings".
Securitization Program.
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 $4,956,624 after deducting a 1%
commission of $50,066.
The Company expects to sell additional loans with a principal balance of
approximately $450,000 at 70% of the outstanding principal balance. Such loans
were written down to market value prior to September 30, 1999 by a charge to
other operating expenses.
Preferred Stock. 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
-- 24 --
otherwise payable on each of March 31, 1999, June 30, 1999 and September 30,
1999. As 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 was held on October 1, 1999;
however, because a quorum of preferred shareholders did not attend or provide
proxies for the meeting, no additional directors were elected. See Part II, Item
3-"Submission of Matters to a Vote of Security Holders". 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.
IMPACT OF INFLATION AND CHANGING PRICES
Because the Company is not currently originating or selling loans and
because 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.
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 than 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 September 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.
-- 25 --
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. 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 also are directed to other risks
discussed in documents filed by the Company with the SEC.
-- 26 --
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 on January 24, 2000. Dynex'
motion to dismiss the Texas Action was denied by the court.
On March 1, 1999, the 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. On August 26,
1999 the court denied the Company's application on points (i) , (ii) and (iii)
while granting Dynex' request for a temporary injunction removing the Company as
servicer. Following the posting by Dynex of a bond in the amount of $1,000,000,
the Company surrendered servicing on those contracts financed by Dynex.
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
-- 27 --
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 without prejudice.
On August 31, 1999 the court ordered servicing to be transferred from the
Company to a third party servicer. The Company will continue to receive
servicing fees on the loans through September 30, 1999. Discovery is ongoing and
trial is set for January 24, 2000.
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 month of
November, 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.
As a consequence of the Company's efforts to reduce expenses, the Company
contacted Norwest Bank, National Association, ("Norwest") and initiated dialogue
to voluntarily transfer servicing on several of its outstanding securitizations.
As part of its voluntary process the Company wanted to receive all appropriate
fees and expenses due to it in its capacity as servicer. Negotiations to that
end were underway when on October 21, 1999, Norwest in its capacity as trustee
of the four securitization trusts sponsored by the Company during 1996 (the
"1996 Trusts"), commenced an action against the Company in the District Court of
Travis County, Texas (126th Judicial District) (the "Norwest Action"). Norwest,
as trustee, alleged that the Company had breached the terms of its various
agreements among the Company, each of the 1996 Trusts and Norwest relating to
the Company's role as servicer, administrator and collection agent.
Specifically, Norwest alleged that the Company failed to cooperate fully in the
transfer of servicing, administration, and collection responsibilities to a
successor servicer. Norwest sought injunctive relief
-- 28 --
requiring the Company to (i) cease all servicing, administration and collection
activities with respect to the 1996 Trusts, (ii) turn over all records and files
relating to the 1996 Trusts and the finance contracts pledged thereto to the
successor servicer and (iii) notify all obligors under the individual finance
contracts pledged to the 1996 Trusts that effective immediately, all payments
and inquiries regarding the finance contracts should be directed to the
successor servicer and not to the Company. Thereafter, the Company reached
agreement with Norwest as to the voluntary transfer of servicing under the 1996
Trusts, and an agreement with respect to the appropriate payment of fees and
expenses to the Company by Norwest.
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 alleged,
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 alleged that such
actions constituted statutory fraud under the Texas Business Corporation Act,
common law fraud and negligent misrepresentation. On August 17, 1999, the court
dismissed the federal securities laws claims with prejudice and dismissed
certain state law claims without prejudice to refile in state court.
-- 29 --
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 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. The Company did not make the interest payments due November
1, 1999 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 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, June 30, 1999 and September 30, 1999. Because dividends on the Preferred
Stock are in arrears for two quarterly dividend periods, holders of the
Preferred Stock 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
was held on October 1, 1999; however, because a quorum of preferred shareholders
did not attend or provide proxies for the meeting, no additional directors were
elected. See Part II, Item 3- "Submission of Matters to a Vote of Security
Holders". 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 September 30, 1999, the
Company had not paid quarterly dividends due on each of March 31, 1999, June 30,
1999 and September 30, 1999.
A special meeting of the Company's preferred shareholders was held on October 1,
1999 at the Company's headquarters in Austin, Texas. Of the 1,125,000 shares of
preferred stock outstanding, less than 50% of such shares were present in person
in the meeting. Because the number of shares voted was insufficient to
constitute a quorum, no additional directors were elected to the Company's Board
at the Special Meeting.
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.
Thereafter, NASDAQ-AMEX took steps to delist the Company's common and preferred
shares. The last day that the Company's common and preferred shares were traded
on NASDAQ-AMEX was October 5, 1999.
On September 3, 1999, the Company announced that Adrian Katz had informed
the Company of his intent to resign as Vice-Chairman, Chief Operating Officer
and Chief Financial Officer on or before December 31, 1999.
-- 30 --
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.
- -----------------------------------------------------------------------------------------------------
(B) Reports of Form 8-K
None.
-- 31 --
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 November 12, 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
-- 32 --