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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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: 28050
ONYX ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0577635
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONYX ACCEPTANCE CORPORATION
8001 IRVINE CENTER DRIVE, FIFTH FLOOR
IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 450-5500
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($0.01 PAR VALUE)
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [ ].
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the Company's Common Stock as of the
closing of the market on March 13, 1998 was 6,026,563. The registrant does not
have different classes of Common Stock. Based on the closing sale price of
$10 1/8, the registrant's Common Stock as quoted on the Nasdaq National Market
on March 13, 1998, the aggregate market value of such stock held by
non-affiliates of the registrant was approximately $29,678,491 on that date. For
purposes of such calculation, only executive officers, board members, and
beneficial owners of more than 10% of the registrant's outstanding Common Stock
are deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: Portions of the
registrant's Proxy Statement for the Annual Meeting of Stockholders currently
expected to be held on May 20, 1998, as filed with the Commission pursuant to
Regulation 14A, are incorporated by reference in Part III of this Report.
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ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Litigation.................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters -- Price Range of Common Stock and
Dividend Policy............................................. 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 27
(i)
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PART I.
Forward-Looking Statements
When used throughout this Annual Report, the words "believes",
"anticipates" and "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to the many risks and
uncertainties which affect the Company's business, and actual results could
differ materially from those projected and forecasted. These uncertainties,
which include competition within the automobile finance industry, the effect of
economic conditions, and the availability of capital to finance planned growth,
are described but are not limited to those disclosed in this Annual Report.
These and other factors which could cause actual results to differ materially
from those in the forward-looking statements are discussed under the heading
"Risk Factors". Given these uncertainties, readers are cautioned not to place
undue reliance on such statements. The Company also undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements. The Company also undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
ITEM 1. BUSINESS
GENERAL
Onyx Acceptance Corporation ("Onyx" or the "Company") is a specialized
consumer finance company engaged in the purchase, securitization and servicing
of motor vehicle retail installment contracts originated by franchised and
select independent automobile dealerships in 18 states, and to a lesser extent
the origination of motor vehicle loans on a direct basis to consumers throughout
the United States (collectively the "Contracts"). The Company focuses its
efforts on acquiring Contracts secured by late model used and, to a lesser
extent, new motor vehicles, entered into with purchasers whom the Company
believes have a favorable credit profile. Since commencing the purchase,
origination and servicing of Contracts in February 1994, the Company has
purchased or originated in excess of $1.2 billion in Contracts from over 2,800
dealerships and has expanded its operations from a single office in Irvine,
California to ten auto finance centers (the "Auto Finance Centers") serving most
regions of the United States.
The Company has significantly expanded its customer base of automobile
dealerships, and has substantially increased both monthly Contract purchases and
originations and the size of its servicing portfolio. The number of active
dealerships increased from 1,471 at December 31, 1996 to 2,846 at December 31,
1997, and the annual volume of Contracts purchased or originated increased from
$319.8 million for the year ended December 31, 1996 to $605.9 million for the
year ended December 31, 1997. As a result, the servicing portfolio grew from an
outstanding balance of $400.7 million as of December 31, 1996 to $757.3 million
as of December 31, 1997. Of the Contracts purchased or originated by Onyx
through December 31, 1997, $949.5 million, or 78%, were secured by used motor
vehicles and $261.4 million, or 22%, were secured by new motor vehicles. For the
twelve month period ended December 31, 1997, the average initial principal
balance, the weighted average interest rate and the weighted average term of
Contracts purchased or originated by the Company that were secured by motor
vehicles were $12,066, 14.59% and 57.0 months, respectively.
The Company generates revenues primarily through the purchase, origination,
warehousing, subsequent securitization of and ongoing servicing of Contracts.
The Company earns net interest income on Contracts held during the warehousing
period. Upon the securitization and sale of Contracts, the Company recognizes a
gain on sale of Contracts, receives future servicing cash flows and earns
servicing fees from the trusts in the amount of one percent per annum of the
outstanding principal balance of the Contracts securitized. Before the Company
receives distributions of future servicing cash flow on any given
securitization, the Company is required to apply the cash flow from the trust to
fund the spread account for that particular securitization up to a predetermined
level required by MBIA, Inc. ("MBIA") in connection with its Financial Guarantee
Insurance Policy. (1)
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(1) Effective February 17, 1998 MBIA acquired all of the outstanding stock of
Capital Markets Assurance Corporation ("CapMAC") through a merger with its
parent CapMAC Holdings, Inc. All references to MBIA, if pertaining to
activities of Onyx prior to February 17, 1998 will refer to services
provided by CapMAC.
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BACKGROUND
The Company was founded in August 1993 by a team of executives from Western
Financial Savings Bank ("WFS"), where they served together in key management
positions responsible for the major aspects of prime auto lending, including
underwriting, servicing, information systems implementation, interest rate
management, securitizations and dealer center management.
The Company was initially capitalized by three venture capital firms in
November 1993. During February 1994, the Company obtained a $75 million
revolving credit facility and began building its portfolio of prime quality
Contracts secured by new and used motor vehicles. Within eight months following
this initial purchase of Contracts, the Company replaced that facility with a
$100 million commercial paper facility with improved terms (which has been
subsequently increased to $200 million) and successfully completed a publicly
underwritten AAA/Aaa rated securitization. Within its first four years of
operations, Onyx has expanded to ten Auto Finance Centers, purchased or
originated over $1.2 billion in Contracts, has completed ten AAA/Aaa rated
publicly underwritten securitizations, and has contracted for credit facilities
which, in the aggregate, as of December 31, 1997, provide Onyx with over $230
million in borrowing capacity.
MARKET AND COMPETITION
Competition in the field of financing retail motor vehicles sales is
intense. The automobile finance market is highly fragmented and historically has
been serviced by a variety of financial entities including the captive finance
affiliates of major automotive manufacturers, banks, savings associations,
independent finance companies, credit unions and leasing companies. Several of
these competitors have greater financial resources than the Company and may have
a significantly lower cost of funds. Many of these competitors also have long-
standing relationships with automobile dealerships and may offer dealerships or
their customers other forms of financing or services not provided by the
Company. Furthermore, during the past four years, a number of automobile finance
companies have completed public offerings of common stock, the proceeds from
which are to be used, at least in part, to fund expansion and finance increased
purchases of Contracts. However, in the past year, many of those auto finance
companies have experienced significant liquidity and performance challenges due
to the intense competition. The Company's ability to compete successfully
depends largely upon its relationships with dealerships and the willingness of
dealerships to offer those Contracts that meet the Company's underwriting
criteria. There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves.
The Company competes for the purchase of Contracts which meet its
underwriting criteria on the basis of emphasizing strong relationships with its
dealership customer base through its local presence. The Company supports its
dealership customer base with an operation that is open seven days a week and
has the ability to finalize purchases of Contracts on weekends, thereby
providing dealerships a level of service not available through most conventional
financing sources. The Company's success in attracting Contracts that satisfy
its underwriting criteria from a significant number of dealerships is dependent
upon the fact that many of the Company's largest competitors are not focused on
the used car market and do not generally provide the service levels provided by
the Company. The Company believes that its strong personal relationship with
dealerships in its customer base provides a significant competitive advantage to
the Company.
BUSINESS STRATEGY
The Company's principal objective remains to become one of the leading
sources of auto lending in the United States by leveraging the experience of its
senior management team in this industry. The Company seeks to attain and
increase profitability through the implementation of the following strategies:
Targeted Market and Product Focus. The Company targets the prime auto
lending market because it believes that prime lending produces greater
origination and operating efficiency than does sub-prime lending. The
Company focuses on late model used rather than new vehicles, as management
believes the risk of loss on used vehicles is lower due to lower
depreciation rates, while interest rates are typically higher. In addition,
the Company believes that the late model used motor vehicle finance market
is growing at a faster rate than is the finance market for new motor
vehicles.
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Localized Dealership Service. The Company provides a high level of
service to its dealership base by marketing, underwriting, purchasing and
servicing Contracts on a local level through its Auto Finance Centers. The
Company locates its Auto Finance Centers in geographic areas of high
dealership concentration to facilitate personal service in the local
markets, including consistent buying practices, operations open seven days
a week, competitive rates, a dedicated customer service staff, fast
turnaround time and systems designed to expedite the processing of Contract
applications. This personal service is provided by a team of experienced
account managers (the "Account Managers") with an established reputation
for responsiveness and integrity who call on dealerships in a consistent
and professional manner. The Company believes that its local presence and
service provide the opportunity to build strong and lasting relationships
with dealerships.
Expansion of Dealership Customer Base. The Company believes that it
can establish active relationships with a substantial percentage of
franchised dealerships in the regions in which it does business through its
ten existing Auto Finance Centers and can access additional franchise
dealerships in other states with the additional centers it expects to add
during 1998.
Maintenance of Underwriting Standards and Portfolio Performance. The
Company has developed an underwriting process that is designed to achieve
attractive yields while minimizing delinquencies and losses. Based on its
belief that a credit scoring system is a less effective means of assessing
credit risk, the Company employs experienced credit managers (the "Credit
Managers") in the local Auto Finance Centers to purchase Contracts
satisfying the underwriting criteria developed by the Company. The
Company's Credit Managers are compensated, in part, upon the quality of
underwriting of the Contracts they approve. To further monitor the
integrity of the underwriting process, management regularly tracks the
delinquency and loss rates of Contracts purchased by each Credit Manager
and reviews Contracts against the Company's underwriting standards shortly
after they have been purchased.
Technology-Supported Operational Controls. Through the use of
technology, the Company has developed and instituted control and review
functions that enable senior management to monitor both the operations of
the Company and the performance of the servicing portfolio. These systems
enable senior management to monitor Contract production, yields and
performance on a real-time basis. The Company believes that its information
systems not only enhance its internal controls but also allow it to
significantly expand its Servicing Portfolio without a corresponding
increase in its labor costs.
Liquidity Through Warehousing and Securitizations. The Company's
strategy is to complete securitizations on a regular basis and to use
warehousing credit facilities provided by institutional lenders, including
a $200 million asset-backed commercial paper conduit to fund Contracts
prior to securitization. To fund dealer participation and finance daily
operations, the Company relies to a significant extent on a $30 million
facility secured by the Company's retained interest in securitized assets
("RISA"). The Company also utilizes both securitization and hedging
strategies to leverage its capital efficiently and substantially reduce its
interest rate risk, while also limiting its credit loss exposure on
Contracts sold.
In an effort to expand and diversify its liquidity relationships, the
Company during the first quarter of 1998 added an additional warehousing credit
facility in the amount of $100 million and an additional credit facility in the
amount of $50 million secured by RISA.
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OPERATIONS
Dealership Marketing and Service. Currently, the Company has ten Auto
Finance Centers located in the following regions:
California Arizona South Florida
Sacramento and San Francisco Bay Area Phoenix Deerfield Beach
Orange County and Metropolitan Los Angeles
North Los Angeles and Ventura Counties Washington Illinois
Riverside and San Bernardino Counties Seattle Chicago
San Diego County Nevada
Las Vegas
As of December 31, 1997 the Company had 2,846 active dealerships in its
dealership customer base located in these regions. Of these 2,846 dealerships,
approximately 90% are franchised and approximately 10% are independent used
automobile dealerships. The Company believes that franchised and select
independent automobile dealerships are most likely to provide the Company with
Contracts that meet the Company's underwriting standards.
The following table sets forth information about the Company's Contracts
and Auto Finance Centers as of the dates indicated:
FOR THE YEARS ENDED
---------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Number of Auto Finance Centers........ 4 5 9 10
Number of Contracts purchased......... 7,619 16,571 26,244 50,214
Dollar volume of Contracts............ $85,723 $199,397 $319,840 $605,905
Average dollar volume of Contracts per
Auto Finance Center................. $21,430 $ 39,879 $ 35,538 $ 60,591
Number of Active Dealerships.......... 380 769 1,471 2,846
The Company's growth objectives over the next 12 months are to open
additional Auto Finance Centers in metropolitan areas within the United States
and to further develop relationships with existing franchised dealerships in the
states where the Company is currently doing business.
The Account Managers work from the Auto Finance Centers to solicit, enroll
and educate new dealerships as well as to maintain relationships with the
Company's existing dealership customer base. Each Account Manager visits finance
managers at each targeted dealership in his or her territory and presents
information about the Company's dealership services. The Company's services
include service hours seven days a week and the ability to rapidly respond to
credit applications. The Account Managers educate the finance managers about the
Company's underwriting philosophy, including its preference for prime quality
Contracts secured by late model used motor vehicles and its practice of using
experienced Credit Managers (rather than sole reliance upon computerized scoring
systems) to review applications.
The Account Managers also advise the dealership finance managers regarding
the Company's commitment to serve a broad scope of qualified borrowers through
its three prime auto lending programs: the "Premier", the "Preferred," and the
"Standard" Programs. The Premier Program allows the Company to market lower
interest rates in order to capture customers of superior credit quality. The
Preferred Program allows the Company to offer Contracts at higher interest rates
to borrowers with proven credit quality. The Standard Program allows the Company
to assist qualified borrowers, who may have experienced previous credit problems
or have not yet established a significant credit history, at interest rates
higher than the Company's other programs.
The Company enters into a non-exclusive dealership agreement containing
certain representations by the dealership about the Contracts. After this
relationship is established, the Account Managers continue to actively monitor
the relationship with the objective of maximizing the volume of applications
meeting the
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Company's underwriting standards. Due to the non-exclusive nature of the
Company's relationships with dealerships, the dealerships retain discretion to
determine whether to seek financing from the Company for a customer seeking to
finance a vehicle purchase. The Account Managers regularly telephone and visit
finance managers to reinforce to them the Company's objectives and to answer any
questions they may have. To increase the effectiveness of these contacts, the
Account Managers can obtain from the Company's management information systems
real-time information listing by dealership the number of applications
submitted, the Company's response and the reasons why a particular application
was rejected. The Company believes that the personal relationships its Account
Managers, Credit Managers and Auto Finance Center Managers establish with the
finance managers are an important factor in creating and maintaining productive
relationships with its dealership customer base.
UNDERWRITING AND PURCHASING OF CONTRACTS
The Company's underwriting standards are applied by experienced Credit
Managers with a personal, hands-on analysis of the creditworthiness of each
applicant, rather than sole reliance upon credit scoring systems used by several
of the Company's competitors. The Company believes that credit scoring systems
may approve applicants who are in fact not creditworthy while denying credit to
others who may have acceptable credit risk for the interest rate being charged.
In addition, the Company believes that it can enhance the relationship with its
dealership and consumer customer base by having its Credit Managers utilize a
rules/exception based credit/audit system to personally review each application
and communicate to the submitting dealership or in the case of contracts
originated by Onyx, communicate to the consumer the results of the review,
including the reasons why a particular application may have been declined. This
practice encourages the dealerships' finance managers to submit Contracts
meeting the Company's underwriting standards, thereby increasing the Company's
operating efficiency.
In order to ensure consistent application of its underwriting standards as
its volume of Contract purchases increases, the Company trains its Credit
Managers internally by requiring each of them to review Contracts recently
purchased by more experienced Credit Managers.
The underwriting process begins when an application is telecopied by a
dealership or in the case of Contracts originated by Onyx, the application
received from the Obligor by mail or telephonically, to a central toll-free
number, at the corporate headquarters where it is input into the Company's front
end application processing system. The application sets forth the applicant's
income, liabilities, credit and employment history, proposed downpayment and
provides a description of the financed vehicle. Each application is evaluated by
a Credit Manager in the local Auto Finance Center, or in the Irvine office in
the case of Contracts originated by Onyx, using uniform underwriting standards
developed by the Company. These underwriting standards are intended to assess
the applicant's ability to timely repay all amounts due under the Contract and
the adequacy of the financed vehicle as collateral. Among the criteria
considered by the Credit Managers in evaluating each application are: (i)
stability of the applicant with specific regard to his or her occupation, length
of employment and length of residency; (ii) the applicant's payment history;
(iii) a debt service-to-gross monthly income ratio test (generally not to exceed
45%); (iv) the proposed downpayment for the financed vehicle; (v) the principal
amount of the Contract taking into account the age, type and market value of the
financed vehicle; and (vi) a payment to income ratio test generally not to
exceed 15%. To evaluate credit applications, the Company reviews on-line
information, including reports of credit reporting agencies provided by
Experian, Equifax and TransUnion, nationally recognized vehicle valuation
services and ownership of real estate listed on an application. Under the
Company's credit policies and procedures, Contracts of more than $50,000 require
the approval of an Executive Vice President, a qualified Regional Manager, or
the Chief Credit Officer and more than $75,000 require approval of the Chief
Executive Officer. The Company's wide area network permits a Credit Manager in
any Auto Finance Center or the corporate headquarters to access an application
on a real-time basis. This computer network enables senior management to
efficiently review and approve Contracts requiring approval and permits the
Company to seamlessly shift underwriting work among any of the Auto Finance
Centers to increase operating efficiency. Finally, the Company's computer
network permits real-time review by senior management of operating results
sorted by any number of variables, including by Credit Manager, Auto Finance
Center, or auto dealership.
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The funds advanced by the Company to purchase a Contract generally do not
exceed: (i) for a new financed vehicle, the dealer's invoice plus taxes, title
and license fees, any extended warranty and credit insurance; or (ii) for a used
financed vehicle, the wholesale value assigned by a nationally recognized
vehicle valuation service value guide, plus taxes, title and license fees, any
extended warranty and credit insurance. However, the actual amount advanced for
a Contract may be often less than the maximum permissible amount depending on a
number of factors, including the length of the Contract term and the make, model
and year of the financed vehicle. These adjustments are made to verify that the
financed vehicle constitutes adequate collateral to secure the Contract.
Contracts purchased or originated in 1997 had an average loan to value ratio of
1.01% which the Company believes is one of the lowest in the industry.
Once review of an application is completed, the Credit Manager communicates
his or her decision to the dealership, or in the case of Contracts originated by
Onyx, by phone or otherwise, specifying approval, conditional approval (such as
an increase in the downpayment, reduction in the term of the financing, or the
addition of a co-signer to the Contract), or denial. During 1997, the Company
approved or conditionally approved approximately 41% of the applications it
received and was selected by the dealerships to fund approximately 41% of those
approved applications.
The dealership is required to deliver the necessary documentation for each
Contract approved for purchase by the Company to the originating Auto Finance
Center. The Company audits such documents for completeness and consistency with
the application, providing final approval for purchase of the Contract once
these requirements have been satisfied. The completed Contract file is then
promptly forwarded to the Irvine headquarters.
The Auto Finance Center purchasing the Contract funds the purchase and pays
any dealer participation. The dealership can receive 100% of the dealer
participation at purchase and the Company is entitled to recover from the
dealership over the life of the Contract the unearned portion of the dealer
participation in the event of a prepayment of the purchased Contract or
repossession of the Financed Vehicle. The Company also offers three "shared
commission" methods, in which the dealership can elect to receive 70%, 60% or
50% of the dealer participation at the time of purchase (the 50% participation
program is used with select independent used car dealerships only). The
participation is paid via check or electronic funds transfer. With shared
commission programs, the Dealership is under no obligation to refund any
unearned participation if the contract pre-pays after 120, 90 or 180 days
respectively, of its purchase date.
The Company conducts a post-funding credit review of a majority of its
Contracts. In the review, the approved application is reexamined to be certain
it complies with the Company's underwriting requirements. The results of these
reviews are then reviewed by senior management to ensure consistent application
of the Company's underwriting standards.
The Company employs a compensation system for its Credit Managers, Account
Managers and Auto Finance Center Managers designed to reward those employees
whose Contract purchases meet the Company's volume and yield objectives while
preserving credit quality. Generally, these bonuses, which are payable monthly,
may constitute up to 40% of an individual's compensation and are initially
calculated based on the volume of Contracts purchased and the yield on such
Contracts. This bonus amount is reduced if the Company's post-funding credit
review reveals that these purchased Contracts did not satisfy the Company's
underwriting standards. Under this system, 50% of the bonus payment is based on
attainment of account manager/credit manager team objectives and 50% is based on
attainment of the Auto Finance Center objectives. The Company believes this
incentive compensation system motivates employees to purchase only those prime
quality Contracts that meet the Company's objectives of increasing volume at
targeted yields while preserving credit quality.
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The following table sets forth information about the Company's Contracts as
of the dates indicated:
FOR THE YEARS ENDED
---------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
------------ ------------ ------------ ------------
Contracts purchased or originated
during the period (Dollars in
thousands).......................... $85,723 $199,397 $319,840 $605,905
Average Contract amount............... $11,251 $ 12,033 $ 12,187 $ 12,066
Weighted average initial term
(months)............................ 54.3 55.5 56.2 57.0
Weighted average A.P.R................ 14.01% 15.00% 14.69% 14.59%
Percentage of Contracts secured by new
Motor Vehicles purchased during the
period.............................. 27.79% 19.91% 21.47% 21.32%
Percentage of Contracts secured by
used Motor Vehicles purchased during
the period.......................... 72.21% 80.09% 78.53% 78.68%
Periodically the Company performs an analysis of its servicing portfolio to
evaluate the effectiveness of its underwriting guidelines. If external economic
factors, credit delinquencies or credit losses change, the Company may adjust
its underwriting guidelines to maintain the asset quality deemed acceptable by
the Company's management.
SERVICING AND COLLECTION PROCEDURES
The Company services all Contracts in its servicing portfolio. To reduce
the costs of its servicing operations, the Company has outsourced certain data
processing and billing functions related to its servicing of Contracts. The
Company has entered into a contract with a service bureau to provide certain
loan accounting, reporting and servicing functions. The agreement has a three
year term expiring in February 2000 subject to successive three year extensions,
and provides for billing on a per account basis. Through these service
providers, the Company mails to each Obligor a monthly billing statement ten
days prior to the due date. The Company believes this method has proven to be
more effective in controlling delinquency, and therefore losses, than payment
coupon books which are delivered to the Obligor at the time the Contract is
purchased. The Company charges a late fee on any payment received after the
expiration of the statutory or contractual grace period. Most payments from
Obligors are deposited directly into a lock box account while the balance is
received directly by the Company and promptly deposited by the Company into the
lock box account.
Under the terms of its credit facilities and securitization trusts, the
Company acts as servicer with respect to all Contracts in its servicing
portfolio. The Company receives servicing fees for servicing securitized
Contracts equal to one percent per annum of the outstanding principal balance of
such Contracts. The Company services the securitized Contracts by collecting
payments due from Obligors and remitting such payments to the trustee in
accordance with the terms of the servicing agreements. The Company maintains
computerized records with respect to each Contract to record receipts and
disbursements and to prepare related reports.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Contracts are performed by
Onyx at its Irvine Collection Center. Collection activities include prompt
investigation and evaluation of the causes of any delinquency. An Obligor is
considered delinquent when he or she has failed to make at least 90% of a
scheduled payment under the Contract within 30 days of the related due date
(each a "Due Date").
To automate its collection procedures, Onyx uses features of the computer
system of its third party service bureau, Online Computer Systems, Inc. ("OCS")
to provide tracking and notification of delinquencies. The collection system
provides relevant Obligor information (for example, current addresses, phone
numbers and loan information) and records of all Contracts. The system also
records an Obligor's promise to pay and affords supervisors the ability to
review collection personnel activity and to modify collection priorities
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with respect to Contracts. Onyx utilizes a predictive dialing system located at
the Irvine Collection Center to make phone calls to Obligors whose payments are
past due by more than eight days but less than 30 days. The predictive dialer is
a computer-controlled telephone dialing system which dials phone numbers of
Obligors from a file of records extracted from the Onyx database. By eliminating
time wasted on attempting to reach Obligors, the system gives a single
collector, on average, the ability to speak with and work 200 to 250 accounts
per day. Once a live voice responds to the automated dialer's call, the system
automatically transfers the call to a collector and the relevant account
information to the collector's computer screen. The system also tracks and
notifies collections management of phone numbers that the system has been unable
to reach within a specified number of days, thereby promptly identifying for
management all Obligors who cannot be reached by telephone.
Once an Obligor is 20 days or more delinquent, these accounts are assigned
to specific collectors at the Irvine Collection Center who have primary
responsibility for such delinquent accounts until they are resolved. To expedite
collections from late paying Obligors, Onyx uses Western Union "Quick Collect,"
which allows an Obligor to pay at numerous locations any late payments which are
in turn wired daily to Onyx's lockbox account by Western Union. Onyx also uses
an automatic payment system that allows an Obligor to authorize Onyx to present
a draft on the Obligor's bank account directly to the Obligor's bank for payment
to Onyx.
Generally, after a scheduled payment under a Contract continues to be past
due for between 45 and 60 days, Onyx will initiate repossession of the financed
vehicle. However, if a Contract is deemed uncollectible, if the financed vehicle
is deemed by collection personnel to be in danger of being damaged, destroyed or
made unavailable for repossession, or if the Obligor voluntarily surrenders the
financed vehicle, Onyx may repossess it without regard to the length or
existence of payment delinquency. Repossessions are conducted by third parties
who are engaged in the business of repossessing vehicles for secured parties.
Under California law and most other states, after repossession, the Obligor
generally has an additional 10 to 15 days to redeem the financed vehicle before
the financed vehicle may be resold by Onyx in an effort to recover the balance
due under the Contract.
Losses may occur in connection with delinquent Contracts and can arise in
several ways, including inability to locate the financed vehicle or the Obligor,
or because of a discharge of the Obligor in a bankruptcy proceeding. The current
policy of Onyx is to recognize losses at the time a Contract is deemed
uncollectible or during the month a scheduled payment under a Contract becomes
120 days or more past due, whichever occurs first.
Upon repossession and sale of the financed vehicle, any deficiency
remaining is pursued against the Obligor to the extent deemed practical by Onyx
and to the extent permitted by law. The loss recognition and collection policies
and practices of Onyx may change over time in accordance with Onyx's business
judgment.
MODIFICATIONS AND EXTENSIONS
Onyx offers certain credit-related extensions to Obligors. Generally, these
extensions are offered only when (i) Onyx believes that the Obligor's financial
difficulty has been resolved or will no longer impair the Obligor's ability to
make future payments, (ii) the extension will result in the Obligor's payments
being brought current, (iii) the total number of credit-related extensions
granted on the Contract will not exceed three and the total credit-related
extensions granted on the Contract will not exceed three months in the
aggregate, (iv) there has been no more than one credit-related extension granted
on the Contract in the immediately preceding twelve months, and (v) Onyx (or its
assignee) had held the Contract for at least six months. Any deviation from this
policy requires the concurrence of a Collection Supervisor and Onyx's Collection
Manager and the Executive Vice President, Collections. The total number of
deferments for 1997 was less than 3% of the number of Contracts in the Servicing
Portfolio at December 31, 1997 compared to 5.0% of the number of Contracts in
the Servicing Portfolio at December 31, 1996.
INSURANCE
Each Contract requires the Obligor to obtain comprehensive and collision
insurance with respect to the related financed vehicle with Onyx named as a loss
payee. In the event that the Obligor fails to maintain the
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required insurance, however, Onyx has purchased limited comprehensive and
collision insurance, referred to as the "Blanket Insurance Policy" coverage. The
Blanket Insurance Policy provides Onyx with protection on each uninsured or
underinsured Financed Vehicle against total loss, damage or theft. Onyx has
obtained its Blanket Insurance Policy from United Financial Casualty Company
("UFCC"), which is rated "A" by A.M. Best & Co. For the Blanket Insurance
Policy, Onyx is assessed a premium based on the size of the servicing portfolio.
The insurer under the Blanket Insurance Policy is required to settle any claim
complying with the policy conditions within 60 days from the date reported. Onyx
contracted with UFCC in April, 1997 to provide insurance tracking services which
the Company believes will reduce its exposure to uninsured motorists.
FINANCING AND SALE OF CONTRACTS
The Company finances acquisition of Contracts primarily with the credit
facilities and through securitizations.
CP Facility. The Company is party to a $200 million auto loan warehousing
program with Triple-A One Funding ("Triple A") used to fund purchases or
origination of Contracts. Triple-A is a commercial paper asset-backed conduit
lender sponsored by MBIA and is currently rated A-1/P-1 by Standard & Poor's
Ratings Group and Moody's Investor Services, Inc., respectively. MBIA provides
credit enhancement to Triple-A by issuing the CP Financial Guarantee Insurance
Policy covering all principal and interest obligations owed by the Company
related to borrowings under the CP Facility. The Company uses the Contracts as
collateral to borrow from Triple-A. The advance rate is 98% of the adjusted
eligible contract balance of each Contract and is subject to reduction by MBIA
if the net yield on the Company's Contract portfolio falls below a target net
yield. The CP Facility term as amended is for a three-year period ending in
September 1998, subject to the annual renewal of a liquidity facility provided
by several financial institutions. After maturity in September 1998, the CP
Facility is subject to annual renewals upon mutual consent of the parties.
Revolving Facility. The Company is party to a collateralized revolving line
of credit with an institutional lender for up to $30 million for working capital
and other expenditures for which the Company's CP Facility is not otherwise
available. Under the Revolving Facility, Onyx may (subject to borrowing base
availability) borrow and repay during the two-year revolving period up to $30
million based on the following collateral-based formula: up to the lesser of 65%
of the net book value of the Company's excess servicing and trust receivables of
the securitizations deemed eligible by the lenders or up to 75% of the value of
such excess servicing and trust receivables determined by such lenders in
accordance with their collateral valuation model. The Revolving Facility
contains affirmative, negative and financial covenants typical of such credit
facilities.
Hedging and Interest Rate Risk Management. The Company employs a hedging
strategy that is intended to minimize the risk of interest rate fluctuations and
which historically has involved the execution of forward interest rate swaps or
use of a pre-funding structure for the Company's securitizations. The Company is
not required to maintain collateral on the outstanding hedging program.
Securitization. Regular securitizations are an integral part of the
Company's business plan because they allow the Company to increase its
liquidity, provide for redeployment of its capital and reduce risks associated
with interest rate fluctuations. In October 1994, the Company commenced a
securitization program that involves selling interests in pools of its Contracts
to investors through the public issuance of AAA/Aaa rated, asset-backed
securities. The Company completed four AAA/Aaa rated publicly underwritten
asset-backed securitization in the amount of $527.3 million in 1997.
The net proceeds of these securitizations are used to pay down outstanding
indebtedness incurred under the Company's credit facilities to purchase
contracts, thereby creating availability for the purchase of additional
Contracts. Since 1994, the Company has securitized $1.1 billion of its Contracts
in ten separate transactions. In each of its securitizations, the Company has
sold its Contracts to a newly formed grantor trust which issued pass-through
certificates in an amount equal to the aggregate principal balance of the
Contracts.
To improve the level of profitability from the sale of securitized
Contracts, the Company arranges for credit enhancement to achieve an improved
credit rating on the asset-backed securities issued. This credit
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enhancement has taken the form of a financial guaranty issued by MBIA, which
issues a financial guarantee insurance policy (the "Financial Guarantee
Insurance Policy") insuring the payment of principal and interest due on the
asset-backed securities. Additionally, a spread account is created which
provides a source of cash to reimburse MBIA for claims made, if any, under the
financial guarantee insurance policy issued with respect to the Company's
securitizations.
The spread account is generally initially funded with a cash deposit made
by the Company either from working capital or from an advance under the
Revolving Facility or with the purchase of a reinsurance policy, and thereafter,
with interest collected on the Contracts that exceeds the interest payable to
holders of the certificates, the monthly servicing fees and certain other
amounts. Funds can be withdrawn from the spread account to reimburse MBIA for
draws on the financial guarantee insurance policy. To date, no such draws have
been required. The Company is entitled to receive future servicing cash flows
from the spread account to the extent the amounts deposited exceed predetermined
required minimum levels. After such levels are reached, the future servicing
cash flows are distributed to the Company in the absence of a default.
The Company receives servicing fees for its duties relating to the
accounting for and collection of the Contracts. In addition, the Company is
entitled to the future servicing cash flows. Generally, the Company sells the
Contracts at face value and without recourse, except that certain
representations and warranties with respect to the Contracts are provided by
Onyx as the servicer and Onyx Acceptance Financial Corporation ("OAFC") as the
seller to the trust.
Gains on sale of Contracts in securitizations provide a significant portion
of the Company's revenues. Several factors affect the Company's ability to
complete securitizations of its Contracts, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the Company's portfolio of Contracts and the
Company's ability to obtain credit enhancement.
The Company appointed Merrill Lynch & Co. in May 1994 as lead manager for
its securitizations and Merrill Lynch & Co. has been the sole lead manager on
all of the Company's transactions through year end 1997.
GOVERNMENT REGULATION
The Company's operations are subject to regulation, supervision, and
licensing under various federal, state and local statutes, ordinances and
regulations. The Company is required to comply with the laws of those states in
which it conducts operations.
Consumer Protection Laws. Numerous federal and state consumer protection
laws and related regulations impose substantial requirements upon lenders and
servicers involved in consumer finance. These laws include the Truth-in-Lending
Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the
Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z,
state's adaptations of the Uniform Consumer Credit Code and of the Uniform
Commercial Code (the "UCC") and state motor vehicle retail installment sales
acts and other similar laws. These laws, among other things, require the Company
to provide certain disclosures to applicants, prohibit misleading advertising
and protect against discriminatory financing or unfair credit practices. The
Truth in Lending Act and Regulation Z promulgated thereunder require disclosure
of, among other things, the payment schedule, the finance charge, the amount
financed, the total of payments and the annual percentage rate charged on each
retail installment contract. The Equal Credit Opportunity Act prohibits
creditors from discriminating against loan applicants (including retail
installment contracts obligors) on the basis of race, color, sex, age (provided
the applicant has the capacity to contract), marital status, religion, national
origin, the fact that all or part of the applicant's income derives from a
public assistance program, or the fact that the applicant has in good faith
exercised any right under the Consumer Credit Protection Act. Under the Equal
Credit Opportunity Act, creditors are required to make certain disclosures
regarding consumer rights and advise consumers whose credit applications are not
approved of the reasons for the rejection. The rules of the Federal Trade
Commission (the "FTC") limit the types of property a creditor may accept as
collateral to secure a consumer loan and its holder in due course rules provide
for the preservation of the consumer's claims
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and defenses when a consumer obligation is assigned to a subject holder. With
respect to used vehicles specifically, the FTC's rule on Sale of Used Vehicles
requires that all sellers of used vehicles prepare, complete and display a
Buyer's guide which explains any applicable warranty coverage for such vehicles.
Also, some state laws impose finance charge ceilings and other restrictions on
consumer transactions and require contract disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In some
cases, these provisions could affect the Company's ability to enforce Contracts
it purchases.
EMPLOYEES
The Company employs personnel experienced in all areas of loan
originations, documentation, collection and administration. The Company employs
and trains specialists in loan processing and servicing with minimal crossover
of duties. At December 31, 1997, the Company had 319 full-time employees, none
of whom were covered by collective bargaining agreements. The Company believes
it has good relationships with its employees.
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RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
which involve risk and uncertainties, including but not limited to credit,
economic, competitive, governmental and financial factors affecting the
Company's operations, markets, financial products, and services and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
LIQUIDITY. The Company requires substantial cash to implement its business
strategy, including cash to: (i) acquire Contracts; (ii) pay dealer
participation; (iii) pay securitization costs and fund spread accounts; (iv)
settle hedge transactions; (v) satisfy working capital requirements and pay
operating expenses; and (vi) pay interest expense. These cash requirements
increase as the Company's volume of purchases or originations of Contracts
increases. A substantial portion of the Company's revenues in any period is
represented by gain on sale of Contracts in such period but the cash underlying
such revenues is received over the life of the Contracts. In addition, cash paid
by the Company for dealer participation is not recovered at the time of
securitizations, but over the life of the Contract. The Company has operated and
expects to continue to operate on a negative cash flow basis as long as the
volume of Contract purchases continues to grow. The Company has historically
funded these negative operating cash flows principally through borrowings from
financial institutions, sales of equity securities and sales of subordinated
notes. No assurance can be given, however, that the Company will have access to
the capital markets in the future for equity or debt issuances or for
securitizations, or that financing through borrowings or other means will be
available on acceptable terms to satisfy the Company's cash requirements to
implement its business strategy. The Company's inability to access the capital
markets or obtain acceptable financing could have a material adverse effect on
the Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON WAREHOUSE FINANCING. The Company depends on warehousing
facilities with financial institutions to finance the purchase or origination of
Contracts pending securitization. The Company participates in a $200 million
asset-backed commercial paper conduit program (the "CP Facility"), of which MBIA
is the program manager, to finance 98% of the purchase price of Contracts. The
CP Facility expires in September 1998, subject to the requirement that the
related liquidity facility provided by certain banks be extended annually. The
Company currently has (subject to borrowing base availability) a $30 million
secured revolving credit facility (the "Revolving Facility") with an
institutional lender for working capital and expenditures for which the
Company's $200 million CP Facility is not otherwise available. The Revolving
Facility, unless extended, converts on June 30, 1998 into fully-amortizing
two-year term loans maturing on June 29, 2000. The Company's business strategy
will require continued availability of financing during the warehousing period.
There can be no assurance that such financing will be available to the Company
on favorable terms. The inability of the Company to arrange new warehousing
credit facilities or to extend its existing credit facilities when they expire
would have a material adverse effect on the Company's results of operations and
financial condition.
The continued availability of the CP Facility is subject to, among other
things, maintenance of a target net yield, and compliance by the Company with
certain financial covenants contained in the sale and servicing agreement
between the Company, as seller, and the Company's wholly owned special purpose
finance subsidiary, OAFC as purchaser. These covenants include a minimum ratio
of tangible net worth to total liabilities plus tangible net worth, minimum
operating cash flow, minimum amount of Contracts serviced by the Company and
minimum cash on hand.
The continued availability of the Revolving Facility is subject to, among
other things, substantially similar financial covenants to those of the CP
Facility except that leverage is measured as the ratio of net worth plus
subordinated debt to total liabilities plus net worth, and is tested on the last
day of every month. Additionally, the Company is subject under the documentation
governing the Revolving Facility, to minimum net worth and subordinated debt
plus net worth tests, a limitation on quarterly operating losses and covenants
restricting delinquencies, losses, prepayments and net yields of Contracts
included in a Securitization.
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DEPENDENCE ON SECURITIZATION PROGRAM. The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its credit facilities
and to create availability to purchase additional Contracts. Further, gain on
sale of Contracts generated by the Company's securitizations represents a
significant portion of the Company's revenues. Several factors affect the
Company's ability to complete securitizations of its Contracts, including
conditions in the securities markets generally, conditions in the asset-backed
securities market specifically, the credit quality of the Company's portfolio of
Contracts and the Company's ability to obtain credit enhancement. If the Company
were unable to profitably securitize a sufficient number of its Contracts in a
particular financial reporting period, then the Company's revenues for such
period would decline and could result in lower income or a loss for such period.
In addition, unanticipated delays in closing a securitization could also
increase the Company's interest rate risk by increasing the warehousing period
for its Contracts. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources," and
"Business -- Financing and Sale of Contracts."
DEPENDENCE ON CREDIT ENHANCEMENT. Since inception, through December 31,
1997 each of the Company's securitizations has utilized credit enhancement in
the form of a financial guarantee insurance policy issued by MBIA in order to
achieve "AAA/Aaa" ratings. This form of credit enhancement reduces the costs of
the securitizations relative to alternative forms of credit enhancements
currently available to the Company. MBIA is not required to insure future
securitizations nor is the Company restricted in its ability to obtain credit
enhancement from providers other than MBIA or to use other forms of credit
enhancement. There can be no assurance that the Company will be able to obtain
credit enhancement in any form from MBIA or any other provider of credit
enhancement on acceptable terms or that future securitizations will be similarly
rated. The Company also relies on MBIA's financial guarantee insurance policy to
reduce its borrowing cost under the "A-1/P-1" rated CP Facility. A downgrading
of MBIA's credit rating or MBIA's withdrawal of credit enhancement could result
in higher interest costs for future Company securitizations and financing costs
during the Warehousing period. Such events could have a material adverse effect
on the Company's results of operations and financial condition.
INTEREST RATE RISK. The Company's profitability is largely determined by
the difference, or "spread," between the effective rate of interest received by
the Company on the Contracts acquired by the Company and the interest rates
payable under its credit facilities during the warehousing period or for
certificates issued in securitizations. Several factors affect the Company's
ability to manage interest rate risk. First, the Contracts are purchased at
fixed interest rates, while amounts borrowed under the Company's credit
facilities bear interest at variable rates that are subject to frequent
adjustment to reflect prevailing rates for short-term borrowings. The Company's
policy is to increase the buy rates it posts with dealerships or to increase
rates it uses to solicit to consumers for Contracts in response to increases in
its cost of funds during the warehousing period. However, there is generally a
time lag before such increased borrowing costs can be offset by increases in the
buy rates for Contracts and, in certain instances, the rates charged by its
competitors may limit the Company's ability to pass through its increased costs
of warehousing financing. Second, the spread can be adversely affected after a
Contract is purchased and while it is held during the warehousing period by
increases in the prevailing rates in the commercial paper markets. The CP
Facility permits the Company to select maturities of up to 270 days for
commercial paper issued under the CP Facility. Third, the interest rate demanded
by investors in securitizations is a function of prevailing market rates for
comparable transactions and the general interest rate environment. Because the
Contracts purchased by the Company have fixed rates, the Company bears the risk
of spreads narrowing because of interest-rate increases during the period from
the date the Contracts are purchased until the closing of its securitization of
such Contracts. The Company employs a hedging strategy that is intended to
minimize this risk which historically has involved the execution of forward
interest rate swaps or use of a pre-funding structure for its securitizations.
There can be no assurance, however, that this strategy will consistently or
completely offset adverse interest-rate movements during the warehousing period
or that the Company will not sustain losses on hedging transactions. The
Company's hedging strategy requires estimates by management of monthly Contract
acquisition volume and timing of its securitizations. If such estimates are
materially inaccurate, then the Company's gains on sales of Contracts and
results of operations could be adversely affected. In addition, to the extent
that the interest rates charged on Contracts sold in a securitization with a
pre-funding structure decline below the rates prevailing at
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the time that the securitization closed the Company has some interest rate
exposure to falling interest rates during the pre-funding period. Such a rate
decline would reduce the interest rate spread because the interest rate on the
certificates would remain fixed. This, in time, would negatively impact the
gains on sale of Contracts and the Company's results of operations.
DEFAULT AND PREPAYMENT RISK. The Company's results of operations, financial
condition and liquidity depend, to a material extent, on the performance of
Contracts purchased and warehoused by the Company. A portion of the Contracts
acquired by the Company may default or prepay during the warehousing period. The
Company bears the risk of losses resulting from payment defaults during the
warehousing period. In the event of a payment default, the collateral value of
the Financed Vehicle may not cover the outstanding Contract balance and costs of
recovery. The Company maintains an allowance for credit losses on Contracts held
during the warehousing period which reflects management's estimates of
anticipated credit losses during such period. If the allowance is inadequate,
then the Company would recognize as an expense the losses in excess of such
allowance and results of operations could be adversely affected. In addition,
under the terms of the CP Facility, the Company will not be able to borrow
against defaulted Contracts.
The Company's servicing income can also be adversely affected by prepayment
or default of Contracts in the servicing portfolio. The Company's contractual
servicing revenue is based on a percentage of the outstanding balance of such
Contracts. Thus, if Contracts are prepaid or charged-off, then the Company's
servicing revenue will decline to the extent of such prepaid or charged-off
Contracts.
The gain on sale of Contracts recognized by the Company in each
securitization and the value of the RISA in each transaction reflects
management's estimate of future credit losses and prepayments for the Contracts
included in that securitization. If actual rates of credit loss or prepayments,
or both, on such Contracts exceeded those estimated, the value of the RISA would
be impaired. The Company periodically reviews its credit loss and prepayment
assumptions relative to the performance of the securitized contracts and to
market conditions. If necessary, the Company would adjust the value of the RISA
by making a charge to servicing fee income. However, the Company's results of
operations and liquidity could be adversely affected if credit loss or
prepayment levels on securitized Contracts substantially exceeded anticipated
levels. Further, any write down of RISA would reduce the amount available to the
Company under the Revolving Facility, thus requiring the Company to pay down
amounts outstanding under the Revolving Facility or provide additional
collateral to cure the borrowing base deficiency.
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE SERVICING CASH FLOWS. The
Company is entitled to receive servicing income only while it acts as servicer
under the sale and servicing agreement for Contracts during the warehousing
period and under the pooling and servicing agreement for securitized Contracts.
Any loss of the servicing rights would have a material adverse effect on the
Company's operations and financial condition.
The Company's right to act as servicer can be terminated by MBIA, as
program manager, upon the occurrence of certain servicer termination events (as
defined in the sale and servicing agreement). Servicer termination events
include: (i) material misrepresentations or material breaches of warranties or
covenants by Onyx or OAFC, including the financial covenants of Onyx contained
in the sale and servicing agreement.
The Company's loss of the servicing rights under the Company's sale and
servicing agreement or the pooling and servicing agreements or the occurrence of
a trigger event that would block release of future servicing cash flows from the
Grantor Trusts' spread accounts would have a material adverse effect on the
Company's results of operations and financial condition.
VARIABLE QUARTERLY EARNINGS. The Company's revenues and losses have
fluctuated in the past and are expected to fluctuate in the future principally
as a result of the timing and size of its securitizations. Several factors
affecting the Company's business can cause significant variations in its
quarterly results of operations. In particular, variations in the volume of the
Company's Contract acquisitions, the interest rate spreads between the Company's
cost of funds and the average interest rate of purchased Contracts, the
effectiveness of the Company's hedging strategies, the Certificate rate for
securitizations, and the timing and size of securitizations, can result in
significant increases or decreases in the Company's revenues from quarter to
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quarter. Any significant decrease in the Company's quarterly revenues could have
a material adverse effect on the Company's results of operations and its
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future operating results depend
in significant part upon the continued service of its key senior management
personnel, none of whom is bound by an employment agreement. The Company's
future operating results also depend in part upon its ability to attract and
retain qualified management, technical, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position or the Company's inability to attract and
retain skilled employees, as needed, could materially adversely affect the
Company's results of operations and financial condition. The Company presently
maintains a key man life insurance policy on John W. Hall in the amount of $3
million.
COMPETITION. Competition in the field of financing retail motor vehicles
sales is intense. The automobile finance market is highly fragmented and
historically has been serviced by a variety of financial entities including the
captive finance affiliates of major automotive manufacturers, banks, savings
associations, independent finance companies, credit unions and leasing
companies. Several of these competitors have greater financial resources than
the Company and may have a significantly lower cost of funds. Many of these
competitors also have long-standing relationships with automobile dealerships
and offer dealerships or their customers other forms of financing or services
not provided by the Company. Furthermore, during the past two years, a number of
automobile finance companies have completed public offerings of common stock,
the proceeds from which are to be used, at least in part, to fund expansion and
finance increased purchases of Contracts. However, in 1996 and 1997, many of
these auto finance companies experienced significant liquidity and performance
challenges due to the intense competition. The Company's ability to compete
successfully depends largely upon its relationships with dealerships and the
willingness of dealerships to offer those Contracts that meet the Company's
underwriting criteria to the Company for purchase. There can be no assurance
that the Company will be able to continue to compete successfully in the markets
it serves.
THE EFFECT OF ADVERSE ECONOMIC CONDITIONS. The Company is a motor vehicle
consumer auto finance company whose activities are dependent upon the sale of
motor vehicles. The ability of the Company to continue to acquire Contracts in
the markets in which it operates and to expand into additional markets is
dependent upon the overall level of sales of new and used motor vehicles in
those markets. A prolonged downturn in the sale of new and used motor vehicles,
whether nationwide or in the California markets, could have an adverse impact
upon the Company, the results of its operations and its ability to implement its
business strategy. See "Business -- Competition."
The automobile industry generally is sensitive to adverse economic
conditions both nationwide and in California. Periods of rising interest rates,
reduced economic activity or higher rates of unemployment generally result in a
reduction in the rate of sales of motor vehicles and higher default rates on
motor vehicle loans. There can be no assurance that such economic conditions
will not occur, or that such conditions will not result in such severe
reductions in the Company's revenues or cash flows available to the Company to
permit the Company to remain current on its credit facilities. See "Risk
Factors -- Liquidity."
REGULATION. The Company's business is subject to numerous federal and state
consumer protection laws and regulations, which, among other things: (i) require
the Company to obtain and maintain certain licenses and qualifications; (ii)
limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's Contracts;
(iv) require specific disclosures; and (v) define the Company's rights to
repossess and sell collateral. The Company believes it is in compliance in all
material respects with all such laws and regulations, and that such laws and
regulations have had no material adverse effect on the Company's ability to
operate its business. However, the Company's failure to comply with applicable
laws and regulations, changes in existing laws or regulations, or in the
interpretation thereof, or the promulgation of any additional laws or
regulations could have a material adverse effect on the Company's results of
operations and financial condition.
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ITEM 2. PROPERTIES
The Company did not own any real property at December 31, 1997. The
Company's headquarters are located in Irvine, California. The Company also
leases office space for its ten Auto Finance Centers. In December 1997, the
Company executed a lease for approximately 85,000 square feet of office space
which will serve as the new corporate headquarters. The Company expects
occupancy in January 1999.
ITEM 3. LITIGATION
The Company is currently not a party to any material litigation, although
it is involved from time to time in routine litigation incident to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this Annual Report on Form 10-K to a vote of security holders,
through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ under the symbol "ONYX".
The following table provides quarterly high and low sales closing prices for the
Company's Common Stock for the years ended December 31, 1997 and December 31,
1996.
1997 HIGH LOW
---- ------ ------
First quarter.......................................... $10.63 $ 7.25
------ ------
Second quarter......................................... $ 8.50 $ 6.50
------ ------
Third quarter.......................................... $ 8.00 $ 7.00
------ ------
Fourth quarter......................................... $ 7.88 $ 6.38
------ ------
1996 HIGH LOW
---- ------ ------
First quarter.......................................... $14.00 $12.75
------ ------
Second quarter......................................... $19.00 $14.00
------ ------
Third quarter.......................................... $15.00 $10.50
------ ------
Fourth quarter......................................... $11.50 $ 7.63
------ ------
At March 13, 1998, there were approximately 1,677 holders of the Company's
Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings for its business and
does not anticipate declaring or paying any dividends on the Common Stock in the
foreseeable future. In addition, the Company's ability to declare or pay
dividends is restricted by the terms of the credit facilities.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
FOR THE YEARS ENDED
DECEMBER 31
-------------------------------------------
1994 1995 1996 1997
------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT
FOR PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net interest income....................................... $ 1,311 $ 2,225 $ 4,140 $ 5,036
Servicing fee income...................................... 269 1,381 2,952 8,091
Gain on sale of contracts................................. 515 2,012 18,128 22,823
------- -------- -------- --------
Total revenues............................................ 2,095 5,618 25,220 35,950
------- -------- -------- --------
Provision for credit losses............................... 208 465 266 785
Operating expenses........................................ 5,392 8,340 15,394 30,740
------- -------- -------- --------
Total expenses............................................ 5,600 8,805 15,660 31,525
------- -------- -------- --------
Income (loss) before income taxes......................... (3,505) (3,187) 9,560 4,425
Income taxes.............................................. 0 0 1,888 1,841
------- -------- -------- --------
Net income (loss)......................................... $(3,505) $ (3,187) $ 7,672 $ 2,584
======= ======== ======== ========
Net income (loss) available to common shareholders........ $(4,081) $ (3,763) $ 7,672 $ 2,584
======= ======== ======== ========
Net income (loss) per share of Common Stock(5)
Basic................................................... $ (1.89) $ (1.68) $ 1.49 $ .43
Diluted................................................. $ (1.89) $ (1.68) $ 1.35 $ .40
Basic shares outstanding.................................. 2,158 2,234 5,159 6,000
Diluted shares outstanding................................ 2,158 2,234 5,700 6,384
OPERATING DATA:
Contracts purchased during the period..................... $85,723 $199,397 $319,840 $605,905
Number of Contracts purchased during the period........... 7,619 16,571 26,244 50,214
Contracts securitized during the period................... $38,601 $105,000 $405,514 $527,276
Number of active dealerships (at end of period)........... 380 769 1,471 2,846
Operating expenses as percentage of average Servicing
Portfolio during the period(1).......................... 19.1% 5.9% 4.9% 5.5%
SELECTED PORTFOLIO DATA:
Servicing Portfolio (at end of period).................... $74,581 $218,207 $400,665 $757,277
Average Servicing Portfolio during the period(1).......... $28,291 $141,029 $311,340 $563,343
Number of Contracts in Servicing Portfolio (at end of
period)................................................. 6,893 20,156 38,275 73,502
Weighted average annual percentage rate (at end of
period)(2).............................................. 14.01% 15.00% 14.69% 14.66%
Delinquencies as a percentage of the dollar amount of
Servicing Portfolio (at end of period)(4)............... 0.07% 1.20% 2.03% 2.51%
Net charge-offs as a percentage of the average Servicing
Portfolio during the period(1).......................... 0.00% 0.37% 1.63% 2.03%
AS OF DECEMBER 31,
-------------------------------------------
1994 1995 1996 1997
------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $10,252 $ 1,623 $ 603 $ 991
Contracts held for sale(3)................................ 40,313 116,893 12,238 63,380
Retained interest in securitized assets................... 2,061 6,182 29,632 48,839
Total assets.............................................. 57,095 136,077 56,677 146,568
Commercial paper.......................................... 40,850 112,380 10,108 60,506
Revolving credit borrowings............................... 0 9,569 2,500 30,000
Subordinated debt......................................... 10,000 10,000 0 0
Redeemable Series A Preferred Stock....................... 8,803 9,379 0 0
Stockholders' equity (deficit)............................ (4,122) (7,896) 37,914 40,555
- ---------------
(1) Averages are based on daily balances.
(2) The weighted averages are based on the Contracts outstanding at the end of
the period.
(3) Contracts held for sale includes dealer participation. See Notes 2 and 4 to
the Consolidated Financial Statements.
(4) Excludes repossessed inventory.
(5) All years have been restated in compliance with FAS 128.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Onyx is a specialized consumer finance company engaged in the purchase,
origination, securitization and servicing of Contracts originated by franchised
and select independent automobile dealerships in 18 states and to a lesser
extent the origination of motor vehicle loans on a direct basis to consumers
(collectively the "Contracts"). The Company focuses its efforts on acquiring
Contracts that are secured by late model used and, to a lesser extent, new
automobiles, that are entered into with purchasers whom the Company believes
have a favorable credit profile. Since commencing the purchase of Contracts in
February 1994, the Company has acquired more than $1.2 billion in Contracts from
over 2,800 dealerships and has expanded its operations from a single office in
Irvine, California to ten Auto Finance Centers serving most regions of the
United States.
The Company generates revenues primarily through the purchase, origination,
warehousing, subsequent securitization and ongoing servicing of Contracts. The
Company earns net interest income on Contracts held during the warehousing
period. Upon the securitization and sale of Contracts, the Company recognizes a
gain on sale of Contracts, receives future servicing cash flows and earns
servicing fees from the trusts in the amount of one percent per annum of the
outstanding principal balance of the Contracts securitized.
The following table illustrates the changes in the Company's Contract
acquisition volume, total revenue, securitization activity and servicing
portfolio during the past three fiscal years.
SELECTED FINANCIAL INFORMATION
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Contracts purchased during year...................... $199,397 $319,840 $605,905
Average monthly purchases during the year............ 16,616 26,653 50,492
Gain on sale of Contracts............................ 2,012 18,128 22,823
Total revenue(1)..................................... 5,618 25,220 35,950
Contracts securitized during the year................ 105,000 405,514 527,276
Servicing Portfolio at year end...................... 218,207 400,665 757,277
- ---------------
(1) Total revenue is comprised of net interest income, servicing fee income and
gain on sale of contracts.
Contracts Purchased and Servicing Portfolio
Since its inception, the Company has experienced significant growth in its
purchased volume of Contracts. Acquisition volume for the year ended December
31, 1997 was $605.9 million compared to $319.8 million for the year ended
December 31, 1996, representing an increase of 89.5% from 1996 to 1997. This
growth in acquisition volume is attributable primarily to the opening of two
additional Auto Finance Centers during 1997 bringing the total to ten Auto
Finance Centers and the continued expansion and maturation of existing
relationships. During 1997, the Company closed the Los Gatos Auto Finance Center
by consolidating its operations with the Sacramento Auto Finance Center.
The Company's increase in Contract acquisition volume has resulted in an
increase in the Company's servicing portfolio. The servicing portfolio at
December 31, 1997 was $757.3 million compared to $400.7 million at December 31,
1996, an increase of 88.9%.
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Net Interest Income
Net interest income consists primarily of the difference between the rate
earned on Contracts held on the balance sheet prior to securitization and the
interest costs associated with the Company's borrowings to finance the
warehousing of such Contracts. The following table illustrates the average rate
earned on Contracts, the average rate paid on borrowings and the corresponding
net interest rate spread.
NET INTEREST RATE SPREAD
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
Yield on Contracts(1)................................... 14.22% 13.66% 13.85%
Cost of borrowings...................................... 7.13% 7.14% 7.03%
Net interest rate spread................................ 7.09% 6.52% 6.82%
- ---------------
(1) The yield on Contracts is net of Dealer Participation amortized expenses.
Gain on Sale of Contracts
The Company computes a gain on sale with respect to contracts securitized
based on the present value of the estimated future excess cash flows to be
received from such contracts using a market discount rate. Gain on sale is
recorded as retained interest in securitized assets ("RISA") on the balance
sheet and is amortized against servicing income over the life of the contracts.
The gain recorded in the income statement is adjusted for prepaid dealer
commissions, issuance costs and the effect of hedging activities.
The Company recorded gains on sale of Contracts of $22.8 million on the
sale of $527.3 million of Contracts in 1997 for its securitizations. The gain on
sale of Contracts is affected by the amount of Contracts securitized and the net
interest rate spread on those Contracts. The following table illustrates the net
interest rate spread for each of the Company's securitizations:
SECURITIZATION TRANSACTIONS
----------------------------------------------------------------------------
REMAINING WEIGHTED
BALANCE AT AVERAGE
ORIGINAL DECEMBER 31, CONTRACT CERTIFICATE GROSS NET
SECURITIZATION BALANCE 1997 RATE(1) RATE SPREAD(2) SPREAD(3)
-------------- ---------- ------------ --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
1994-1 Grantor Trust........... $ 38,601 $ 5,042 13.75% 6.90% 6.85% 1.32%
1995-1 Grantor Trust........... 105,000 24,304 14.94 7.00 7.94 1.07
1996-1 Grantor Trust........... 100,500 36,578 15.07 5.40 9.67 3.07
1996-2 Grantor Trust........... 85,013 39,513 14.84 6.40 8.44 2.98
1996-3 Grantor Trust........... 120,000 66,246 14.54 6.45 8.09 2.54
1996-4 Grantor Trust........... 100,000 64,364 14.80 6.20 8.60 2.63
1997-1 Grantor Trust........... 90,000 64,500 13.86 6.55 7.31 2.25
1997-2 Grantor Trust........... 121,676 98,409 14.85 6.35 8.50 2.48
1997-3 Grantor Trust........... 149,600 134,200 14.77 6.35 8.42 2.70
1997-4 Grantor Trust........... 166,000 160,740 14.69 6.30 8.39 2.67
---------- --------
Total.......................... $1,076,390 $693,896
========== ========
- ---------------
(1) As of issue date.
(2) Difference between weighted average Contract rate and certificate rate.
(3) Difference between weighted average Contract rate and certificate rate, net
of underwriting costs, other issuance costs, servicing fees, ongoing
financial guarantee insurance policy premiums and trustee fees, and the
hedging gain or loss.
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22
Servicing Fee Income
Contractual servicing is earned at a rate of 1.0% per annum on the
outstanding balance of contracts securitized and is consistent with industry
standards. Excess servicing income is dependent upon the average excess spread
on the contracts sold and the performance of the contracts. Servicing fee income
is related to the size of the serviced portfolio and also includes interest,
extension fees and other fees charged to customer's accounts.
RESULTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
The Company had net income of $2.6 million for the year ended December 31,
1997 compared to net income of $7.7 million and a net loss of $3.2 million for
the years ended December 31, 1996 and 1995. The reduction in net income from
1996 to 1997 was attributable to several factors, most notably to the Company's
commitment to build reserves in the face of increasing delinquency and credit
loss ratios related to purchases of contracts in the second half of 1995 and the
first half of 1996 by one of the Company's auto finance centers. Management
believes that the Company is adequately reserved at this time. Additionally, the
losses incurred by the Company during its start-up phase (calendar years 1994
and 1995) generated net operating loss carryforwards which were fully utilized
in 1996 to shield pretax income. The unavailability of these carryforwards in
1997 accounted for a significant portion of the net income differential between
1997 and 1996.
Net Interest Income. Net interest income increased by 21% to $5.0 million
for the year ended December 31, 1997 from $4.1 million for the year ended
December 31, 1996 and from $2.2 million for the year ended December 31, 1995.
The increase is due in part to higher net interest margins available to the
Company throughout 1997 as compared to 1996 and to an increase in the average
amount of Contracts held for sale during 1997 as compared to 1996. Net interest
margins rose to 6.82% in 1997 from 6.52% in 1996 while the average amount of
Contracts held for sale increased to $85.7 million in 1997 from $80.6 million in
1996. The yield on contracts held for sale increased by .19% to 13.85% for the
year ended December 31, 1997 compared to 13.66% for the year ended December 31,
1996. In addition, the Company's cost of borrowings decreased by .11% from 7.14%
at December 31, 1996 to 7.03% at December 31, 1997.
Servicing Fee Income. Servicing fee income increased to $8.1 million for
the year ended December 31, 1997, from $3.0 million for the year ended December
31, 1996 and from $1.4 million for the year ended December 31, 1995. The
increase was attributable to a significant increase in the size of the average
servicing portfolio. For the year ended December 31, 1997, the size of the
average servicing portfolio increased to $563.3 million from $311.3 million and
from $141.0 million for the same period in 1996 and 1995.
Gain on Sale of Contracts. The Company completed four securitizations
totaling $527.3 million during the year ended December 31, 1997 resulting in
gains on sale of Contracts totaling $22.8 million, $405.5 million during the
year ended December 31, 1996, resulting in gains on sale of Contracts of $18.1
million and a $105 million securitization in 1995 with a gain on sale of
Contracts of $2.0 million.
Provision for Credit Losses. The Company maintains an allowance for credit
losses to cover anticipated losses on the Contracts held on balance sheet. The
allowance for credit losses is increased by charging the provision for credit
losses and decreased by actual losses on the Contracts held on balance sheet or
by the reduction of Contracts held on balance sheet. The level of the allowance
is determined based principally on the outstanding balance of Contracts held on
balance sheet, pending sales of Contracts and historical loss trends. When the
Company sells Contracts in a securitization transaction, it reduces its
allowance for credit losses and factors potential losses into its calculations
of gain on sale. The Company believes that the allowance for credit losses is
currently adequate to absorb potential losses in the owned portfolio.
Salaries and Benefits Expense. The Company incurred salary and benefit
expenses of $17.4 million during the year ended December 31, 1997 compared to
$8.5 million during the year ended December 31, 1996, and $5.1 million for the
year ended December 31, 1995. In order to support the growth of its operations
20
23
and the servicing portfolio, the Company hired 98 employees during 1997. The
number of employees increased from 77 at December 31, 1995 to 221 at December
31, 1996 to 319 at December 31, 1997.
Other Operating Expenses. Other operating expenses increased to $13.3
million at December 31, 1997 from $6.8 million at December 31, 1996 and from
$3.2 million for the year ended December 31, 1995. The majority of increases
were due to the growth of the average servicing portfolio from $141.0 million to
$311.3 million and $563.3 million at December 31, 1995, 1996 and 1997,
respectively. Additionally, the Company opened additional Auto Finance Centers
during the years ended December 31, 1997 and December 31, 1996.
Income Taxes. The Company files federal and certain state tax returns as
part of a consolidated group that includes Onyx and OAFC. Tax liabilities from
the consolidated returns are allocated in accordance with a tax sharing
agreement based on the relative income or loss of each entity on a stand-alone
basis. The effective tax rate for Onyx was 41.6% in 1997. The Company's
effective tax rate in 1996 was 19.8% as the Company had net operating losses
that were utilized to reduce income tax expense. The Company had net operating
losses in 1995 and had no income tax expense.
Net Income. The Company had net income of $2.6 million for the year ended
December 31, 1997 compared to income of $7.7 million and losses of $3.2 million
for the years ended December 31, 1996 and 1995. Net income for 1997 as compared
to 1996 was impacted by several issues. The income tax rate in effect during
1996 was 19.8% due to the utilization of net operating losses (NOL). There were
no NOL's available during 1997. As a result the effective tax rate during 1997
was 41.6%. Management, in response to increases in delinquency and charge off
ratios relating to the purchase of Contracts by one of the Company's Auto
Finance Centers (see Financial Condition -- Asset Quality) increased the
estimate of future losses used to compute the gain on sale of loans during 1997.
This change, along with the additional reserves set aside for these loans
increased the reserve for serviced assets from 2.12% at December 31, 1996 to
3.32% at December 31, 1997.
FINANCIAL CONDITION
Contracts Held for Sale
Contracts held for sale totaled $63.4 million at December 31, 1997 compared
to $12.2 million at December 31, 1996. The number and principal balance of
Contracts held for sale is largely dependent upon the timing and size of the
Company's securitizations. The increase in the Contracts held for sale from year
end 1996 to year end 1997 is primarily attributable to the Company's higher
contract volume during the December 1997 warehousing period and to the sale of
Contracts originated during the December 1996 warehousing period into the fourth
quarter 1996 securitization transaction, which was a prefunded sale. Onyx
securitizes Contracts on a regular basis. See Notes 4 to the Company's
Consolidated Financial Statements for Contracts held for sale and allowance for
credit losses.
Trust Receivable
At the time a securitization closes, the Company is required to establish
spread accounts in connection with each securitization. Depending on the
securitization structure, the Company may be required to deposit cash into the
spread account. The future servicing cash flows generated by Contracts sold to
each trust are deposited into the related spread account and are expected to be
paid to the Company after the related spread account reaches a predetermined
funding level. Trust receivable represents funds due to the Company but not yet
disbursed from the spread accounts, because of the restrictions imposed by the
terms of the securitizations. Trust receivable at December 31, 1996 was $10.1
million compared to $27.6 million at December 31, 1997, an increase of 173%, a
result of the increase in total Contracts securitized and outstanding.
Retained Interest in Securitized Assets
RISA consists of the estimated present value of future servicing cash flows
from related securitizations. Future servicing cash flows are computed by taking
into account certain assumptions principally regarding prepayments, losses and
servicing costs. These cash flows are then discounted at a market-based rate.
The
21
24
balance is then amortized against actual servicing fee income on a monthly
basis. The following table provides historical data regarding the RISA.
RETAINED INTEREST IN SECURITIZED ASSETS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1997
--------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance.......................................... $ 6,182 $ 29,632
Additions.................................................. 35,870 45,940
Amortization............................................... (12,420) (26,733)
-------- --------
Ending balance............................................. $ 29,632 $ 48,839
======== ========
Asset Quality
The Company monitors and attempts to minimize delinquencies and losses
through timely collections and the use of a predictive dialing system. At
December 31, 1997, delinquencies for the servicing portfolio represented 2.51%
of the amount of Contracts in its servicing portfolio compared to 2.03% at
December 31, 1996. Net charge-offs as a percentage of the average servicing
portfolio were 2.03% for the period ended December 31, 1997 compared to 1.63%
for the period ended December 31, 1996. The levels of delinquencies and loan
losses have increased and the management of Onyx believes that this increase is
attributable in part to an increase on a national basis in the level of
bankruptcies and consumer defaults generally, and the tendency of delinquencies
and losses with respect to a pool of automobile loans to increase after a period
of seasoning. The delinquency and loss levels of the Servicing Portfolio were
also affected by the continued impact of high delinquency and loss levels of the
Contracts purchased through the third quarter of 1996 by the Company's North
Hollywood Auto Finance Center. The North Hollywood Auto Finance Center had a
higher concentration of used car dealerships than the Company's other Auto
Finance Centers, and this concentration of used car dealerships was principally
responsible for the deterioration in the performance of the portion of Onyx's
portfolio that was purchased from July 1995 to September 1996. The performance
of these loans has impacted delinquency and losses through December 31, 1997 and
has contributed a disproportionate amount of the delinquencies and losses for
that period.
Management has also increased its on and off balance sheet reserves of the
serviced portfolio from 2.12% at December 31, 1996 to 3.32% at December 31,
1997. Off balance sheet reserves are those reserves established within the
separate financial statements of the grantor trusts in connection with
securitized Contracts.
DELINQUENCY EXPERIENCE OF SERVICING PORTFOLIO
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
AMOUNT NO. AMOUNT NO. AMOUNT NO.
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
Servicing Portfolio........ $218,207 20,156 $400,665 38,275 $757,277 73,502
Delinquencies(1)(2)
30-59 days............... 1,608 153 5,022 478 11,902 1,211
60-89 days............... 470 35 1,816 162 3,370 346
90+ days................. 547 42 1,279 111 3,743 316
Total delinquencies as a
percent of Servicing
Portfolio................ 1.20% 1.14% 2.03% 1.96% 2.51% 2.55%
- ---------------
(1) Delinquencies include principal amounts only, net of repossessed inventory.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
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25
LOAN LOSS EXPERIENCE OF SERVICING PORTFOLIO
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Number of Contracts................................ 20,156 38,275 73,502
Period end Servicing Portfolio..................... $218,207 $400,665 $757,277
Average Servicing Portfolio(1)..................... $141,029 $311,340 $563,343
Number of gross charge-offs........................ 197 987 2,161
Gross charge-offs.................................. $ 548.2 $5,789.2 $ 13,076
Net charge-offs(2)................................. $ 528.6 $5,066.1 $ 11,434
Net charge-offs as a percent of average Servicing
Portfolio........................................ 0.37% 1.63% 2.03%
On and off balance sheet reserves as a percent of
Period end Serviced Portfolio.................... 1.24% 2.12% 3.32%
- ---------------
(1) Average is based on daily balances.
(2) Net charge-offs are gross charge-offs minus recoveries of Contracts
previously charged off.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires substantial cash and capital resources to operate its
business. Its primary uses of cash include: (i) acquisition of Contracts; (ii)
payment of dealer participation; (iii) securitization costs, including cash held
in spread accounts; (iv) settlements of hedging transactions; (v) maintenance of
working capital requirements and payment of operating expenses; and (vi)
interest expense. The capital resources available to the Company include: (i)
net interest income during the warehousing period; (ii) contractual servicing
fees; (iii) future servicing cash flows; (iv) settlements of hedging
transactions; (v) sales of Contracts in securitizations; and (vi) borrowings
under its Credit Facilities. These sources can provide capital to fund expansion
of the Company's Contract purchasing and servicing capabilities.
Cash used in operating activities was $75.0 million for the year ended
December 31, 1997, compared to $90.3 million provided in the year ended December
31, 1996 and $88.9 million used in 1995. The principal reason for the increase
in cash used in the Company's operating activities was the increase in Contracts
purchased during the year. This increase was partially offset by the proceeds
from securitizations in 1997. Contract volume increased to $605.9 million in
1997 compared to $319.8 million in 1996, an increase of 89%.
Cash used in investing activities increased to $1.8 million in the year
ended December 31, 1997 from $804,587 and $287,631 in the years ended December
31, 1996 and 1995 respectively. This increase resulted from higher capital
expenditures by the Company, principally in the purchase of furniture and
equipment, in connection with the Company's expansion.
Cash provided by financing activities was $77.2 million for the year ended
December 31, 1997, compared to $90.5 million used and $80.6 million provided for
the years ended December 31, 1996 and 1995. This increase over 1996 was
primarily due to an increase in borrowing from the Company's warehouse and
revolving credit facilities, which are discussed below.
The Company's wholly owned special purpose subsidiary, OAFC, is party to a
$200 million auto loan warehouse program (the "CP Facility") with Triple-A One
Funding Corporation ("Triple-A"). Triple-A is a commercial paper asset-backed
conduit lender sponsored by MBIA and is currently rated A-1/P1 by Standard &
Poor's Ratings Group and Moody's Investor Services, Inc., respectively (such
ratings are not recommendations to invest and are subject to change). This
facility provides funds to purchase Contracts. The advance rate to OAFC has been
recently increased to 98% from 95% of adjusted eligible principal balance of
each Contract. The advance rate is subject to reduction by MBIA if the net yield
on OAFC's Contract portfolio falls below a target net yield. The remaining 2% of
the purchase price of the Contracts generally is funded either from net interest
income earned by OAFC or by proceeds from the Revolving Facility described
below. Since the CP Facility is commercial paper based, the Company has the
ability to manage its interest
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26
rate exposure during the warehouse period between origination and securitization
by determining the maturities (one to 270 days) of its commercial paper
borrowings.
Upon the occurrence of a wind-down event (as defined in the CP Facility
documents), no further borrowings by OAFC from Triple-A will be permitted and
all collections on the Contracts included in the borrowing base are distributed
in substantially the same manner as before the wind-down event except that all
outstanding Triple-A advances must be repaid before any amounts can be paid to
other borrowers or OAFC. Unless earlier terminated upon the occurrence of a
wind-down event, the CP Facility matures in September 1998, subject to the
requirement that the liquidity facility provided by certain banks to Triple-A be
extended annually. After maturity in September 1998, the CP Facility is subject
to annual renewals upon mutual consent of the parties.
Additionally, the Company has a collateralized revolving line of credit
with an institutional lender (the "Revolving Facility"). This facility has
recently been increased from $20 million to $30 million. The Revolving Facility
is used for working capital and other expenditures for which the Company's $200
million CP Facility is not otherwise available. Under the Revolving Facility,
Onyx may (subject to borrowing base availability) borrow and repay during the
two-year revolving period up to $30 million based on the following
collateral-based formula: up to the lesser of 65% of the net book value of the
Company's RISA and trust receivables for the securitizations deemed eligible by
the lenders or 75% of the value of such RISA and trust receivables determined by
such lenders in accordance with their collateral valuation model. Advances bear
interest at 3/4% over the lenders' prime rate. The Company's obligations under
the Revolving Facility are collateralized by a blanket lien on the Company's
assets. The Revolving Facility contains affirmative, negative and financial
covenants and other provisions typical of such credit facilities. The Revolving
Facility converts from revolving loans to fully-amortizing two-year term loans
on January 31, 1998 or, if earlier, upon the occurrence of certain "Credit
Triggers."
In an effort to expand and diversify lending relationships, the Company
created a new special finance subsidiary Onyx Acceptance Funding Corporation
(OFC) during the first quarter of 1998. Since then, OFC has developed two
lending lines with Merrill Lynch Mortgage Capital, Inc.
The $100.0 million line (the "Merrill Line") provides funding for the
expansion of the purchase or origination of Contracts and is used in concert
with the CP Facility the Company currently has in place. The Merrill Line
provides an advance rate of approximately 95% of the principal balance of each
of the Contracts that are used as collateral for the financing. The interest
rate is based on LIBOR. The Merrill Line has a term of one year and matures in
February of 1999.
The $50.0 million line (the "Residual Facility") is a residual financing
line and can be used by the Company to finance any operating requirements. The
amount available for borrowings is based on a collateral based formula of a
percentage of the value of excess cash flow to be received from certain
securitizations. The interest rate is based on LIBOR. The Residual Facility has
a term of one year and matures in February of 1999.
The facilities contain affirmative, negative and financial covenants
typical of the such credit facilities.
The Company, during the first quarter of 1998, completed a $10.0 million
subordinated debt offering. The term of the subordinated debt is for two years
ending February 27, 2000 with an option by the Company to extend the term by
three years during which the loan would fully amortize, and bears a fixed
interest rate at 9 1/2%. The Company also issued to the lender a warrant for
Common Stock in the amount of 180,529 shares of the Common Stock of the Company.
SECURITIZATIONS
The Company has a securitization program that involves selling interests in
pools of its Contracts to investors through the issuance of AAA/Aaa rated,
asset-backed securities. Management's experience in this area dates back to
1985. The Company believes that experience coupled with the quality of Contracts
acquired and the Company's management information systems are instrumental in
the Company successfully completing ten AAA/Aaa rated publicly underwritten
securitizations since October 1994. The Company
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27
successfully completed four AAA/Aaa rated publicly underwritten securitizations
in 1997 totaling $527.2 million compared to four securitizations in 1996
totaling $405.5 million.
In the first quarter of 1998, the Company sold whole loans, with servicing
retained, in the amount of $15 million and securitized contracts in the amount
of $173 million.
These ongoing periodic securitizations are an integral part of the
Company's business plan because they allow the Company to increase its
liquidity, provide for redeployment of its capital and reduce risks associated
with interest rate fluctuations. The net proceeds of these securitizations are
generally used to pay down outstanding loans under the Company's CP Facility,
thereby creating availability for the acquisition of additional Contracts. In
each of its securitizations, the Company sells its Contracts from OAFC to a
newly formed grantor trust. The trust in turn issues interest-bearing
certificates to investors in an amount equal to the aggregate principal balance
of the Contracts. Purchasers of the certificates backed by Contracts receive a
fixed rate of interest established at the time of the sale.
INTEREST RATE EXPOSURE AND HEDGING
The Company is able through the use of varying maturities on advances from
the CP Facility to lock in rates during the warehousing period, when in
management's judgment it is appropriate, to limit interest rate exposure during
the warehousing period. See "Risk Factors -- Interest Rate Risk."
The Company has the ability to move rates upward in response to rising
borrowing costs because the Company currently does not originate loans near the
maximum rates permitted by law. Further, the Company employs a hedging strategy
which primarily consists of the execution of forward interest rate swaps. These
hedges are entered into by the Company in numbers and amounts which generally
correspond to the anticipated principal amount of the related securitization.
Gains and losses relative to these hedges are recognized in full at the time of
securitization as an adjustment to the gain on sale of the Contracts. The
Company has only used counterparties with investment grade debt ratings from
national rating agencies for its hedging transactions.
Management monitors the Company's hedging activities on a frequent basis to
ensure that the value of hedges, their correlation to the Contracts being hedged
and the amounts being hedged continue to provide effective protection against
interest rate risk. The Company's hedging strategy requires estimates by
management of monthly Contract acquisition volume and timing of its
securitizations. If such estimates are materially inaccurate, then the Company's
gain on sales of Contracts and results of operations could be adversely
affected. The amount and timing of hedging transactions are determined by senior
management based upon the amount of Contracts purchased and the interest rate
environment. Senior management currently expects to hedge substantially all of
its Contracts pending securitization.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 will require companies to present all
non-owner changes in equity, e.g., market value adjustments to investments and
adjustments to the minimum pension liability that are currently included as a
component of stockholders' equity, as a component of comprehensive income. The
new disclosures will be effective beginning in the first quarter of 1998. The
Company does not expect the adoption of the provisions of SFAS No. 130 to
materially affect the presentation of the financial statements.
YEAR 2000 COMPLIANCE
The Company is substantially dependent on its computer systems and
applications and the computer systems and applications of third party providers.
Historically, some computer systems and applications were developed to recognize
the year as a two-digit number, with the digits "00" being recognized as 1900.
The year 2000 presents a number of potential problems for such systems,
including potentially significant systems errors or failure.
25
28
The Company has contacted the third party service bureaus that provide key
accounting and loan servicing to the Company and has been assured by each of
them that they are implementing changes and/or upgrades that will allow them to
provide their respective services to the Company in the year 2000 without
interruption. During 1997, the Company began its own risk assessment of its
various computer systems and applications and began formulating a plan to
address the potential problems of the year 2000 issues. During 1998 and 1999 the
Company expects to continue and complete its remediation efforts and to
undertake internal testing of its systems and applications. The Company has
developed a new front end application processing system which is expected to be
implemented company-wide by the end of 1998. This system is designed to be year
2000 compliant.
FORWARD LOOKING INFORMATION
The preceding Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations contain certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate," "should" or "continue" or
the negative thereof or other variations thereon or comparable terminology. The
matters set forth in this Annual Report on Form 10-K constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, as listed under Item 14, appear in a
separate section of this Annual Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and officers of the Company is
incorporated herein by reference to the descriptions set forth under the caption
"Election of Directors" and "Management" in the Proxy Statement for the Annual
Meeting of Stockholders currently expected to be held May 20, 1998 (the "1998
Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference to the descriptions set forth under the caption "Executive
Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the information
set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
the Company is incorporated herein by reference to the information set forth
under the caption "Certain Transactions" in the 1998 Proxy Statement.
26
29
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The Company's financial statements appear in a separate section of this
Annual Report on Form 10-K beginning on the pages referenced below:
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the years December 31, 1997, 1996
and 1995.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
(a) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
*3.1 Omitted.
*3.2 Omitted.
*3.3 Omitted.
*3.4 Certificate of Incorporation of the Company.
*3.5 Bylaws of the Company.
*3.6 Omitted.
*4.1 Omitted.
+4.2 Rights Agreement dated as of July 8, 1997, between the
Company and American Stock Transfer and Trust Company, as
Rights Agent (which includes the form of Certificate of
Designation for the Series A Participating Preferred Stock
and the form of Rights Certificate of the Company.
*10.1 Form of Indemnification Agreement of the Company, a Delaware
corporation.
*10.2 Second Amended and Restated 1994 Stock Option Plan.
*10.3 Form of Notice of Grant of Stock Option under Second Amended
and Restated 1994 Stock Option Plan.
*10.4 Form of Stock Option Agreement under Second Amended and
Restated 1994 Stock Option Plan.
*10.5 Form of Stock Purchase Agreement under Second Amended and
Restated 1994 Stock Option Plan.
*10.6 1994 Special Performance Option Grant Plan.
*10.7 Form of Notice of Grant of Stock Option under 1994 Special
Performance Option Grant Plan.
*10.8 Form of Stock Option Agreement under 1994 Special
Performance Option Grant Plan.
*10.9 Form of Stock Purchase Agreement under 1994 Special
Performance Option Grant Plan.
*10.10 Omitted
*10.11 Omitted
*10.12 Omitted
27
30
*10.13 Third Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
the Investors identified therein dated as of November 27,
1995.
*10.14 Warrant to purchase Common Stock in favor of ContiTrade
Services Corporation from Onyx Acceptance Corporation dated
as of February 1, 1994.
*10.15 First Amendment to Co-Sale and First Refusal Agreement
between and among Onyx Acceptance Corporation,
ContiFinancial Services Corporation, the Investors and
Managers, as defined therein, dated as of February 1, 1994.
*10.16 First Amendment to and Waiver of Certain Provisions of
Investors' Rights Agreement between Onyx Acceptance
Corporation, ContiFinancial Services Corporation, the
Investors and the Management Holders, as defined therein,
dated as of February 1, 1994.
*10.17 Senior Subordinated Note and Warrant Purchase Agreement
between and among Onyx Acceptance Corporation, Capital
Resource Lenders II, L.P. and Dominion Fund III, L.P., dated
as of November 17, 1994.
*10.18 Omitted
*10.19 Omitted
*10.20 Warrant to purchase Common Stock in favor of Capital
Resource Lenders II, L.P. from Onyx Acceptance Corporation
dated as of November 17, 1994.
*10.21 Warrant to purchase Common Stock in favor of Dominion Fund
III, L.P. from Onyx Acceptance Corporation dated as of
November 17, 1994.
*10.22 Amended and Restated Co-Sale and First Refusal Agreement
between and among Onyx Acceptance Corporation and the
Shareholders identified therein dated as of November 17,
1994.
*10.23 Amended and Restated Investors' Rights Agreement between and
among Onyx Acceptance Corporation, the Investors and the
Management Holders identified therein dated as of November
17, 1994.
*10.24 Amended and Restated Voting Agreement between and among Onyx
Acceptance Corporation and the Shareholders identified
therein dated as of November 17, 1994.
*10.25 Omitted
*10.26 Omitted
*10.27 Omitted
*10.28 Omitted
*10.29 Omitted
*10.30 Sale and Servicing Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of September 8, 1994.
*10.31 Triple-A One Funding Corporation Credit Agreement between
and among Onyx Acceptance Financial Corporation, Triple-A
One Funding Corporation, CapMAC Financial Services, Inc. and
Capital Markets Assurance Corporation dated as of September
8, 1994.
*10.32 Triple-A One Funding Corporation Note in favor of Onyx
Acceptance Financial Corporation from Triple-A One Funding
Corporation dated as of September 12, 1994.
*10.33 Triple-A One Funding Corporation Security Agreement between
and among Onyx Acceptance Financial Corporation, Triple-A
One Funding Corporation and Capital Markets Assurance
Corporation dated as of September 8, 1994.
*10.34 Subordinated Security Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of September 8, 1994.
*10.35 Insurance and Indemnity Agreement between and among Onyx
Acceptance Corporation, Capital Markets Assurance
Corporation, Onyx Acceptance Financial Corporation and
Triple-A One Funding Corporation dated as of September 8,
1994.
28
31
*10.36 Seller Note in favor of Onyx Acceptance Corporation from
Onyx Acceptance Financial Corporation dated September 12,
1994.
*10.37 Subordinated Note in favor of Onyx Acceptance Corporation
from Onyx Acceptance Financial Corporation dated September
12, 1994.
*10.38 Sublease and Administrative Services Agreement between Onyx
Acceptance Corporation and Onyx Acceptance Financial
Corporation dated as of September 8, 1994.
*10.39 Tax Allocation Agreement between Onyx Acceptance Corporation
and Onyx Acceptance Financial Corporation dated as of
September 1, 1994.
*10.40 Corporate Separateness Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
September 8, 1994.
*10.41 Amendment Number One to Security Agreement, Subordinated
Security Agreement, Sale and Servicing Agreement and
Definitions List between and among Onyx Acceptance Financial
Corporation, Onyx Acceptance Corporation, Triple-A One
Funding Corporation and Capital Markets Assurance
Corporation dated March 1, 1995.
*10.42 Omitted.
*10.43 Omitted.
*10.44 Omitted.
*10.45 First Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
certain Investors identified therein dated as of December
15, 1994.
*10.46 Omitted.
*10.47 Omitted.
*10.48 Omitted.
*10.49 Omitted
*10.50 Omitted
*10.51 Omitted
*10.52 Omitted
*10.53 Omitted
*10.54 Master Lease Agreement between Onyx Acceptance Corporation
and Comdisco, Inc. dated January 7, 1994.
*10.55 Warrant to purchase Series A Preferred Stock in favor of
Comdisco, Inc. from Onyx Acceptance Corporation dated as of
January 7, 1994.
*10.56 Warrant to purchase Common Stock in favor of Lighthouse
Capital Partners from Onyx Acceptance Corporation dated
November 3, 1995.
*10.57 Master Lease Agreement between Lighthouse Capital Partners
and Onyx Acceptance Corporation dated November 3, 1995.
*10.58 Second Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
the Investors identified therein dated as of November 3,
1995.
*10.59 Agreement for On-Line Services between On-Line Computer
Systems, Inc. and Onyx Acceptance Corporation dated as of
November 19, 1993.
*10.60 Agreement for On-Line Service between On-Line Computer
Systems, Inc. and Onyx Acceptance Financial Corporation
dated as of September 7, 1994.
*10.61 Option Agreement between Onyx Acceptance Corporation and
John W. Hall dated as of December 20, 1994.
*10.62 Promissory Note in favor of Onyx Acceptance Corporation from
John Hall dated as of December 20, 1994.
29
32
*10.63 Option Agreement between Onyx Acceptance Corporation and
Brian Mac Innis dated as of December 20, 1994.
*10.64 Omitted
*10.65 Omitted
*10.66 Stock Purchase Agreement between and among John W. Hall and
certain Investors identified therein dated as of June 7,
1995.
*10.67 Sublease Agreement between Onyx Acceptance Corporation and
AT&T Resource Management Corporation dated as of August 31,
1993.
*10.68 Office Space Lease (Master Lease) between and among The
Irvine Company and American Telephone and Telegraph Company
dated as of April 29, 1987.
*10.69 First Amendment To Sublease between and among AT&T Resource
Management Corporation and Onyx Acceptance Corporation dated
as of September 1, 1993.
*10.70 Onyx Acceptance Corporation 401(k) Plan dated January 1,
1994.
*10.71 Pooling and Servicing Agreement between Onyx Acceptance
Financial Corporation, Onyx Acceptance Corporation and
Bankers Trust Company dated as of January 1, 1996.
*10.72 Underwriting Agreement between Onyx Acceptance Financial
Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated January 31, 1996.
*10.73 Indemnification Agreement by and among Capital Markets
Assurance Corporation, Onyx Acceptance Corporation, Onyx
Acceptance Financial Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated dated January 31, 1996.
*10.74 Indemnification Agreement by and between Onyx Acceptance
Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated as of January 31, 1996.
*10.75 Excess Servicing and Trust Receivable Revolving Credit and
Term Loan Agreement among Onyx Acceptance Corporation, State
Street Bank and Trust Company and The First National Bank of
Boston dated as of January 31, 1996.
*10.76 Pledge and Security Agreement by and among Onyx Acceptance
Corporation, State Street Bank and Trust Company and The
First National Bank of Boston dated as of January 31, 1996.
*10.77 Subordination and Intercreditor Agreement by and among State
Street Bank and Trust Company, The First National Bank of
Boston, Capital Resource Lenders II, L.P., Dominion Fund III
and Onyx Acceptance Corporation dated as of January 31,
1996.
*10.78 1996-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.
*10.79 1995-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.
*10.80 1995-1 Purchase Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of February 6, 1996.
*10.81 1994-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.
*10.82 1994-1 Purchase Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of February 6, 1996.
*10.83 Omitted.
*10.84 Omitted.
*10.85 1996 Stock Option/Stock Issuance Plan.
**10.86 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-2 Grantor Trust.
30
33
**10.87 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-2 Grantor Trust.
**10.88 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-3 Grantor Trust.
***10.89 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-3 Grantor Trust.
***10.90 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-4 Grantor Trust.
***10.91 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-4 Grantor Trust.
****10.92 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-1 Grantor Trust.
****10.93 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1997-1 Grantor Trust.
#10.94 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-2 Grantor Trust
#10.95 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1997-2 Grantor Trust.
##10.96 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-3 Grantor Trust.
##10.97 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch Pierce, Fenner and
Smith Incorporation in connection with 1997-3 Grantor Trust.
###10.98 1997-4 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) Dated as of December 12, 1997.
###10.99 Form of Pooling Servicing Agreement between Onyx Acceptance
Corporation, Onyx Acceptance Financial Corporation, and
Bankers Trust Company in connection with the 1997-4 Onyx
Acceptance Grantor Trust.
###10.100 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation, Onyx Acceptance Corporation and
Merrill Lynch & Co. in connection with the 1997-4 Onyx
Acceptance Grantor Trust.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
31
34
- ---------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-680).
** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-4220).
*** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-10461).
**** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-16601).
***** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-22301).
# Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-28893).
## Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-33471)
+ Incorporated by reference from the Company's Current Report on Form 8-K
dated July 8, 1997.
### Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-40089).
(a)(3) FINANCIAL STATEMENT SCHEDULES
None.
(b) EXHIBITS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended December
31, 1997.
32
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
ONYX ACCEPTANCE CORPORATION
By: /s/ JOHN W. HALL
------------------------------------
John W. Hall
President and
(Principal Executive Officer)
By: /s/ DON P. DUFFY
------------------------------------
Don P. Duffy
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of
the Registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS C. STICKEL Chairman of the Board of Directors March 30, 1998
- ------------------------------------------------
Thomas C. Stickel
/s/ JOHN W. HALL President, Chief Executive Officer March 30, 1998
- ------------------------------------------------ and Director
John W. Hall
/s/ BRUCE R. HALLETT Secretary and Director March 30, 1998
- ------------------------------------------------
Bruce R. Hallett
/s/ ROBERT A. HOFF Director March 30, 1998
- ------------------------------------------------
Robert A. Hoff
/s/ G. BRADFORD JONES Director March 30, 1998
- ------------------------------------------------
G. Bradford Jones
/s/ DON P. DUFFY Executive Vice President and Chief March 30, 1998
- ------------------------------------------------ Financial Officer, Director
Don P. Duffy
33
36
ONYX ACCEPTANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995.................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
37
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Onyx Acceptance Corporation
We have audited the accompanying consolidated statements of financial
condition of Onyx Acceptance Corporation and subsidiary (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Onyx Acceptance
Corporation and its subsidiary as of December 31, 1997 and 1996, the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
January 23, 1998
F-2
38
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
ASSETS
Cash and cash equivalents................................. $ 991,010 $ 603,028
Contracts held for sale (net of allowance)................ 64,342,309 12,562,073
Trust receivable.......................................... 27,628,619 10,105,690
Retained interest in securitized assets (net of
amortization).......................................... 48,838,815 29,632,039
Furniture and equipment (net of accumulated
depreciation).......................................... 2,842,520 1,327,200
Other assets.............................................. 1,924,970 2,446,923
------------ -----------
TOTAL ASSETS................................................ $146,568,243 $56,676,953
============ ===========
LIABILITIES
Accounts payable.......................................... $ 8,458,147 $ 2,705,118
Commercial paper.......................................... 60,505,902 10,108,390
Revolving credit borrowing................................ 30,000,000 2,500,000
Capital lease obligations................................. 1,002,307 542,843
Accrued interest payable.................................. 302,238 73,161
Other liabilities......................................... 5,744,157 2,833,625
------------ -----------
TOTAL LIABILITIES........................................... 106,012,751 18,763,137
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK
Par value $.01 per share; authorized 15,000,000 shares;
issued and outstanding 6,017,635 as of December 31,
1997 and issued and outstanding 5,904,768 shares as
of December 31, 1996................................. 60,176 59,048
ADDITIONAL PAID IN CAPITAL................................ 37,810,158 37,753,725
RETAINED EARNINGS......................................... 2,685,158 101,043
------------ -----------
TOTAL EQUITY................................................ 40,555,492 37,913,816
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $146,568,243 $56,676,953
============ ===========
See Accompanying Notes to Consolidated Financial Statements.
F-3
39
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUES:
Interest income..................................... $11,866,957 $ 9,354,271 $ 7,707,644
Investment income................................... 431,373 325,885 522,676
----------- ----------- -----------
INTEREST INCOME -- TOTAL.............................. 12,298,330 9,680,156 8,230,320
INTEREST EXPENSE...................................... 7,261,645 5,539,850 6,005,376
----------- ----------- -----------
NET INTEREST INCOME................................... 5,036,685 4,140,306 2,224,944
SERVICING FEE INCOME.................................. 8,090,612 2,952,242 1,381,041
GAIN ON SALE OF CONTRACTS............................. 22,823,001 18,127,956 2,012,365
----------- ----------- -----------
TOTAL REVENUES........................................ 35,950,298 25,220,504 5,618,350
----------- ----------- -----------
EXPENSES:
Provision for credit losses......................... 785,445 265,802 465,240
Salaries and benefits............................... 17,424,729 8,547,815 5,127,005
Occupancy........................................... 1,478,349 662,634 398,673
Depreciation........................................ 1,194,186 821,354 688,876
General and administrative expenses................. 10,643,087 5,362,382 2,125,602
----------- ----------- -----------
TOTAL EXPENSES........................................ 31,525,796 15,659,987 8,805,396
----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES................. 4,424,502 9,560,517 (3,187,046)
INCOME TAXES.......................................... 1,840,387 1,888,691 0
----------- ----------- -----------
NET INCOME (LOSS)..................................... $ 2,584,115 $ 7,671,826 $(3,187,046)
=========== =========== ===========
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS........................................ $ 2,584,115 $ 7,671,826 $(3,762,960)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic............................................... $ .43 $ 1.49 $ (1.68)
Diluted............................................. $ .40 $ 1.35 $ (1.68)
=========== =========== ===========
Basic shares outstanding.............................. 6,000,431 5,159,182 2,234,412
=========== =========== ===========
Diluted shares outstanding............................ 6,384,183 5,700,515 2,234,412
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-4
40
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
MANDATORILY
REDEEMABLE SERIES A SERIES B PREFERRED
PREFERRED STOCK COMMON STOCK STOCK ADDITIONAL RETAINED
----------------------- ------------------- ------------------ PAID IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
---------- ---------- --------- ------- -------- ------- ----------- -----------
Balance at December 31, 1994.... 8,227,349 $8,803,263 2,158,779 $21,588 136,365 $ 1,364 $ 801,094 $(4,945,684)
---------- ---------- --------- ------- -------- ------- ----------- -----------
Issuance of Common Stock...... 82,675 827 2,015
Issuance costs on Common
Stock....................... (13,969)
Accretion of Redeemable Series
A Preferred Stock to
redemption price............ 575,914 (575,914)
Net loss...................... (3,187,046)
---------- ---------- --------- ------- -------- ------- ----------- -----------
Balance at December 31, 1995.... 8,227,349 9,379,177 2,241,454 22,415 136,365 1,364 803,109 (8,722,613)
---------- ---------- --------- ------- -------- ------- ----------- -----------
Issuance of Common Stock...... 2,908,135 29,081 32,307,821
Conversion of Preferred Stock
Series A.................... (8,227,349) (9,379,177) 715,422 7,154 8,220,195 1,151,830
Conversion of Preferred Stock
Series B.................... 39,757 398 (136,365) (1,364) 966
Issuance costs................ (3,578,366)
Net income.................... 7,671,826
---------- ---------- --------- ------- -------- ------- ----------- -----------
Balance at December 31, 1996.... 0 0 5,904,768 59,048 0 0 37,753,725 101,043
---------- ---------- --------- ------- -------- ------- ----------- -----------
Issuance of Common Stock........ 112,867 1,128 56,433
Net Income...................... 2,584,115
---------- ---------- --------- ------- -------- ------- ----------- -----------
Balance at December 31, 1997.... 0 $ 0 6,017,635 $60,176 0 $ 0 $37,810,158 $ 2,685,158
========== ========== ========= ======= ======== ======= =========== ===========
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance at December 31, 1994.... $(4,121,638)
-----------
Issuance of Common Stock...... 2,842
Issuance costs on Common
Stock....................... (13,969)
Accretion of Redeemable Series
A Preferred Stock to
redemption price............ (575,914)
Net loss...................... (3,187,046)
-----------
Balance at December 31, 1995.... (7,895,725)
-----------
Issuance of Common Stock...... 32,336,902
Conversion of Preferred Stock
Series A.................... 9,379,179
Conversion of Preferred Stock
Series B....................
Issuance costs................ (3,578,366)
Net income.................... 7,671,826
-----------
Balance at December 31, 1996.... 37,913,816
-----------
Issuance of Common Stock........ 57,561
Net Income...................... 2,584,115
-----------
Balance at December 31, 1997.... $40,555,492
===========
See Accompanying Notes to Consolidated Financial Statements.
F-5
41
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
OPERATING ACTIVITIES
Net Income (loss)....................................... $ 2,584,115 $ 7,671,826 $ (3,187,046)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of retained interest in securitized
assets........................................... 26,733,224 12,419,479 4,597,816
Provision for credit losses........................ 785,446 265,802 465,240
Depreciation and amortization...................... 1,194,186 821,354 688,876
Increase in trust receivable....................... (17,522,928) (3,897,074) (5,184,314)
Increase in retained interest in securitized
assets........................................... (45,940,000) (35,870,000) (8,718,596)
(Increase) decrease in other assets................ 521,949 (1,471,078) 106,304
Increase in accounts payable....................... 5,753,029 2,417,599 158,673
Increase (decrease) in accrued interest payable.... 229,077 (1,244,356) 1,249,453
Increase in other liabilities...................... 3,245,629 1,766,591 9,002
Proceeds from the sale of Contracts held for sale....... 527,276,091 405,513,000 105,000,000
Purchase of Contracts held for sale..................... (605,905,410) (319,840,214) (199,397,321)
Principal payments received on Contracts held for
sale.................................................. 26,957,179 21,582,236 18,936,342
Write-off unamortized participation on sold loans....... 15,523,390 12,582,515 3,485,771
Payments of participation to dealers (net of chargeback
collections and amortized expense).................... (16,416,932) (12,449,983) (7,148,199)
------------- ------------- -------------
Cash provided by (used in) operating activities........... (74,981,955) 90,267,697 (88,937,999)
INVESTING ACTIVITIES
Purchase of furniture and equipment..................... (1,824,853) (804,587) (287,631)
------------- ------------- -------------
Cash used in investing activities......................... (1,824,853) (804,587) (287,631)
FINANCING ACTIVITIES
Payments on capital leases.............................. (425,190) (486,369) (502,978)
Proceeds from commercial paper issuance................. 538,897,511 273,228,073 628,929,455
Payments to retire outstanding commercial paper......... (488,500,000) (375,500,000) (557,399,222)
Proceeds from drawdown on revolving credit borrowings... 27,500,000 16,348,568 9,850,000
Payments to paydown revolving credit borrowings......... 0 (23,417,776) (280,782)
Paydown of subordinated debt............................ 0 (10,000,000) 0
Payments of stock issuance costs........................ 0 (1,595,837) 0
Proceeds from exercise of options/warrants.............. 57,562 17,250 0
Proceeds from sale of preferred and common stock........ 0 30,337,128 0
Payments in other loans................................. (335,093) 586,168 0
------------- ------------- -------------
Cash provided by (used in) financing activities........... 77,194,790 (90,482,795) 80,596,473
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents.......... 387,982 (1,019,685) (8,629,157)
Cash and cash equivalents at beginning of period.......... 603,028 1,622,713 10,251,870
------------- ------------- -------------
Cash and cash equivalents at end of period................ $ 991,010 $ 603,028 $ 1,622,713
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Additions to capital leases........................... $ 884,654 $ 471,256 $ 166,281
Cash paid for interest................................ 7,032,567 6,784,204 4,755,923
Conversion of preferred stock......................... 0 9,379,177 0
See Accompanying Notes to Consolidated Financial Statements.
F-6
42
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS
Onyx Acceptance Corporation ("Onyx") was incorporated on August 17, 1993,
and commenced operations in February 1994. Onyx and its wholly owned special
purpose finance subsidiary Onyx Acceptance Financial Corporation ("OAFC")
(collectively, the "Company") specialize in the purchase, origination, sale and
servicing of retail automobile installment loans ("Loans" or "Contracts")
originated by automobile dealers. The Company provides an independent source to
automobile dealers to finance their customers' purchases of new and used
automobiles. The Company attempts to meet the needs of dealers through
consistent buying practices, competitive rates, a dedicated customer service
staff, fast turnaround time and systems designed to expedite the processing of
loan applications.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Onyx and OAFC. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
Cash and Cash Equivalents: The Company considers all significant
investments with maturity at acquisition of three months or less to be cash
equivalents.
Contracts Held for Sale: Contracts held for sale are stated at the lower
of aggregate amortized cost or market. Market is determined based on the
estimated value of the contracts if securitized and sold.
The Company defers certain contract origination fees and premiums paid to
dealers. The net amount is amortized as an adjustment to the related contracts
yield, on the same basis as that used to record income on the Contracts, over
the contractual life of the related loans. At the time of sale any remaining
amounts are included as part of the computation of the gain on sale of
Contracts.
The Company continues to accrue interest on Contracts until the Contract is
charged off which occurs after the earlier of the end of the month in which (i)
the underlying vehicle is repossessed and sold or (ii) the Contract becomes past
due 120 days. At the time that the Contract is charged off, all accrued interest
is also charged off.
Allowance for Credit Losses: The allowance for credit losses is maintained
at a level believed adequate by management to absorb potential losses in the
Contracts held for sale. The Company stratifies the portfolio by credit type at
origination, with each separate risk pool assigned a unique provision rate. This
unique provision rate is established by Management using the following criteria;
past loan loss experience, current economic conditions, volume, growth and other
relevant factors, and is re-evaluated on a quarterly basis. The allowance is
increased by provisions for loan losses charged against income. All recoveries
on finance receivables previously charged off are credited to the allowance.
Sales of Contracts: The Company purchases contracts to be sold to
investors with servicing rights retained by Onyx. Onyx sells 100% of the
contracts and does not retain any residual interest in securitized or sold
contracts. Contracts are sold at or near par value with the Company retaining a
participation in the future cash flows released by the Grantor Trusts. As of
December 31, 1997 the Company is servicing all the Contracts sold to the Grantor
Trusts.
Effective January 1, 1997, the Company adopted the accounting provisions of
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125") and, in
accordance with SFAS 125, prior periods have not been restated. The adoption of
SFAS 125 did not materially affect the Company's revenue recognition on the sale
of contracts. SFAS 125 requires that following a transfer of financial assets,
an entity is to recognize the assets it controls
F-7
43
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the liabilities it has incurred, and derecognize assets for which control
has been surrendered and liabilities that have been extinguished.
Upon the transfer of finance receivables to the Trusts, the Company removes
the net book value of the finance receivables sold from its balance sheet and
allocates such carrying value between the assets transferred and the interests
retained, based upon their relative fair values at the settlement date. The
difference between the sales proceeds, net of transaction costs, and the
allocated basis of the assets transferred is recognized as gain on sale of
receivables.
Furniture and Equipment: Furniture and equipment are stated at cost less
accumulated depreciation and are depreciated for financial reporting purposes on
a straight-line basis over a three year estimated life. Capitalized leased
assets are amortized over the lease term.
Reverse Stock Split: As a result of the initial public offering during 1996
Onyx effected a 3.43 for 1 reverse split of Common Stock. The Common Stock and
Additional Paid in Capital of Onyx reported on the Consolidated Statements of
Financial Condition have been retroactively adjusted for all reported periods
for the reverse stock split. The reverse stock split has also been given effect
to the Net Income (Loss) Per Share, Stock Options (Note 11) and Warrants (Note
15).
Interest and Fee Income: Interest and fee income on Contracts held for sale
is determined on a monthly basis using either the simple interest (level yield)
method or the sum-of-the-months digits method which approximates the effective
yield method.
Income Taxes: The Company utilizes Statement of Financial Accounting
Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statements and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the year in deferred tax assets and liabilities. The Company files
consolidated federal and state tax returns.
Net Income Per Share: The Company has adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" effective for year end
financial statements in 1997. Earnings per share are now presented in a dual
format, computed both including and excluding the impact of common stock
equivalents. Prior year information has been restated for comparable disclosure.
The net loss per share in 1995 has been calculated in terms of Staff Accounting
Bulletin 98 issued by the Securities and Exchange Commission which requires the
net loss attributable to common stockholders to be divided by the number of
shares of common stock outstanding, after giving effect to the reverse stock
split in 1996.
Derivative Financial Instruments: The Company employs hedging strategies to
manage its gross interest rate risk. The hedging strategies include the use of
forward swap agreements to manage the interest rate on securitization of the
Contracts held for sale.
The forward swap agreements are entered into by the Company in numbers and
amounts which generally correspond to the principal amount of future
securitization transactions. The market value of these forward agreements
responds inversely to the market value change of the underlying Contracts.
Because of this inverse relationship, Onyx can effectively lock in its gross
interest rate spread at the time the hedge transaction is entered into. Gains
and losses relative to these agreements are deferred and recognized in full at
the time of securitization as an adjustment to the Gain on Sale of Contracts.
The Company is not required to maintain any collateral with respect to its
hedging strategies. The Company only uses highly rated Counterparties. Credit
exposure is limited to those transactions with a positive fair value.
F-8
44
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pervasiveness of Estimates: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk: A majority of the Company's operations are
concentrated in California and performance of the Company's Contracts held for
sale and RISA is sensitive to general economic conditions.
Stock-based Compensation: Accounting for Stock-Based Compensation ("SFAS
123"), was issued by the Financial Accounting Standards Board in October 1995
and is effective for fiscal years beginning after December 15, 1995. SFAS 123
encourages, but does not require companies to recognize compensation expense
associated with stock based compensation plans over the anticipated service
period based on the fair value of the award on the date of grant. As allowed by
SFAS 123, however, the Company has elected to continue to measure compensation
costs as prescribed by APB Opinion No. 25 "Accounting for Stock Issued to
Employees." See footnote 11 for Pro Forma disclosures of net income (loss) and
earnings per share, as if 123 had been adopted.
Reclassification: Certain amounts in the prior year consolidated financial
statements have been reclassified to conform to 1997 presentation.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 will require companies to present all
non-owner changes in equity, e.g., market value adjustments to investments and
adjustments to the minimum pension liability that are currently included as a
component of stockholders' equity as a component of comprehensive income. The
new disclosures will be effective beginning in the first quarter of 1998. The
Company does not expect the adoption of the provisions of SFAS No. 130 to
materially affect the presentation of the financial statements.
NOTE 4 -- CONTRACTS HELD FOR SALE
Contracts held for sale consist of the following:
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Contracts held for sale........................... $71,216,278 $14,539,285
Less unearned interest............................ 7,835,794 2,301,207
----------- -----------
63,380,484 12,238,078
Allowance for credit losses....................... (316,902) (61,190)
----------- -----------
63,063,582 12,176,888
Dealer participation.............................. 1,278,727 385,185
----------- -----------
Total............................................. $64,342,309 $12,562,073
=========== ===========
F-9
45
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, contractual maturities of Contracts held for sale
were as follows:
1998........................................................ $ 160,287
1999........................................................ 1,178,449
2000........................................................ 4,720,842
2001........................................................ 10,205,322
2002 and thereafter......................................... 47,115,584
-----------
$63,380,484
===========
Changes in the allowance for credit losses were as follows:
DECEMBER 31,
----------------------
1997 1996
--------- ---------
Balance at beginning of period....................... $ 61,190 $ 591,765
Provision for credit losses.......................... 785,446 265,802
Charged-off loans.................................... (620,781) (953,582)
Recoveries........................................... 91,047 157,205
--------- ---------
Balance at end of period............................. $ 316,902 $ 61,190
========= =========
The fair value of Contracts held for sale was $64.3 million and $13.1
million at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company had entered into two-year forward swap
agreements with a notional face amount outstanding of $105.9 million with
maturities matching the average life of the Contracts being hedged. At December
31, 1997 the Company had deferred losses of $232,000 relating to these
agreements. The latest maturity is March 12, 1998. At December 31, 1996, the
Company had similar agreements with a notional face amount outstanding of $75.0
million with deferred losses of $2,000.
Included in the Gain on Sale of Contracts for the years ended December 31,
1997, 1996 and 1995 are losses of $1.3 million, $2.3 million, and $1.6 million
respectively, arising from hedging activities.
Contracts serviced by the Company for the benefit of others totaled
approximately $693.9 million at December 31, 1997 and $388.4 million at December
31, 1996. These amounts are not reflected in the accompanying consolidated
financial statements.
F-10
46
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- RETAINED INTEREST IN SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity
is to recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished.
Retained interest in securitized assets ("RISA") capitalized upon
securitization of contracts represent the present value of the estimated future
earnings to be received by the Company from the excess spread created in
securitization transactions. Excess spread is calculated by taking the
difference between the coupon rate of the contracts sold and the certificate
rate paid to the investors less contractually specified servicing and guarantor
fees and projected credit losses, after giving effect to estimated prepayments.
Prepayment and credit loss assumptions are utilized to project future
earnings and are based on historical experience. Credit losses are estimated
using cumulative loss frequency and severity estimates by management. All
assumptions are evaluated each quarter and adjusted, if appropriate, to reflect
the actual performance of the contracts.
Future earnings are discounted at a rate management believes to be
representative of market at the time of securitization. The balance of RISA is
amortized against actual excess spread income earned on a monthly basis over the
expected repayment life of the underlying contracts. RISA is classified in a
manner similar to available for sale securities and as such is marked to market
each quarter. Market value changes are calculated by discounting the remaining
projected excess spread using a current market discount rate. Any changes in the
market value of the RISA is reported as a separate component of shareholders'
equity as an unrealized gain or loss, net of deferred taxes. As of December 31,
1997 the market value of RISA approximated cost. The Company retains the rights
to service all contracts it securitizes.
The following table presents the balances and activity for RISA:
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
Beginning Balance....................................... $ 29,632,039 $ 6,181,518
Additions............................................... 45,940,000 35,870,000
Amortization............................................ (26,733,224) (12,419,479)
------------ ------------
Ending Balance.......................................... $ 48,838,815 $ 29,632,039
============ ============
The fair value of RISA was $48.8 million and $29.6 million at December 31,
1997 and 1996, respectively.
In initially valuing the RISA, the Company establishes an off balance sheet
allowance for expected future credit losses. The allowance is based upon
historical experience and management's estimate of future performance regarding
credit losses. The amount is reviewed periodically and adjustments are made if
actual experience or other factors indicate that future performance may differ
from management's prior estimates.
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations. Estimated future
undiscounted RISA earnings are calculated by taking the difference between the
coupon rate of the contracts sold and the certificate rate paid to the
investors, less the contractually specified servicing fee of 1.0% and guarantor
fees, after giving effect to estimated prepayments and assuming no losses. To
arrive at the RISA, this amount is reduced by the off balance sheet allowance
established for potential future losses and by discounting to present value.
F-11
47
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
Estimated net undiscounted RISA earnings.................... $ 78,579,178 $ 41,493,370
Off balance sheet allowance for losses...................... 24,787,037 8,415,871
Discount to present value................................... 4,953,326 3,445,460
------------- -------------
Retained interest in securitized assets..................... $ 48,838,815 $ 29,632,039
============= =============
Outstanding balance of contract sold through
securitizations........................................... $ 693,896,100 $ 388,427,211
============= =============
NOTE 6 -- FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
OWNED:
Office furniture.......................................... $1,469,004 $ 617,485
Computer equipment........................................ 2,397,728 726,616
Leasehold improvements.................................... 713,382 389,425
---------- ----------
Total............................................. 4,580,114 1,733,526
---------- ----------
CAPITALIZED LEASES:
Office furniture.......................................... 40,750 481,768
Computer equipment........................................ 1,471,594 1,173,149
---------- ----------
Total............................................. 1,512,344 1,654,917
---------- ----------
Total furniture and equipment............................... 6,092,458 3,388,443
Less: accumulated depreciation and amortization............. 3,249,938 2,061,243
---------- ----------
Furniture and equipment, net................................ $2,842,520 $1,327,200
========== ==========
NOTE 7 -- COMMERCIAL PAPER
The Company has a commercial paper facility (the "CP facility") with a
financial institution with borrowings outstanding at December 31, 1997 of
$60,505,902 and at December 31, 1996 of $10,108,390. Under terms of the
agreements the Company is able to borrow 98% of the principal amount of loans
purchased. Borrowings under the commercial paper arrangement become due as the
principal payments are received or the related automobile loans are sold. The
combined amount of credit available to the Company for the purchase of
automobile loans under the facility is $200 million. The amount of commercial
paper outstanding at any time is collateralized by the Contracts held for sale.
These credit arrangements mature on September 7, 1998 and are subject to annual
renewal on each anniversary date. The Company is in compliance with certain
ratios and other borrowing covenants under the commercial paper arrangements.
The fair value of commercial paper was $60.5 million and $10.1 million at
December 31, 1997 and 1996 respectively. The commercial paper facility had an
average interest rate of 6.63% for the year ended December 31, 1997, and 6.69%
for the year ended December 31, 1996.
NOTE 8 -- SUBORDINATED DEBT
On November 17, 1994 the Company issued $5.0 million of 12% and $5.0
million of 11 3/4% subordinated debentures, with warrants for common stock, due
October 31, 1999. The debentures were paid off at the completion of the initial
public offering.
F-12
48
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- REVOLVING CREDIT BORROWING
The Company has a collateralized revolving line of credit with borrowings
outstanding of $30.0 million at December 31, 1997 and $2.5 million at December
31, 1996. The Company can borrow up to $30.0 million for working capital and
other expenditures for which the $200.0 million CP facility is not available.
The Company may borrow and repay the loan during the two-year revolving period
with the loan amount determined by a borrowing base formula. The formula is a
percentage of the Company's RISA and trust receivable which are collateral for
the borrowings. Advances bear interest at 3/4% over the lenders prime rate. The
Revolving facility converts from revolving loans to fully-amortizing two-year
term loans on June 30, 1998. The Revolving Facility had an average interest rate
of 8.91% for the year ended December 31, 1997 and 8.50% for 1996. The fair value
of the Revolving Facility was $30.0 million at December 31, 1997 and $2.5
million at December 31, 1996. The Company is in compliance with certain ratios
and other borrowing covenants under the revolving credit borrowings.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases furniture, fixtures and equipment under capital leases
with terms in excess of one year. The Company leases its office space under
operating leases with options to renew. Certain operating lease agreements
provide for escalations based on contractual provisions.
Future minimum lease payments required under capital leases and
noncancelable operating leases are as follows as of December 31, 1997:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1998............................................ $ 522,432 $ 1,304,084
1999............................................ 374,184 1,835,041
2000............................................ 167,152 2,220,443
2001............................................ 77,408 2,070,048
2002 and thereafter............................. 59,428 13,261,239
---------- -----------
Total...................................... 1,200,604 $20,690,855
===========
Less amounts representing interest.............. 198,297
----------
Present value of net minimum lease payments..... $1,002,307
==========
Rental expenses for premises and equipment amounted to approximately $1.4
million, $651,898, and $373,000 for the year ended December 31, 1997, 1996, and
1995 respectively.
NOTE 11 -- STOCK OPTIONS
The Company has reserved 1,133,303 shares for future issuance to certain
employees under its incentive stock option plan. The options may be exercised at
prices ranging from $0.51 per share to $15.50 per share at any time, in whole or
part, within ten years after the date of grant. Reserved, unoptioned shares
totaled 759,488 at December 31, 1995, 502,764 at December 31, 1996, and 185,176
at December 31, 1997.
F-13
49
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plan as of December
31, 1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
1997 1996 1995
--------------------------- --------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------- ---------------- -------- ---------------- ------- ----------------
Outstanding at begin-
ning of year 597,480 $6.10 373,811 $ 2.30 307,517 $ .51
Granted 402,700 7.89 394,593 11.14 68,044 10.34
Exercised (112,867) .51 (33,056) .51 0 0
Forfeited (85,113) 8.66 (137,868) 11.56 (1,750) .51
-------- ----- -------- ------ ------- ------
Outstanding at end of
year 802,200 $7.51 597,480 $ 6.10 373,811 $ 2.30
======== ===== ======== ====== ======= ======
Options exercisable
at year end 321,564 342,866 215,633
======== ======== =======
Weighted-average fair
value of options
granted during the
year $ 7.89 $ 11.14 $ 10.34
======== ======== =======
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ------------------------------
------------------------------------------------- NUMBER
NUMBER WEIGHTED-AVERAGE EXERCISABLE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
$ .51 151,079 6.25 year $ .51 140,630 $ .51
$ 6.86 to $ 8.00 427,545 6.21 $ 7.87 59,113 $ 7.62
$10.29 to $13.72 203,576 7.05 $11.16 101,821 $11.28
$15.50 20,000 8.41 $15.50 20,000 $15.50
------- ---- ------ --------- ------
$ .51 to $15.50 802,200 6.48 $ 7.51 321,564 $ 6.16
================ ======= ==== ====== ========= ======
Substantially all of the options granted by the Company vest over a four
year period, 25% after one year and the remaining 75% ratably over the following
36 month period.
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123") SFAS 123 provides for companies to recognize compensation expense
associated with stock based compensation plans over the anticipated service
period based on the fair value of the award on the date of grant. However, SFAS
123 allows companies to continue to measure compensation costs prescribed by APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Companies
electing to continue accounting for stock based compensation plans under APB 25
must make pro forma disclosures of net income and earnings per share, as if SFAS
123 had been adopted. The company has continued to account for stock-based
compensation plans under APB 25. The fair value of the
F-14
50
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options was estimated at date of grant using a Black-Scholes single option
pricing model using the following assumptions:
1997 1996 1995
---------- ---------- ----------
Risk free interest rate............................ 5.5% 6.0% 6.0%
Expected stock price volatility.................... 52.0% 80.0% 80.0%
Expected life of options........................... four years four years four years
Expected dividends................................. none none none
The following table presents the pro forma disclosures required for SFAS
123 as of December 31:
1997 1996 1995
------ ------ -------
Pro forma net income (loss) (dollars in thousands)...... $2,044 $6,785 $(3,892)
Pro forma net income (loss) per share-basic............. $ .36 $ 1.32 $ (1.74)
Pro forma net income (loss) per share-diluted........... $ .34 $ 1.19 $ (1.74)
NOTE 12 -- REDEEMABLE PREFERRED STOCK
The Company has reserved 10 million shares of preferred stock and had
designated 9 million shares as Series A Preferred Stock. The shares were subject
to a $.06 per share dividend, payable quarterly when and if declared by the
Board of Directors. The dividends were not cumulative. The Series A Preferred
Stock was subject to holder redemption to be paid out of future earnings in
three annual installments beginning January 1, 1999 and each subsequent January
until January 1, 2001. The shares were subject to a 7% per year increase from
the issue date. The increase accrued at December 31 of each year. The Series A
Preferred Stock was converted to Common Stock at the time of the initial public
offering.
NOTE 13 -- STOCKHOLDER'S EQUITY
The Company had designated 136,000 shares of preferred stock as Series B
Preferred Stock. The shares were subject to a $.05 per share dividend payable
annually when, as and if declared by the Board of Directors. The dividends were
not cumulative. The Series B Preferred Stock was converted into Common Stock
upon the initial public offering.
The Company's ability to pay or declare dividends is restricted by the
terms of the credit facilities.
NOTE 14 -- INCOME TAXES
The following table presents the current and deferred provision (benefit)
for federal and state income taxes for the years ended December 31, 1997, 1996
and 1995:
1997 1996 1995
---------- ---------- ----
Current:
Federal................................... $ (12,018) $ 725,801 $ 0
State..................................... (23,591) (20,602) 0
---------- ---------- ----
(35,609) 705,199 0
---------- ---------- ----
Deferred:
Federal................................... 1,340,202 337,285 0
State..................................... 535,794 846,207 0
---------- ---------- ----
1,875,996 1,183,492 0
---------- ---------- ----
Total..................................... $1,840,387 $1,888,691 $ 0
========== ========== ====
F-15
51
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
------ ------ ------
Statutory regular federal income tax rate
(benefit).................................... 34.00% 34.00% (34.00)%
State taxes (net of federal benefit)........... 7.64 10.35 (12.59)
Other.......................................... (.05) 7.66 (0.79)
Change in valuation allowance.................. .00 (32.24) 47.38
------ ------ ------
41.59% 19.77% 0.00%
====== ====== ======
The components of the deferred income tax asset or (liability) as of
December 31, 1997 and 1996 are as follows:
1997 1996
----------- -----------
Property and equipment.......................... $ 46,752 $ 36,973
Accrued liabilities............................. 522,831 54,715
Capitalized costs............................... 89,268 171,670
Allowance for credit losses..................... 0 27,719
Gain on sale of Contracts....................... (8,169,887) (5,930,396)
Charitable Contribution......................... 1,626 0
Net operating losses............................ 3,948,044 4,149,362
Credit carryover................................ 31,453 18,211
State taxes..................................... 470,425 288,254
----------- -----------
$(3,059,488) $(1,183,492)
=========== ===========
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state purposes of $10,167,168 and $4,346,962, respectively. The net
operating loss carryforwards begin to expire after 2009 and 1999, respectively.
NOTE 15 -- WARRANTS
At December 31, 1997, the Company had the following warrants outstanding to
purchase shares of common stock:
BALANCE BALANCE BALANCE
OUTSTANDING NET REDUCTIONS OUTSTANDING NET REDUCTIONS OUTSTANDING
AT TO AT TO AT
EXERCISE DECEMBER 31, OUTSTANDING DECEMBER 31, OUTSTANDING DECEMBER 31,
PRICE 1995 WARRANTS 1996 WARRANTS 1997
------ --------- ---------- ------- -- -------
Warrants............... $ 0.03 1,704,183 (1,587,261) 116,922 0 116,922
Warrants............... $ 0.51 109,891 (25,580) 84,311 0 84,311
Warrants............... $11.50 0 0 16,332 0 16,332
Warrants............... $17.15 3,791 0 3,791 0 3,791
--------- ---------- ------- -- -------
Total............. 1,817,865 (1,612,841) 221,356 0 221,356
========= ========== ======= == =======
At December 31, 1997, all the Company's warrants outstanding to purchase
shares of common stock were exercisable.
During the year ended December 31, 1996 warrants of 15,843 and 25,580 were
exercised at a price of $0.03 and $0.51 respectively. No warrants were exercised
during 1997.
F-16
52
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128, the
following is an illustration of the dilutive effect of the Company's common
stock equivalents on earnings per share ("EPS").
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(In thousands, except
earnings per share)
Net income....................................... $2,584 $7,672 $3,763
Weighted average shares outstanding.............. 6,000 5,159 2,234
Net effect of dilutive stock options/warrants.... 384 541 --
------ ------ ------
Fully diluted weighted average shares
outstanding.................................... 6,384 5,700 2,234
====== ====== ======
Earnings Per Share............................... $ 0.43 $ 1.49 $(1.68)
====== ====== ======
Earnings Per Share Assuming Full Dilution........ $ 0.40 $ 1.35 $(1.68)
====== ====== ======
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgement is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: The carrying amount approximates fair value
because of the short maturity of those investments.
Commercial Paper and Revolving Credit Borrowing: The fair value of the
Company's debt is estimated based upon the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities and characteristics.
Contracts held for sale: The fair value of Contracts held for sale is based
on the estimated proceeds expected on securitization of the Contracts held for
sale.
Trust Receivable: The fair value of the Trust Receivable is estimated using
discounted cash flow analyses, using interest rates commensurate with the risk
associated with the underlying assets of the Grantor Trusts.
Retained Interest in Securitized Assets: The carrying amount is accounted
for at an estimated fair value which is calculated by discounting the excess
spread using a current market discount rate.
Hedging. The fair value of the Company's outstanding forward agreements are
estimated based on current rates offered to the Company for forward agreements
with similar terms and conditions.
F-17
53
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instrument are as
follows at December 31:
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN MILLIONS)
Cash and cash equivalents........................ $ .9 $ .9 $ .6 $ .6
Contracts held for sale.......................... $64.3 $68.4 $12.6 $13.1
Trust receivable................................. $27.6 $26.4 $10.1 $10.1
Retained interest in securitized assets.......... $48.8 $48.8 $29.6 $29.6
Commercial paper................................. $60.5 $60.5 $10.1 $10.1
Revolving credit borrowings...................... $30.0 $30.0 $ 2.5 $ 2.5
Hedging
Forward agreements.......................... $(1.1) $ .4
NOTE 18 -- RELATED PARTIES
The Company has a note receivable from a certain shareholder in the amount
of $175,000. The note bears interest at 6.66% per annum. Principal and accrued
interest are due on December 20, 1998.
F-18
54
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ----------- ----------
1997
Interest income........................ $1,881,992 $3,265,712 $ 3,659,736 $3,490,890
Interest expense....................... 1,054,909 1,830,284 2,096,118 2,280,334
Net interest income.................... 827,083 1,435,428 1,563,618 1,210,556
Provision for credit losses............ 293,270 211,324 100,045 180,806
Income before income taxes............. 1,048,444 1,118,507 1,126,419 1,131,133
Income taxes........................... 436,000 465,297 468,590 470,500
Net income............................. 612,444 653,210 657,829 660,633
Net income per common share (Basic).... $ 0.10 $ 0.11 $ 0.11 $ 0.11
Net income per common share
(Diluted)........................... $ 0.10 $ 0.10 $ 0.10 $ 0.10
1996
Interest income........................ $2,135,353 $2,752,428 $ 2,994,193 $1,798,182
Interest expense....................... 1,790,268 1,255,688 1,492,629 1,001,264
Net interest income.................... 345,085 1,496,740 1,501,564 796,918
Provision for credit losses............ (74,894) 49,824 167,963 122,909
Income before income taxes............. 3,981,858 2,642,299 1,874,294 1,062,064
Income taxes........................... 782,100 526,591 370,000 210,000
Net income............................. 3,199,758 2,115,708 1,504,294 852,064
Net income per common share (Basic).... $ 1.04 $ 0.37 $ 0.26 $ 0.14
Net income per common share
(Diluted)........................... $ 0.87 $ 0.33 $ 0.23 $ 0.13
1995
Interest income........................ $2,233,457 $ 369,575 $ 1,868,823 $3,758,465
Interest expense....................... 1,290,357 989,611 1,220,902 2,504,506
Net interest income.................... 943,100 (620,036) 647,921 1,253,959
Provision for credit losses............ 178,864 4,542 21,286 260,548
Loss before income taxes............... (740,857) (286,829) (1,198,003) (961,375)
Income taxes........................... 0 0 0 0
Net loss............................... (740,857) (286,829) (1,198,003) (961,375)
Net income per common share (Basic).... $ (0.33) $ (0.13) $ (0.53) $ (0.43)
Net loss per common share (Diluted).... $ (0.33) $ (0.13) $ (0.53) $ (0.43)
NOTE 20 -- SUBSEQUENT EVENTS (UNAUDITED)
In the first quarter of 1998, the Company sold or securitized contracts
totaling $188.0 million.
In an effort to expand and diversify lending relationships, the Company
created a new special finance subsidiary Onyx Acceptance Funding Corporation
(OFC) during the first quarter of 1998. Since then, OFC has developed two
lending lines with Merrill Lynch Mortgage Capital, Inc.
The lines are for $150.0 million and contain a warehouse line of $100.0
million and a residual line of $50.0 million. The lines are LIBOR based and have
a term of one year with a maturity date in February 1999.
F-19
55
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, during the first quarter of 1998, completed a $10.0 million
subordinated debt offering. The term of the subordinated debt is for two years
ending February 27, 2000 with an option by the Company to extend the term by
three years during which the loan would fully amortize, and bears a fixed
interest rate at 9 1/2%. The Company also issued to the lender a warrant for
Common Stock in the amount of 180,529 shares of the Common Stock of the Company.
F-20
56
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
*3.1 Omitted.....................................................
*3.2 Omitted.....................................................
*3.3 Omitted.....................................................
*3.4 Certificate of Incorporation of the Company.................
*3.5 Bylaws of the Company.......................................
*3.6 Omitted.....................................................
*4.1 Omitted.....................................................
+4.2 Rights Agreement dated as of July 8, 1997, between the
Company and American Stock Transfer and Trust Company, as
Rights Agent (which includes the form of Certificate of
Designation for the Series A Participating Preferred Stock
and the form of Rights Certificate of the Company...........
*10.1 Form of Indemnification Agreement of the Company, a Delaware
corporation.................................................
*10.2 Second Amended and Restated 1994 Stock Option Plan..........
*10.3 Form of Notice of Grant of Stock Option under Second Amended
and Restated 1994 Stock Option Plan.........................
*10.4 Form of Stock Option Agreement under Second Amended and
Restated 1994 Stock Option Plan.............................
*10.5 Form of Stock Purchase Agreement under Second Amended and
Restated 1994 Stock Option Plan.............................
*10.6 1994 Special Performance Option Grant Plan..................
*10.7 Form of Notice of Grant of Stock Option under 1994 Special
Performance Option Grant Plan...............................
*10.8 Form of Stock Option Agreement under 1994 Special
Performance Option Grant Plan...............................
*10.9 Form of Stock Purchase Agreement under 1994 Special
Performance Option Grant Plan...............................
*10.10 Omitted.....................................................
*10.11 Omitted.....................................................
*10.12 Omitted.....................................................
*10.13 Third Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
the Investors identified therein dated as of November 27,
1995........................................................
*10.14 Warrant to purchase Common Stock in favor of ContiTrade
Services Corporation from Onyx Acceptance Corporation dated
as of February 1, 1994......................................
*10.15 First Amendment to Co-Sale and First Refusal Agreement
between and among Onyx Acceptance Corporation,
ContiFinancial Services Corporation, the Investors and
Managers, as defined therein, dated as of February 1, 1994..
*10.16 First Amendment to and Waiver of Certain Provisions of
Investors' Rights Agreement between Onyx Acceptance
Corporation, ContiFinancial Services Corporation, the
Investors and the Management Holders, as defined therein,
dated as of February 1, 1994................................
57
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
*10.17 Senior Subordinated Note and Warrant Purchase Agreement
between and among Onyx Acceptance Corporation, Capital
Resource Lenders II, L.P. and Dominion Fund III, L.P., dated
as of November 17, 1994.....................................
*10.18 Omitted.....................................................
*10.19 Omitted.....................................................
*10.20 Warrant to purchase Common Stock in favor of Capital
Resource Lenders II, L.P. from Onyx Acceptance Corporation
dated as of November 17, 1994...............................
*10.21 Warrant to purchase Common Stock in favor of Dominion Fund
III, L.P. from Onyx Acceptance Corporation dated as of
November 17, 1994...........................................
*10.22 Amended and Restated Co-Sale and First Refusal Agreement
between and among Onyx Acceptance Corporation and the
Shareholders identified therein dated as of November 17,
1994........................................................
*10.23 Amended and Restated Investors' Rights Agreement between and
among Onyx Acceptance Corporation, the Investors and the
Management Holders identified therein dated as of November
17, 1994....................................................
*10.24 Amended and Restated Voting Agreement between and among Onyx
Acceptance Corporation and the Shareholders identified
therein dated as of November 17, 1994.......................
*10.25 Omitted.....................................................
*10.26 Omitted.....................................................
*10.27 Omitted.....................................................
*10.28 Omitted.....................................................
*10.29 Omitted.....................................................
*10.30 Sale and Servicing Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of September 8, 1994.....................................
*10.31 Triple-A One Funding Corporation Credit Agreement between
and among Onyx Acceptance Financial Corporation, Triple-A
One Funding Corporation, CapMAC Financial Services, Inc. and
Capital Markets Assurance Corporation dated as of September
8, 1994.....................................................
*10.32 Triple-A One Funding Corporation Note in favor of Onyx
Acceptance Financial Corporation from Triple-A One Funding
Corporation dated as of September 12, 1994..................
*10.33 Triple-A One Funding Corporation Security Agreement between
and among Onyx Acceptance Financial Corporation, Triple-A
One Funding Corporation and Capital Markets Assurance
Corporation dated as of September 8, 1994...................
*10.34 Subordinated Security Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of September 8, 1994.....................................
*10.35 Insurance and Indemnity Agreement between and among Onyx
Acceptance Corporation, Capital Markets Assurance
Corporation, Onyx Acceptance Financial Corporation and
Triple-A One Funding Corporation dated as of September 8,
1994........................................................
*10.36 Seller Note in favor of Onyx Acceptance Corporation from
Onyx Acceptance Financial Corporation dated September 12,
1994........................................................
*10.37 Subordinated Note in favor of Onyx Acceptance Corporation
from Onyx Acceptance Financial Corporation dated September
12, 1994....................................................
58
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
*10.38 Sublease and Administrative Services Agreement between Onyx
Acceptance Corporation and Onyx Acceptance Financial
Corporation dated as of September 8, 1994...................
*10.39 Tax Allocation Agreement between Onyx Acceptance Corporation
and Onyx Acceptance Financial Corporation dated as of
September 1, 1994...........................................
*10.40 Corporate Separateness Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
September 8, 1994...........................................
*10.41 Amendment Number One to Security Agreement, Subordinated
Security Agreement, Sale and Servicing Agreement and
Definitions List between and among Onyx Acceptance Financial
Corporation, Onyx Acceptance Corporation, Triple-A One
Funding Corporation and Capital Markets Assurance
Corporation dated March 1, 1995.............................
*10.42 Omitted.....................................................
*10.43 Omitted.....................................................
*10.44 Omitted.....................................................
*10.45 First Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
certain Investors identified therein dated as of December
15, 1994....................................................
*10.46 Omitted.....................................................
*10.47 Omitted.....................................................
*10.48 Omitted.....................................................
*10.49 Omitted.....................................................
*10.50 Omitted.....................................................
*10.51 Omitted.....................................................
*10.52 Omitted.....................................................
*10.53 Omitted.....................................................
*10.54 Master Lease Agreement between Onyx Acceptance Corporation
and Comdisco, Inc. dated January 7, 1994....................
*10.55 Warrant to purchase Series A Preferred Stock in favor of
Comdisco, Inc. from Onyx Acceptance Corporation dated as of
January 7, 1994.............................................
*10.56 Warrant to purchase Common Stock in favor of Lighthouse
Capital Partners from Onyx Acceptance Corporation dated
November 3, 1995............................................
*10.57 Master Lease Agreement between Lighthouse Capital Partners
and Onyx Acceptance Corporation dated November 3, 1995......
*10.58 Second Amendment to Amended and Restated Investors' Rights
Agreement between and among Onyx Acceptance Corporation and
the Investors identified therein dated as of November 3,
1995........................................................
*10.59 Agreement for On-Line Services between On-Line Computer
Systems, Inc. and Onyx Acceptance Corporation dated as of
November 19, 1993...........................................
*10.60 Agreement for On-Line Service between On-Line Computer
Systems, Inc. and Onyx Acceptance Financial Corporation
dated as of September 7, 1994...............................
*10.61 Option Agreement between Onyx Acceptance Corporation and
John W. Hall dated as of December 20, 1994..................
59
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
*10.62 Promissory Note in favor of Onyx Acceptance Corporation from
John Hall dated as of December 20, 1994.....................
*10.63 Option Agreement between Onyx Acceptance Corporation and
Brian Mac Innis dated as of December 20, 1994...............
*10.64 Omitted.....................................................
*10.65 Omitted.....................................................
*10.66 Stock Purchase Agreement between and among John W. Hall and
certain Investors identified therein dated as of June 7,
1995........................................................
*10.67 Sublease Agreement between Onyx Acceptance Corporation and
AT&T Resource Management Corporation dated as of August 31,
1993........................................................
*10.68 Office Space Lease (Master Lease) between and among The
Irvine Company and American Telephone and Telegraph Company
dated as of April 29, 1987..................................
*10.69 First Amendment To Sublease between and among AT&T Resource
Management Corporation and Onyx Acceptance Corporation dated
as of September 1, 1993.....................................
*10.70 Onyx Acceptance Corporation 401(k) Plan dated January 1,
1994........................................................
*10.71 Pooling and Servicing Agreement between Onyx Acceptance
Financial Corporation, Onyx Acceptance Corporation and
Bankers Trust Company dated as of January 1, 1996...........
*10.72 Underwriting Agreement between Onyx Acceptance Financial
Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated January 31, 1996.........................
*10.73 Indemnification Agreement by and among Capital Markets
Assurance Corporation, Onyx Acceptance Corporation, Onyx
Acceptance Financial Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated dated January 31, 1996..........
*10.74 Indemnification Agreement by and between Onyx Acceptance
Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated as of January 31, 1996...................
*10.75 Excess Servicing and Trust Receivable Revolving Credit and
Term Loan Agreement among Onyx Acceptance Corporation, State
Street Bank and Trust Company and The First National Bank of
Boston dated as of January 31, 1996.........................
*10.76 Pledge and Security Agreement by and among Onyx Acceptance
Corporation, State Street Bank and Trust Company and The
First National Bank of Boston dated as of January 31,
1996........................................................
*10.77 Subordination and Intercreditor Agreement by and among State
Street Bank and Trust Company, The First National Bank of
Boston, Capital Resource Lenders II, L.P., Dominion Fund III
and Onyx Acceptance Corporation dated as of January 31,
1996........................................................
*10.78 1996-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.....................
*10.79 1995-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.....................
60
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
*10.80 1995-1 Purchase Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of February 6, 1996......................................
*10.81 1994-1 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) dated as of February 6, 1996.....................
*10.82 1994-1 Purchase Agreement between Onyx Acceptance
Corporation and Onyx Acceptance Financial Corporation dated
as of February 6, 1996......................................
*10.83 Omitted.....................................................
*10.84 Omitted.....................................................
*10.85 1996 Stock Option/Stock Issuance Plan.......................
**10.86 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-2 Grantor Trust........................................
**10.87 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-2 Grantor
Trust.......................................................
**10.88 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-3 Grantor Trust........................................
***10.89 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-3 Grantor
Trust.......................................................
***10.90 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1996-4 Grantor Trust........................................
***10.91 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1996-4 Grantor
Trust.......................................................
****10.92 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-1 Grantor Trust........................................
****10.93 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1997-1 Grantor
Trust.......................................................
#10.94 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-2 Grantor Trust........................................
#10.95 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch, Pierce, Fenner and
Smith Incorporated in connection with 1997-2 Grantor
Trust.......................................................
##10.96 Form of Pooling and Servicing Agreement between Onyx
Acceptance Financial Corporation, Onyx Acceptance
Corporation and Bankers Trust Company in connection with
1997-3 Grantor Trust........................................
##10.97 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation and Merrill Lynch Pierce, Fenner and
Smith Incorporation in connection with 1997-3 Grantor
Trust.......................................................
61
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ----------- ------------
###10.98 1997-4 Spread Account Trust Agreement between Onyx
Acceptance Financial Corporation and Bankers Trust
(Delaware) Dated as of December 12, 1997....................
###10.99 Form of Pooling Servicing Agreement between Onyx Acceptance
Corporation, Onyx Acceptance Financial Corporation, and
Bankers Trust Company in connection with the 1997-4 Onyx
Acceptance Grantor Trust....................................
###10.100 Form of Underwriting Agreement between Onyx Acceptance
Financial Corporation, Onyx Acceptance Corporation and
Merrill Lynch & Co. in connection with the 1997-4 Onyx
Acceptance Grantor Trust....................................
21.1 Subsidiaries of the Registrant..............................
27.1 Financial Data Schedule.....................................
27.2 Financial Data Schedule.....................................
27.3 Financial Data Schedule.....................................
- ---------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-680).
** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-4220).
*** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-10461).
**** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-16601).
***** Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-22301).
# Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-28893).