ONYX ACCEPTANCE CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

[ ] 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 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		33-0577635 (I.R.S. EMPLOYER IDENTIFICATION NO.)

ONYX ACCEPTANCE CORPORATION
27051 TOWNE CENTRE DRIVE
FOOTHILL RANCH, CA 92610
(949) 465-3900
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

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

YES [X] NO [ ]

As of November 14, 2002 there were 5,086,793 shares of registrant’s Common Stock, par value $.01 per share outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
		ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
SIGNATURE
EXHIBIT INDEX
EXHIBIT 21.1
EXHIBIT 99.1
EXHIBIT 99.2

ONYX ACCEPTANCE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q


		PAGE

PART I	Financial Information		3




Item 1	Financial Statements		3




	Condensed Consolidated Statements of Financial Condition at September 30, 2002 and December 31, 2001		3




	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2002 and September 30, 2001		4




	Consolidated Statement of Stockholders’ Equity at September 30, 2002		5




	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and September 30, 2001		6




	Notes to Condensed Consolidated Financial Statements		7




Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10




Item 3	Quantitative and Qualitative Disclosures about Market Risk		18




Item 4	Controls and Procedures		19
PART II	Other Information		19




Item 1	Legal Proceedings		19








Item 4	Submission of Matters to a Vote of Security Holders		19
Item 5	Other Information		20




Item 6	Exhibits and Reports on Form 8-K		26




SIGNATURES			27




EXHIBIT INDEX			30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)


			SEPTEMBER 30,		DECEMBER 31,
			2002		2001

			(DOLLARS IN THOUSANDS)
ASSETS




Cash and cash equivalents			$	104	$	1,135




Restricted cash				4,785		—




Credit enhancement assets, at fair value				180,870		184,300




Contracts held for sale				213,698		189,265




Contracts held for investment (net of allowance)				4,521		2,259




Other assets				9,241		9,326

		Total assets	$	413,219	$	386,285

LIABILITIES




Accounts payable			$	33,117	$	27,024




Debt:




Warehouse lines				214,008		190,008




Excess service lines				52,359		68,355




Subordinated debt/other				21,471		16,232

	Total debt			287,838		274,595




Other liabilities				29,107		24,965

	Total liabilities			350,062		326,584




EQUITY




Common stock Par value $.01 per share; authorized 15,000,000 shares; issued and outstanding 5,086,793 as of September 30, 2002 and 5,078,046 as of December 31, 2001				51		51




Paid in capital				32,651		32,647




Retained earnings				27,375		25,960




Accumulated other comprehensive income, net of tax				3,080		1,043

		Total equity		63,157		59,701

		Total liabilities and equity	$	413,219	$	386,285

See the accompanying notes to the condensed consolidated financial statements.

ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


		THREE MONTHS ENDED				NINE MONTHS ENDED
		SEPTEMBER 30,				SEPTEMBER 30,

		2002		2001		2002			2001

		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
		(UNAUDITED)				(UNAUDITED)
REVENUES:




Interest income		$	10,298	$	7,833	$	28,159		$	21,249




Interest expense			2,845		2,849		9,003			10,775

Net interest income			7,453		4,984		19,156			10,474




Gain on sale of contracts, net			3,625		6,591		10,302			26,167




Service fee income			12,842		13,936		39,472			41,934

Total Revenues			23,920		25,511		68,930			78,575




EXPENSES:




	Provision for credit losses		818		502		(461	)		966




	Interest expense-other		1,225		812		3,154			3,032




OPERATING EXPENSES:




	Salaries and benefits		13,549		13,228		40,998			39,895




	Systems and servicing		777		476		2,156			3,573




	Telephone and data lines		1,056		1,201		2,541			3,680




	Depreciation		806		1,094		2,676			3,568




	General and administrative expenses		4,592		5,957		15,449			16,989

Total Operating Expenses			20,780		21,956		63,820			67,705

Total Expenses			22,823		23,270		66,513			71,703

	Income before Income Taxes		1,097		2,241		2,417			6,872




	Income Taxes		455		899		1,002			2,821

Net Income		$	642	$	1,342	$	1,415		$	4,051

Net Income per share — Basic		$	0.13	$	0.27	$	0.28		$	0.81




Net Income per share — Diluted		$	0.12	$	0.25	$	0.27		$	0.78




Basic Shares Outstanding			5,086,793		5,047,292		5,084,914			5,008,767




Diluted Shares Outstanding			5,142,298		5,354,351		5,194,178			5,214,455

See the accompanying notes to the condensed consolidated financial statements.

ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
(UNAUDITED)


									ACCUMULATED OTHER
					ADDITIONAL				COMPREHENSIVE
			COMMON		PAID-IN		RETAINED		INCOME
	SHARES		STOCK		CAPITAL		EARNINGS		NET OF TAX			TOTAL

BALANCE, DECEMBER 31, 2001		5,078	$	51	$	32,647	$	25,960	$	1,043		$	59,701




Stock issued for options exercised		9				4							4




Comprehensive income:




Unrealized gains in securitized assets, net of tax of $2.0 million										2,777			2,777




Unrealized loss on hedging activities, net of tax of $525 thousand										(740	)		(740	)




Net income								1,415					1,415

Total comprehensive income								1,415		2,037			3,452

BALANCE, SEPTEMBER 30, 2002		5,087	$	51	$	32,651	$	27,375	$	3,080		$	63,157

See the accompanying notes to the condensed consolidated financial statements.

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


		NINE MONTHS ENDED
		SEPTEMBER 30,

		2002			2001

		(Dollars in Thousands)
OPERATING ACTIVITIES:




	Net cash used in operating activities	$	(9,067	)	$	(44,552	)




INVESTING ACTIVITIES:




	Cash used for purchases of property and equipment		(998	)		(2,140	)




FINANCING ACTIVITIES:




	Proceeds from exercise of employee options		4			47




	Payments on capital lease obligations		(331	)		—




	Proceeds from lease refinance		900			206




	Payments on residual lines of credit		(102,474	)		(13,884	)




	Proceeds from drawdown on residual lines of credit		86,480			32,600




	Paydown of warehouse lines related to securitizations		(900,223	)		(925,310	)




	Proceeds from warehouse lines		924,223			958,305




	Proceeds from issuance of subordinated debt		8,120			—




	Principal payments on subordinated debt		(2,880	)		(2,427	)

Net cash provided by financing activities			13,819			49,537

	Increase in cash and cash equivalents		3,754			2,845




Cash and cash equivalents at beginning of period			1,135			3,130

Cash and cash equivalents at end of period		$	4,889		$	5,975

See the accompanying notes to the condensed consolidated financial statements.

ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — NATURE OF OPERATIONS

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 the United States. The Company focuses its efforts on acquiring Contracts that are collateralized 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 $8.3 billion in Contracts and currently has relationships with over 10,600 dealerships.

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 excess cash flows generated by owner trusts, and earns fees from servicing the securitized Contracts.

RECLASSIFICATION

Certain amounts in the prior quarter and year to date condensed consolidated financial statements have been reclassified to conform to the corresponding 2002 presentation.

NOTE 2 — BASIS OF PRESENTATION

The condensed consolidated financial statements included herein are unaudited and have been prepared by Onyx Acceptance Corporation (“Onyx” or the “Company”) in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the regulations. In the opinion of management, the financial statements reflect all adjustments (all of a normal and recurring nature) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim period. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The condensed consolidated financial statements should be read in conjunction with the audited financial statements and footnotes thereto for the year ended December 31, 2001 included in the Company’s 2001 Annual Report on Form 10-K.

USE OF ESTIMATES

In conformity with generally accepted accounting principles, management utilizes assumptions and estimates that affect the reported values of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for each reporting period. The more significant estimates made in the preparation of the Company’s condensed consolidated financial statements relate to the credit enhancement assets and the gain on sale of motor vehicle retail installment sales and loan contracts (“Contracts”). Such assumptions include, but are not limited to, estimates of loan prepayments, defaults, recovery rates and present value discount rates. The Company uses a combination of its own historical experience and expectation of future performance to determine such estimates. Actual results may differ from the Company’s estimates due to numerous factors both within and beyond the control of Company management. Changes in these factors could require the Company to revise its assumptions concerning the amount of voluntary prepayments, the frequency and/or severity of defaults and the recovery rates associated with the disposition of repossessed vehicles.

NOTE 3 — RESTRICTED CASH

Restricted cash represents amounts held in reserve accounts providing credit enhancement on the Company’s outstanding on balance sheet residual securitization.

NOTE 4 — CONTRACTS HELD FOR SALE

Contracts held for sale consisted of the following, and are carried at the lower of cost or market value:


	September 30,			December 31,
	2002			2001

	(In Thousands)
Gross contracts held for sale	$	218,407		$	193,879




Less unearned interest		(1,608	)		(2,164	)

Contracts held for sale		216,799			191,715




Dealer participation (net)		(3,101	)		(2,450	)

Total	$	213,698		$	189,265

NOTE 5 — CONTRACTS HELD FOR INVESTMENT

Contracts held for investment are net of a $1.9 million allowance for future losses for September 30, 2002 and a $1.3 million allowance for December 31, 2001. Amounts held for investment include Contracts that do not qualify for Contract securitizations as a result of delinquency status or minimum balance.

NOTE 6 — CREDIT ENHANCEMENT ASSETS

SFAS 140 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.

Credit enhancement assets consisted of the following:


	September 30,		December 31,
	2002		2001

	(In Thousands)
Trust receivable	$	3,500	$	3,980




RISA		177,370		180,320

Total	$	180,870	$	184,300

Trust receivables represents initial deposits in spread accounts.

Retained interest in securitized assets (“RISA”) is capitalized upon securitization of Contracts, and represents 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 weighted average coupon rate of the Contracts sold and the weighted average security 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 cash flows upon securitization and are based on historical experience. In calculating the gain on sale, the Company uses a 1.75% prepayment rate f

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents