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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 2000
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 NUMBER)
ONYX ACCEPTANCE CORPORATION
27051 TOWNE CENTRE DRIVE, SUITE 100
FOOTHILL RANCH, CA 92610
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 465-3900
(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. [ ]
The number of shares outstanding of the Company's Common Stock as of the
closing of the market on March 19, 2001 was 4,989,504. The registrant does not
have different classes of Common Stock. Based on the closing sale price of $3.69
the registrant's Common Stock as quoted on the Nasdaq National Market on March
19, 2001, the aggregate market value of such stock held by non-affiliates of the
registrant was approximately $11.7 million on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on May 31, 2001, to be 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
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters: Price Range of Common Stock............ 20
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 33
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits and Reports on Form 8-K............................ 36
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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, litigation risks 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 that may be made to reflect any future events
or circumstances.
ITEM 1. BUSINESS
GENERAL
Onyx Acceptance Corporation, a Delaware 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
(collectively the "Contracts"). The Company was founded in August 1993 by a team
of executives with extensive automobile finance experience in the major aspects
of near-prime auto lending, including underwriting, servicing, information
systems implementation, interest rate management, securitizations and auto
dealer center management. The Company focuses its efforts on acquiring
near-prime Contracts collateralized 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 $5.5 billion in Contracts, has completed 22 securitizations and
currently has an active dealer base of approximately 9,700 dealerships. The
Company has expanded its operations pursuant to its managed growth strategy from
a single office in Orange County, California to 19 auto finance centers (the
"Auto Finance Centers") serving most regions of the United States.
MARKET AND COMPETITION
The Company operates in a highly competitive market. The automobile finance
market has historically 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. A number of these competitors have greater financial
resources than the Company. 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.
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. The Company
believes that its strong personal relationships with and its level of service to
the dealerships in its customer base provide a competitive advantage to the
Company.
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BUSINESS STRATEGY
The Company's principal objective remains to become one of the leading
sources of near-prime auto lending in the United States by leveraging the
experience of its senior management team in this industry. The Company seeks to
maintain and increase profitability through the implementation of the following
strategies:
Targeted Market and Product Focus: The Company targets the near-prime auto
lending market because it believes that near-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.
Localized Dealership Service: The Company provides a high level of service
to its dealership base by underwriting and purchasing Contracts and marketing to
and servicing dealerships on a local level through its Auto Finance Centers. The
Company strategically 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 dealer 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 establishes active
relationships with a substantial percentage of franchised dealerships in the
regions in which it does business through its 19 existing Auto Finance Centers.
The Company intends to establish additional relationships within its existing
market areas in 2001, and contemplates opening new Auto Finance Centers in 2002.
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 standardized commercially available credit scoring system is a less
effective means of assessing credit risk, especially in the near-prime sector,
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 and Account
Managers are compensated as a team and their compensation relies, in part, upon
the quality of underwriting of the Contracts they approve. The Company has
developed a credit review process where a post funding audit is performed on
most purchases and originations by reviewing Contracts against the Company's
underwriting standards within 48 hours after they have been funded. This audit
provides feedback to enhance the underwriting process. To further monitor the
integrity of the underwriting process, management regularly tracks the yields,
delinquency and loss rates of Contracts purchased by each Credit and Account
Manager team.
Technology-Supported Operational Controls: The Company has developed and
instituted control and review systems that enable it to monitor both the
operations of the Company and the performance of the serviced portfolio. These
risk management systems allow 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 serviced portfolio without a significant 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 warehouse credit
facilities to fund Contracts prior to securitization. To fund dealer
participation and finance daily operations the Company relies to a significant
extent on credit facilities that are collateralized 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 to
substantially reduce its interest rate risk.
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OPERATIONS
Dealership Marketing and Service: As of December 31, 2000, the Company had
19 Auto Finance Centers located throughout the United States and had an active
dealer base of approximately 9,700 dealerships. Of these dealerships,
approximately 90% are franchised and approximately 10% are independent
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 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 serviced portfolio. 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,
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1996 1997 1998 1999 2000
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(DOLLARS IN THOUSANDS)
Number of auto finance centers............ 9 10 14 17 19
Number of contracts purchased............. 26,244 50,214 86,150 127,628 131,648
Dollar volume of contracts collateralized
by new vehicles......................... $ 68,654 $129,178 $ 186,654 $ 245,058 $ 301,100
Dollar volume of contracts collateralized
by used vehicles........................ $251,186 $476,727 $ 851,881 $1,313,946 $1,370,603
Dollar volume of contracts................ $319,840 $605,905 $1,038,535 $1,559,004 $1,671,703
Average dollar volume of contracts per
auto finance center..................... $ 35,538 $ 60,591 $ 74,181 $ 91,706 $ 87,984
Number of active dealerships.............. 1,471 2,846 5,401 7,617 9,741
Serviced portfolio........................ $400,665 $757,277 $1,345,961 $2,133,460 $2,690,607
The Company's growth objectives over the next 12 months are to expand its
financing reach in metropolitan areas within the United States and to further
develop relationships with existing franchised and select used dealerships in
the states where the Company is currently doing business. At present, the
Company does not intend to open new Auto Finance Centers in 2001.
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 the
dealership finance manager 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 dealership
finance managers about the Company's underwriting philosophy, including its
preference for near-prime quality Contracts collateralized 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 near-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 and warranties by the dealership about the Contracts.
After this relationship is established, the Account Managers continue to
actively monitor the relationship to meet the Company's objectives with respect
to the volume of applications satisfying the 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 solicit financing from
the Company or from another source or sources for a customer seeking to finance
a vehicle
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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 at the
dealerships are a significant 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 and
Account Managers with a personal, hands-on analysis of the creditworthiness of
each applicant, rather than sole reliance upon standardized commercially
available 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 whom 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 and Account Managers utilize a
rules/exception based automated credit/audit system. The Credit and Account
Managers personally review each application and communicate to the submitting
dealership the results of the review, including the reasons why a particular
application may have been declined. This practice encourages the dealership
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 has instituted a formal internal
training program for new and existing Credit and Account Managers.
The underwriting process begins when an application is faxed by a
dealership to a central toll-free number, at the Company's corporate
headquarters, where it is input into the Company's front-end application
processing system. Each application is evaluated by a Credit or Account Manager
in the local Auto Finance Center 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. To evaluate credit applications,
the Credit or Account Manager reviews, among other things, on-line information,
including reports of credit reporting agencies, nationally recognized vehicle
valuation services, and ownership of real estate listed on an application. The
Company's wide area network permits a Credit or Account Manager in any Auto
Finance Center to access an application on a real-time basis. This computer
network enables senior management to efficiently review Contracts requiring
senior 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 risk management reporting system permits daily review by senior
management of operating results sorted by any number of variables, including by
Credit/Account Manager, Auto Finance Center or dealership.
The Company has installed an in-house grading system to facilitate its
current underwriting standards. The system analyzes the borrower's credit
profile and collateral and produces a recommended advance guideline. The system
also performs additional fraud checks to alert the users of potential problems
with the application. The system also ties in the overall Contract grade with
the user's credit limits, as each user is assigned a credit limit within each
grade the Company offers. If the application falls outside the user's limits,
the system will prompt the application to be approved by a higher user level.
The system was installed to further enhance the enforcement of the Company's
credit policies and to monitor credit exceptions on a real-time basis.
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 limited by a number of factors, including the
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length of the Contract term, the make, model and year of the financed vehicle
and the creditworthiness of the obligor. These adjustments are made to insure
that the financed vehicle constitutes adequate collateral to secure the
Contract. Contracts purchased or originated in 2000 had an average loan to value
ratio at purchase or origination of 101% which the Company believes is one of
the lowest in the industry.
Once the review of an application is completed, the Credit or Account
Manager communicates their decision to the dealership specifying approval,
conditional approval (such as an increase in the down-payment, reduction in the
term of the financing, or the addition of a co-signer to the Contract), or
denial.
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 corporate headquarters.
The Auto Finance Center purchasing the Contract funds the purchase and may
pay the dealer a fee in the form of dealer participation in the finance income.
The dealership can receive 100% of the dealer participation, at purchase or at
month-end, 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 charge-off of the Contract.
The Company also offers three other participation methods, in which the Company
pays less than 100% of the dealer participation, but for which the dealership is
under no obligation to refund any unearned participation amount if the Contract
defaults or pre-pays after the expiration of a set period of time after the
Contract purchase date.
The Company conducts a post-funding credit review of a significant portion
of its Contracts. In the review, the funded application is re-examined to ensure
compliance with the Company's underwriting requirements. As part of the
post-funding review, a predetermined sampling of approximately one out of eight
Contracts is selected in which the borrower is contacted to verify certain
information on the Contract. The results 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 as teams, and is designed to reward
those employees whose Contract purchases meet the Company's volume and yield
objectives while preserving credit quality. Generally, these bonuses are payable
monthly, and constitute a significant portion of an employee's compensation. The
Company believes this incentive compensation system motivates employees to
purchase only those near-prime quality Contracts that meet the Company's
objectives of increasing volume at targeted yields while preserving credit
quality.
The following table sets forth information about the Company's Contracts as
of the dates indicated:
FOR THE YEARS ENDED DECEMBER 31,
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1996 1997 1998 1999 2000
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(DOLLARS IN THOUSANDS)
Contracts purchased....................... $319,840 $605,905 $1,038,535 $1,559,004 $1,671,703
Average contract amount purchased......... $ 12.2 $ 12.1 $ 12.1 $ 12.2 $ 12.6
Weighted average initial term (months).... 56.2 57.0 57.5 57.0 57.2
Percentage of dollar amount of contracts
purchased and collateralized by new
motor vehicles.......................... 21.47% 21.32% 17.97% 15.72% 18.01%
Percentage of dollar amount of contracts
purchased and collateralized by used
motor vehicles.......................... 78.53% 78.68% 82.03% 84.28% 81.99%
Periodically the Company performs an analysis of its serviced portfolio to
evaluate the effectiveness of its underwriting guidelines. If external economic
factors, credit delinquencies or credit losses change, the
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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 serviced portfolio, but utilizes
an external service provider for its loan accounting and collection system
processing. The charges associated with this provider are directly correlated to
the number of Contracts serviced by the Company. To reduce the costs of its
growing portfolio, the Company has acquired a loan accounting and collection
system, and is presently customizing it to the Company's specifications to bring
the processes in-house in 2001. The contract with the existing external service
provider will then be terminated. The Company currently outsources its customer
billing functions. Through a service provider, the Company mails to each obligor
a monthly billing statement 20 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, where
allowed by law, on any payment received after the expiration of the statutory or
contractual grace period. Most payments from obligors are deposited directly
into a lockbox account while the remainder of payments are received directly by
the Company and promptly deposited by the Company into the lockbox account.
Under the terms of its credit facilities and securitization trusts, the
Company acts as servicer with respect to all Contracts purchased or originated
in its serviced 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 servicing reports.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Contracts are performed by
the Company at its Foothill Ranch, California and Hazelwood, Missouri collection
centers. 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 a scheduled payment under the Contract within 30 days of
the related due date (each a "Due Date").
To automate its collection procedures, the Company uses features of the
computer system of its third party service bureau 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 with respect to Contracts. These processes
will also be brought in-house in 2001. The Company utilizes a predictive dialing
to make phone calls to obligors whose payments are past due by more than eight
days but less than 20 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 Contract database. By eliminating time wasted on
attempting to reach obligors, this system permits a collector to work on average
3 times the number of accounts. 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 Foothill Ranch or Hazelwood collection centers who
have primary responsibility for such delinquent accounts until they are
resolved. To expedite collections from late paying obligors, the Company uses
several Western Union payment services which allow an obligor to remit, any
payments which are in turn deposited to the Company's lockbox account.
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Generally, after a scheduled payment under a Contract continues to be past
due for between 45 and 60 days, the Company will initiate repossession of the
financed vehicle. However, if a Contract is deemed uncollectable, 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 of payment delinquency. Repossessions are conducted by
third parties that are engaged in the business of repossessing vehicles for
secured parties. Under California law and the laws of most other states, after
repossession, the obligor generally has an additional period of time to redeem
the financed vehicle before the financed vehicle may be resold by the Company in
an effort to recover the balance due under the Contract.
If the proceeds from the sale of a repossessed vehicle fall short of the
balance due on the Contract, the Company will experience a loss. The current
policy of the Company is to recognize losses on repossessed vehicles in the
month in which the vehicle is sold or in which the scheduled payment becomes 120
days delinquent, whichever occurs first. Losses may occur in connection with
delinquent Contracts for which the vehicle was not repossessed, either because
of a discharge of the obligor's indebtedness in a bankruptcy proceeding or due
to the Company's inability to locate the financed vehicle or the obligor. In
these cases, losses are recognized at the time a Contract is deemed
uncollectable or during the month a scheduled payment under the Contract becomes
150 days 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 the
Company and to the extent permitted by law. The loss recognition and collection
policies and practices of the Company may change over time in accordance with
the Company's business judgement.
MODIFICATIONS AND EXTENSIONS
The Company offers certain credit-related extensions to obligors. These
extensions are offered only when the Company believes that the obligor's
financial difficulty has been resolved or will no longer impair the obligor's
ability to make future payments.
INSURANCE
Each Contract requires the obligor to obtain comprehensive and collision
insurance with respect to the related financed vehicle with the Company named as
a loss payee. In the event that the obligor fails to maintain the required
insurance, however, the Company has purchased limited comprehensive and
collision insurance from Great American Insurance Companies. A portion of the
policy provides the Company with protection on each uninsured or underinsured
financed vehicle against total loss, damage or theft. In conjunction with the
blanket coverage, the Company also has the ability to place month-to-month
insurance certificates through Great American Insurance Companies on uninsured
accounts. To further reduce its exposure to uninsured motorists, the Company
operates an insurance tracking function at its corporate headquarters. This
department systematically records cancellations, expirations and renewals and
initiates contacts with both obligors and insurers to maximize compliance with
Company policy.
FINANCING AND SALE OF CONTRACTS
The Company finances the acquisition and origination of Contracts primarily
through its warehouse credit facilities as discussed below:
CP Facilities: As of December 31, 2000, the Company was party to two
primary Contract warehousing programs (the "CP Facilities"), one a $355.0
million facility with Triple-A One Funding Corporation ("Triple-A"), and the
other a $150.0 million facility with Park Avenue Receivables Corporation
("Parco"). Two of the Company's special purpose subsidiaries, Onyx Acceptance
Financial Corporation ("Finco") for the Triple-A Facility and Onyx Acceptance
Receivables Corporation ("Recco") for the Parco Facility, are the borrowers
under the CP Facilities. The CP Facilities are used to fund the purchase or
origination of Contracts. Triple-A and Parco are both rated commercial paper
asset-backed conduits sponsored by MBIA Insurance Corporation ("MBIA") and The
Chase Manhattan Bank ("Chase"), respectively. MBIA provides
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credit enhancement for both facilities by issuing financial guarantee insurance
policies covering all principal and interest obligations owed for the borrowings
under the facilities. The Company pledges its Contracts held for sale to borrow
from Triple-A and from Parco. The Parco Facility was renewed in August 2000, and
expires in August 2001, but may be further renewed at the option of the lender.
The Triple-A Facility was renewed in
September 2000. The Capacity of this line was reduced by $20.0 million to $355.0
million. The reduction was the result of a merger of one of the liquidity banks,
and is not considered significant to ongoing operations, as the Company has
excess borrowing capacity. This facility will expire in September 2001 but may
be renewed at the option of the lender.
The Merrill Line: A subsidiary of the Company, Onyx Acceptance Funding
Corporation ("Fundco"), had a $100 million line of credit (the "Merrill Line"),
with Merrill Lynch Mortgage Capital, Inc. ("MLMCI"), which provided warehouse
funding for the purchase or origination of Contracts and was used in concert
with the CP Facilities the Company currently has in place. This line expired in
February 2001.
The Company finances dealer participation payments and daily operations
principally through credit facilities collateralized by its retained interest in
securitized assets, as well as through proceeds from subordinated debt
offerings.
The Residual Lines: The Company, through Fundco, has three residual
financing facilities: a $20.0 million facility with Merrill Lynch International
("MLI") executed in May 2000, which replaced a prior residual financing facility
with MLMCI, and a $50.0 million line with Salomon Smith Barney Realty
Corporation ("SBRC"). The Company also executed a residual financing facility in
October 2000 in the amount of $35.0 million with Credit Suisse First Boston
(Europe) Limited, as buyer ("CSFB-Europe"), and Credit Suisse First Boston
Corporation, as agent ("CSFB"). The line will be used as an additional liquidity
source to fund ongoing operations. (The SBRC facility together with the facility
with MLI, and the newest facility with CSFB-Europe described above are referred
to herein as the "Residual Lines"). The Residual Lines are used by the Company
to finance operating requirements. The lines utilize collateral-based formulas
that set borrowing availability to a percentage of the value of excess cash flow
to be received from certain securitizations. The facility provided by MLI has a
one year term expiring in May 2001. This line may be renewed at the option of
the lender. Each loan under the SBRC line or the CSFB-Europe line matures one
year after the date of the loan; the Company expects each loan to be renewed at
term.
Subordinated Debt: As of December 31, 2000, the Company had outstanding
approximately $19.5 million of subordinated debt. A portion of this amount is
being amortized through February 2003. During the second quarter of 2000, the
Company issued $12.0 million in subordinated debt with a stated interest rate of
12.5% and a maturity of June 2006.
The facilities and lines above contain affirmative, negative and financial
covenants typical of such credit facilities. The Company was in compliance with
these covenants as of December 31, 2000.
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, until
the point where the fair value declines below ($1.0) million.
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. The Company has developed 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
securitizations in the amount of $1.72 billion in 2000. During the first quarter
of 2000, the Company securitized the residual cash flows from 15 of its then
currently outstanding securitizations and recorded a loss of approximately
$938,000, which approximated the costs in connection with the transaction. The
proceeds of this transaction were used to pay down two of the Company's residual
financing facilities and pay off another residual financing facility.
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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. Through December 31, 2000, the Company had securitized approximately
$5.2 billion of Contracts in 22 separate transactions. In each of its
securitizations, the Company sold its Contracts to a newly formed grantor or
owner trust which issued pass-through certificates or notes 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 enhancement has
taken the form of a financial guaranty policy (the "Financial Guarantee
Insurance Policy") insuring the payment of principal and interest due on the
asset-backed securities.
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 excess cash flows arising from the trusts. 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 the Company as the servicer and Finco as the seller to the trusts.
Gains on sale of Contracts arising from 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.
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. Management believes that it is in compliance with
these laws and regulations.
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,
states' 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 credit applicants (including retail
installment contract obligors) on the basis of specific enumerated criteria.
Creditors are also required to make certain disclosures regarding consumer
rights and advise consumers whose credit applications are not approved. The
rules of the Federal Trade Commission (the "FTC") limit the types of property a
creditor may accept as collateral to secure a consumer obligation, and its
holder in due course rules provide for the preservation of the consumer's claims
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 or originates.
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EMPLOYEES
The Company employs personnel experienced in all areas of loan origination,
documentation, collection and administration. The Company employs and trains
specialists in loan processing and servicing with minimal crossover of duties.
At December 31, 2000, the Company had 896 full-time employees, none of whom were
covered by collective bargaining agreements. The Company believes it has good
relationships with its employees.
RISK FACTORS
You should carefully consider the following risks in your evaluation of us
and our common stock. The risks and uncertainties described below are not the
only ones facing our Company. Additional risks and uncertainties, including, but
not limited to, credit, economic, competitive, governmental and financial
factors affecting our operations, markets, financial products, and services and
other factors discussed in our filings with the Securities and Exchange
Commission may also adversely impact and impair our business. If any of these
risks actually occur, our business, results of operations, cash flows or
financial condition would likely suffer. In such case, the trading price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
WE NEED SUBSTANTIAL LIQUIDITY.
We require a substantial amount of liquidity to operate our business. Among
other things, we use such liquidity to:
- acquire Contracts;
- pay dealer participation;
- pay securitization costs and fund related accounts;
- settle hedge transactions;
- satisfy working capital requirements and pay operating expenses; and
- pay interest expense.
A substantial portion of our revenues in any period is represented by gain
on sale of Contracts generated by a securitization in such period, but the cash
underlying such revenues is received over the life of the Contracts.
We have operated on a negative cash flow basis and expect to do so in the
future as long as the volume of Contract purchases continues to grow. We have
historically funded these negative operating cash flows principally through
borrowings from financial institutions, sales of equity securities and sales of
subordinated notes. We cannot assure you, however, that (1) we will have access
to the capital markets in the future for equity, debt issuances or
securitizations, or (2) financing through borrowings or other means will be
available on acceptable terms to satisfy our cash requirements. If we are unable
to access the capital markets or obtain acceptable financing, our results of
operations, financial condition and cash flows would be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
WE DEPEND ON WAREHOUSE FINANCING.
We depend on warehousing facilities with financial institutions to finance
the purchase or origination of Contracts pending securitization. See
"Business -- Financing and Sale of Contracts." Our business strategy requires
that such financing continue to be available during the warehousing period.
Whether the CP Facilities continue to be available to us depends on, among
other things, whether we maintain a target net yield for the Contracts financed
under the CP Facilities and comply with certain financial covenants contained in
the sale and servicing agreements between us, as seller, and our wholly-owned
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special purpose finance subsidiaries, Finco or Recco, as applicable, as
purchaser. These financial covenants include:
- a minimum ratio of net worth plus subordinated debt to total assets;
- a maximum ratio of credit enhancement assets to tangible net worth;
- earnings before interest, depreciation and taxes coverage ratio; and
- minimum cash on hand.
We cannot assure you that our CP Facilities will be available to us or that
they will be available on favorable terms. If we are unable to arrange new
warehousing credit facilities or extend our existing credit facilities when they
expire, our results of operations, financial condition and cash flows could be
materially and adversely affected.
WE DEPEND ON RESIDUAL FINANCING.
When we sell our Contracts in securitizations, we receive cash and a
residual interest in the securitized assets ("RISA"). The RISA represents the
future cash flows to be generated by the Contracts in excess of the interest
paid on the securities issued in the securitization and other costs of servicing
the Contracts and completing the securitization. (See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Securitizations"). We typically use the RISA from each
securitization as collateral to borrow cash to finance our operations. The
amount of cash advanced by our lenders under our Residual Lines depends on a
collateral formula that is determined in large part by how well our securitized
Contracts perform. If our portfolio of securitized Contracts experienced higher
delinquency and loss ratios than expected, then the amount of money we could
borrow under the Residual Lines would be reduced. The reduction in availability
under these Residual Lines could materially and adversely affect our operations,
financial condition and cash flows. Additionally, we are subject, under the
documentation governing the Residual Lines, to certain financial covenants.
WE DEPEND ON SECURITIZATIONS TO GENERATE REVENUE.
We rely significantly upon securitizations to generate cash proceeds for
repayment of our warehouse and our residual credit facilities and to create
availability to purchase additional Contracts. Further, gain on sale of
Contracts generated by our securitizations represents a significant portion of
our revenues. Our ability to complete securitizations of our Contracts is
affected by the following factors, among other things:
- conditions in the securities markets generally;
- conditions in the asset-backed securities market specifically;
- the credit quality of our portfolio of Contracts; and
- our ability to obtain credit enhancement.
If we were unable to profitably securitize a sufficient number of our
Contracts in a particular financial reporting period, then our revenues for such
period could decline and could result in lower net income or a loss for such
period. In addition, unanticipated delays in closing a securitization could also
increase our interest rate risk by increasing the warehousing period for our
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."
WE DEPEND ON CREDIT ENHANCEMENT.
From inception through December 31, 2000, each of our securitizations has
utilized credit enhancement in the form of a financial guarantee insurance
policy in order to achieve "AAA/Aaa" ratings. This form of
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credit enhancement reduces the cost of the securitizations relative to
alternative forms of credit enhancements currently available to us. We cannot
assure you that:
- we will be able to continue to obtain credit enhancement in any form from
our current provider;
- we will be able to obtain credit enhancement from any other provider of
credit enhancement on acceptable terms; or
- future securitizations will be similarly rated.
We also rely on financial guarantee insurance policies to reduce our
borrowing cost under the CP Facilities. If our current provider's credit rating
is downgraded or if it withdraws our credit enhancement, we could be subject to
higher interest costs for our future securitizations and financing costs during
the warehousing period. Such events could have a material adverse effect on our
results of operations, financial condition and cash flows.
WE ARE SUBJECT TO INTEREST RATE FLUCTUATIONS.
Our profitability is largely determined by the difference, or "spread,"
between the effective rate of interest received by us on the Contracts acquired
and the interest rates payable under our credit facilities during the
warehousing period and for securities issued in securitizations.
Several factors affect our ability to manage interest rate risk. First, the
Contracts are purchased or originated at fixed interest rates, while amounts
borrowed under our credit facilities bear interest at variable rates that are
subject to frequent adjustment to reflect prevailing rates for short-term
borrowings. Our policy is to increase the buy rates we issue to dealerships or,
for the Contracts we originate, to increase rates we make available to consumers
for Contracts in response to increases in our 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 our competitors may limit our ability
to pass through our increased costs of warehouse financing.
Second, the spread can be adversely affected after a Contract is purchased
or originated and while it is held during the warehousing period by increases in
the prevailing rates in the commercial paper markets. While the CP Facilities
permit us to select maturities of up to 270 days for commercial paper, if we
selected a shorter maturity or had a delay in completing a securitization, we
would face this risk.
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 or originated by us
have fixed rates, we bear the risk of spreads narrowing because of interest-rate
increases during the period from the date the Contracts are purchased until the
pricing of our securitization of such Contracts. We employ a hedging strategy
that is intended to minimize this risk and which historically has involved the
execution of forward interest rate swaps or use of a pre-funding structure for
our securitizations. However, we cannot assure you that this strategy will
consistently or completely offset adverse interest-rate movements during the
warehousing period or that we will not sustain losses on hedging transactions.
Our hedging strategy requires estimates by management of monthly Contract
acquisition volume and timing of our securitizations. If such estimates are
materially inaccurate, then our gains on sales of Contracts, results of
operations and cash flows could be materially and adversely affected.
We also have exposure to interest rate fluctuations under the Residual
Lines. The interest rates are based on 30 day LIBOR and reset each month. In
periods of increasing interest rates our cash flows, results of operations and
financial condition could be adversely affected.
In addition, we have some interest rate exposure to falling interest rates
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 the time that the securitization prices. Such a rate decline would reduce the
interest rate spread because the interest rate on the notes and/or the
certificates would remain fixed. This would negatively impact the gains on sale
of Contracts and our results of operations and cash flows.
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WE WILL BE ADVERSELY AFFECTED WHEN CONTRACTS ARE PREPAID OR DEFAULTED.
Our results of operations, financial condition, cash flows, and liquidity
depend, to a material extent, on the performance of Contracts purchased,
originated, warehoused, and securitized by us. A portion of the Contracts
acquired by us may default or prepay during the warehousing period. We bear the
risk of losses resulting from payment defaults during the warehousing period. In
the event of payment default, the collateral value of the financed vehicle may
not cover the outstanding Contract balance and costs of recovery. We maintain 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 we would recognize as an expense
the losses in excess of such allowance, and our results of operations could be
adversely affected. In addition, under the terms of the CP Facilities, we are
not able to borrow against defaulted Contracts.
Our servicing income can also be adversely affected by prepayment of or
defaults under Contracts in the serviced portfolio. Our contractual servicing
revenue is based on a percentage of the outstanding principal balance of such
Contracts. Thus, if Contracts are prepaid or charged-off, then our servicing
revenue will decline to the extent of such prepaid or charged-off Contracts.
The gain on sale of Contracts recognized by us in each securitization and
the value of the retained interest in securitized assets ("RISA") in each
transaction reflects management's estimate of future credit losses and
prepayments for the Contracts included in such securitization. If actual rates
of credit loss or prepayments, or both, on such Contracts exceed those
estimated, the value of the RISA would be impaired. We periodically review our
credit loss and prepayment assumptions relative to the performance of the
securitized Contracts and to market conditions. Our results of operations and
liquidity could be adversely affected if credit loss or prepayment levels on
securitized Contracts substantially exceed anticipated levels. If necessary, we
would write-down the value of the RISA through a reduction to servicing fee
income. Further, any write down of RISA could reduce the amount available to us
under our Residual Lines, thus requiring us to pay down amounts outstanding
under the facilities or provide additional collateral to cure the borrowing base
deficiency.
WE WILL BE ADVERSELY AFFECTED IF WE LOSE SERVICING RIGHTS.
Our results of operations, financial condition and cash flows would be
materially and adversely affected if any of the following were to occur:
- loss of the servicing rights under our sale and servicing agreements for
the CP Facilities;
- loss of the servicing rights under the applicable pooling and servicing
or sale and servicing agreement of a grantor trust or owner trust,
respectively; or
- a trigger event that would block release of future excess cash flows
generated from the grantor trusts' or owner trusts' respective spread
accounts.
We are entitled to receive servicing income only while we act as servicer
under the applicable sales and servicing agreements or pooling and servicing
agreements. Under the CP Facilities our right to act as servicer can be
terminated by our lender or financial insurer, upon the occurrence of certain
events.
OUR QUARTERLY EARNINGS MAY FLUCTUATE.
Our revenues have fluctuated in the past and are expected to fluctuate in
the future principally as a result of the following factors:
- the timing and size of our securitizations;
- variations in the volume of our Contract acquisitions;
- the interest rate spread between our cost of funds and the average
interest rate of purchased Contracts;
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- the effectiveness of our hedging strategies; and
- the investor rate for securitizations.
Any significant decrease in our quarterly revenues could have a material
adverse effect on our results of operations, financial condition, cash flows and
stock price.
WE DEPEND ON KEY PERSONNEL.
Our future operating results depend in significant part upon the continued
service of our key senior management personnel, none of whom is bound by an
employment agreement. Our future operating results also depend in part upon our
ability to attract and retain qualified management, technical, and sales and
support personnel for our operations. Competition for such personnel is intense.
We cannot assure you that we 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 our inability to attract and retain
skilled employees, as needed, could materially and adversely affect our results
of operations, financial condition and cash flows.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
Competition in the field of financing retail motor vehicle 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, as well as banks, savings
associations, independent finance companies, credit unions and leasing
companies. Several of these competitors have greater financial resources than we
do. 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 us. Our ability to compete successfully
depends largely upon our relationships with dealerships and the willingness of
dealerships to offer those Contracts that meet our underwriting criteria to us
for purchase. We cannot assure you that we will be able to continue to compete
successfully in the markets we serve.
WE MAY BE HARMED BY ADVERSE ECONOMIC CONDITIONS.
We are a motor vehicle consumer auto finance company whose activities are
dependent upon the sale of motor vehicles. Our ability to continue to acquire
Contracts in the markets in which we operate 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 us, our results of operations and our ability to implement
our business strategy.
The automobile industry generally is sensitive to adverse economic
conditions both nationwide and in California, where we have our largest
single-state exposure. 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
contracts. We cannot assure you that such economic conditions will not occur, or
that such conditions will not result in severe reductions in our revenues or the
cash flows available to us to permit us to remain current on our credit
facilities.
WE ARE SUBJECT TO SYSTEM RISKS
The Company is currently in the process of converting from an external
service provider for its loan accounting and collections system to an in-house
system. If this process is not completed in a successful manner, or if issues
with the in-house system arise in the future, we may be unable to fund Contracts
and service the outstanding portfolio. The failure of this process could
materially and adversely affect our results of operations, financial condition
and cash flows.
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WE ARE SUBJECT TO MANY REGULATIONS.
Our business is subject to numerous federal and state consumer protection
laws and regulations, which, among other things:
- require us to obtain and maintain certain licenses and qualifications;
- limit the interest rates, fees and other charges we are allowed to
charge;
- limit or prescribe certain other terms of our Contracts;
- require specific disclosures; and
- define our rights to repossess and sell collateral.
We believe that we are 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 our ability to operate our business. However, we will be
materially and adversely affected if we fail to comply with:
- applicable laws and regulations;
- changes in existing laws or regulations;
- changes in the interpretation of existing laws or regulations; or
- any additional laws or regulations that may be enacted in the future.
WE ARE SUBJECT TO LITIGATION RISKS.
We are party to various legal proceedings, similar to actions brought
against other companies in the motor vehicle finance industry. Companies in the
motor vehicle finance industry have been named as defendants in an increasing
number of class action lawsuits brought by purchasers of motor vehicles claiming
violation of various federal and state consumer credit and similar laws and
regulations. We are defendants in three such consumer class action lawsuits, one
of which was served on us in 2000. One such proceeding served in 1999, in which
we are a defendant, has been brought as a putative class action and is pending
in the State of California. A class was certified in 2000; in the matter, the
plaintiffs raise issues regarding the payment of dealer participation to
dealers. Another such proceeding, served in 2000, in which we are a defendant,
was brought as a putative class action and is pending in the state of New
Jersey. This case recently settled for a nominal amount and will be dismissed
once the settlement documentation is finalized.
In another such consumer class action, filed and served in 1999, pending in
Orange County Superior Court in the state of California, and entitled Jason
Bollinger v. Onyx Acceptance Corporation (Action number 807831), the plaintiffs
alleged that the we sent defective post-repossession notices to certain
California borrowers following the repossession or voluntary surrender of their
vehicles. Without admitting liability, we entered into a settlement agreement
with respect to this matter, and this agreement was approved by the court in
October 2000. Under the terms of the settlement, we refunded certain amounts
collected on deficiencies related to class members' accounts (in some instances,
with interest) and paid a certain portion of the plaintiff's counsel fees and
other amounts. Pursuant to the settlement, the monies from refund checks not
cashed by the class members cannot be returned to the Company. In accordance
with the settlement, these amounts shall be paid as follows: one-half to the
plaintiff's counsel up to a negotiated cap, as an additional attorney's fee
award, and the remainder to a non-profit youth soccer organization in Orange
County, California where the Company's headquarters is located. One of the
children of Mr. Hall, the Company's President and Chief Executive Officer,
participates in this organization. Mr. Hall has also volunteered in certain
capacities in this organization.
On January 25, 2000, a putative class action complaint was filed against us
and certain of our officers and directors alleging violations of Section 10(b)
and 20(a) of the Securities and Exchange Act of 1934 arising from the use of the
cash-in method of measuring and accounting for credit enhancement assets in the
financial statements. The matter is entitled D. Colin v. Onyx Acceptance
Corporation, et al, in the U.S. District Court for the Central District of
California (Case number SACV 00-0087 (GLT)(EEx)). We believe that our
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previous use of the cash-in method of measuring and accounting for credit
enhancement assets was consistent with then current generally accepted
accounting principles and accounting practices of other finance companies. As
required by the Financial Accounting Standards Board's Special Report, "A Guide
to Implementation of Statement 125 on Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, Second Edition," dated
December 1998 and related statements made by the staff of the Securities and
Exchange Commission, we retroactively changed the method of measuring and
accounting for credit enhancement assets to the cash-out method and restated our
financial statements for 1996, 1997 and the first three fiscal quarters of 1998.
In February 2001, an amended complaint was dismissed with prejudice by the
court; the plaintiff has filed a notice of appeal.
While we intend to vigorously defend ourselves against such proceedings
there is a chance that our results of operations, financial condition and cash
flows could be materially and adversely affected by unfavorable outcomes.
ITEM 2. PROPERTIES
The Company did not own any real property at December 31, 2000. The
Company's leases approximately 82,000 square feet of office space for its
headquarters located in Foothill Ranch, California. The Company also leases
office space for its Auto Finance Centers and its Hazelwood, Missouri collection
center; the average size of an Auto Finance Center is generally four to five
thousand square feet. The Hazelwood collection center is in approximately 20,000
square feet. One Auto Finance Center is located in the corporate headquarters
building.
ITEM 3. LEGAL PROCEEDINGS
As a consumer finance company, the Company is subject to various consumer
claims and litigation seeking damages and statutory penalties based upon, among
other things, disclosure inaccuracies and wrongful repossession, which could
take the form of a plaintiff's class action complaint. The Company, as the
assignee of finance Contracts originated by dealers, may also be named as a
co-defendant in lawsuits filed by consumers principally against dealers. The
damages and penalties claimed by consumers in these types of matters can be
substantial. The relief requested by the plaintiffs varies but includes requests
for compensatory, statutory and punitive damages. The Company is currently a
defendant in three consumer class action lawsuits. One such proceeding, served
in 1999, in which the Company is a defendant, has been brought as a class action
and is pending in the State of California. A class was certified in 2000; in the
matter, the plaintiffs raise issues regarding the payment of dealer
participation to dealers. Another such proceeding, served in 2000, in which the
Company is a defendant, was brought as a putative class action and is pending in
the state of New Jersey. This case recently settled for a nominal amount and
will be dismissed once the settlement documentation is finalized.
In another such consumer class action, filed and served in 1999, pending in
Orange County Superior Court in the state of California, and entitled Jason
Bollinger v. Onyx Acceptance Corporation (Action number 807831), the plaintiffs
alleged that the Company sent defective post-repossession notices to certain
California borrowers following the repossession or voluntary surrender of their
vehicles. The Company, without admitting liability, entered into a settlement
agreement with respect to this matter, and this agreement was approved by the
court in October 2000. Under the terms of the settlement, the Company refunded
certain amounts collected on deficiencies related to class members' accounts (in
some instances, with interest) and paid a certain portion of the plaintiff's
counsel fees and other amounts. Pursuant to the settlement, the monies from
refund checks not cashed by the class members cannot be returned to the Company.
In accordance with the settlement, these amounts shall be paid as follows:
one-half to the plaintiff's counsel up to a negotiated cap, as an additional
attorney's fee award, and the remainder to a non-profit youth soccer
organization in Orange County, California where the Company's headquarters is
located. One of the children of Mr. Hall, the Company's President and Chief
Executive Officer, participates in this organization. Mr. Hall has also
volunteered in certain capacities in this organization.
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On January 25, 2000, a putative class action complaint was filed against
the Company and certain of the Company's officers and directors alleging
violations of Section 10(b) and 20(a) of the Securities and Exchange Act of 1934
arising from the Company's use of the cash-in method of measuring and accounting
for credit enhancement assets in the financial statements. The matter is
entitled D. Colin v. Onyx Acceptance Corporation, et al, in the U.S. District
Court for the Central District of California (Case number SACV 00-0087
(GLT)(EEx)). The Company believes that its previous use of the cash-in method of
measuring and accounting for credit enhancement assets was consistent with then
current generally accepted accounting principles and accounting practices of
other finance companies. As required by the Financial Accounting Standards
Board's Special Report, "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, Second Edition," dated December 1998 and related statements made by
the staff of the Securities and Exchange Commission, the Company retroactively
changed the method of measuring and accounting for credit enhancement assets to
the cash-out method and restated the Company's financial statements for 1996,
1997 and the first three fiscal quarters of 1998. In February 2001, an amended
complaint was dismissed with prejudice by the court; the plaintiff has filed a
notice of appeal.
Management believes that the Company has taken prudent steps to address the
litigation risks associated with the Company's business activities. However,
there can be no assurance that the Company will be able to successfully defend
against all such claims or that the determination of any such claim in a manner
adverse to the Company would not have a material adverse effect on the Company's
automobile finance business.
In the opinion of management, the resolution of the proceedings described
in this section will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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.
19
20
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 closing prices for the
Company's Common Stock for the years ended December 31, 2000 and December 31,
1999.
HIGH LOW
----- -----
1999
First quarter............................................... $6.63 $5.19
Second quarter.............................................. $8.63 $5.75
Third quarter............................................... $9.44 $6.69
Fourth quarter.............................................. $7.50 $6.00
2000
First quarter............................................... $7.00 $5.00
Second quarter.............................................. $5.38 $3.38
Third quarter............................................... $4.89 $3.50
Fourth quarter.............................................. $4.38 $2.63
At March 23, 2001, there were approximately 1,421 beneficial 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 certain of its credit facilities.
20
21
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,
--------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
REVENUE:
Net interest income..................... $ 4,690 $ 6,594 $ 11,731 $ 11,873 $ 8,285
Servicing fee income.................... 3,236 9,189 16,663 28,877 47,543
Gain on sale of contracts............... 15,251 19,586 36,417 53,920 45,029
-------- -------- ---------- ---------- ----------
Total revenues................... 23,177 35,369 64,811 94,670 100,857
-------- -------- ---------- ---------- ----------
EXPENSES:
Provision for credit losses............. 266 785 1,580 1,246 990
Interest expense -- other............... 550 1,557 4,419 5,727 5,592
Operating expenses...................... 15,394 30,741 48,426 70,959 84,304
-------- -------- ---------- ---------- ----------
Total expenses................... 16,210 33,083 54,425 77,932 90,886
-------- -------- ---------- ---------- ----------
Income before income taxes.............. 6,967 2,286 10,386 16,738 9,971
Income taxes............................ 851 984 4,310 6,946 4,136
-------- -------- ---------- ---------- ----------
Net income.............................. $ 6,116 $ 1,302 $ 6,076 $ 9,792 $ 5,835
======== ======== ========== ========== ==========
Net income per share of Common Stock:
Basic................................. $ 1.19 $ 0.22 $ 0.99 $ 1.59 $ 1.03
Diluted............................... $ 1.09 $ 0.21 $ 0.95 $ 1.50 $ 1.00
Basic shares outstanding (in
thousands)............................ 5,159 6,000 6,112 6,174 5,657
Diluted shares outstanding (in
thousands)............................ 5,585 6,294 6,425 6,514 5,811
OPERATING DATA:
Contracts purchased during the period... $319,840 $605,905 $1,038,535 $1,559,004 $1,671,703
Number of contracts purchased during the
period................................ 26,244 50,214 86,150 127,628 131,648
Contracts securitized during the
period................................ $405,514 $527,276 $ 911,760 $1,450,000 $1,720,000
Number of active dealerships (at end of
period)............................... 1,471 2,846 5,401 7,617 9,741
Operating expenses as percentage of
average serviced portfolio during the
period(1)............................. 4.9% 5.5% 4.7% 4.1% 3.4%
SELECTED PORTFOLIO DATA:
Serviced portfolio (at end of period)... $400,665 $757,277 $1,345,961 $2,133,460 $2,690,607
Average serviced portfolio during the
period(1)............................. $311,340 $563,343 $1,023,237 $1,728,875 $2,456,796
Number of contracts in serviced
portfolio
(at end of period).................... 38,275 73,502 131,862 209,745 269,372
Weighted average annual percentage rate
(at end of period)(2)................. 14.72% 14.66% 14.72% 14.77% 14.67%
Delinquencies as a percentage of the
dollar amount of serviced portfolio
(at end of period)(3)................. 2.03% 2.13% 2.54% 2.81% 4.14%
Net charge-offs as a percentage of the
average serviced portfolio during the
period(1)............................. 1.63% 2.03% 1.72% 1.85% 2.30%
21
22
AS OF DECEMBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 603 $ 991 $ 1,929 $ 5,190 $ 3,130
Contracts held for sale(4)................... 12,238 63,380 151,952 229,475 173,784
Credit enhancement assets.................... 37,144 71,736 112,953 142,884 146,013
Total assets................................. 54,083 141,836 275,422 393,835 331,380
Warehouse borrowings......................... 10,108 60,506 150,044 232,288 172,509
Excess servicing and residual lines.......... 2,500 30,000 49,556 55,880 41,138
Subordinated debt............................ 0 0 10,000 10,000 19,505
Stockholders' equity......................... 36,358 37,717 43,824 53,108 55,593
- ---------------
(1) Averages are based on daily balances.
(2) The weighted averages are based on the serviced portfolio outstanding at the
end of the period.
(3) Excludes repossessed inventory and accounts in bankruptcy.
(4) Contracts held for sale excludes dealer participation and allowance for
credit losses. See Note 4 to the Consolidated Financial Statements.
22
23
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 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 $5.5 billion in Contracts and currently has an active dealer base of
over 9,700 dealerships. The Company has expanded its operations from a single
office in California to 19 Auto Finance Centers serving many 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 excess cash flows generated by owner
and grantor trusts, and earns fees from servicing the securitized Contracts.
The following table illustrates the changes in the Company's Contract
acquisition volume, total revenue, securitization activity and serviced
portfolio during the past three fiscal years.
SELECTED FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Contracts purchased during year................ $1,038,535 $1,559,004 $1,671,703
Average monthly purchases during the year...... 86,544 129,917 139,308
Gain on sale of contracts...................... 36,417 53,920 45,029
Total revenue(1)............................... 64,811 94,670 100,857
Contracts securitized during the year.......... 911,760 1,450,000 1,720,000
Serviced portfolio at year end................. 1,345,961 2,133,460 2,690,607
- ---------------
(1) Total revenue is comprised of net interest income, servicing fee income and
gain on sale of contracts.
CONTRACTS PURCHASED AND SERVICED PORTFOLIO
Since its inception, the Company has experienced continuing growth in its
purchased volume of Contracts. Acquisition volume for the year ended December
31, 2000, was $1.7 billion compared to $1.6 billion for the year ended December
31, 1999, representing an increase of 6.25%. This growth in acquisition volume
is attributable primarily to the opening of two new Auto Finance Centers in the
first half of 2000.
Contract purchases during the second half of the year slowed as management
discontinued its branch expansion efforts after the second quarter. Management
believes that the current market environment has become irrational due to
increases in the offering of contract terms over 60 months on used cars and the
increasing dollar amount of loan proceeds offered in excess of the value of the
related financed vehicle. These factors, as well as the anticipated slowing of
the economic environment, were considered by management and the decision was
made to reduce the rate of growth in the Company. Management has focused its
efforts on reviewing and utilizing automation tools to assist in the
underwriting and credit review processes. The resulting enhancements to the
front-end credit decision processes are expected to improve not only the speed
of the decision but also the ability of our credit officers to make a decision
that is acceptable. Management has also enhanced the post funding review process
of the underwriting decision so that the process is more automated. Management
will return to its expansion plans when it determines that the market
environment has improved.
23
24
The Company's increase in Contract acquisition volume has resulted in the
growth in the Company's serviced portfolio. The serviced portfolio at December
31, 2000, was $2.7 billion compared to $2.1 billion at December 31, 1999, an
increase of 28.5%.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The Company had net income of $5.8 million for the year ended December 31,
2000, compared to net income of $9.8 million and $6.1 million for the years
ended December 31, 1999 and 1998, respectively. The decrease in net income from
1999 to 2000 is attributable to the interest rate spread compression experienced
on Contracts securitized during the year coupled with an increase in the loan
loss reserve rate. Off balance sheet reserves increased to 4.6% of the sold
portion of the portfolio at December 31, 2000 compared to 4.4% at December 31,
1999. The weighted average gross spread for securitizations executed during the
current year was 7.68% compared to 8.40% in 1999. The increase in net income
from 1998 to 1999 is attributable to a 59% increase in the dollar volume of
Contracts securitized, resulting in a 48% increase in gains on sales, higher
servicing fee income due to an increase in the serviced portfolio and
improvements in the cost structure of the Company.
Net Interest Income. Net interest income consists primarily of the
difference between the finance revenue earned on Contracts held on the balance
sheet during the warehousing period and the interest costs associated with the
Company's borrowings to purchase such Contracts.
Net interest income declined by 30.2% to $8.3 million for 2000, from $11.9
million during 1999, and $11.7 million during 1998. The reduction in 2000 was
principally due to the increase in the cost of warehouse borrowings during the
year and a reduction in the average amount of Contracts held for sale. The
weighted average cost of warehouse borrowings increased to 7.42% for 2000,
compared to 6.32% and 6.72% for 1999 and 1998 respectively. Due to the
prefunding structure of the securitizations executed during the current year,
the average amount of Contracts held for sale during 2000 decreased to $159.2
million, compared to $163.4 million and $148.7 million in 1999 and 1998
respectively. A prefunded securitization reduces the time period that Contracts
are held for sale. A prefunded structure allows the Company to mitigate its
interest rate risk in a rising rate environment by locking in the rate for
future fixed rate Contract acquisitions. Additionally, it permits the Company to
time its securitizations earlier in the quarter when transaction volumes are
lower, thus enabling the Company to take advantage of market conditions.
Servicing Fee Income. Contractual servicing is earned at a rate of 1.0% per
annum on the outstanding principal balance of Contracts securitized. Excess
servicing income is dependent upon the average excess spread on the Contracts
sold and the performance of those Contracts. Servicing fee income is related to
the size of the serviced portfolio and also includes investment interest, late
fees, extension fees, document fees and other fees charged to customer accounts.
Servicing fee income increased to $47.5 million for the year ended December
31, 2000, from $28.9 million for the year ended December 31, 1999, and from
$16.7 million for the year ended December 31, 1998. The increase was primarily
attributable to an increase in the size of the average sold portion of the
serviced portfolio. For the year ended December 31, 2000, the size of the
average sold portion of the serviced portfolio increased to $2.3 billion from
$1.6 billion from $875.0 million for the same period in 1999 and 1998,
respectively.
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 a credit enhancement asset on the statement of
financial condition, and is amortized against servicing income over the life of
the Contracts. The gain recorded in the statement of income is adjusted for
prepaid dealer participation, issuance costs and the effect of hedging
activities. The gains on sales of Contracts is affected by the amount of
Contracts securitized and the net interest rate spread on those Contracts.
24
25
The following table illustrates the net interest rate spread for each of
the Company's securitizations:
SECURITIZATION TRANSACTIONS(4)
----------------------------------------------------------------------------
REMAINING WEIGHTED WEIGHTED
BALANCE AT AVERAGE AVERAGE
ORIGINAL DECEMBER 31, CONTRACT INVESTOR GROSS NET
SECURITIZATION BALANCE 2000 RATE(1) RATE(1) SPREAD(2) SPREAD(3)
-------------- ---------- ------------ -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
1994-1 Grantor Trust.......... $ 38,601 Paid in Full 13.75% 6.90% 6.85% 1.94%
1995-1 Grantor Trust.......... 105,000 Paid in Full 14.94 7.00 7.94 1.86
1996-1 Grantor Trust.......... 100,500 Paid in Full 15.07 5.40 9.67 3.83
1996-2 Grantor Trust.......... 85,013 Paid in Full 14.84 6.40 8.44 3.61
1996-3 Grantor Trust.......... 120,000 Paid in Full 14.54 6.45 8.09 3.14
1996-4 Grantor Trust.......... 100,000 Paid in Full 14.80 6.20 8.60 3.28
1997-1 Grantor Trust.......... 90,000 Paid in Full 13.86 6.55 7.31 2.78
1997-2 Grantor Trust.......... 121,676 $ 12,578 14.85 6.35 8.50 3.11
1997-3 Grantor Trust.......... 149,600 20,990 14.77 6.35 8.42 3.30
1997-4 Grantor Trust.......... 166,000 28,974 14.69 6.30 8.39 3.27
1998-1 Grantor Trust.......... 173,000 36,131 14.91 5.95 8.96 3.40
1998-A Owner Trust............ 208,759 52,023 14.73 5.87 8.86 3.34
1998-B Owner Trust............ 250,000 77,662 14.73 5.78 8.95 3.18
1998-C Owner Trust............ 280,000 101,015 14.89 5.72 9.17 3.51
1999-A Owner Trust............ 310,000 124,786 14.33 5.73 8.60 3.44
1999-B Owner Trust............ 350,000 168,046 14.65 5.86 8.79 3.54
1999-C Owner Trust............ 400,000 225,096 14.82 6.62 8.20 2.86
1999-D Owner Trust............ 390,000 242,737 15.01 6.90 8.11 2.87
2000-A Owner Trust............ 430,000 306,436 14.86 7.26 7.60 2.67
2000-B Owner Trust............ 450,000 354,162 15.18 7.29 7.89 2.64
2000-C Owner Trust............ 440,000 383,311 15.16 7.18 7.98 2.52
2000-D Owner Trust............ 400,000 379,460 13.95 6.76 7.19 1.73
---------- ------------
Total................ $5,158,149 $ 2,513,407
========== ============
- ---------------
(1) As of issue date.
(2) Difference between weighted average Contract rate and weighted average
investor rate as of the issue date.
(3) Difference between weighted average Contract rate and weighted average
investor rate, net of unearned dealer participation payments, underwriting
costs, other issuance costs, servicing fees, estimated credit losses,
ongoing financial guarantee insurance policy premiums, and the hedging gain
or loss.
(4) The Company assumes an average prepayment speed of 1.75% per month of the
original number of Contracts in the original pool balance ("ABS"), a
discount rate ranging from 3.5% to 4.5% above the weighted average investor
rate, and utilizes a lifetime loss rate ranging from 3.5% to 4.3% of the
original balance, for all remaining securitizations.
The Company completed four securitizations totaling $1.72 billion during
the year ended December 31, 2000, resulting in gains on sale of Contracts of
$45.0 million, compared to four securitizations totaling $1.45 billion,
resulting in gains on sale of Contracts totaling $53.9 million, and four
securitizations totaling $911.8 million and a whole loan sale of $15 million
during the year ended December 31, 1998, resulting in gains on sale of Contracts
of $36.4 million. These reductions in gains are in line with management's
objective to become less reliant on the initial gain-on-sale accounting for its
reported financial results.
The reduction in the gain as a percentage of the Contracts securitized was
attributable to a combined decrease in net interest rate spreads and an increase
in credit loss assumptions during the year ended December 31, 2000. Annual loss
assumptions for the second, third and fourth quarter securitizations of 2000
were increased from 2.30% to 2.55% to counter increased losses in the serviced
portfolio. The average net interest rate spread on the 2000 securitizations was
2.41% compared to 3.15% in 1999 and 3.36% in 1998.
25
26
The net interest rate spread is the difference between the weighted average
Contract rate of the securitized assets, and the weighted average investor rate
inclusive of all costs related to the transaction. Interest rate spread is
affected by product mix, general market conditions and overall market interest
rates. The risks inherent in interest rate fluctuations are partially reduced
through hedging activities.
During the first quarter of 2000, the Company securitized the residual cash
flows from 15 of its then outstanding securitizations and recorded a loss of
approximately $938,000, which approximated the costs in connection with the
transaction. The proceeds of this transaction were used to pay down two of the
Company's residual financing facilities and pay off another residual financing
facility.
Provision for Credit Losses. The Company maintains an allowance for credit
losses to cover anticipated losses on the Contracts held on the statement of
financial condition. The allowance for credit losses is increased by charging
the provision for credit losses and decreased by actual losses on the Contracts
held on the statement of financial condition or by the sale of Contracts held on
the statement of financial condition. The level of the allowance is based
principally on the outstanding balance of Contracts held on the statement of
financial condition, 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.
The provision for credit losses was $989.5 thousand during 2000 compared to
$1.2 million during 1999 and $1.6 million during 1998. The reduction in
provision for credit losses in 2000 relative to 1999 was due primarily to a
reduction in the year over year net change in Contracts held for sale. At
year-end 2000, Contracts held for sale decreased by $55.7 million over year-end
1999, while at year-end 1999, Contracts held for sale increased $77.5 million
over year-end 1998.
Salaries and Benefits Expense. The Company incurred salary and benefit
expenses of $46.3 million during the year ended December 31, 2000, compared to
$40.0 million during the year ended December 31, 1999, and $26.8 million for the
year ended December 31, 1998. In order to support the growth of its operations
and the serviced portfolio, the number of employees increased from 526 at
December 31, 1998, to 715 at December 31, 1999 and to 896 at December 31, 2000.
System and Servicing Expense. System and servicing expense increased to
$5.5 million, compared to $4.3 million and $2.1 million for the years end
December 31, 2000, 1999 and 1998 respectively. Currently, the Company uses an
external service provider for its loan accounting system. The charges associated
with this provider are directly correlated to the number of Contracts serviced
by the Company. The Company has acquired a loan accounting and collection
system, and intends to bring these processes in-house in 2001. As of December
31, 2000, the Company serviced approximately 269,000 accounts, compared to
approximately 210,000 accounts at year end 1999 and 132,000 accounts at year end
1998. The increases in systems and servicing expense also reflect higher
consulting fees in connection with the customization of the Company's new loan
accounting and collection system.
Telephone and Data Line Expenses. Telephone and data line expenses remained
relatively stable at approximately $6.0 million from $6.1 million and $4.2
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Although these charges generally increase with the growth of the serviced
portfolio, the stability between 1999 and 2000 was primarily due to renegotiated
contracts for long distance rates with certain carriers. Assuming no additional
reduction in long distance rates, the Company expects these charges to increase
relative to the continued growth of the serviced portfolio.
Depreciation Expense. Depreciation expense increased to $4.4 million from
$3.5 million and $2.1 million for the years ended December 31, 2000, 1999, and
1998, respectively. These increases are in line with the Company's continued
investment in technology and infrastructure to support the growth of the
serviced portfolio.
Other Operating Expenses. Other operating expenses increased to $22.2
million for the year ended December 31, 2000, from $17.1 million for the year
ended December 31, 1999, and from $13.3 million for the year ended December 31,
1998. The majority of the increases were due to the growth of the average
serviced
26
27
portfolio from $1.0 billion to $1.7 billion and $2.5 billion for the years ended
December 31, 1998, 1999 and 2000, respectively. Additionally, the Company opened
new Auto Finance Centers during the years ended December 31, 2000, 1999 and
1998.
Income Taxes. The Company files federal and certain state tax returns as a
consolidated group. 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 41.5%
for 1998 through 2000.
FINANCIAL CONDITION
CONTRACTS HELD FOR SALE
Contracts held for sale totaled $173.8 million at December 31, 2000,
compared to $229.5 million at December 31, 1999. The number and principal
balance of Contracts held for sale is largely dependent upon the timing and size
of the Company's securitizations.
CREDIT ENHANCEMENT ASSETS
Credit enhancement assets consisted of the following:
AS OF DECEMBER 31,
----------------------
1999 2000
--------- ---------
(DOLLARS IN THOUSANDS)
Trust receivable....................................... $ 5,713 $ 7,510
RISA................................................... 137,171 138,503
-------- --------
Total........................................ $142,884 $146,013
======== ========
Trust receivable represents servicer advances and initial deposits in
spread accounts.
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 discounted cash flows are then discounted at a
market-based rate until they are released from the spread account and received
by the Company. The balance is then amortized against actual servicing fee
income on a monthly basis. The following table provides historical data
regarding the RISA. Included in RISA is restricted cash of $57.8 million and
$35.8 million for the years ended December 31, 2000 and 1999, respectively. (See
"Risk Factors")
RETAINED INTEREST IN SECURITIZED ASSETS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 2000
--------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance...................................... $109,241 $137,171
Additions.............................................. 101,586 109,173
Amortization........................................... (72,704) (61,229)
Sale of RISA........................................... (49,924)
Change in unrealized loss on securities available for
sale................................................. (952) 3,312
-------- --------
Ending balance......................................... $137,171 $138,503
======== ========
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, 2000, delinquencies represented 4.14% of the amount of Contracts in
its serviced portfolio compared to 2.81% at December 31, 1999, and 2.54% at
December 31, 1998. Net charge-offs as a percentage of the average serviced
portfolio were 2.30% for the year
27
28
ended December 31, 2000, compared to 1.85% and 1.72% for the years ended
December 31, 1999, and 1998, respectively. The levels of delinquencies at
December 31, 2000, increased over December 31, 1999, primarily due to the
transfer of certain east-coast accounts to the Hazelwood, Missouri, collection
center before the staff was fully trained and capable of handling the additional
work load. The increase in loan losses from 1999 to 2000 is attributable to the
rise in delinquencies.
In each of the last three years, management has increased its off balance
sheet reserves as a percentage of the serviced portfolio sold. Reserves have
increased from 4.31% at December 31, 1998, to 4.42% at December 31, 1999, to
4.62% at December 31, 2000. Off balance sheet reserves are those reserves
established upon the sale of Contracts to the grantor and owner trusts in
connection with securitized Contracts.
DELINQUENCY EXPERIENCE OF THE SERVICED PORTFOLIO
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Serviced portfolio............................. $1,345,961 $2,133,460 $2,690,607
Delinquencies(1)(2) 30 - 59 days............... 25,357 36,886 71,681
60 - 89 days................................... 6,017 14,965 23,085
90+ days....................................... 2,751 8,113 16,748
Total delinquencies as a percent of
serviced portfolio................. 2.54% 2.81% 4.14%
- ---------------
(1) Delinquencies include principal amounts only, net of repossessed inventory
and accounts in bankruptcy.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOAN LOSS EXPERIENCE OF THE SERVICED PORTFOLIO
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Number of contracts............................ 131,862 209,745 269,372
Period end serviced portfolio.................. $1,345,961 $2,133,460 $2,690,607
Average serviced portfolio(1).................. $1,023,237 $1,728,875 $2,456,796
Number of gross charge-offs.................... 3,761 6,398 10,091
Gross charge-offs.............................. $ 20,640 $ 37,024 $ 66,850
Net charge-offs(2)............................. $ 17,618 $ 31,963 $ 56,449
Net charge-offs as a percent of average
serviced portfolio........................... 1.72% 1.85% 2.30%
On and off balance sheet reserves as a percent
of period end serviced portfolio............. 3.87% 4.00% 4.36%
- ---------------
(1) Average is based on daily balances.
(2) Net charge-offs are gross charge-offs minus recoveries on Contracts
previously charged off.
28
29
The following table illustrates the monthly performance of each of the
securitized pools outstanding for the period from the date of securitization
through December 31, 2000.
TRUST:
---------------------------------------------------------------------------------------------------------------------------
MONTH 96-1 96-2 96-3 96-4 97-1 97-2 97-3 97-4 98-1 98-A 98-B 98-C 99-A 99-B 99-C 99-D 00-A 00-B
- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1 0.00% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.03% 0.07% 0.02% 0.02% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.00% 0.02% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00%
3 0.05% 0.20% 0.07% 0.05% 0.03% 0.02% 0.02% 0.01% 0.02% 0.03% 0.02% 0.02% 0.02% 0.03% 0.03% 0.01% 0.02% 0.02%
4 0.11% 0.33% 0.16% 0.14% 0.06% 0.07% 0.09% 0.04% 0.08% 0.07% 0.08% 0.04% 0.05% 0.07% 0.06% 0.04% 0.04% 0.04%
5 0.23% 0.46% 0.43% 0.24% 0.13% 0.22% 0.13% 0.11% 0.14% 0.14% 0.19% 0.15% 0.11% 0.14% 0.16% 0.09% 0.11% 0.10%
6 0.40% 0.78% 0.54% 0.38% 0.26% 0.32% 0.24% 0.20% 0.24% 0.23% 0.33% 0.27% 0.21% 0.27% 0.28% 0.15% 0.18% 0.17%
7 0.69% 0.98% 0.74% 0.53% 0.37% 0.59% 0.36% 0.28% 0.40% 0.37% 0.45% 0.46% 0.35% 0.43% 0.47% 0.24% 0.37% 0.30%
8 0.82% 1.15% 0.97% 0.81% 0.52% 0.80% 0.47% 0.43% 0.53% 0.42% 0.61% 0.57% 0.49% 0.60% 0.64% 0.43% 0.63% 0.44%
9 0.93% 1.39% 1.13% 0.98% 0.60% 0.91% 0.62% 0.55% 0.68% 0.51% 0.82% 0.74% 0.63% 0.85% 0.83% 0.59% 0.87% 0.67%
10 1.15% 1.52% 1.32% 1.18% 0.76% 1.07% 0.73% 0.72% 0.85% 0.70% 0.95% 0.94% 0.81% 1.07% 1.09% 0.76% 1.05%
11 1.25% 1.69% 1.47% 1.43% 0.92% 1.26% 0.81% 0.87% 1.04% 0.85% 1.10% 1.12% 1.04% 1.34% 1.31% 0.99% 1.27%
12 1.47% 1.94% 1.60% 1.63% 1.02% 1.42% 0.94% 0.95% 1.20% 1.01% 1.20% 1.30% 1.29% 1.56% 1.47% 1.20%
13 1.65% 2.08% 1.77% 1.73% 1.13% 1.58% 1.10% 1.08% 1.33% 1.17% 1.36% 1.54% 1.49% 1.79% 1.62% 1.41%
14 1.79% 2.34% 1.94% 1.87% 1.23% 1.68% 1.23% 1.19% 1.46% 1.37% 1.48% 1.73% 1.72% 1.90% 1.77% 1.52%
15 2.02% 2.52% 2.09% 2.07% 1.40% 1.80% 1.38% 1.36% 1.61% 1.48% 1.64% 1.90% 1.90% 2.08% 2.00% 1.70%
16 2.25% 2.76% 2.27% 2.23% 1.56% 1.97% 1.58% 1.42% 1.71% 1.59% 1.89% 2.10% 2.10% 2.23% 2.08%
17 2.43% 2.89% 2.42% 2.33% 1.68% 2.10% 1.68% 1.52% 1.88% 1.76% 2.05% 2.28% 2.26% 2.42% 2.29%
18 2.59% 3.10% 2.57% 2.49% 1.75% 2.23% 1.77% 1.64% 2.01% 1.96% 2.22% 2.51% 2.46% 2.63%
19 2.77% 3.14% 2.70% 2.62% 1.85% 2.35% 1.91% 1.75% 2.17% 2.07% 2.37% 2.71% 2.59% 2.71%
20 2.93% 3.30% 2.83% 2.73% 1.92% 2.48% 2.04% 1.85% 2.25% 2.25% 2.50% 2.83% 2.71% 2.89%
21 3.06% 3.47% 2.94% 2.84% 1.98% 2.59% 2.11% 1.97% 2.41% 2.37% 2.67% 2.95% 2.83%
22 3.15% 3.60% 3.00% 2.93% 2.09% 2.72% 2.20% 2.08% 2.52% 2.48% 2.79% 3.08% 2.88%
23 3.21% 3.70% 3.08% 3.02% 2.17% 2.81% 2.31% 2.12% 2.63% 2.65% 2.92% 3.25% 3.03%
24 3.28% 3.81% 3.17% 3.10% 2.22% 2.85% 2.41% 2.23% 2.75% 2.76% 3.06% 3.39%
25 3.40% 3.93% 3.28% 3.22% 2.31% 2.93% 2.51% 2.36% 2.86% 2.81% 3.14% 3.45%
26 3.43% 4.06% 3.38% 3.29% 2.38% 2.96% 2.59% 2.41% 2.98% 2.95% 3.23% 3.57%
27 3.55% 4.13% 3.43% 3.39% 2.44% 3.09% 2.71% 2.52% 3.06% 2.99% 3.28%
28 3.60% 4.22% 3.54% 3.46% 2.50% 3.17% 2.79% 2.55% 3.15% 3.03% 3.35%
29 3.73% 4.23% 3.59% 3.58% 2.55% 3.22% 2.92% 2.62% 3.19% 3.12%
30 3.75% 4.29% 3.69% 3.61% 2.63% 3.26% 2.94% 2.71% 3.26% 3.13%
31 3.79% 4.31% 3.77% 3.64% 2.67% 3.33% 3.01% 2.77% 3.33% 3.18%
32 3.85% 4.33% 3.75% 3.72% 2.73% 3.39% 3.04% 2.81% 3.40%
33 3.88% 4.37% 3.77% 3.74% 2.77% 3.48% 3.08% 2.85% 3.42%
34 3.90% 4.39% 3.79% 3.77% 2.84% 3.51% 3.11% 2.88% 3.46%
35 3.94% 4.39% 3.81% 3.79% 2.86% 3.54% 3.20% 2.93%
36 3.94% 4.42% 3.83% 3.81% 2.85% 3.55% 3.21% 2.91%
37 3.94% 4.42% 3.84% 3.83% 2.89% 3.56% 3.23% 2.94%
38 3.97% 4.43% 3.88% 3.85% 2.91% 3.56% 3.24%
39 3.99% 4.45% 3.92% 3.89% 2.96% 3.58% 3.25%
40 3.96% 4.46% 3.92% 3.89% 2.99% 3.58% 3.27%
41 3.96% 4.45% 3.92% 3.89% 3.01% 3.58%
42 3.95% 4.45% 3.91% 3.89% 3.00% 3.59%
43 3.96% 4.45% 3.91% 3.89% 2.99% 3.60%
44 3.94% 4.48% 3.91% 3.87% 3.00%
45 3.97% 4.49% 3.90% 3.87% 3.01%
46 3.95% 4.52% 3.89% 3.88%
47 3.92% 4.51% 3.90% 3.86%
48 3.90% 4.49% 3.90% 3.86%
49 3.89% 4.50% 3.89%
50 3.86% 4.46% 3.89%
51 3.86% 4.44% 3.88%
52 3.84% 4.43%
53 3.84%
54 3.83%
55 3.83%
56 3.83%
TRUST:
-----------
MONTH 00-C 00-D
- ----- ---- ----
1 0.00% 0.00%
2 0.00% 0.00%
3 0.01%
4 0.03%
5 0.06%
6 0.11%
7
8
9
10
11
12
13
14
15