This filing is made pursuant to Rule 424(b)2
under the Securities Act of 1933 in
connection with Registration No. 333-71238
This is a supplement to the Prospectus dated February 11, 2002
SPECIAL INTEREST RATES FOR RENEWABLE UNSECURED SUBORDINATED NOTES
OFFERED BY
ONYX ACCEPTANCE CORPORATION
Effective May 28, 2002
--------------------------------------------------------------------------------
THE FOLLOWING SPECIAL INTEREST RATES ARE AVAILABLE SOLELY TO INVESTORS WHO
SUBSCRIBE IN ACCORDANCE WITH THE INSTRUCTIONS IN AN EMAIL SENT BY YAHOO! DIRECT
WITH RESPECT TO THE OFFERING. TO QUALIFY FOR THE SPECIAL RATES, THESE INVESTORS
MUST PURCHASE A RENEWABLE UNSECURED SUBORDINATED NOTE ON OR BEFORE JUNE 30,
2002. INVESTMENTS MADE BY THESE INVESTORS AFTER JUNE 30, 2002 WILL BE SUBJECT TO
THE THEN CURRENT INTEREST RATES. ONYX ACCEPTANCE CORPORATION AND SUMNER
HARRINGTON LTD. DISCLAIM ANY OBLIGATION TO OFFER THESE RATES TO ANY INVESTORS
WHO DO NOT COMPLY WITH THE INSTRUCTIONS IN THE EMAIL SENT BY YAHOO! DIRECT.
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
AMOUNT (1) $1,000 - $2,499 $2,500 - $24,999 $25,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 $100,000 OR MORE
-----------------------------------------------------------------------------------------------------------------------------
Interest Annual Interest Annual Interest Annual Interest Annual Interest Annual Interest Annual
NOTE TERM Rate % Yield % Rate % Yield % Rate % Yield % Rate % Yield % Rate % Yield % Rate % Yield %
-----------------------------------------------------------------------------------------------------------------------------
3 MONTH (2) 6.07 6.26 6.07 6.26 6.20 6.40 6.33 6.53 6.46 6.67 6.59 6.81
-----------------------------------------------------------------------------------------------------------------------------
6 MONTH (2) 7.24 7.51 7.24 7.51 7.37 7.65 7.50 7.79 7.63 7.93 7.76 8.07
-----------------------------------------------------------------------------------------------------------------------------
1 YEAR (3) 8.49 8.86 8.74 9.13 8.87 9.27 9.00 9.42 9.13 9.56 9.26 9.70
-----------------------------------------------------------------------------------------------------------------------------
2 YEAR (3) 9.31 9.76 9.66 10.14 9.79 10.28 9.92 10.43 10.05 10.57 10.18 10.71
-----------------------------------------------------------------------------------------------------------------------------
3 YEAR (3) 9.36 9.81 9.36 9.81 9.49 9.95 9.62 10.10 9.75 10.24 9.88 10.38
-----------------------------------------------------------------------------------------------------------------------------
4 YEAR (3) 9.50 9.96 9.50 9.96 9.63 10.11 9.76 10.25 9.89 10.39 10.02 10.54
-----------------------------------------------------------------------------------------------------------------------------
5 YEAR (3) 9.63 10.11 9.63 10.11 9.76 10.25 9.89 10.39 10.02 10.54 10.15 10.68
-----------------------------------------------------------------------------------------------------------------------------
10 YEAR (3) 9.77 10.26 9.77 10.26 9.90 10.41 10.03 10.55 10.16 10.69 10.29 10.84
-----------------------------------------------------------------------------------------------------------------------------
(1) The applicable portfolio amount is determined at the time a note is
purchased or renewed by aggregating the principal amounts of all notes issued by
Onyx Acceptance Corporation that are currently owned by the investor and the
investor's immediate family members. Immediate family members include parents,
children, siblings, grandparents and grandchildren. Members of sibling families
are also considered immediate family members if both siblings are noteholders.
(2) The effective net annual yield calculation assumes that the term of the note
is renewed sequentially for an entire year, that the interest earned during each
term is included in the principal amount for the next term, that the listed
interest rate is the interest rate for each term and that the accrued interest
is paid annually.
(3) The effective net annual yield calculation assumes that accrued interest is
paid annually.
Paying Agent: Wells Fargo Bank Minnesota, N.A.
The description in this prospectus supplement of the terms of these notes adds
to the description of the general terms and provisions of the notes in the
accompanying prospectus. Investors should rely on the description of the notes
in this supplement if it is consistent with the description in the prospectus.
PROSPECTUS
$50,000,000
ONYX ACCEPTANCE CORPORATION
[ONYX ACCEPTANCE CORPORATION LOGO]
THREE AND SIX MONTH RENEWABLE UNSECURED SUBORDINATED NOTES
ONE, TWO, THREE, FOUR, FIVE AND TEN YEAR RENEWABLE UNSECURED SUBORDINATED NOTES
---------------------
We are offering up to $50 million aggregate principal amount of our
renewable unsecured subordinated notes. We may offer the notes from time to time
with maturities ranging from three months to ten years. However, depending on
our capital needs, notes with certain terms may not always be available. We will
establish interest rates on the securities offered in this prospectus from time
to time in supplements to this prospectus. The notes are unsecured obligations
and your right to payment is subordinated in right of payment to all of our
existing or future senior, secured, unsecured and subordinate indebtedness. Upon
maturity, the notes will be automatically renewed for the same term as your
maturing note and at an interest rate that we are offering at that time to other
investors for notes of the same term, unless we or you elect not to have them
renewed. If notes of the same term are not then being offered, the interest rate
upon renewal will be the rate specified by us on or before maturity, or the rate
of the existing note if no such rate is specified. The interest rate on your
renewed note may be different than the interest rate on your original note.
After giving you thirty days advance notice, we may redeem all or a portion of
the notes for their original principal amount plus accrued and unpaid interest.
You also may request us to repurchase your notes prior to maturity; however,
unless the request is due to your death or disability, we will charge you a
penalty of up to three months interest on notes with three month maturities and
up to six months interest on all other notes and we will not repurchase more
than an aggregate of $1 million for all requested repurchases prior to maturity
in any calendar quarter.
The notes will be marketed and sold through Sumner Harrington Ltd., which
is acting as our selling agent for the notes. The notes will not be listed on
any securities exchange or quoted on Nasdaq or any over-the-counter market and
will not be rated. Sumner Harrington Ltd. does not intend to make a market in
the notes and we do not anticipate that a market in the notes will develop.
There will be significant restriction on your ability to transfer or resell the
notes. Sumner Harrington Ltd. also will act as our servicing agent in connection
with our ongoing administrative responsibilities for the notes.
THE NOTES ARE NOT CERTIFICATES OF DEPOSIT OR SIMILAR OBLIGATIONS OF, AND
ARE NOT GUARANTEED OR INSURED BY, ANY DEPOSITORY INSTITUTION, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL OR PRIVATE FUND OR
ENTITY. INVESTING IN THE NOTES INVOLVES RISKS WHICH ARE DESCRIBED IN "RISK
FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
PER NOTE TOTAL
-------- -----
Public offering price....................................... 100% 100%
Selling Agent commissions................................... 3.00% 3.00%
Proceeds to Onyx, before expenses........................... 97.00% 97.00%
The selling agent will not receive the entire 3.0% gross commission on
notes with terms of one year or less unless the notes are successively renewed
for a total term of two years. There will be no underwriting discount.
Sumner Harrington Ltd. is not required to sell any specific number or
dollar amount of notes but will use its best efforts to sell the notes offered.
We will issue the notes in book-entry or uncertificated form. Purchasers
will not receive a certificated security or a negotiable instrument that
evidences their notes. Sumner Harrington Ltd. will deliver written confirmations
to purchasers of the notes. U.S. Bank National Association, St. Paul, Minnesota,
will act as trustee for the notes.
---------------------
SUMNER HARRINGTON LTD.
---------------------
The date of this Prospectus is February 11, 2002.
Onyx Acceptance Corporation provides prime and near-prime automobile
lending to franchise and select independent car dealers. It provides service to
those dealers from its auto finance centers throughout the United States. Since
it started purchasing, originating and servicing motor vehicle contracts in
February 1994, Onyx has purchased or originated over $6.7 billion in auto
receivables through September 30, 2001. Onyx services its retail customers from
its offices in Foothill Ranch, California, and a secondary servicing facility
located in Hazlewood, Missouri.
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999 2000 2001
-------- -------- ---------- ---------- ---------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Total revenues......... $ 23,177 $ 35,369 $ 64,811 $ 94,670 $ 100,857 $ 80,324
Net income............. 6,116 1,302 6,076 9,792 5,835 4,051
Net income per diluted
share................ $ 1.09 $ 0.21 $ 0.95 $ 1.50 $ 1.00 $ 0.78
Diluted shares
outstanding.......... 5,585 6,294 6,425 6,514 5,811 5,214
Total assets........... $ 54,083 $141,836 $ 275,422 $ 393,835 $ 331,380 $ 403,445
Stockholders' equity... 36,358 37,717 43,824 53,108 55,593 62,778
Servicing portfolio at
period end........... $400,665 $757,277 $1,345,961 $2,133,460 $2,690,607 $2,876,986
Contracts purchased.... $319,840 $605,905 $1,038,535 $1,559,004 $1,671,703 $1,241,060
[Bar chart showing dollar amount of revenues for the years ended December 31,
1996, 1997, 1998, 1999, 2000 and the nine months ended September 30, 2001]
[Bar chart showing dollar amount of servicing portfolio for the years ended
December 31, 1996, 1997, 1998, 1999, 2000 and the nine months ended September
30, 2001]
[Bar chart showing the number of contracts purchased for the years ended
December 31, 1996, 1997, 1998, 1999, 2000 and at September 30, 2001]
[Bar chart showing the number of dealer relationships for each quarter from the
first quarter of 1999 through the third quarter of 2001]
TABLE OF CONTENTS
PROSPECTUS SUMMARY ...................................................... 1
Onyx ........................................................... 1
Business ....................................................... 1
The Offering ................................................... 3
RISK FACTORS ............................................................ 7
Risk Factors Relating to the Notes ............................. 7
Risk Factors Relating to Onyx .................................. 11
FORWARD-LOOKING STATEMENTS .............................................. 18
RATIOS OF EARNINGS TO FIXED CHARGES ..................................... 18
USE OF PROCEEDS ......................................................... 18
CAPITALIZATION .......................................................... 19
Recent Developments ............................................ 20
DESCRIPTION OF THE NOTES ................................................ 22
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................ 33
PLAN OF DISTRIBUTION .................................................... 35
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ......................... 36
LEGAL MATTERS ........................................................... 36
EXPERTS ................................................................. 36
WHERE YOU CAN FIND MORE INFORMATION ..................................... 37
GLOSSARY ................................................................ 38
-i-
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all the information that may be important to you. You should read
the entire prospectus before making an investment decision. Certain industry
terms that we use are defined in the Glossary which begins on page 36.
ONYX
We are a specialized consumer finance company engaged principally in the
business of providing indirect automobile financing to franchised new car
dealerships and select used car dealerships throughout the United States. We
primarily purchase motor vehicle contracts from such dealerships. We focus our
efforts on acquiring motor vehicle contracts that are secured by late model used
motor vehicles and, to a lesser extent, new motor vehicles, that were entered
into with purchasers whom we believe have favorable credit profiles. We generate
revenues primarily through the purchase, warehousing, securitization and ongoing
servicing of motor vehicle contracts. Since we started purchasing, originating
and servicing motor vehicle contracts in February 1994, we have purchased or
originated more than $6.7 billion in motor vehicle contracts from approximately
9,900 dealers through September 30, 2001, and we have expanded our operations
from a single office in Orange County, California to major markets throughout
the United States.
BUSINESS
Our principal objective is to become one of the leading sources of
near-prime auto lending in the United States by leveraging the experience of our
senior management team in this industry. We seek to attain and increase
profitability through the implementation of the following strategies:
- Targeted Market and Product Focus. We have positioned
ourselves as one of the lowest loan-to-value and
payment-to-income lenders in the near-prime auto finance
market. We target the near-prime auto lending market because
we believe that it produces greater origination and operating
efficiencies than does the sub-prime lending market. We focus
on late model used motor vehicles, rather than new motor
vehicles, because we believe the risk of loss on used vehicles
is lower due to lower depreciation rates. Furthermore, motor
vehicle contracts secured by used motor vehicles generally
bear interest at rates that are higher than new motor vehicle
contracts. In addition, we believe 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. We provide a high level of
service to our dealership base by marketing to and servicing
dealerships on a local level through our auto finance centers.
Our credit and account manager teams service our dealers
locally and are able to provide a quick decision process with
respect to potential motor vehicle contracts submitted to us
by our dealers for purchase. These teams use our proprietary
credit evaluation system based on our underwriting standards.
We strategically locate our auto finance centers in geographic
areas with many dealerships in order to facilitate personal
service.
- Expansion of Dealership Customer Base. We establish active
relationships with a substantial percentage of franchised
dealerships in the regions in which we do business through our
existing auto finance centers. We intend to establish
additional dealer relationships as we continue our expansion
plans in the future.
-1-
- Maintenance of Underwriting Standards and Portfolio
Performance. We have developed an underwriting process that is
designed to achieve attractive yields while minimizing
delinquencies and losses. The underwriting process emphasizes
a personal, hands-on analysis of the creditworthiness of each
applicant rather than sole reliance on a credit scoring
system. We also audit most motor vehicle contracts that we
purchase within days of their origination to further assure
adherence to our underwriting guidelines.
- Technology-Supported Operational Controls. We have developed
and instituted control and review systems that enable us to
monitor both our operations and the performance of the motor
vehicle contracts we service. These systems allow us to
monitor motor vehicle contract production, yields and
performance on a continuous and real-time basis.
- Liquidity Through Warehousing and Securitizations. Our
strategy is to complete securitizations on a regular basis and
to use warehouse credit facilities to fund the acquisition or
origination of motor vehicle contracts prior to
securitization. We also utilize both securitization and
hedging strategies to leverage our capital efficiently and
substantially reduce our interest rate risk.
As these strategies indicate, our focus is on controlled growth, rather
than increasing our volume at any cost. We are committed to a long-term
profitable growth strategy in the near-prime auto lending market.
We were incorporated in California in 1993, and reincorporated in Delaware
in 1996 in connection with our initial public offering of common stock in March
1996. Our principal executive offices are located at 27051 Towne Centre Drive,
Suite 100, Foothill Ranch, California 92610, and our telephone number is (949)
465-3900.
-2-
THE OFFERING
Issuer............................... Onyx Acceptance Corporation.
Trustee.............................. U.S. Bank National Association.
Selling and Servicing Agent.......... Sumner Harrington Ltd.
Securities Offered................... Renewable Unsecured Subordinated Notes.
The notes are unsecured promises to pay
issued by us. By purchasing a note, you
are lending money to us. The notes
represent our obligation to repay your
loan with interest.
Method of Purchase................... Prior to your purchase of notes, you
will be required to complete a
subscription agreement that will set
forth the principal amount of your
purchase, the term of the notes and
certain other information regarding your
ownership of the notes. The form of
subscription agreement is filed as an
exhibit to the registration statement of
which this prospectus is a part.
Denomination......................... You can choose the denomination of the
notes you purchase in any principal
amount of $1,000 or more.
Offering Price....................... 100% of the principal amount per note
Maturity............................. You can generally choose maturities for
your notes of 3 or 6 months or 1, 2, 3,
4, 5 or 10 years; however, depending on
our capital requirements at the time, we
may not always sell notes of all
maturities.
Interest Rate........................ The interest rate of the notes will be
established at the time you purchase
them, or at the time of renewal, based
upon the rates we are offering in our
latest supplement to this prospectus,
and will remain fixed throughout the
term of the notes. We will generally
offer higher rates of interest to
investors with larger aggregate note
portfolios, as set forth in the
prospectus supplement.
Interest Payment Dates............... You can choose to receive interest
payments monthly, quarterly,
semiannually, annually or at maturity.
If you choose to receive interest
payments monthly, you can choose the day
on which you will be paid. You may
change this interest payment date once
during the term of the notes.
Principal Payment.................... We will not pay principal over the term
of the notes. We are obligated to pay
the entire principal balance of the
outstanding notes upon maturity.
-3-
Payment Method....................... Principal and interest payments will be
made by an electronic funds transfer to
a depository account you designate in
your subscription documents.
Renewal or Redemption at Maturity.... Upon maturity, the notes will be
automatically renewed for the same term
at the interest rate we are offering for
notes of the same maturity at that time
to other investors, unless we notify you
prior to maturity that we intend to
repay the notes or you notify us within
15 days after maturity that you want
your notes repaid. The interest rate
being offered upon renewal may be
different than the interest rate on your
original note. See "Description of the
Notes - Renewal or Redemption On
Maturity."
Optional Redemption or Repurchase.... After giving you 30 days prior notice,
we may redeem the notes at any time at a
price equal to their original principal
amount plus accrued and unpaid interest.
You may request us to repurchase your
notes prior to maturity; however, unless
the request is due to your death or
disability, we will charge you a penalty
of up to three months interest on notes
with three month maturities and up to
six months interest on all other notes.
We will not repurchase more than an
aggregate of $1 million for all
requested repurchases prior to maturity
in any calendar quarter.
See "Description of Notes - Redemption
or Repurchase Prior To Stated Maturity."
Consolidation, Merger or Sale ....... Upon any consolidation, merger or sale
of our company, either we will redeem
all of the notes or our successor will
be required to assume our obligations to
pay principal and interest on the notes
and under the indenture.
For a description of these provisions
see "Description of the Notes -
Consolidation, Merger or Sale."
Ranking; No Security................. The notes:
- are unsecured;
- rank junior to our existing and
future senior debt, including debt
we may incur under our existing and
future credit facilities and debt
held by our special purpose
entities;
- rank junior to our existing and
future secured debt;
- rank junior to our existing and
future subordinated debt, except
for offerings of additional
renewable unsecured subordinate
notes which will rank equally with
the notes;
- rank junior to our existing and
future unsecured debt, except for
offerings of additional renewable
unsecured
-4-
subordinate notes which will rank
equally with the notes; and
- rank senior to our existing and
future debt that is primarily held
by our affiliates, subsidiaries or
control persons, other than debt
held by our special purpose
entities.
Assuming we had issued the notes and
applied the proceeds as of September 30,
2001, we would have had outstanding
approximately $282.4 million of debt,
including debt held by our special
purpose entities, which is senior to the
notes. See "Capitalization."
Restrictive Covenants................ The indenture governing the notes, among
other things:
- requires us to maintain a positive
net worth, which includes
stockholders' equity and
subordinated debt;
- prohibits us from paying dividends
on our capital stock if there is an
event of default with respect to
the notes or a payment of the
dividend would result in an event
of default; and
- restricts us from entering into
certain transactions with
affiliates.
The covenants set forth in the indenture
are more fully described under
"Description of Notes - Restrictive
Covenants." These covenants have
significant exceptions.
Use of Proceeds...................... If all the notes are sold, with
maturities of two years or more, we
would expect to receive approximately
$48.2 million of net proceeds from this
offering after deducting the selling
agent's commissions and estimated
offering expenses payable by us. We
intend to use the net proceeds to expand
our business and for other general
corporate purposes. See "Use of
Proceeds."
Absence of Public Market............. There is no existing market for the
notes. We cannot provide you with any
assurance as to:
- the liquidity of any market that
may develop for the notes;
- your ability to sell or pledge your
notes; or
- the prices at which you will be
able to sell your notes.
Sumner Harrington Ltd. has advised us
that it does not intend to make a market
in the notes after the completion of
this offering and we do not anticipate
that a secondary market for the notes
will develop. We do not intend to apply
for listing of
-5-
the notes on any securities exchange or
for quotation of the notes in any
automated dealer quotation system.
Transfers............................ The notes will be issued in book entry
or uncertificated form only. The notes
will not be evidenced by certificated
securities or negotiable instruments.
You will be able to transfer or pledge
the notes only with our prior written
consent. See "Description of the Notes -
Transfers."
-6-
RISK FACTORS
Before you invest in the notes, you should carefully consider these risk
factors, as well as the other information contained in this prospectus.
RISK FACTORS RELATING TO THE NOTES
THE NOTES MAY NOT BE A SUITABLE INVESTMENT FOR ALL INVESTORS. The notes
may not be a suitable investment for you, and we advise you to consult your
investment, tax and other professional financial advisors prior to purchasing
notes.
The risks described below set forth many of the risks associated with the
purchase of notes. In addition to those risks, the characteristics of the notes,
including maturity, interest rate and lack of liquidity, may not satisfy your
investment objectives or otherwise be a suitable investment for you based on
your ability to withstand a loss of interest or principal or other aspects of
your financial situation, including your income, net worth, financial needs,
investment risk profile, return objectives, investment experience and other
factors. For instance, prior to purchasing any notes, you should consider your
investment allocation with respect to the amount of your contemplated investment
in the notes in relation to your other investment holdings and the diversity of
those holdings.
YOU LACK PRIORITY IN PAYMENT ON THE NOTES. Your right to receive payments
on the notes is junior to all of our existing indebtedness and all of our future
borrowings.
Your notes will be subordinated to the prior payment in full of all of our
other debt obligations except loans from affiliates, subsidiaries or control
persons. Your notes are also senior to the company's financial obligations to
its stockholders in that capacity. As of September 30, 2001, we had
approximately $282.4 million of indebtedness, including indebtedness held by our
special purpose entities, which will rank senior to your notes. In addition, we
may incur substantial additional indebtedness in the future which would also
rank senior to your notes. Because of the subordination provisions of the notes,
in the event of our bankruptcy, liquidation or dissolution, our assets would be
available to make payments to you under the notes only after all payments had
been made on all of our secured and unsecured indebtedness that is senior to the
notes. Sufficient assets may not remain after all such senior payments have been
made to make any payments to you under the notes, including payments of interest
when due or principal upon maturity.
THERE WILL BE NO TRADING MARKET FOR THE NOTES. Your ability to liquidate
your investment is limited because of transfer restrictions, the lack of a
trading market and the limitation on repurchase requests prior to maturity.
Your notes may not be transferred without our prior written consent. In
addition, there will be no trading market for the notes. Due to the
non-transferable nature of the notes and the lack of a market for the sale of
the notes, even if we permitted a transfer, you might be unable to sell, pledge
or otherwise liquidate your investment. Also, repurchases of the notes prior to
maturity at the request of the holders of the notes are subject to repurchase
penalties of up to three months interest on notes with three month maturities
and up to six months interest on notes with maturities of six months or longer,
and an aggregate limitation of $1 million per calendar quarter. See "Description
of the Notes."
THE NOTES WILL HAVE NO SINKING FUND, SECURITY, INSURANCE OR GUARANTEE.
There is no sinking fund, security, insurance or guarantee for our obligation to
make payments on the notes, so you will have to rely on our cash flow from
operations and other sources of funds for repayment.
The notes are not secured by any of our assets. We do not contribute funds
to a separate account, commonly known as a sinking fund, to make interest or
principal payments on the notes. The notes are not certificates of deposit or
similar obligations of, and are not guaranteed or insured by, any depository
institution, the
-7-
Federal Deposit Insurance Corporation, or any other governmental or private fund
or entity. Therefore, if you invest in the notes, you will have to rely only on
our cash flow from operations and other sources of funds for repayment of
principal at maturity or redemption and for payment of interest when due. If our
cash flow from operations and other sources of funds are not sufficient to pay
the notes, then you may lose all or part of your investment.
THE NOTES WILL AUTOMATICALLY RENEW. If we are allowing renewal and you
fail to timely elect not to have your notes renewed, your notes will
automatically renew for the same term as your maturing notes at an interest rate
that may be different from your maturing rate, and your renewed notes will be
subject to the same limitations and restrictions as your maturing notes,
including early repurchase penalties.
Upon maturity, the notes will be automatically renewed for the same term
as your maturing note and at an interest rate that we are offering at that time
to other investors for notes of the same term, unless we notify you prior to
maturity that we intend to repay the notes or you notify us within 15 days after
maturity that you want your notes repaid. If notes with the same term are not
then being offered, the interest rate upon renewal will be the rate specified by
us on or before the maturity date, or the rate of the existing note if no such
rate is specified. The interest rate on your renewed note may be lower than the
interest rate of your original note. In addition, if you fail to notify us of
your desire not to have your notes renewed within the specified time period,
your notes will automatically renew and any requests for repurchases after your
notes are renewed will be subject to early repurchase penalties and the
limitations on the amount of notes we will repurchase in any calendar quarter.
WE HAVE SUBSTANTIAL INDEBTEDNESS. Our substantial indebtedness could
adversely affect our financial health and prevent us from fulfilling our
obligations under the notes.
We have now and, after we sell these notes, will continue to have a
substantial amount of indebtedness. Our substantial indebtedness could have
important consequences to your investment in the notes. For example, it could:
- make it more difficult for us to perform our obligations with
respect to the notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing amounts
available for working capital, capital expenditures and other
general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
- limit our ability to borrow additional funds.
WE MIGHT INCUR SUBSTANTIALLY MORE INDEBTEDNESS. Our ability to incur
substantially more debt could further increase the risks described above.
We may incur substantial additional indebtedness in the future. While the
indenture for the notes requires us to maintain a positive net worth, it does
not prohibit us from incurring additional indebtedness. In fact, we expect to
enter into additional credit facilities in the future. Any such borrowings would
be senior to the notes. If we borrow more money, the related risks that we now
face could intensify. See "Capitalization" and "Description of the Notes."
WE REQUIRE A SUBSTANTIAL AMOUNT OF CASH FOR OPERATIONS. To service our
indebtedness, we will require a significant amount of cash. Our ability to
generate cash depends on many factors beyond our control.
-8-
Our ability to repay or refinance our debt depends on our successful
financial and operating performance. We cannot assure you that our business
strategy will continue to succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a
number of factors, many of which are beyond our control. These factors include:
- the current economic and competitive conditions in the asset-backed
securities market;
- the current credit quality of our motor vehicle contracts;
- any operating difficulties or pricing pressures we may experience;
- our ability to obtain credit enhancement;
- the passage of laws or regulations that affect us adversely; and
- any delays in implementing any strategic projects we may have.
Depending upon the outcome of one or more of these factors, we may not be
able to generate sufficient cash flow from operations or to obtain sufficient
funding to satisfy all of our obligations, including the notes. If we are unable
to pay our debts, we will be required to pursue one or more alternative
strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. These alternative strategies
may not be feasible at the time or prove adequate and could require the prior
consent of our senior secured and unsecured lenders.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS. Our
management has broad discretion over how to use the proceeds from the offering
and may choose not to use the funds to pay down debt that is senior to the
notes.
It is expected that we will use the proceeds from the offering primarily
to expand our business and for other general corporate purposes, which may
include the payment of general and administrative expenses. Because no specific
allocation of the proceeds will be required in the indenture, our management
will have broad discretion in determining how the proceeds of the offering will
be used. As a result, management could use the funds for purposes other than to
pay down debt that is senior to the notes. See "Use of Proceeds."
WE ARE SUBJECT TO MANY RESTRICTIONS IN OUR CREDIT FACILITIES AND THE
INDENTURE. The terms of our credit facilities impose significant restrictions
and the indenture for the notes imposes certain limited restrictions on our
ability and that of our subsidiaries to take certain actions, which may have an
adverse impact on our business, results of operations and financial condition.
Our credit facilities impose significant operating and financial
restrictions on us and our subsidiaries and require us to meet certain financial
tests. The indenture for the notes also imposes certain limited restrictions on
our activities. These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
- incurring or guaranteeing additional indebtedness;
- paying dividends or other distributions to our stockholders or
redeeming, repurchasing or retiring our capital stock or
subordinated obligations;
- making investments;
- making capital expenditures;
-9-
- creating liens on our assets;
- issuing or selling capital stock of our subsidiaries;
- transferring or selling assets currently held by us;
- engaging in transactions with affiliates; and
- engaging in mergers or consolidations.
The failure to comply with any of the covenants of our credit facilities
or the indenture or to maintain certain indebtedness ratios would cause a
default under our credit facilities and may cause a default under the indenture
or our other debt agreements which may be outstanding from time to time. A
default, if not waived, could result in acceleration of the related
indebtedness, in which case such debt would become immediately due and payable.
A continuing default or acceleration of any of our credit facilities, the
indenture or any other debt agreement, will likely cause a default under other
credit facilities, the indenture and other debt agreements that otherwise would
not be in default, and in which case all such related indebtedness could be
accelerated. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance our indebtedness. Even if any new financing is
available, it may not be on terms that are acceptable to us or it may not
refinance all of our indebtedness as it becomes due. Complying with these
covenants may cause us to take actions that are not favorable to holders of the
notes. See "Description of the Notes - Restrictive Covenants."
YOU WILL HAVE ONLY LIMITED PROTECTION UNDER THE INDENTURE. The indenture
governing the notes contains only limited restrictions on our activities and
only limited events of default, and thus, provides only limited protection to
you.
The indenture governing the notes contains limited restrictions on our
activities, and in comparison to the restrictive covenants that are imposed on
us by our other credit facilities and borrowing arrangements, the indenture
governing the notes contains relatively minimal restrictions on our activities.
In addition, the indenture contains only limited events of default other than
our failure to pay principal and interest on time. Because there are only very
limited restrictions and limited events of default under the indenture, we will
not be restricted from issuing additional debt senior to your notes or be
required to maintain any ratios of assets to debt in order to increase the
likelihood of timely payments to you under the notes. Further, if we default in
the payment of the notes or otherwise under the indenture, you may have to rely
on the trustee to exercise your remedies on your behalf. You may not be able to
seek remedies against us directly. See "Description of the Notes - Events Of
Default."
RISK OF REDEMPTION AT THE OPTION OF THE COMPANY. Redemption by us prior to
maturity may result in reinvestment risk to you.
We have the right to redeem any note at any time prior to its stated
maturity upon 30 days written notice to you. The notes will be redeemed at 100%
of the principal amount plus accrued but unpaid interest up to the redemption
date. Any such redemption may have the effect of reducing the income or return
on investment that any investor may receive on an investment in the notes by
reducing the term of the investment. In addition, an investor in the notes may
not be able to reinvest the proceeds of any such redemption for the remainder of
the original term of the notes at an interest rate comparable to the rate paid
on the notes. See "Description of the Notes - Redemption or Repurchase Prior To
Stated Maturity."
RISK OF TERMINATION OF DISTRIBUTION AND MANAGEMENT AGREEMENT.
The Distribution and Management Agreement between us and Sumner Harrington
may be terminated by either party by prior notice. Therefore, it is not certain
Sumner Harrington will be responsible for the marketing, sale and administration
of the notes for the duration of this offering. Other parties, including our
company, may take over
-10-
the functions currently provided by Sumner Harrington; therefore, you should not
rely on Sumner Harrington continuously being responsible for the marketing, sale
and administration of the notes.
YOU MAY BE REQUIRED TO PAY TAXES ON ACCRUED INTEREST ON NOTES PRIOR TO
RECEIVING INTEREST PAYMENTS.
If you choose to have interest on your note paid at maturity and the term
of your note exceeds one year, you may be required to pay taxes on the accrued
interest prior to our making any interest payments to you.
RISK FACTORS RELATING TO ONYX
WE MAY BE UNABLE TO OBTAIN FINANCING FOR OPERATIONS. 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 and we may be unable to make payments on the notes.
We require a substantial amount of cash liquidity to operate our business.
Among other things, we use such cash liquidity to:
- acquire motor vehicle contracts;
- pay dealer participation;
- pay securitization costs and fund spread accounts;
- settle hedge transactions;
- satisfy working capital requirements and pay operating expenses; and
- pay interest expense.
When we securitize our motor vehicle contracts, we report a gain on the
sale of those contracts. This gain represents a substantial portion of our
revenues. However, although we report this gain at the time of sale, we receive
the monthly cash payments on these contracts which represent these revenues over
the life of the motor vehicle contracts, rather than at the time of sale.
Similarly, we recover the cash paid by us for dealer participation over the life
of the related motor vehicle contracts, rather than at the time of sale. As a
result, a substantial portion of our reported revenues does not represent
immediate cash liquidity.
Cash generated from our operations has been insufficient to fund our
operations due to our growth. We have historically funded our operations
principally through borrowings from financial institutions, the sale of equity
securities and sales of subordinated notes. However, we may not be able to
obtain sufficient funding for our operations through either or a combination of:
- future access to the capital markets for equity or debt issuances or
securitizations; or
- future borrowings or other financings on acceptable terms to us.
WE DEPEND ON WAREHOUSE FINANCING. If we are unable to arrange new
warehousing credit facilities or extend our existing credit facilities when they
come due, our results of operations, financial condition and cash flows could be
materially and adversely affected and we may be unable to make payments on the
notes.
We depend on credit and warehouse facilities with financial institutions
to finance our purchases of motor vehicle contracts. Our business strategy
requires that these credit and warehouse financing sources continue to be
-11-
available to us from the time of purchase or origination of a motor vehicle
contract until its sale through a securitization.
We depend substantially on a single $355 million warehouse line of credit
with Triple-A One Funding Corporation ("Triple-A One"). The Triple-A One
facility was renewed in November 2001. Unless earlier terminated upon the
occurrence of certain wind-down and other events, the Triple-A One facility will
expire in November 2004. This warehouse facility will remain available to us
only if, among other things, we comply with certain financial covenants
contained in the documents governing this facility. This warehouse facility may
not be available to us in the future and we may not be able to obtain other
credit facilities on favorable terms to fund our operations.
WE DEPEND ON RESIDUAL FINANCING. The reduction in availability or loss of
access to our residual lines of credit could materially and adversely affect our
operations, financial condition and cash flows and our ability to make payments
on the notes.
When we sell our motor vehicle contracts in securitizations, we receive
cash and a residual interest in the securitized assets. This residual interest
represents the right to receive the future cash flows to be generated by the
motor vehicle contracts in excess of the interest and principal paid on the
securities issued in the securitization and other costs of servicing the motor
vehicle contracts and completing the securitization.
We typically use the residual interest from each securitization as
collateral to borrow cash to finance our operations. The amount of cash advanced
by our lenders under our residual lines of credit depends on a collateral
formula that is determined in large part by how well our securitized motor
vehicle contracts are expected to perform based primarily upon our historical
performance. If our portfolio of securitized motor vehicle contracts has higher
delinquency and loss ratios than expected, then the amount of money we could
borrow under the residual lines would be reduced. Our residual lines of credit
also include covenants that require us to meet certain minimum net worth and
operating loss tests and place limits on allowed levels of delinquencies,
losses, prepayments and net yields of the motor vehicle contracts included in
the related securitization.
WE DEPEND ON SECURITIZATIONS TO GENERATE REVENUE. If we are unable to
securitize profitably a sufficient number of our motor vehicle contracts in a
particular financial reporting period, then our revenues for that period could
decline and result in lower income or a loss for that period and we may be
unable to make payments on the notes.
We rely significantly upon securitizations to generate cash proceeds to
repay our warehouse credit facility and to thereby allow us to finance the
purchase of additional motor vehicle contracts. Further, the gain on sale of
motor vehicle contracts generated by our securitizations represents a
significant portion of our revenues. Our ability to complete securitizations of
our motor vehicle contracts is affected by the following factors, among other
things:
- conditions in the securities markets generally;
- prevailing interest rates;
- conditions in the asset-backed securities market specifically;
- the credit quality of our portfolio of motor vehicle contracts; and
- our ability to obtain credit enhancement.
Unanticipated delays in closing a securitization could also increase our
interest rate risk by increasing the warehousing period for our motor vehicle
contracts.
WE DEPEND ON CREDIT ENHANCEMENT. If we are unable to maintain our existing
financial guarantee insurance policies or to obtain new financial guarantee
insurance policies for our future securitizations, we could be subject to higher
financing costs, which could have a material adverse effect on our results of
operations, financial condition and cash flows and our ability to make payments
on the notes.
-12-
In each of our securitizations, we utilize credit enhancement in the
form of a financial guarantee insurance policy issued by MBIA Insurance
Corporation, or its predecessor. Each of these policies unconditionally and
irrevocably guarantees certain interest and principal payments on the securities
issued in our securitizations. These guarantees enable these securities to
achieve the highest credit rating available. This form of credit enhancement
reduces the costs of our securitizations relative to alternative forms of credit
enhancements currently available to us. MBIA is not required to insure future
securitizations and we are not restricted in our ability to obtain credit
enhancement from providers other than MBIA or to use other forms of credit
enhancement. As we pursue future securitizations, we may not be able to obtain:
- credit enhancement in any form from MBIA;
- credit enhancement from any other provider of credit
enhancement on acceptable terms; or
- similar ratings for future securitizations.
We also rely on MBIA's financial guarantee insurance policy to reduce
our borrowing cost under our warehouse facility with Triple-A One. If MBIA's
credit rating is downgraded or if it withdraws our credit enhancement for this
warehouse facility, we could be subject to higher interest costs for our future
securitizations and higher financing costs during the warehousing period.
WE ARE SUBJECT TO INTEREST RATE FLUCTUATIONS. Interest rate
fluctuations may materially and adversely affect our results of operations,
financial condition and cash flows and our ability to make payments on the
notes.
Our profitability is largely determined by the difference, or "spread,"
between the effective interest rate received by us on the motor vehicle
contracts which we acquire or originate and the interest rates payable under our
warehouse credit facility during the warehousing period and on the securities
issued in our securitizations.
Several factors affect our ability to manage interest rate risk. First,
we purchase or originate motor vehicle contracts at fixed interest rates, while
we borrow under our warehouse credit facility at variable interest rates that
are subject to frequent adjustment to reflect prevailing rates for short-term
borrowings. If the interest rates applicable to our borrowings under our
warehouse credit facility increase during a warehousing period, our policy is to
increase the interest rate that we quote to dealers at which we will purchase
motor vehicle contracts from those dealers or to increase the interest rates we
make available to consumers for motor vehicle contracts originated by us.
However, there is generally a time lag before our increased borrowing costs can
be offset by increases in these buy rates. In certain instances, the rates
charged by our competitors may limit our ability to pass through all or most of
our increased costs of warehousing financing.
Second, our spread can be materially and adversely affected by
increases in the prevailing interest rates in the commercial paper markets after
a motor vehicle contract is purchased or originated and while it is held during
the warehousing period. While our warehouse facility with Triple-A One permits
us generally to select maturities for commercial paper issued under this
facility, under these circumstances, our spread would be reduced if we selected
a shorter maturity or experienced a delay in completing a securitization.
Third, the interest rate demanded by investors in our securitizations
is a function of prevailing market rates for comparable transactions and the
general interest rate environment. Because the motor vehicle contracts that we
purchase or originate have fixed interest rates, we bear the risk of spreads
narrowing because of interest rate increases during the period from the date the
motor vehicle contracts are purchased or originated until the pricing of our
securitization of such motor vehicle 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 the use of a pre-funding structure
for our securitizations. A pre-funding structure utilizes a portion of the
proceeds of the sale of securities in a securitization to purchase motor vehicle
contracts after the initial closing of the securitization. However, this
strategy may not consistently or completely offset adverse interest rate
movements during the warehousing period or
-13-
we may sustain losses on hedging transactions. In order to execute our hedging
strategy we must estimate our monthly motor vehicle contract acquisition volume
and the timing of our securitizations. If such estimates are wrong, then our
gains on sales of motor vehicle contracts, results of operations, financial
condition and cash flows could be materially and adversely affected, including
our ability to make payments on the notes.
We also have exposure to interest rate fluctuations under our residual
lines of credit. The interest rates under these lines of credit are based on the
30 day London Interbank Offered Rate, or LIBOR. The applicable interest rate
under our lines of credit based on LIBOR reset on a monthly basis. In periods of
increasing interest rates, our cash flows, results of operations and financial
condition could be adversely affected, including our ability to fulfill our
obligations under the notes.
In addition, we have some interest rate exposure to falling interest
rates to the extent that the interest rates charged on motor vehicle contracts
sold in a securitization with a pre-funding structure decline below the rates
prevailing at the time of pricing of the securities to be issued in that
securitization. This rate decline would reduce the interest rate spread because
the interest rate on the securities issued in the securitization would remain
fixed, while the interest rates charged on the motor vehicle contracts which are
purchased during the pre-funding period would be declining. This would reduce
our gain on sale of our motor vehicle contracts and adversely affect our results
of operations, financial condition and cash flows and our ability to make
payments on the notes.
WE WILL BE ADVERSELY AFFECTED WHEN CONTRACTS ARE PREPAID OR DEFAULTED.
If motor vehicle contracts that we purchase or service are prepaid or experience
defaults, this could materially and adversely affect our results of operations,
financial condition and cash flows and our ability to make payments on the
notes.
Our results of operations, financial condition, cash flows and
liquidity, and consequently our ability to make payments on the notes, depend,
to a material extent, on the performance of motor vehicle contracts which we
purchase, warehouse and securitize. A portion of the motor vehicle 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 motor vehicle securing
a motor vehicle contract may not cover the outstanding principal balance on that
contract and the related costs of recovery. We maintain an allowance for credit
losses on motor vehicle contracts held during the warehousing period which
reflects our estimates of anticipated credit losses during that period. If the
allowance is inadequate, then we would recognize as an expense the losses in
excess of the allowance and our results of operations could be adversely
affected. In addition, under the terms of our warehouse facility with Triple-A
One we are not able to borrow against defaulted motor vehicle contracts.
Our servicing income can also be adversely affected by prepayment of,
or defaults under, motor vehicle contracts in our servicing portfolio. Our
contractual servicing revenue is based on a percentage of the outstanding
principal balance of the motor vehicle contracts in our servicing portfolio. If
motor vehicle contracts are prepaid or charged-off, then our servicing revenue
will decline while our servicing costs may not decline proportionately.
The gain on sale of motor vehicle contracts recognized by us in each
securitization and the value of our residual interest in the securitized assets
in each securitization reflects our estimate of expected future credit losses
and prepayments for the motor vehicle contracts included in such securitization.
If actual rates of credit loss or prepayments, or both, on such motor vehicle
contracts exceed our estimates, the value of our residual interest and the
related cash flow would be impaired. We periodically review our credit loss and
prepayment assumptions relative to the performance of the securitized motor
vehicle contracts and to market conditions. Our results of operations and
liquidity could be adversely affected if actual credit loss or prepayment levels
on securitized motor vehicle contracts substantially exceed expected levels as
was the case in the fourth quarter of 2001. As a result, we wrote down the value
of our residual interest by $3.3 million in the fourth quarter of 2001. If
necessary, we will, in the future, further write down the value of our residual
interest.
-14-
WE WILL BE ADVERSELY AFFECTED IF WE LOSE SERVICING RIGHTS. The loss of
our servicing rights could materially and adversely affect our results of
operations, financial condition and cash flows and our ability to make payments
on the notes.
Our results of operations, financial condition and cash flows, and our
ability to make payments on the notes, would be materially and adversely
affected if any of the following were to occur:
- the loss of our servicing rights under the sale and servicing
agreement for our warehouse facility with Triple-A One;
- the loss of our servicing rights under the applicable pooling
and servicing or sale and servicing agreement relating to
motor vehicle contracts which we have sold in our
securitizations; or
- the occurrence of certain trigger events under the insurance
agreement between us and MBIA in each of our securitizations
that would block the release of future servicing cash flows
from the spread accounts in those securitizations;
We are entitled to receive servicing income only while we act as
servicer under the applicable sale and servicing agreement or pooling and
servicing agreement for motor vehicle contracts which we have securitized and
sold. Under our warehouse facility with Triple-A One, MBIA can terminate our
right to act as servicer upon the occurrence of certain events, including:
- our failure generally to observe and perform covenants and
agreements applicable to us;
- certain bankruptcy events involving us; or
- the occurrence of certain events of default under the
documents governing the facilities.
WE DEPEND ON KEY PERSONNEL. The success of our operations depends on
certain 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. Increased competition could
materially and adversely affect our operations and profitability.
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, banks, savings associations,
independent finance companies, credit unions and leasing companies. Many 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 to us
for purchase those motor vehicle contracts that meet our underwriting criteria.
We may not be able to continue to compete successfully in the markets we serve.
WE MAY BE HARMED BY ADVERSE ECONOMIC CONDITIONS. Adverse economic
conditions could materially and adversely effect our revenues and cash flows.
-15-
Our business is dependent upon the sale of motor vehicles. Our ability
to continue to acquire motor vehicle 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 states where our motor vehicle contracts are geographically concentrated,
could have a material adverse impact upon us, our results of operations and our
ability to implement our business strategy. Similarly, adverse economic
conditions or other factors particularly affecting the states in which our motor
vehicle contracts are geographically concentrated might adversely affect the
performance of those contracts, including the level of delinquencies, which
could materially and adversely affect our results of operation, financial
condition and cash flows and our ability to perform our obligations under the
notes. In particular, economic conditions or other factors particularly
affecting the state of California might adversely affect the performance of the
motor vehicle contracts in our serviced portfolio. As of September 30, 2001,
approximately 28.48% of our contracts in our serviced portfolio (based on the
number of contracts outstanding) were originated in California. In addition,
these contracts represent 27.24% of the outstanding balance of our serviced
portfolio. Such percentages are higher than any other state.
The automobile industry generally is sensitive to adverse economic
conditions both nationwide and in California. Periods of rising interest rates,
reduced economic activity or higher rates of unemployment generally result in a
reduction in the rate of sales of motor vehicles and higher default rates on
motor vehicle loans. These economic conditions could occur in the future and if
they occur, they would likely result in severe reductions in our revenues or the
cash flows available to us to permit us to remain current on our credit
facilities or materially and adversely affect our ability to make payments on
the notes.
WE ARE SUBJECT TO SYSTEM RISKS. Problems with our in-house loan
accounting and collection systems could materially and adversely affect our
collections and cash flows and our ability to make payments on the notes.
As of July 1, 2001, we converted from an external service provider for
the loan accounting and collection systems relating to the motor vehicle
contracts in our servicing portfolio to in-house systems. If issues with our in-
house systems arise in the future, we may be unable to maintain the same level
of operations with respect to the funding of motor vehicle contacts and the
servicing of our outstanding portfolio. Any significant failures or defects with
our in-house systems could adversely affect our results of operations, financial
conditions and cash flows and our ability to perform our obligations under the
notes.
WE ARE SUBJECT TO MANY REGULATIONS. Failure to materially comply with
all laws and regulations applicable to us could materially and adversely affect
our ability to operate our business and our ability to make payments on the
notes.
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 motor vehicle
contracts;
- require specific disclosures; and
- define our rights to repossess and sell collateral.
-16-
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. Unfavorable outcomes in any of our
current or future litigation proceedings could materially and adversely affect
our results of operations, financial conditions and cash flows and our ability
to make payments on the notes.
We are party to various legal proceedings, similar to actions brought
against other companies in the motor vehicle finance and other industries.
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.
Moreover, 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 our use of the cash-in method of measuring and accounting for credit
enhancement assets in our 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 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 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 appealed the dismissal.
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.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain statements of a forward-looking nature
relating to future events or our future performance. These forward-looking
statements are based on our current expectations, assumptions, estimates and
projections about us and our industry. When used in this prospectus, the words
"expects," "believes," "anticipates," "estimates," "intends" and similar
expressions are intended to identify forward-looking statements. These
statements include, but are not limited to, statements of our plans, strategies
and prospects under the captions "Prospectus Summary," "Risk Factors," "Use of
Proceeds," and other statements contained elsewhere in this prospectus.
These forward-looking statements are only predictions and are subject
to risks and uncertainties that could cause actual events or results to differ
materially from those projected. The cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this
-17-
prospectus. We assume no obligation to update these forward-looking statements
publicly for any reason. Actual results could differ materially from those
anticipated in these forward-looking statements.
RATIOS OF EARNINGS TO FIXED CHARGES
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges (1) ... 2.21x 1.29x 1.68x 1.86x 1.46x 1.46x
(1) For purposes of computing our ratios of earnings to fixed charges, we
calculated earnings by adding fixed charges to income before income
taxes. Fixed charges consist of gross interest expenses and one third
of our rent expense, which is the amount we believe is representative
of the interest factor component of our rent expense.
USE OF PROCEEDS
If all of the notes are sold with maturities of two years or more, we
would expect to receive approximately $48.2 million of net proceeds from this
offering after deducting the selling agent's commissions and estimated offering
expenses payable by us. Although we have no specific plan to allocate the
proceeds, the general purpose of the offering is to raise capital to expand our
business and for other general corporate purposes, which may include payment of
general and administrative expenses.
-18-
CAPITALIZATION
The following table sets forth our capitalization, as of September 30,
2001, and as adjusted to give effect to the sale of $50 million principal amount
of the notes. For a description of the application of the net proceeds, assuming
all of the notes are sold with maturities of two years or more, see "Use of
Proceeds" and "Risk Factors - Risk Factors Relating to the Notes - Our
Management has Broad Discretion Over the Use of Proceeds."
AS OF SEPTEMBER 30, 2001
----------------------------
AS
ACTUAL ADJUSTED
---------- ---------
LIABILITIES (In Thousands)
Accounts Payable...................................................... $ 30,562 $ 30,562
Debt:
Warehouse Borrowings................................................ $205,503
Excess Servicing Credit and Residual Lines.......................... 59,855
Subordinated Debt................................................... 17,078
--------
Subtotal of Debt........................................... 282,436 $ 282,436
---------- ---------
Other Liabilities.....................................................
Capital Lease Obligations........................................... 456
Accrued Interest Payable............................................ 705
Other Liabilities................................................... 26,508
--------
Subtotal of Other Liabilities.............................. 27,669 27,669
---------- ---------
Subtotal of Indebtedness Senior to Notes................... 340,667 340,667
Renewable Unsecured Subordinated Notes ........................ 50,000
---------- ---------
Total Liabilities......................................... 340,667 390,667
STOCKHOLDERS' EQUITY
Series A Participating Preferred stock $.01 par value,
200,000 shares authorized; no shares issued and outstanding........ - -
Preferred stock (undesignated), $.01 par value, 2,800,000
shares authorized; no shares issued and outstanding................ - -
Common stock, $.01 par value, 15,000,000 shares authorized;
5,078,046 shares issued and outstanding............................ 51 51
Additional paid-in capital
32,647 32,647
Retained earnings..................................................... 25,601 25,601
Accumulated other comprehensive loss.................................. 4,479 4,479
---------- ---------
Total Stockholders' Equity:................................ 62,778 62,778
---------- ---------
Total Capitalization:...................................... $ 403,445 $ 453,445
========== =========
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On January 31, 2002, we announced our financial and operational results
for the year ended December 31, 2001. The following preliminary financial data
for the year ended December 31, 2001 is unaudited and is subject to change. The
following data reflects all adjustments (consisting of a pre-tax write-down of
our residual interest in securitized assets of $3.3 million as well as normal
recurring adjustments) which are, in our opinion, necessary for a fair
presentation of our financial position and operating results:
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Net Income $4.4 million $5.8 million
Total Revenues $103.6 million $100.9 million
Contracts Purchased $1.6 billion $1.7 billion
Annualized Net Charge-offs as a Percent
of the Average Servicing Portfolio 2.78% 2.30%
Operating Expenses as a Percent of the
Average Servicing Portfolio 3.2% 3.4%
Total Delinquencies as a Percent of the
Servicing Portfolio 4.01% 4.14%
Gains on Sales of Contracts $30.8 million $45.0 million
Servicing Fee Income $50.1 million $47.5 million
REVENUES. For the twelve months ended December 31, 2001, total revenues
increased to $103.6 million, compared to $100.9 million in 2000. For the fourth
quarter ended December 31, 2001, total revenues were $23.3 million, compared to
$23.9 million in the same period in 2000 and $26.4 million for the third quarter
of 2001. Revenues for the quarter were impacted by the economic slow-down that
the nation is experiencing. In addition, higher than expected losses and
delinquency for the period necessitated a pre-tax write-down of our residual
interest in securitized assets ("RISA") by $3.3 million. Net interest income for
the fourth quarter ended December 31, 2001 was $6.8 million compared to $3.0
million for the same period in 2000. For the year ended December 31, 2001, net
interest income was $22.7 million, compared to $8.3 million in 2000. The
increase in net interest income for the year was principally due to excess
service fee income now reported as interest income in accordance with Emerging
Issues Task Force 99-20. For the twelve months ended December 31, 2001, service
fee income increased to $50.1 million, compared to $47.5 million for the same
period in 2000. For the quarter ended December 31, 2001, service fee income was
$11.9 million versus $14.7 million for the same period in 2000.
During the fourth quarter of 2001, we recorded a net gain on sale of
contracts of $4.6 million, after the RISA write-down, compared to $6.2 million
during the same period in 2000. For the twelve months ended December 31, 2001,
we recorded a total gain on sales of $30.8 million, compared to $45.0 million
for 2000. The reduction in gain recorded is partially due to a reduction in
contract purchases compared to prior periods.
CONTRACT VOLUME. Contract purchases for the quarter and twelve-month
period ended December 31,2001 were $365.3 million and $1.6 billion,
respectively, compared to $401.2 million and $1.7 billion for the same periods
in 2000. The reduction in volume for the quarter was impacted by zero percent
financing incentives offered by most of the automobile manufacturers, the events
of September 11th and the softening economy.
OPERATING EXPENSES. Operating expenses totaled $21.8 million or 3.0% of
average serviced portfolio for the fourth quarter 2001, compared to $20.4
million or 3.1% for the same period in 2000. For the twelve months ended
December 31, 2001, total expenses were $89.5 million or 3.2%, compared to $84.3
million or 3.4% for the same period in 2000. The reduction in operating expenses
as a percent of average serviced portfolio is the result of renegotiated vendor
contracts and the successful conversion of our loan and collection data
processing systems to an in-house system.
PORTFOLIO PERFORMANCE. As a result of the economic slow-down that the
nation is experiencing, losses and delinquencies in the fourth quarter of 2001
were higher than was anticipated when the affected securitizations were
originally completed. The general economic slow-down negatively impacted
recovery rates on car sales and increased bankruptcy filings, which, in turn,
led to increased loss rates in the fourth quarter of 2001. The increased loss
rates necessitated a pre-tax write-down of our residual interest in securitized
assets in the amount of $3.3 million.
Total delinquency as a percentage of the serviced portfolio decreased to
4.01% at December 31, 2001, from 4.14% at year-end 2000. Annualized net
charge-offs as a percent of the average servicing portfolio increased to 3.13%
during the fourth quarter of 2001, from 2.42% for the same period in 2000. For
the twelve months ended December 31, 2001, net charge-offs were 2.78% compared
to 2.30% in 2000. Our allowance for estimated credit losses on securitized
assets was 4.2% at December 31, 2001, compared to 4.6% at December 31, 2000. In
an effort to improve borrower credit statistics, we initiated tighter credit
standards during the fourth quarter of 2000. This resulted in increased FICO
credit scores and an improvement in overall borrower statistics. This
improvement continued throughout 2001. The allowance for loan loss has declined
as a percentage of loans outstanding as newer transactions have lower loss
reserves based on the improved quality of the underlying contracts.
The majority of the charge-offs are related to older transactions that have been
impacted by the slow-down in the economy and the lower credit quality of the
borrowers.
2002 DEVELOPMENTS. While we are currently marketing our second
net interest margin securitization for the purpose of providing additional
borrowing capacity under our existing residual lines of credit, we are still in
the marketing stage of such transaction, and the structure of such transaction
has not been finally determined. Although the cost of such transaction may have
an adverse impact on first quarter earnings in 2002, we are not able to predict
the extent, if any, of such impact at this time.
-20-
DESCRIPTION OF THE NOTES
GENERAL. The notes we are offering in this prospectus will represent
subordinated, unsecured debt obligations of Onyx Acceptance Corporation. We will
issue the notes under an indenture dated February __, 2002, between us and U.S.
Bank National Association, as trustee. The terms and conditions of the notes
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939. The following is a summary of
some, but not all, provisions of the notes, the indenture and the Trust
Indenture Act. For a complete understanding of the notes, you should review the
definitive terms and conditions contained in the actual notes, the indenture and
the Trust Indenture Act, which include definitions of certain terms used below.
Copies of the form of the notes and the indenture are available from us at no
charge upon request.
The notes will be subordinated in right of payment to the prior payment
in full of all our secured, unsecured, senior and subordinate debt, as described
in this prospectus, whether outstanding on the date of the indenture or incurred
following the date of the indenture. Subject to limited restrictions contained
in the indenture discussed below, there is no limit under the indenture on the
amount of additional debt we may incur. See " - Subordination" below. In
addition, the notes are not insured by the Federal Deposit Insurance
Corporation, the Securities Investor Protection Corporation or any other agency
or company.
The notes are not secured by any collateral or lien and we are not
required to establish or maintain a sinking fund to provide for payments on the
notes. See " - No Security; No Sinking Fund" below.
You may determine the amount (minimum $1,000) and term (ranging from 3
months to 10 years) of the notes you would like to purchase when you subscribe;
however, depending upon our capital requirements, we may not always offer notes
of each maturity. See " - Denomination" and " - Term" below.
With the help of our servicing agent, we will determine the rate at
which we will pay you interest on the notes at the time of subscription and the
rate will be fixed for the term of your note. Currently available rates will be
set forth in a supplement to this prospectus. The interest rate will vary based
on the term to maturity of the note you purchase and the total principal amount
of all notes owned by you and your immediate family. We may change the interest
rates at which we are offering new or renewed notes based on market conditions,
the demand for notes and other factors. See " - Interest Rate" below.
Upon acceptance of your subscription to purchase notes, our servicing
agent will create an account in a book-entry registration and transfer system
for you and credit the principal amount of your subscription to your account.
Our servicing agent will send you a book-entry receipt or confirmation that will
indicate our acceptance of your subscription. You will have three business days
to rescind your subscription after the date on which we accept your
subscription. If your subscription is rejected by us or our servicing agent, or
you rescind your subscription during the three-day revocation period, all funds
deposited will be promptly returned to you without any interest. See " -
Book-Entry Registration and Transfer" and " - Rescission Right" below. Investors
whose subscriptions for notes have been accepted and anyone who subsequently
acquires notes in a qualified transfer are referred to as "holders" or
"registered holders" in this prospectus and in the indenture.
We may modify or supplement the terms of the notes described in this
prospectus from time to time in a supplement to the indenture and this
prospectus. Except as set forth under " - Amendment, Supplement And Waiver"
below, any modification or amendment will not affect notes outstanding at the
time of such modification or amendment.
DENOMINATION. You may purchase notes in the minimum principal amount of
$1,000 or any amount in excess of $1,000. You will determine the original
principal amount of each note you purchase when you subscribe. You may not
cumulate purchases of multiple notes with principal amounts less than $1,000 to
satisfy the minimum denomination requirement.
-21-
TERM. We may offer notes with terms ranging from three months to ten
years as follows:
- three months - three years
- six months - four years
- one year - five years
- two years - ten years
You will select the term of each note you purchase when you subscribe. You may
purchase multiple notes with different terms by filling in investment amounts
for more than one term on your subscription agreement. However, we may not
always sell notes with all of the above terms.
INTEREST RATE. The rate of interest we will offer to pay you on notes
at any particular time will vary based upon market conditions, and will be
determined by the length of the term of the notes, the total principal amount of
all notes owned by you and your immediate family and our capital requirements.
The interest rate on a particular note will be determined at the time of
subscription or renewal, and then remain fixed for the original or renewal term
of the note. We will establish and may change the interest rates payable for
notes of various terms and at various investment levels in a supplement to this
prospectus. Our servicing agent will assist us in establishing these interest
rates, including advising us on current market conditions.
The notes will earn incrementally higher interest rates when, at the
time they are purchased or renewed, the aggregate principal amount of the note
portfolios of the holder and the holder's immediate family is at least $25,000,
$50,000, $75,000 or $100,000. The interest rates payable at each level of
investment will be set forth in a prospectus supplement. Immediate family
members include parents, children, siblings, grandparents, and grandchildren.
Members of sibling families are also considered immediate family members if both
siblings are note holders. An investor must identify his or her immediate family
members in the subscription documents to include their portfolios in determining
the interest rate for such investor's notes.
Interest rates we offer on the notes may vary based on numerous factors
in addition to length of the term and aggregate principal amount. These factors
may include, but are not limited to:
- the desire to attract new investors;
- whether the notes exceed certain principal amounts;
- whether the notes are purchased for IRA and/or Keogh accounts;
- whether the notes are being renewed by existing holders; and
- whether the notes are beneficially owned by persons residing
in particular geographic localities.
COMPUTATION OF INTEREST. We will compute interest on notes on the basis
of an actual calendar year. Interest will compound daily and accrue from the
date of purchase. The date of purchase will be the date we receive funds, if the
funds are received prior to 12:01 p.m. central time on a business day, or the
next business day if the funds are received on a non-business day or on or after
12:01 p.m. central time on a business day. Our business days are Monday through
Friday, except for legal holidays in the State of Minnesota.
INTEREST PAYMENT DATES. Holders of notes may elect at the time a
subscription agreement is completed to have interest paid either monthly,
quarterly, semiannually, annually or at maturity. If you choose to have interest
paid monthly, you may elect the day of the month on which interest will be paid.
For all other payment periods, interest will be paid on the same day of the
month as the purchase date of your note. If you elect to have interest paid
monthly, your last interest payment will be made on the same day of the month as
the purchase date of the note.
-22-
The election of the period or day of interest payment for each note may
be changed one time only by the holder during the term of the note, subject to
our approval. Requests to change the election must be made in writing to our
servicing agent and will be effective on the first business day following the
45th day following the date the election is received. No specific change in
election form is required and there is no charge to change the election once
during the term of a note. Any interest not paid on an interest payment date
will be paid at maturity.
PLACE AND METHOD OF PAYMENT. We will pay principal and interest on the
notes through our paying agent, by electronic funds transfer to a depository
account you specify in your subscription documents. If the foregoing payment
method is not available, principal and interest on the notes will be payable at
our principal executive office or at such other place as we may designate for
payment purposes.
SERVICING AGENT. We have engaged Sumner Harrington Ltd., the investment
banking firm that is helping us sell the notes, to act as our servicing agent
for the notes. Sumner Harrington's responsibilities as servicing agent will
involve the performance of certain administrative and customer service functions
for the notes that we are responsible for performing as the issuer of the notes.
For example, as our servicing agent, Sumner Harrington will serve as our
registrar and transfer agent and will manage all aspects of the customer service
function for the notes, including handling all phone inquiries, mailing
investment kits, meeting with investors, processing subscription agreements,
issuing quarterly investor statements and redeeming and repurchasing notes. In
addition, as servicing agent, Sumner Harrington will provide us with monthly
reports and analysis regarding the status of the notes, the marketing efforts
and the amount of notes that remain available for purchase and also will have
the ability to exercise certain limited discretion with respect to waiving early
repurchase penalties, changing interest payment dates and rejecting subscription
agreements. Other duties of Sumner Harrington as our servicing agent under the
distribution and management agreement are described throughout this section and
under "Plan of Distribution".
As compensation for its services as servicing agent, we will pay Sumner
Harrington an annual portfolio management fee equal to 0.25% of the weighted
average principal balance of the notes so long as Sumner Harrington is engaged
as our servicing agent. Such ongoing fee will be paid monthly. The distribution
and management agreement may be terminated by either party by prior notice.
Sumner Harrington's duties and compensation as selling agent under the same
agreement are described under "Plan of Distribution."
You may contact our servicing agent as follows with any questions about
the notes:
Attn.: Onyx Notes Department
Sumner Harrington Ltd.
11100 Wayzata Boulevard, Suite 170
Minneapolis, MN 55305
Telephone: (800) 234-5777
BOOK-ENTRY REGISTRATION AND TRANSFER. The notes are issued in book
entry form, which means that no physical note is created. Evidence of your
ownership is provided by written confirmation. Holders will not receive or be
entitled to receive any physical delivery of a certificated security or
negotiable instrument that evidences their notes. The issuance and transfer of
notes will be accomplished exclusively through the crediting and debiting of the
appropriate accounts in our book-entry registration and transfer system. Our
book-entry system will be maintained by our servicing agent.
The holders of the accounts established upon the purchase or transfer
of notes will be deemed to be the owners of the notes under the indenture. The
holder of the notes must rely upon the procedures established by the trustee to
exercise any rights of a holder of notes under the indenture. On a monthly
basis, our servicing agent will provide the trustee with information regarding
the establishment of new accounts and the transfer of existing accounts.
Our servicing agent will regularly provide the trustee with information
regarding the total amount of any principal and/or interest due to holders with
regard to the notes on any interest payment date or upon redemption.
-23-
On each interest payment date, the servicing agent will credit interest due on
each account and direct our paying agent to make such payments to the holders.
The servicing agent will determine the interest payments to be made to the
book-entry accounts and maintain, supervise and review any records relating to
book-entry beneficial interests in the notes.
Book-entry notations in the accounts evidencing ownership of the notes
are exchangeable for actual notes in denominations of $1,000 and any amount in
excess of $1,000 and fully registered in those names as we direct only if: (i)
we, at our option, advise the trustee in writing of our election to terminate
the book-entry system, or (ii) after the occurrence of an event of default under
the indenture, holders of the notes aggregating more than 50% of the aggregate
outstanding amount of the notes advise the trustee in writing that the
continuation of a book-entry system is no longer in the best interests of the
holders of notes and the trustee notifies all registered holders of the
occurrence of any such event and the availability of certificated securities
that evidence the notes. Subject to the exceptions described above, the
book-entry interests in these securities will not be exchangeable for fully
registered certificated notes.
RESCISSION RIGHT. The holder has the right to rescind his or her
investment without penalty within the first three business days after acceptance
of his or her subscription. No interest will be earned for the time the
rescinded note is outstanding. We will promptly return any funds sent with a
subscription that is subsequently properly rescinded. The limitation on the
amount of notes that can be redeemed early in a single calendar quarter
described under "- Redemption or Repurchase Prior to Stated Maturity" below does
not affect your rescission right.
RIGHT TO REJECT SUBSCRIPTIONS. Our servicing agent may reject any
subscription for notes in its sole discretion.
RENEWAL OR REDEMPTION ON MATURITY. Approximately 15, but not less than
10, days prior to maturity of your note, our servicing agent will send you a
notice at your registered address that your note is about to mature and whether
we will allow automatic renewal of your note. If we allow you to renew your
note, our servicing agent will also send to you a current prospectus supplement,
and a current prospectus if such prospectus has changed since the delivery of
the prospectus in connection with your original subscription or any prior
renewal. The prospectus supplement will set forth the interest rates then in
effect. Such notice will recommend that you review the prospectus, along with
the prospectus supplement, prior to exercising one of the below options. If we
do not send you a new prospectus, a new prospectus will be sent to you upon
request. You will have until 15 days after the maturity date to exercise one of
the following options:
- You can do nothing, in which case your note will automatically
renew for a new term equal to the original term at the
interest rate in effect at the time of renewal. If your note
pays interest only at maturity, all accrued interest will be
added to the principal amount of your note upon renewal. For
notes with other payment options, interest will be paid on the
renewed note on the same schedule as the original note.
- You can require repayment of your note, in which case the
principal amount will be repaid in full along with any accrued
and unpaid interest. If you choose this option, your note will
not earn interest on or after the maturity date.
- You can require repayment of your note and use all or part of
the proceeds to purchase a new note with a different term. To
exercise this option, you will need to complete a subscription
agreement for the new note and mail it along with your request
to our servicing agent. The issue date of the new note will be
the maturity date of the old note. Any proceeds from the old
note that are not applied to the new note will be sent to you.
- If your note pays interest only at maturity, you can receive
the accrued interest that you have earned during the note term
just ended while allowing the principal amount of your note to
roll over and renew for the same term at the interest rate
then in effect. To exercise this option, call, fax or send a
written request to our servicing agent.
-24-
The foregoing options will be available to holders until termination or
redemption under the indenture and the notes by either the holder or us.
Interest will accrue from the first day of each renewed term. Each renewed note
will retain all its original provisions, including provisions relating to
payment, except that the interest rate payable during any renewed term will be
the interest rate that is being offered to other holders of notes with the same
term at the time of renewal. If similar notes are not then being offered, the
interest rate upon renewal will be the rate specified by us on or before the
maturity date, or the rate of the existing note if no such rate is specified.
If we notify the holder of our intention to repay a note at maturity,
we will pay the holder the principal amount and any accrued and unpaid interest
on the stated maturity date. Similarly, if, within 15 days after its stated
maturity date, a holder requests repayment, we will not pay interest during the
period on or after the note's stated maturity date and prior to repayment. We
will pay the holder upon the later of the maturity date or 5 business days after
the date on which we receive such notice from the holder. Requests for repayment
should be made to our servicing agent in writing.
REDEMPTION OR REPURCHASE PRIOR TO STATED MATURITY. The notes may be
redeemed prior to stated maturity only as set forth below. The holder has no
right to require us to prepay or repurchase any note prior to its maturity date
as originally stated or as it may be extended, except as indicated below.
Redemption By Us. We have the right to redeem any note at any
time prior to its stated maturity upon 30 days written notice to the holder of
the note at a redemption price equal to the outstanding principal amount thereof
plus accrued and unpaid interest up to but not including the date of redemption
without any penalty or premium. We may use any criteria we choose to determine
which notes we will redeem if we choose to do so. We are not required to redeem
notes on a pro rata basis.
Repurchase Election Upon Death Or Total Permanent Disability.
Notes may be repurchased prior to maturity, in whole and not in part, at the
election of a holder who is a natural person (including notes held in an
individual retirement account), by giving us written notice within 45 days
following his or her total permanent disability, as established to our
satisfaction, or at the election of his or her estate, by giving written notice
within 45 days following his or her death. Subject to the limitations described
below, we will repurchase the notes within 10 days after receipt of notice or
satisfactory establishment of the holder's death or disability. The repurchase
or redemption price, in the event of such a death or disability, will be the
principal amount of the notes, plus interest accrued and not previously paid up
to but not including the date of repurchase. If spouses are joint registered
holders of a note, the election to repurchase will apply when either registered
holder dies or becomes subject to a total permanent disability. If the note is
held by a person who is not a natural person such as a trust, partnership,
corporation or other similar entity, the right to request repurchase upon death
or disability does not apply. In addition, we will not be required to repurchase
any notes prior to maturity at the request of the holder in excess of $1 million
aggregate principal amount for all holders per calendar quarter including upon
death or total permanent disability and any notes that we repurchase pursuant to
the holders' right to elect repurchase, as described below. For purposes of the
$1 million limit, repurchase requests will be honored in the order in which they
are received and any repurchase request not honored in a calendar quarter will
be honored in the next calendar quarter, to the extent possible, since
repurchases in the next calendar quarter are also subject to the $1 million
limitation.
We may modify the foregoing policy on repurchase after death
or disability in the future. However, no modification will affect the right of
repurchase applicable to any outstanding note.
Repurchase At Request of Holder. In addition to the right to
elect repurchase upon death or disability, a holder may elect repurchase of
notes prior to maturity, in whole and not in part, at any time by giving us
written notice. Subject to the $1 million limitation described below, we will
repurchase the holder's note(s) specified in the notice within 10 days of
receipt of the notice. The repurchase price, in the event of such election, will
be the principal amount of the note, plus interest accrued and not previously
paid (up to but not including the date of repurchase), minus a repurchase
penalty. If repurchase is requested prior to maturity, then the early repurchase
penalty for a note with a three month maturity is the interest accrued on such
note up to the date of repurchase, not to exceed three months of simple interest
at the existing rate. If repurchase is requested prior to
-25-
maturity, then the penalty for a note with a maturity of six months or longer is
the interest accrued on such note up to the date of repurchase, not to exceed
six months of simple interest at the existing rate. The penalty for early
repurchase may be waived or reduced at the limited discretion of our servicing
agent. We will not be required to redeem any notes prior to maturity at the
request of the holder in excess of $1 million aggregate principal amount for all
holders per calendar quarter including elections by holders who are requesting
repurchase pursuant to this paragraph and any notes that we repurchase pursuant
to the death or disability of a holder as described above. For purposes of the
$1 million limit, repurchase requests will be honored in the order in which they
are received and any repurchase request not honored in a calendar quarter will
be honored in the next calendar quarter, to the extent possible, since
repurchases in the next calendar quarter are also subject to the $1 million
limitation.
We may modify the foregoing policy on repurchase at the
holder's election in the future. However, no modification will affect the right
of repurchase applicable to any note outstanding at that time.
TRANSFERS. The notes are not negotiable debt instruments and, subject
to certain exceptions, will be issued only in book-entry form. The book-entry
receipt issued upon our acceptance of a subscription is not a certificated
security or negotiable instrument, and no rights of record ownership can be
transferred without our prior written consent. Ownership of notes may be
transferred on our register only as follows:
- The holder must deliver written notice requesting a transfer
to our servicing agent signed by the holder(s) or such
holder's duly authorized representative on a form to be
supplied by our servicing agent.
- Our servicing agent must provide its written consent to the
proposed transfer, which consent may not be unreasonably
withheld.
- Our servicing agent may require a legal opinion from counsel
satisfactory to the servicing agent that the proposed transfer
will not violate any applicable securities laws and a
signature guarantee in connection with such transfer.
Upon transfer of a note, our servicing agent will provide the new
holder of the note with a book-entry receipt which will evidence the transfer of
the account on our records. We or our servicing agent may charge a reasonable
service charge in connection with the transfer of any note.
QUARTERLY STATEMENTS. Our servicing agent will provide holders of the
notes with quarterly statements, which will indicate, among other things, the
account balance at the end of the quarter, interest credited, redemptions or
repurchases made, if any, and the interest rate paid during the quarter. These
statements will be mailed not later than the tenth business day following the
end of each calendar quarter. Our servicing agent will provide additional
information as holders of notes may reasonably request from time to time. Our
servicing agent may charge such holders a fee to cover the charges incurred in
providing such information.
SUBORDINATION. The indebtedness evidenced by the notes, and any
interest thereon, are subordinated in right of payment to all of our senior
debt. "Senior debt" means all of our secured, unsecured, senior or subordinate
indebtedness and all such indebtedness owed by our special purpose entities,
whether outstanding on the date of this prospectus or incurred after the date of
this prospectus, whether such indebtedness is or is not specifically designated
as being senior debt in its defining instruments, other than (i) the offering of
additional renewable unsecured subordinated notes which will rank equally with
the notes and (ii) existing and future debt that is primarily held by our
affiliates, subsidiaries or control persons except for debt held by our special
purpose entities. The indenture does not prevent holders of senior debt from
disposing of, or exercising any other rights with respect to, any or all of the
collateral securing the senior debt. As of September 30, 2001, we had
approximately $282.4 million of debt outstanding that would be senior to the
notes, including debt owed by our special purpose entities. Except for certain
limited restrictions, the terms of the notes or the indenture do not impose any
limitation on the amount of senior debt or other indebtedness we may incur,
although our existing senior debt agreements may restrict us from incurring new
senior debt. See "Risk Factors - Risk Factors Relating to the Notes - You Lack
Priority in Payment on the Notes."
-26-
The notes are not guaranteed by any of our subsidiaries, affiliates or
control persons. Accordingly, in the event of a liquidation or dissolution of
one of our subsidiaries, the law requires that creditors of that subsidiary be
paid in full, or provision for such payment be made, from the assets of that
subsidiary prior to distributing any remaining assets to us as a shareholder of
that subsidiary. Therefore, in the event of liquidation or dissolution of a
subsidiary, no assets of that subsidiary may be used to make payment to the
holders of the notes until the creditors of that subsidiary are paid in full
from the assets of that subsidiary.
Existing and future debt that is primarily held by our affiliates,
subsidiaries or control persons, other than debt held by our special purpose
entities, will be subordinated to the notes. However, as long as we make
required payments on the notes and there exists no default under the notes or
the indenture, we may also make required payments and pre-payments on, and
complete payment of, our debt held by our affiliates, subsidiaries and control
persons. As of September 30, 2001, we had no principal amount outstanding held
by our affiliates, subsidiaries or control persons, other than debt owed by our
special purpose entities. Therefore, none of our current debt is subordinate to
the notes. To the extent we incur debt held by our affiliates, subsidiaries or
control persons, other than debt owed by our special purpose entities, we have
no current intention to prepay any such debt obligations in advance of the
maturity of those obligations.
The subordination of debt held by our affiliates and subsidiaries or
control persons to the notes does not apply to debt owed by our special purpose
entities that may be our affiliates or subsidiaries, which debt is senior to the
notes. Special purpose entities are entities that are formed for the specific
purpose of securitizing our auto contract receivables and facilitating our
warehouse, residual and other financing facilities. As of September 30, 2001,
our special purpose entities had an aggregate of $265.4 million in outstanding
principal amount of indebtedness, repayment of which is senior to the notes.
In the event of any liquidation, dissolution or any other winding up of
us, or of any receivership, insolvency, bankruptcy, readjustment, reorganization
or similar proceeding under the U.S. Bankruptcy Code or any other applicable
federal or state law relating to bankruptcy or insolvency, or during the
continuation of any event of default on the senior debt, no payment may be made
on the notes until all senior debt has been paid in full. If any of the above
events occurs, holders of senior debt may also submit claims on behalf of
holders of the notes and retain the proceeds for their own benefit until they
have been fully paid, and any excess will be turned over to the holders of the
notes. If any distribution is nonetheless made to holders of the notes, the
money or property distributed to them must be paid over to the holders of the
senior debt to the extent necessary to pay senior debt in full.
In the event and during the continuation of any default in the payment
of principal of or interest on any senior debt, we will not make any payment,
direct or indirect, on the notes and any other indebtedness being subordinated
to the payment of the notes unless and until (i) the default has been cured or
waived or has ceased to exist or (ii) the end of the payment blockage period.
Any payment blockage period will commence on the date the trustee receives
written notice of default from a holder of the senior debt and will end on the
earlier of (a) 179 days after the trustee's receipt of the notice of default;
(b) the trustee's receipt of a valid waiver of default from the holder of senior
debt; or (c) the trustee's receipt of a written notice from the holder of senior
debt terminating the payment blockage period.
NO SECURITY; NO SINKING FUND. The notes are unsecured, which means that
none of our tangible or intangible assets or property, nor any of the assets or
property of any of our affiliates or subsidiaries, has been set aside or
reserved to make payment to the holders of the notes in the event that we
default on our obligations to the holders. In addition, we do not contribute
funds to any separate account, commonly known as a sinking fund, to repay
principal or interest due on the notes upon maturity or default. See "Risk
Factors - Risk Factors Relating to the Notes - The Notes will have No Sinking
Fund, Security, Insurance or Guarantee."
RESTRICTIVE COVENANTS. The indenture contains certain limited
restricted covenants that require us to maintain certain financial standards and
restrict us from certain actions as set forth below.
Maintenance of Certain Financial Standards. The indenture provides
that, so long as the notes are outstanding:
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- we will maintain a positive net worth, which includes
stockholder's equity and any of our debt that is subordinate
to the notes.
Prohibition on Certain Actions. The indenture provides that,
so long as the notes are outstanding:
- we will not pay any dividends on our common or preferred stock
unless there is no event of default with respect to the notes;
and
- we will not guarantee, endorse or otherwise become liable for
any obligations of any of our control persons, or other
parties controlled by or under common control with any of our
control persons, provided however, that we and our
subsidiaries may make investments in entities that are special
purpose entities.
See "Risk Factors - Risk Factors Relating to the Notes - You Will Have
Only Limited Protection Under the Indenture."
CONSOLIDATION, MERGER OR SALE. The indenture generally permits a
consolidation or merger between us and another entity. It also permits the sale
or transfer by us of all or substantially all of our property and assets. These
transactions are permitted if:
- the resulting or acquiring entity, if other than us, is
organized and existing under the laws of a domestic
jurisdiction and assumes all of our responsibilities and
liabilities under the indenture, including the payment of all
amounts due on the notes and performance of the covenants in
the applicable indenture; and
- immediately after the transaction, and giving effect to the
transaction, no event of default under the indenture exists.
If we consolidate or merge with or into any other entity or sell or
lease all or substantially all of our assets, according to the terms and
conditions of the indenture, the resulting or acquiring entity will be
substituted for us in the indenture with the same effect as if it had been an
original party to the indenture. As a result, such successor entity may exercise
our rights and powers under the indenture, in our name and we will be released
from all our liabilities and obligations under the indenture and under the
notes.
EVENTS OF DEFAULT. The indenture provides that each of the following
constitutes an event of default:
- failure to pay interest on a note within 15 days after the due
date for such payment (whether or not prohibited by the
subordination provisions of the indenture);
- failure to pay principal on a note within 10 days after the
due date for such payment (whether or not prohibited by the
subordination provisions of the indenture);
- our failure to observe or perform any material covenant or our
breach of any material representation or warranty, but only
after we have been given notice of such failure or breach and
such failure or breach is not cured within 30 days after our
receipt of notice;
- defaults in certain of our other financial obligations that
are not cured within 30 days; and
- certain events of bankruptcy or insolvency with respect to us.
If any event of default occurs and is continuing (other than an event
of default involving certain events of bankruptcy or insolvency with respect to
us), the trustee or the holders of at least a majority in principal amount of
the then outstanding notes may declare the unpaid principal of and any accrued
interest on the notes to be due and payable immediately. However, so long as any
senior debt is outstanding, a declaration of this kind will not become
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effective until the earlier of (i) the day which is five business days after the
receipt by representatives of senior debt of such written notice of acceleration
or (ii) the date of acceleration of any senior debt. In the case of an event of
default arising from certain events of bankruptcy or insolvency, with respect to
us, all outstanding notes will become due and payable without further action or
notice.
Holders of the notes may not enforce the indenture or the notes except
as provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the notes notice of any continuing default or event of default
(except a default or event of default relating to the payment of principal or
interest) if the trustee in good faith determines that withholding notice would
have no material adverse effect on the holders.
The holders of a majority in aggregate principal amount of the notes
then outstanding by notice to the trustee may, on behalf of the holders of all
of the notes, waive any existing default or event of default and its
consequences under the indenture, except a continuing default or event of
default in the payment of interest on, or the principal of, a note.
We are required to deliver to the trustee annually a statement
regarding compliance with the indenture, and we are required, upon becoming
aware of any default or event of default, to deliver to the trustee a statement
specifying such default or event of default.
AMENDMENT, SUPPLEMENT AND WAIVER. Except as provided in this prospectus
or the indenture, the terms of the notes then outstanding may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the notes then outstanding, and any existing default or compliance
with any provision of the indenture or the notes may be waived with the consent
of the holders of a majority in principal amount of the then outstanding notes.
Notwithstanding the foregoing, an amendment or waiver will not be
effective with respect to the notes held by a holder who has not consented if it
has any of the following consequences:
- reduces the principal of or changes the fixed maturity of any
note or alters the repurchase or redemption provisions or the
price at which we shall offer to repurchase or redeem the
note;
- reduces the rate of or changes the time for payment of
interest on any note;
- waives a default or event of default in the payment of
principal or interest on the notes except a rescission of
acceleration of the notes by the holders of at least a
majority in aggregate principal amount of the then outstanding
notes and a waiver of the payment default that resulted from
such acceleration;
- makes any note payable in money other than that stated in the
notes;
- makes any change in the provisions of the indenture relating
to waivers of past defaults or the rights of holders of notes
to receive payments of principal of or interest on the notes;
- makes any change to the subordination provisions of the
indenture that has a material adverse effect on holders of
notes;
- modifies or eliminates holders' rights to request repurchase;
or
- makes any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of the
notes, we and the trustee may amend or supplement the indenture or the notes:
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- to cure any ambiguity, defect or inconsistency;
- to provide for assumption of our obligations to holders of the
notes in the case of a merger, consolidation or sale of all or
substantially all of our assets;
- to provide for additional certificates or certificated
securities;
- to make any change that would provide any additional rights or
benefits to the holders of the notes or that does not
materially adversely affect the legal rights under the
indenture of any such holder, including an increase in the
aggregate dollar amount of notes which may be outstanding
under the indenture;
- to modify our policy regarding repurchases elected by a holder
of notes prior to maturity and our policy regarding repurchase
of the notes prior to maturity upon the death or total
permanent disability of any holder of the notes, but such
modifications shall not materially adversely affect any then
outstanding notes; or
- to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
THE TRUSTEE. U.S. Bank National Association has agreed to be the
trustee under the indenture. The indenture contains certain limitations on the
rights of the trustee, should it become one of our creditors, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any claim as security or otherwise. The trustee will be permitted to
engage in other transactions with us.
Subject to certain exceptions, the holders of a majority in principal
amount of the then outstanding notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the trustee. The indenture provides that in case an event of
default specified in the indenture shall occur and not be cured, the trustee
will be required, in the exercise of its power, to use the degree of care of a
reasonable person in the conduct of his own affairs. Subject to such provisions,
the trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any holder of notes, unless the holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
RESIGNATION OR REMOVAL OF THE TRUSTEE. The trustee may resign at any
time, or may be removed by the holders of a majority of the aggregate principal
amount of the outstanding notes. In addition, upon the occurrence of
contingencies relating generally to the insolvency of the trustee or the
trustee's ineligibility to serve as trustee under the Trust Indenture Act of
1939, as amended, we may remove the trustee or a court of competent jurisdiction
may remove the trustee upon petition of a holder of notes. However, no
resignation or removal of the trustee may become effective until a successor
trustee has accepted the appointment as provided in the indenture.
REPORTS TO TRUSTEE. Our servicing agent will provide the trustee with
quarterly reports containing any information reasonably requested by the
trustee. These quarterly reports will include information on each note
outstanding during the preceding quarter, including outstanding principal
balance, interest credited and paid, transfers made, any redemption or
repurchase and interest rate paid.
NO PERSONAL LIABILITY OF OUR OR OUR SERVICING AGENT'S DIRECTORS,
OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee,
incorporator or stockholder of ours or our servicing agent, will have any
liability for any of our obligations under the notes, the indenture or for any
claim based on, in respect to, or by reason of, these obligations or their
creation. Each holder of the notes waives and releases these persons from any
liability. The waiver and release are part of the consideration for issuance of
the notes. We have been advised that the waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the SEC that
such a waiver is against public policy.
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SERVICE CHARGES. We and our servicing agent may assess service charges
for changing the registration of any note to reflect a change in name of the
holder, multiple changes in interest payment dates or transfers (whether by
operation of law or otherwise) of a note by the holder to another person.
ADDITIONAL SECURITIES. We may offer additional classes of securities
with terms and conditions different from the notes currently being offered in
this prospectus. We will amend or supplement this prospectus if and when we
decide to offer to the public any additional class of security under this
prospectus. If we sell the entire principal amount of notes offered in this
prospectus, we may register and sell additional notes by amending this
prospectus, but we are under no obligation to do so.
VARIATIONS BY STATE. We may offer different securities and vary the
terms and conditions of the offer (including, but not limited to, different
interest rates and service charges for all notes) depending upon the state where
the purchaser resides.
INTEREST WITHHOLDING. We will withhold 30% (which rate will
periodically be reduced to 28% for payments made in 2006) of any interest paid
to any investor who has not provided us with a Social Security Number, Employer
Identification Number, or other satisfactory equivalent in the subscription
agreement (or another document) or where the Internal Revenue Service has
notified us that back-up withholding is otherwise required. See "Material
Federal Income Tax Consequences - Reporting and Backup Withholding."
LIQUIDITY. There is not currently a trading market for the notes, and
we do not expect that a trading market for the notes will develop.
SATISFACTION AND DISCHARGE OF INDENTURE. The indenture shall cease to
be of further effect upon the payment in full of all of the outstanding notes
and the delivery of an officer's certificate to the trustee stating that we do
not intend to issue additional notes under the indenture or, with certain
limitations, upon deposit with the trustee of funds sufficient for the payment
in full of all of the outstanding notes.
REPORTS. We currently publish annual reports containing financial
statements and quarterly reports containing financial information for the first
three quarters of each fiscal year. We will send copies of these reports to any
holder of notes who requests them in writing at no charge.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is our counsel's opinion of the material
federal income tax consequences relating to the ownership and disposition of the
notes. The discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended, regulations issued under the Internal Revenue
Code and judicial or ruling authority, all of which are subject to change that
may be applied retroactively. The discussion assumes that the notes are held as
capital assets and does not discuss the federal income tax consequences
applicable to all categories of investors, some of which may be subject to
special rules such as banks, tax-exempt organizations, insurance companies,
dealers in securities or currencies, persons that will hold notes as a position
in a hedging, straddle or conversion transactions, or persons that have a
functional currency other than the U.S. dollar. If a partnership holds notes,
the tax treatment of a partner will generally depend on the status of the
partner and on the activities of the partnership. In addition, it does not deal
with holders other than original purchasers. You should consult your own tax
advisor to determine the specific federal, state, local and any other tax
consequences applicable to you relating to your ownership and disposition of the
notes.
INTEREST INCOME ON THE NOTES
Interest paid on the notes will generally be taxable to you as ordinary
income as the income is paid if you are a cash method taxpayer or as the income
accrues if you are an accrual method taxpayer.
However, a note with a term of one year or less, which we refer to in
this discussion as a "short-term note," will be treated as having been issued
with original issue discount or "OID" for tax purposes equal to the total
payments on the note over its issue price. If you are a cash method holder of a
short-term note you are not required to include this OID as income currently
unless you elect to do so. Cash method holders who make that election and
accrual method holders of short-term notes are generally required to recognize
the OID in income currently as it accrues on a straight-line basis unless the
holder elects to accrue the OID under a constant yield method. Under a constant
yield method, you generally would be required to include in income increasingly
greater amounts of OID.
Cash method holders who do not include OID in income currently will
generally be taxed on stated interest at the time it is received and will treat
any gain realized on the disposition of a short-term note as ordinary income to
the extent of the accrued OID generally reduced by any prior payments of
interest. In addition, these cash method holders will be required to defer
deductions for certain interest paid on indebtedness related to purchasing or
carrying the short-term notes until the OID is included in the holder's income.
There are also some situations in which a cash basis holder of a note
may have taxable interest income with respect to a note before any cash payment
is received with respect to the note. If you report income on the cash method
and your note pays interest only at maturity, you generally will be required to
include interest accrued during the original term as ordinary gross income as
the interest accrues. In addition, cash method taxpayers will be required to
include in ordinary gross income, unpaid accrued interest on any notes that pay
interest only at maturity and have terms longer than one year.
TREATMENT OF DISPOSITIONS OF NOTES
Upon the sale, exchange, retirement or other taxable disposition of a
note, you will recognize gain or loss in an amount equal to the difference
between the amount realized on the disposition and your adjusted tax basis in
the note. Your adjusted tax basis of a note generally will equal your original
cost for the note, increased by any accrued but unpaid interest you previously
included in income with respect to the note and reduced by any principal
payments you previously received with respect to the note. Any gain or loss will
be capital gain or loss, except for gain representing accrued interest not
previously included in your income. This capital gain or loss will be short-term
or long-term capital gain or loss, depending on whether the note had been held
for more than one year or for one year or less.
NON-U.S. HOLDERS
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Generally, if you are a nonresident alien individual or a non-U.S.
corporation and do not hold the note in connection with a United States trade or
business, interest and OID paid on the notes will be treated as "portfolio
interest" and therefore will be exempt from a 30% United States withholding tax.
In that case, you will be entitled to receive interest payments on the notes
free of United States federal income tax provided that you periodically provide
us with a statement certifying under penalty of perjury that you are not a
United States person and provide your name and address. In addition, in that
case you will not be subject to United States federal income tax on gain from
the disposition of a note unless you are an individual who is present in the
United States for 183 days or more during the taxable year in which the
disposition takes place and certain other requirements are met. Interest and OID
paid to a non-U.S. person are not subject to withholding if they are effectively
connected with a United States trade or business conducted by that person. They
will, however, generally be subject to the regular United States income tax.
REPORTING AND BACKUP WITHHOLDING
We will report annually to the Internal Revenue Service and to holders
of record that are not excepted from the reporting requirements any information
that may be required with respect to interest on the notes.
Under certain circumstances, as a holder of a note, you may be subject
to "backup withholding" at a 30% rate (which rate will be reduced periodically
to 28% for payments made in 2006). After December 31, 2010, the backup
withholding rate will be increased to 31%. Backup withholding may apply to you
if you are a United States person and, among other circumstances, you fail to
furnish your Social Security number or other taxpayer identification number to
us. Backup withholding may apply, under certain circumstances, if you are a
non-U.S. person and fail to provide us with the statement necessary to establish
an exemption from federal income and withholding tax on interest on the note.
Backup withholding, however, does not apply to payments on a note made to
certain exempt recipients, such as corporations and tax-exempt organizations,
and to certain non-U.S. persons. Backup withholding is not an additional tax and
may be refunded or credited against your United States federal income tax
liability, provided that you furnish certain required information.
THIS FEDERAL TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT
BE APPLICABLE DEPENDING UPON YOUR PARTICULAR SITUATION. YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Under the terms and subject to the conditions contained in a
distribution and management agreement between us and Sumner Harrington Ltd.,
Sumner Harrington has agreed to serve as our selling agent and to use its best
efforts to sell the notes on the terms set forth in this prospectus.
The selling agent proposes to offer the notes to the public on our
behalf on the terms set forth in this prospectus and the prospectus supplements
that we file from time to time. The selling agent plans to market the notes
directly to the public through newspaper, radio, internet, direct mail and other
advertising.
We have agreed to reimburse the selling agent for its out-of-pocket
expenses incurred in connection with the offering, including the fees and
expenses of its counsel and marketing costs. Under the terms of the distribution
and management agreement, we also will pay our selling agent a commission equal
to 3.00% of the principal amount of all notes sold. For notes with maturities
exceeding one year, the entire 3.00% commission will be paid to the selling
agent at the time of issuance and no additional commission will be paid upon
renewal. For notes with maturities of one year or less, the gross 3.00%
commission will be paid in equal installments upon the original issuance and
each renewal over the first two years. Accordingly, the selling agent will not
receive the entire 3.00% gross commission on notes with terms of one year or
less unless the notes are successively renewed for two years. The selling agent
may engage or allow selected brokers or dealers to sell notes for a commission,
at no additional cost to us.
In addition, our selling agent will manage all aspects of customer
service relating to the notes, including handling all inquiries from potential
investors, mailing investment kits, meeting with investors, processing
subscription agreements and responding to all written and telephonic questions
relating to the notes. The selling agent's servicing responsibilities are
described under "Description of the Notes - Servicing Agent."
The distribution and management agreement may be terminated by either
us or Sumner Harrington upon giving prior notice.
The following table summarizes the compensation we will pay the selling agent
for its services in selling the notes:
Form of Compensation
Total commissions $1,500,000 (1)(2)
Reimbursement of expenses $ 45,000 (3)
(1) Assumes the sale of 100% of aggregate principal amount of notes
offered and that each note with a term of one year or less is successively
renewed for a total of two years.
(2) Does not include annual portfolio management fee which is equal to
0.25% of the weighted average daily principal balance of the outstanding notes.
(3) Does not include estimated marketing or registration expenses which
have not been determined. We estimate that the total expenses of the offering,
excluding the selling agent's commissions described above will be approximately
$350,000.
The distribution and management agreement provides that the selling
agent will use its best efforts to sell the notes. The selling agent is not
obligated to sell any minimum amount of notes or to purchase any of the notes.
The distribution and management agreement provides for reciprocal
indemnification between us and the selling agent, including the selling agent's
and our officers, directors and controlling persons, against civil liabilities
in connection with this offering, including certain liabilities under the
Securities Act of 1933, as amended. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted pursuant to such
indemnification
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provisions, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Prior to the offering, there has been no public market for the notes.
We do not intend to list the notes on any securities exchange or include them
for quotation on the NASDAQ system. The selling agent is not obligated to make a
market in the notes and does not intend to do so. We do not anticipate that a
secondary market for the notes will develop.
The foregoing is a summary of the material provisions relating to
selling and distribution of the notes in the distribution and management
agreement. The provisions of the distribution and management agreement relating
to our retention of Sumner Harrington to act as our servicing agent in
performing our ongoing administrative responsibilities for the notes are
described under "Description of the Notes." As our servicing agent, Sumner
Harrington will be paid an additional and ongoing portfolio management fee that
is based on the principal balance of the notes outstanding. The distribution and
management agreement has been filed as an exhibit to the registration statement
of which this prospectus is a part.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Our Annual Report on Form 10-K for the year ended December 31, 2000,
filed April 2, 2001 (File No. 000- 28050) and our Quarterly Report on Form 10-Q
for the quarters ended March 31, 2001, filed May 15, 2001 (File No. 000-28050),
June 30, 2001, filed August 14, 2001 (File No. 000-28050) and September 30,
2001, filed November 14, 2001 (File No. 000-28050), are hereby incorporated by
reference.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this prospectus and prior to the
termination of the offering of the renewable unsecured subordinated notes shall
be deemed to be incorporated by reference in this prospectus and to be a part
hereof from the respective dates of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this prospectus or in
the accompanying prospectus supplement modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus.
The Company will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated in this prospectus by reference
(other than exhibits to such documents which are not specifically incorporated
by reference in such documents). Written requests for such copies should be
directed to Onyx Acceptance Corporation, 27051 Towne Centre Drive, Suite 100,
Foothill Ranch, California 92610, Attention: Secretary. Telephone requests may
be directed to the office of the Secretary of Onyx at (949) 465-3900.
LEGAL MATTERS
Certain legal matters in connection with the notes will be passed upon
for us by Andrews & Kurth L.L.P., Dallas, Texas.
EXPERTS
The financial statements incorporated in this prospectus by reference
to the annual report on Form 10-K for the year ended December 31, 2000, have
been so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-3 under the Securities Act with respect to the
notes offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto, certain parts of which are omitted as permitted by the rules
and regulations of the Commission. For further information with respect to us
and the notes offered in this prospectus, reference is made to the registration
statement and the exhibits and schedules filed therewith. Although all material
terms and provisions of any material contract or other document filed are
referred to in this prospectus and described herein, these descriptions are not
necessarily complete, and in each instance reference is made to the copy of the
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by the reference.
We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended, pursuant to
Section 15(d) thereof and, in accordance therewith, file reports, proxy
statements and other information with the Commission. For further information
with respect to us, reference is hereby made to such reports and other
information which, together with the registration statement and the exhibits and
schedules thereto, can be inspected at the public reference facilities
maintained by the Commission at the Public Reference Room of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on
the operation of the Commission's Public Reference Room by calling the
Commission at 1-800-SEC- 0330. The Commission also maintains a website at
http://www.sec.gov, that contains reports, proxy and information statements, and
other information that has been or will be filed by us.
Our website address is http://www.onyxco.com. The information included
in our website is not made a part of this prospectus.
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GLOSSARY
ASSET-BACKED SECURITIES -- Securities that are backed by financial assets, such
as automobile contracts and loans.
AUTO FINANCE CENTERS -- Regional offices we establish to purchase contracts and
to market to and support relationships with motor vehicle dealerships.
BUY RATE -- An interest rate we quote to a dealer at which we will purchase a
contract.
CREDIT ENHANCEMENT -- Credit enhancement refers to a mechanism that is intended
to protect the holders of the asset backed securities against losses due to
defaults by the obligors under the contracts.
DEALER PARTICIPATION -- The amount we pay to the dealership to purchase a
contract above the principal amount financed. The dealer participation is based
upon the finance charge that would be paid on the contract if it earned interest
at a rate equal to the positive difference between the contract rate and our buy
rate. Depending on the option selected by the dealership, we may pay all or a
portion of the dealer participation at the time we acquire the contract.
FUTURE SERVICING CASH FLOWS -- The difference between the cash collected from
contracts in a securitization trust in any period, and the sum of (i) principal
and interest paid in respect of such period on the asset backed securities
issued to investors in the securitized pool of such contracts, (ii) a servicing
fee at the rate of one percent per annum on the outstanding balance of such
securitized pool of contracts and (iii) other expenses of the trust.
MOTOR VEHICLE CONTRACT -- A retail installment sales contract or installment
loan agreement secured by a new or used automobile, light-duty truck or van.
PRE-FUNDING STRUCTURE -- A way of structuring securitizations involving a
pre-funding account into which a portion of the proceeds received by the trust
upon issuance of the asset-backed securities are deposited and used to purchase
contracts during a set period after the initial closing of the securitization.
SECURITIZATION OR SECURITIZED -- The process through which contracts and other
receivables are accumulated or pooled and sold to a trust which issues
securities representing interests in the trust to investors.
SERVICING PORTFOLIO -- All of the contracts that we own and that we have sold in
securitizations and continue to service.
SPREAD ACCOUNT -- An account required by the credit enhancer of a securitization
trust in order to protect the credit enhancer against credit losses. Generally,
excess interest received by the securitization trust from the pool of contracts
is credited to the account and retained until the account balance reaches a set
maximum balance. If the maximum balance set forth under the terms of a
particular securitization is attained, the future servicing cash flows and any
surplus in the spread account are returned to us or our lenders, as the case may
be. The maximum balance in a particular securitization may increase or decrease
over time, and also may never be attained in any particular securitization. Any
remaining spread account balance is released to us or our lenders, as the case
may be, upon termination of the securitization.
WAREHOUSING -- A method in which contracts are financed by financial
institutions on a short-term basis. In a warehousing arrangement, contracts are
accumulated or pooled on a daily or less frequent basis and assigned or pledged
as collateral for short-term borrowings until they are sold in a securitization.
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