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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
    FORM 10-Q    x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO COMMISSION FILE NUMBER: 028050 ONYX ACCEPTANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 DELAWARE
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
    
    33-0577635
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 ONYX ACCEPTANCE CORPORATION
27051 TOWNE CENTRE DRIVE
FOOTHILL RANCH, CA 92610
(949) 465-3900
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o NO x As of November 12, 2004 there were 5,551,629 shares of registrants Common
Stock, par value $.01 per share outstanding.




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TABLE OF CONTENTS ONYX ACCEPTANCE CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q PAGEPART I Financial Information
    
    
    3Item 1 Financial Statements
    
    
    3Condensed Consolidated Statements of Financial Condition at September 30, 2004 and December
31, 2003
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended September
30, 2004 and September 30, 2003
    
    
    4Consolidated Statement of Stockholders Equity at September 30, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2004 and September 30, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4 Controls and Procedures
    
    
    22PART II Other Information
    
    
    22Item 1 Legal Proceedings
    
    
    22Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    23Item 4 Submission of Matters to a Vote of Security Holders
    
    
    23Item 5 Other Information
    
    
    23Item 6 Exhibits and Reports on Form 8-K
    
    
    30SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33EX-21.1EXHIBIT 31EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) SEPTEMBER 30,
    
    DECEMBER 31,2004
    
    2003(DOLLARS IN THOUSANDS)ASSETSCash and cash equivalents
    
    $
    28,367
    
    
    $
    15,434Restricted cash
    
    
    1,576
    
    
    
    500Credit enhancement assets, at fair value
    
    
    184,269
    
    
    
    182,344Contracts held for sale
    
    
    161,573
    
    
    
    195,347Contracts held for investment (net of allowance)
    
    
    10,900
    
    
    
    8,812Other assets
    
    
    12,449
    
    
    
    11,378Total assets
    
    $
    399,134
    
    
    $
    413,815LIABILITIESAccounts payable
    
    $
    35,528
    
    
    $
    21,064Debt:Warehouse lines
    
    
    127,701
    
    
    
    183,008Residual lines
    
    
    27,190
    
    
    
    30,697Subordinated financing
    
    
    52,821
    
    
    
    51,077Total debt
    
    
    207,712
    
    
    
    264,782Other liabilities
    
    
    59,528
    
    
    
    48,050Total liabilities
    
    
    302,768
    
    
    
    333,896EQUITYCommon stockPar value $.01 per share; authorized 15,000,000 shares;
issued and outstanding 5,260,577 as of September 30, 2004
and 5,141,566 as of December 31, 2003
    
    
    53
    
    
    
    51Paid in capital
    
    
    31,237
    
    
    
    32,880Retained earnings
    
    
    42,126
    
    
    
    33,561Accumulated other comprehensive income, net of tax
    
    
    22,950
    
    
    
    13,427Total equity
    
    
    96,366
    
    
    
    79,919Total liabilities and equity
    
    $
    399,134
    
    
    $
    413,815
 See the accompanying notes to the condensed consolidated financial statements. 3




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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME  THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2004
    
    2003(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)REVENUES:Interest income
    
    $
    11,421
    
    
    $
    8,670
    
    
    $
    32,388
    
    
    $
    30,140Interest expense-warehouse and residual lines
    
    
    2,100
    
    
    
    1,666
    
    
    
    5,936
    
    
    
    6,071Interest expense-other
    
    
    1,992
    
    
    
    2,250
    
    
    
    6,466
    
    
    
    4,994Net interest income
    
    
    7,329
    
    
    
    4,754
    
    
    
    19,986
    
    
    
    19,075Gain on sale of contracts (net)
    
    
    8,508
    
    
    
    8,725
    
    
    
    25,099
    
    
    
    18,057Service fee income
    
    
    15,003
    
    
    
    13,616
    
    
    
    42,406
    
    
    
    40,042Total Revenues
    
    
    30,840
    
    
    
    27,095
    
    
    
    87,491
    
    
    
    77,174EXPENSES:Provision for credit losses
    
    
    760
    
    
    
    967
    
    
    
    1,515
    
    
    
    2,221OPERATING EXPENSES:Salaries and benefits
    
    
    14,755
    
    
    
    13,474
    
    
    
    43,655
    
    
    
    41,236Systems and servicing
    
    
    1,221
    
    
    
    1,088
    
    
    
    3,510
    
    
    
    3,135Telephone and data lines
    
    
    877
    
    
    
    781
    
    
    
    2,223
    
    
    
    2,366Depreciation
    
    
    372
    
    
    
    575
    
    
    
    1,243
    
    
    
    1,885General and administrative expenses
    
    
    5,596
    
    
    
    7,068
    
    
    
    17,966
    
    
    
    20,362Total Operating Expenses
    
    
    22,821
    
    
    
    22,986
    
    
    
    68,597
    
    
    
    68,984Total Expenses
    
    
    23,581
    
    
    
    23,953
    
    
    
    70,112
    
    
    
    71,205Income before income taxes
    
    
    7,259
    
    
    
    3,142
    
    
    
    17,379
    
    
    
    5,969Income Taxes
    
    
    2,903
    
    
    
    1,304
    
    
    
    6,982
    
    
    
    2,478Net Income
    
    $
    4,356
    
    
    $
    1,838
    
    
    $
    10,397
    
    
    $
    3,491Net Income per share  Basic
    
    $
    0.83
    
    
    $
    0.36
    
    
    $
    1.98
    
    
    $
    0.69Net Income per share  Diluted
    
    $
    0.69
    
    
    $
    0.31
    
    
    $
    1.66
    
    
    $
    0.63Basic Shares Outstanding
    
    
    5,225,551
    
    
    
    5,103,395
    
    
    
    5,247,011
    
    
    
    5,092,998Diluted Shares Outstanding
    
    
    6,310,967
    
    
    
    6,002,979
    
    
    
    6,262,581
    
    
    
    5,514,459
 See the accompanying notes to the condensed consolidated financial statements. 4




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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY 
 ACCUMULATED OTHERADDITIONAL
    
    
    
    
    
    COMPREHENSIVECOMMON
    
    PAID-IN
    
    RETAINED
    
    INCOMESHARES
    
    STOCK
    
    CAPITAL
    
    EARNINGS
    
    NET OF TAX
    
    TOTALBALANCE, DECEMBER 31, 2003
    
    
    5,142
    
    
    $
    51
    
    
    $
    32,880
    
    
    $
    33,561
    
    
    $
    13,427
    
    
    $
    79,919Issuance of Common Stock
    
    
    300
    
    
    
    3
    
    
    
    1,101
    
    
    
    
    
    
    
    
    
    
    
    1,104Repurchase of Common Stock
    
    
    (181
    )
    
    
    (1
    )
    
    
    (2,744
    )
    
    
    
    
    
    
    
    
    
    
    (2,745
    )Dividends Paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,832
    )
    
    
    
    
    
    
    (1,832
    )Comprehensive income:Unrealized gain in credit
enhancement assets, net of
tax of $6.3 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,523
    
    
    
    9,523Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,397
    
    
    
    
    
    
    
    10,397Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,920BALANCE, SEPTEMBER 30, 2004
    
    
    5,261
    
    
    $
    53
    
    
    $
    31,237
    
    
    $
    42,126
    
    
    $
    22,950
    
    
    $
    96,366
 See the accompanying notes to the condensed consolidated financial statements. 5




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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  NINE MONTHS ENDEDSEPTEMBER 30,20032004
    
    (Restated)(Dollars in Thousands)OPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    75,399
    
    
    $
    (10,963
    )INVESTING ACTIVITIES:Cash used for purchases of property and equipment
    
    
    (364
    )
    
    
    (975
    )FINANCING ACTIVITIES:Proceeds from exercise of employee options
    
    
    1,104
    
    
    
    151Repurchase of Common Stock
    
    
    (2,745
    )Payments on capital lease obligations
    
    
    (481
    )
    
    
    (480
    )Dividends paid
    
    
    (1,832
    )Payments on residual lines of credit
    
    
    (23,507
    )
    
    
    (44,897
    )Proceeds from drawdown on residual lines of credit
    
    
    20,000
    
    
    
    29,398Paydown of warehouse lines related to securitizations
    
    
    (1,296,918
    )
    
    
    (1,170,121
    )Proceeds from warehouse lines
    
    
    1,241,609
    
    
    
    1,189,120Proceeds from issuance of subordinated debt
    
    
    12,899
    
    
    
    25,179Principal payments on subordinated debt
    
    
    (11,155
    )
    
    
    (7,192
    )Net cash provided by financing activities
    
    
    (61,026
    )
    
    
    21,158Increase (decrease) in cash and cash equivalents
    
    
    14,009
    
    
    
    9,220(Increase) Decrease in restricted cash
    
    
    (1,076
    )
    
    
    2,611Cash and cash equivalents at beginning of period
    
    
    15,434
    
    
    
    9,488Cash and cash equivalents at end of period
    
    $
    28,367
    
    
    $
    21,319
 See the accompanying notes to the condensed consolidated financial statements. 6




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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1  NATURE OF OPERATIONS Onyx Acceptance Corporation, a Delaware Corporation, (Onyx), and its
wholly owned special purpose finance subsidiaries, Onyx Acceptance Financial
Corporation (OAFC), Onyx Acceptance Funding Corporation (OFC), and Onyx
Acceptance Receivables Corporation (OARC), its wholly owned subsidiary, ABNI
Inc. (ABNI), and its recently dissolved majority owned subsidiary, C .U.
Acceptance Corporation (CUAC), (collectively, the Company), is a
specialized consumer finance company engaged in the purchase, securitization
and servicing of motor vehicle retail installment contracts originated by
franchised and select independent automobile dealerships (collectively the
Contracts). Onyx was incorporated on August 17, 1993, and commenced
operations in February 1994. Onyx provides an independent source to automobile
dealers to finance their customers purchases of new and used vehicles
throughout the United States. The Company attempts to meet the needs of dealers
through consistent buying practices, competitive rates, a dedicated customer
service staff, fast turnaround time and systems designed to expedite the
processing of credit applications. RECLASSIFICATION Certain amounts in the 2003 periods condensed consolidated statements
have been reclassified to conform to the corresponding 2004 presentation. The table below presents the reclassifications made: As of
    
    As ofSeptember 30,
    
    September 30,2003
    
    2003As reported
    
    Reclassified(Dollars in thousands)Cash and cash equivalents
    
    
    19,149
    
    
    
    21,319Contracts held for sale
    
    
    186,630
    
    
    
    193,819Credit enhancement assets
    
    
    177,923
    
    
    
    185,613Total Assets
    
    
    401,519
    
    
    
    418,569Accounts payable
    
    
    27,005
    
    
    
    36,865Other Liabilities
    
    
    36,525
    
    
    
    43,714Total Liabilities
    
    
    327,575
    
    
    
    344,625
 NOTE 2  BASIS OF PRESENTATION The condensed consolidated financial statements included herein are
unaudited and have been prepared by Onyx Acceptance Corporation (Onyx or the
Company) in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the regulations. In the opinion of
management, the financial statements reflect all adjustments (all of a normal
and recurring nature) which are necessary for a fair statement of the financial
position, results of operations and cash flows for the interim period.
Operating results for the three and nine months ended September 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. The condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
footnotes thereto for the year ended December 31, 2003 included in the
Companys 2003 Annual Report on Form 10-K. 7




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USE OF ESTIMATES In conformity with generally accepted accounting principles, management
utilizes assumptions and estimates that affect the reported values of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses for each reporting period. The more significant estimates made in the
preparation of the Companys condensed consolidated financial statements relate
to the credit enhancement assets and the gain on sale of Contracts. Such
assumptions include, but are not limited to, estimates of loan prepayments,
defaults, recovery rates and present value discount rates. The Company uses a
combination of its own historical experience and expectation of future
performance to determine such estimates. Actual results may differ from the
Companys estimates due to numerous factors both within and beyond the control
of Company management. Changes in these factors could require the Company to
revise its assumptions concerning the amount of voluntary prepayments, the
frequency and/or severity of defaults and the recovery rates associated with
the disposition of repossessed vehicles. NOTE 3  RESTRICTED CASH The Companys restricted cash balance may, from time to time, consist of
one or more of the following components: funds held in reserve accounts
supporting an on balance sheet residual transaction or backup servicing
arrangement; cash collateral to meet margin requirements related to hedging
activities; and cash collateral to cure potential borrowing base deficiencies
associated with the Companys warehouse lines. NOTE 4  CONTRACTS HELD FOR SALE Contracts held for sale are carried at the lower of cost or market value
on an aggregate basis. Contracts held for sale include Contracts reacquired
upon the exercise of securitization clean up calls and available for sale as
part of future securitizations. At the time of such calls, any remaining
Retained Interest in Securitized Assets (RISA) balance, net of associated
other comprehensive income remaining in stockholders equity, is reclassified
from credit enhancement assets and accounted for as loan premium on the
reacquired Contracts. Loan premiums are amortized in a manner that results in a
constant effective yield over the remaining life of the Contracts. In
amortizing loan premium, the Company anticipates prepayments will occur at a
rate consistent with that utilized in valuing its residual interests (1.75 ABS)
over the estimated remaining contractual life of the Contracts at the date such
Contracts are reacquired. If the Companys actual prepayment experience differs
materially from anticipated prepayment experience, the Company will recalculate
the effective yield to reflect actual payments to date and anticipated future
payments. The unamortized loan premium is adjusted, through a charge or credit
to interest income, to the amount that would have existed had the new effective
yield been applied since the acquisition of the Contracts. Contracts held for sale consist of the following: September 30,
    
    December 31,2004
    
    2003(In thousands)Gross Contracts held for sale
    
    $
    150,686
    
    
    $
    189,561Less unearned interest
    
    
    (973
    )
    
    
    (844
    )Net Contract balance
    
    
    149,713
    
    
    
    188,717Loan Premium
    
    
    10,931
    
    
    
    4,853Contracts held for sale
    
    
    160,644
    
    
    
    193,570Dealer participation
    
    
    929
    
    
    
    1,777Total
    
    $
    161,573
    
    
    $
    195,347
 As of September 30, 2004 and December 31, 2003, 25% and 26% of Contracts
held for sale were originated in California, respectively. Contracts originated by the Company through its Gold program totaled
approximately $602.7 million and $198.3 million at September 30, 2004 and
December 31, 2003, respectively. These amounts are not reflected in the
accompanying consolidated financial statements. 8




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NOTE 5  CONTRACTS HELD FOR INVESTMENT Contracts held for investment are net of a $3.1 million allowance for
probable losses at September 30, 2004 and a $2.5 million allowance at December
31, 2003. Amounts held for investment include Contracts that do not qualify for
securitizations as a result of delinquency status, minimum balance or minimum
remaining term. Contracts held for investment are carried at amortized cost
reduced by a valuation allowance for credit losses inherent in the portfolio as
of the balance sheet date. Contracts held for investment consist of the following: September 30,
    
    December 31,2004
    
    2003(In thousands)Gross Contracts held for investment
    
    $
    13,990
    
    
    $
    11,312Less unearned interest
    
    
    (16
    )
    
    
    (14
    )Contracts held for investment
    
    
    13,974
    
    
    
    11,298Allowance for credit losses
    
    
    (3,074
    )
    
    
    (2,486
    )Total
    
    $
    10,900
    
    
    $
    8,812
 Changes in the allowance for credit losses were as follows: September 30,
    
    December 31,2004
    
    2003(In thousands)Balance at beginning of period
    
    $
    2,486
    
    
    $
    1,851Provision for credit losses
    
    
    1,515
    
    
    
    3,216Charged-off loans
    
    
    (6,388
    )
    
    
    (7,424
    )Recoveries-general
    
    
    5,461
    
    
    
    4,843Balance at end of period
    
    $
    3,074
    
    
    $
    2,486
 NOTE 6  CREDIT ENHANCEMENT ASSETS SFAS 140 requires that following a transfer of financial assets, an entity
is to recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished. RISA, capitalized upon securitization of Contracts, represents the present
value of the estimated future cash flows to be received by the Company from the
excess spread created in securitization transactions. Excess spread is
calculated by taking the difference between the weighted average coupon rate of
the Contracts sold and the weighted average security rate paid to the investors
less contractually specified servicing and guarantor fees and projected credit
losses, after giving effect to estimated prepayments. Prepayment and credit loss assumptions are utilized to project future cash
flows and are based on historical experience. All assumptions are evaluated
each quarter and adjusted, if appropriate, to reflect the actual performance of
the underlying Contracts. Subsequent changes in loss, prepayment and discount
rate assumptions applied upon the execution of the securitization could have a
material effect on gains on future securitizations. Key economic assumptions used in determining the fair value of RISA at the
time of securitization are as follows: For the Period Ended
    
    For the Period EndedSeptember 30,
    
    December 31,2004
    
    2003Prepayment rate (ABS Speed)
    
    
    1.75
    
    
    
    1.75Cumulative credit losses
    
    3.25% to 3.5%
    
    3.5% to 4.4%Average Contract life
    
    1.71% to 1.74%
    
    1.67% to 1.76%Discount rate
    
    11.0% to 11.8%
    
    10.8% to 11.0%
 9




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Key economic assumptions used in determining the fair value of the RISA at
September 30, 2004, and December 31, 2003 are as follows: September 30,
    
    December 31,2004
    
    2003Prepayment rate (ABS Speed)
    
    1.61 to 2.07
    
    1.65 to 2.14Cumulative credit losses
    
    2.4% to 3.8%
    
    2.8% to 6.6%Discount rate
    
    9.2% to 11.8%
    
    8.5% to 11.0%
 The outstanding owner trusts incurred net credit losses of $8.6 million
and $13.6 million related to the securitized Contracts above during the
quarters ended September 30, 2004 and 2003, respectively. During the quarter and nine-month period ended September 30, 2003, the
Company recorded impairment losses of $0.45 million and $8.7 million,
respectively. There was no impairment during the nine month period of 2004.
Impairment charges are netted against gain on sale as reported in the statement
of income. In initially valuing the RISA and determining estimated cash flows, the
Company establishes an off balance sheet allowance for probable credit losses.
The allowance is based upon historical experience, the credit statistics of the
underlying portfolio and managements estimate of future performance regarding
credit losses. The amount is reviewed periodically and adjustments are made if
actual experience or other factors indicate that future performance may differ
from managements prior estimates. The following table presents the estimated future cash flows to be
received from securitizations. Estimated future cash flows are calculated by
taking the difference between the weighted average coupon rate of the Contracts
sold and the weighted average security rate paid to the investors, less the
contractually specified servicing fee of 1.0% per annum, financial guaranty
insurance premiums and other costs and fees, after giving effect to estimated
prepayments and assuming no losses. To arrive at the RISA, this amount is
reduced by the off balance sheet allowance established for probable future
losses and by discounting to present value. September 30,
    
    December 31,2004
    
    2003(In thousands)Cash held in spread accounts
    
    $
    101,215
    
    
    $
    100,821Estimated undiscounted RISA cash flows
    
    
    205,395
    
    
    
    211,544Off balance sheet allowance for losses
    
    
    (94,034
    )
    
    
    (101,894
    )Discount to present value
    
    
    (28,307
    )
    
    
    (28,127
    )Credit Enhancement Assets
    
    $
    184,269
    
    
    $
    182,344Outstanding balance of Contracts sold through securitizations
    
    $
    2,688,922
    
    
    $
    2,643,431
 NOTE 7  NET INCOME PER SHARE In accordance with Statement of Financial Accounting Standards No. 128,
the following is the dilutive effect of the Companys potential common stock on
net income per share. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in Thousands, Except Per Share Data)Net Income
    
    $
    4,356
    
    
    $
    1,838
    
    
    $
    10,397
    
    
    $
    3,491Weighted average shares outstanding
    
    
    5,226
    
    
    
    5,103
    
    
    
    5,247
    
    
    
    5,093Net effect of dilutive stock
options/warrants
    
    
    1,085
    
    
    
    900
    
    
    
    1,016
    
    
    
    421Diluted weighted average shares
outstanding
    
    
    6,311
    
    
    
    6,003
    
    
    
    6,263
    
    
    
    5,514Net income per share:Basic EPS
    
    $
    0.83
    
    
    $
    0.36
    
    
    $
    1.98
    
    
    $
    0.69Diluted EPS
    
    $
    0.69
    
    
    $
    0.31
    
    
    $
    1.66
    
    
    $
    0.63
 10




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##### Table of Contents



As of September 30, 2003, 49,182 of combined options and warrants were not
included in the calculation of full dilution, as they were anti-dilutive. As of
September 30, 2004, there were no options that were anti-dilutive.
Additionally, the Company has no warrants outstanding as of September 30, 2004. NOTE 8  STOCK OPTIONS Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation (SFAS No. 123), and Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123 encourages, but does not
require, companies to recognize compensation expense associated with stock
based compensation plans over the anticipated service period based on the fair
value of the award on the date of grant. As allowed by SFAS 123 and 148, the
Company has continued to account for stock-based compensation plans under APB
25. The fair value of the options was estimated at date of grant using a
Black-Scholes single-option pricing model using the following assumptions: September 30,2004
    
    2003Risk free interest rate
    
    
    3.0
    %
    
    
    2.9
    %Expected stock price volatility
    
    
    82.0
    %
    
    
    79.7
    %Expected life of options
    
    six years
    
    four yearsExpected dividends
    
    none
    
    none
 The following table presents the pro forma disclosures required for SFAS
123 and SFAS 148 for the three and nine-month periods ended September 30: For the Quarters Ended,
    
    For the Nine Months Ended,September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in Thousands, Except Per Share Data)Net income, as reported (in thousands)
    
    $
    4,356
    
    
    $
    1,838
    
    
    $
    10,397
    
    
    $
    3,491Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (in thousands)
    
    $
    117
    
    
    $
    110
    
    
    $
    427
    
    
    $
    332Pro forma net income (in thousands)
    
    $
    4,239
    
    
    $
    1,728
    
    
    $
    9,970
    
    
    $
    3,159Earnings per share:Basic  as reported
    
    $
    0.83
    
    
    $
    0.36
    
    
    $
    1.98
    
    
    $
    0.69Basic  pro forma
    
    $
    0.81
    
    
    $
    0.34
    
    
    $
    1.90
    
    
    $
    0.62Diluted  as reported
    
    $
    0.69
    
    
    $
    0.31
    
    
    $
    1.66
    
    
    $
    0.63Diluted  pro forma
    
    $
    0.67
    
    
    $
    0.29
    
    
    $
    1.59
    
    
    $
    0.57
 NOTE 9  STOCK REPURCHASES In April, the Company announced that its Board of Directors authorized a
stock repurchase program to purchase up to $5.0 million of its common stock. As
of September 30, 2004, the Company repurchased 180,768 shares or $2.7 million
in open market transactions; no purchases were made after August 4, 2004. NOTE 10  CONTINGENCIES Management believes that the Company has taken prudent steps to address
the litigation risks associated with the Companys business. However, there can
be no assurance that the Company will be able to successfully defend against
all such claims or that the determination of any such claim in a manner adverse
to the Company would not have a material adverse effect on the Companys
automobile finance business. Based upon information presently available, the
Company believes that all current proceedings should not have a material
adverse effect upon the Companys results of operations, cash flows or
financial condition. 11




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW Onyx is a specialized consumer finance company engaged in the purchase,
origination, securitization and servicing of Contracts originated by franchised
and select independent automobile dealerships in the United States. The Company
focuses its efforts on acquiring Contracts that are collateralized by late
model used and, to a lesser extent, new automobiles, that are entered into with
purchasers whom the Company believes have a favorable credit profile. Since
commencing the purchase of Contracts in February 1994, the Company has acquired
more than $12.3 billion in Contracts and currently has relationships with over
13,000 dealerships. The Company has expanded its operations from a single
office in California to 19 Auto Finance Centers and one centralized buying
center, together serving most of the United States. The Company generates revenues primarily through the purchase,
origination, warehousing, subsequent securitization and ongoing servicing of
Contracts. The Company earns net interest income on Contracts held during the
warehousing period. Net interest income is the difference between the income
earned on interest earning assets and the interest paid on interest bearing
liabilities. Upon the securitization and sale of Contracts, the Company
recognizes a gain on sale of Contracts, receives excess cash flows generated by
owner trusts, and earns fees from servicing the securitized Contracts. CRITICAL ACCOUNTING POLICIES Critical accounting policies are an integral part of the compilation of
the Companys financial condition and results of operations. Critical
accounting policies require complicated and often intricate calculations and
judgments because they often rely on estimates based on continually changing
market conditions. The following is a summary of accounting policies we
consider critical. RETAINED INTEREST IN SECURITIZED ASSETS (RISA) RISA represents the present value of the estimated future earnings to be
received by the Company from the excess spread created in securitization
transactions. Excess spread is calculated by taking the difference between the
weighted average coupon rate of the Contracts sold and the weighted average
security rate paid to the investors less contractually specified servicing and
guarantor fees and projected credit losses, after giving effect to estimated
prepayments. The estimates that Management makes during the execution of the
securitization relate to the expected prepayment rate of the Contracts in the
transaction, the discount rate to be applied to the cash flows and the amount
of cumulative net losses that will be experienced by the Contracts that are
sold in the transaction. As these estimates are made at the inception of the
transaction, they will have a degree of uncertainty as the transaction ages. A
major variable to these estimates relates to the general state of the economy
at any given time and its effect on the performance of the Contracts in the
transaction. The Company recognizes the excess of all estimated cash flows
attributable to the RISA estimated at the acquisition date over the initial
investment (accretable yield) as interest income over the estimated life of the
RISA using the effective yield method. If estimated cash flows change, then the
accretable yield is recalculated and the periodic accretion is adjusted
prospectively. If the estimated fair value of the RISA has declined below its
carrying amount, an other-than-temporary decline is considered to exist if
there has been a decline in the estimated present value of future cash flows
and the difference between the carrying value and fair value of the RISA is
recorded as an impairment loss through the income statement. RISA is classified in a manner similar to available for sale assets and as
such is marked to market each quarter. Market value changes are calculated by
discounting the estimated cash flows using a current market discount rate. Each
quarter Management reviews its estimates of the cash flows and adjusts any that
are inconsistent with its current estimates. If the effect of the new estimates
reduces the present value of the cash flows and if the fair market value has
declined below the carrying amount of the transaction, Management will record
an impairment loss on the transaction. If the new estimated present value has
declined but the carrying amount remains below the fair value, any change in
the market value of the RISA is reported as a separate component of
shareholders equity on the consolidated statements of financial condition as
accumulated other comprehensive income (loss), net of applicable taxes. 12




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##### Table of Contents



HEDGING ACTIVITIES The Contracts originated and held by the Company earn interest at a fixed
rate and, accordingly, the Company has exposure to changes in interest rates
during the warehouse period. The Company therefore employs a hedging strategy
that is intended to minimize the risk of interest rate fluctuations. Such
transactions involve the execution of forward interest rate swaps and/or the
use of a pre-funding structure for securitizations. Management monitors the hedging activities on a frequent basis to ensure
that the value of hedges, their correlation to the Contracts being hedged and
the amounts being hedged continue to provide effective protection against
interest rate risk. Our hedging strategy requires estimates of monthly Contract
acquisition volume and timing of securitizations. The amount and timing of
hedging transactions are determined by senior management, and are based upon
the amount of Contracts purchased and the interest rate environment. The Company uses forward interest rate swaps to hedge the variability in
the forecasted future net cash flows it will receive from the RISA attributable
to the risk of changing interest rates. The Companys interest rate swap
agreements involve arrangements to pay a fixed interest rate and receive a
floating interest rate, at specified intervals, calculated on agreed-upon
amortizing notional amounts. The debt and amounts that the Company hedges are
determined based on prevailing market conditions and the current shape of the
yield curve. Interest rate swap agreements are executed as an integral part of
specific securitization transactions. Interest rate swap agreements are unwound
upon securitization, whereby the gain or loss on the hedge is recorded to
income and the associated component of the gain or loss previously recorded in
other comprehensive income is reversed. As of September 30, 2004, the Company
had no forward interest rate swaps outstanding. Derivative instruments used by Onyx involve, to varying degrees, elements
of credit risk in the event a counterparty should default and market risk as
the instruments are subject to rate and price fluctuations. Credit risk is
managed through the use of credit standard guidelines, counterparty
diversification, monitoring of counterparty financial condition and
International Swap Dealers Association master netting agreements in place with
all derivative counterparties. All derivatives are recognized on the balance sheet at their fair value.
On the date that the Company enters into a derivative contract, it designates
the derivative as a hedge of a forecasted transaction of the variability of
cash flows that are to be received or paid in connection with the
securitization (a cash flow hedge). Changes in the fair value of a derivative
that are highly effective and previously designated to qualify as a cash flow
hedge to the extent that the hedge is effective, are recorded in other
comprehensive income until earnings are affected by the variability of cash
flows of the hedged transaction (e.g., until periodic settlements of a variable
asset or liability are recorded in earnings). Any hedge ineffectiveness (which
represents the amount by which the changes in the fair value of the derivative
exceed the variability in the cash flows of the forecasted transaction) is
recorded in current-period earnings. RESULTS OF OPERATIONS The Company had net income of $4.4 million for the three-month period
ended September 30, 2004, compared to net income of $1.8 million for the same
period in 2003. For the nine-month period ended September 30, 2004, net income
was $10.4 million, versus $3.5 million for the same period in 2003. The
increase in net income for the three-month period was principally due to an
increase in service fee income. The increase in net income for the nine-month
period was principally due to higher gains from securitization sales.
Additionally, collection related operating expenses decreased due to the
improved performance of the serviced portfolio. Net Interest Income.Net interest income consists primarily of (1) the
difference between the finance revenue earned on Contracts held on balance
sheet during the warehousing period and the interest costs associated with the
Companys borrowings to purchase such Contracts; (2) the difference between
income accreted on RISA and the interest costs associated with residual line
borrowings secured by RISA and (3) interest and amortized fees charged in
connection with the Companys subordinated debt financings, capital lease
obligations, the costs associated with hedging activities under the guidelines
of FAS 133, and amortization of loan premiums. Net interest income was $7.3 million for the quarter ended September 30,
2004, compared to $4.8 million for the same period in 2003. For the nine-month
period ended September 30, 2004, net interest income was $20.0 million, versus
$19.1 million for the same period in 2003. The increase in net interest income
for the three and nine-month 13




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periods ended September 30, 2004 was principally due to an increase in
interest income generated from the Companys retained interest in securitized
assets. Partially offsetting this increase for the nine-month period ending
September 30, 2004, was an increase in interest expense incurred on the
Companys renewable unsecured subordinated notes. Interest expense in
connection with the Companys renewable unsecured subordinated notes increased
by $1.5 million for the nine-month period ended September 30, 2004. As of
September 30, 2004, the balance of the renewable unsecured subordinated notes
was $40.8 million, compared to $33.4 million as of September 30, 2003. The
reduction in other interest expense for the third quarter of 2004 versus 2003
was principally due to a reduction in interest expense under the guidelines of
FAS 133. The table below depicts the major components of net interest income. For the Three Months Ended,
    
    For the Nine Months Ended,September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in Thousands)Income:Finance Revenue (net of participation amortization)
    
    $
    2,902
    
    
    $
    3,806
    
    
    $
    10,618
    
    
    $
    13,147RISA income
    
    
    8,519
    
    
    
    4,864
    
    
    
    21,770
    
    
    
    16,993Total interest income
    
    
    11,421
    
    
    
    8,670
    
    
    
    32,388
    
    
    
    30,140Expense:Warehouse lines
    
    
    1,485
    
    
    
    990
    
    
    
    4,094
    
    
    
    3,265Residual lines
    
    
    615
    
    
    
    676
    
    
    
    1,842
    
    
    
    2,806Other interest expense
    
    
    1,992
    
    
    
    2,250
    
    
    
    6,466
    
    
    
    4,994Total interest expense
    
    
    4,092
    
    
    
    3,916
    
    
    
    12,402
    
    
    
    11,065Net interest income
    
    $
    7,329
    
    
    $
    4,754
    
    
    $
    19,986
    
    
    $
    19,075
 The Company has increased the fair value on certain of its outstanding
securitization transactions through other comprehensive income on the statement
of financial condition. The increase is principally due to the improved loss
performance of certain securitization transactions, and may result in higher
earnings on the RISA assets in future quarters. Contractual servicing fee income is earned at a rate of 1.0% per annum on
the outstanding principal balance of the serviced Portfolio. The Company also
earns servicing fees on Contracts originated through its Onyx Gold program.
Servicing fee income is related to the size of the serviced portfolio and also
includes investment interest, late fees, extension fees, document fees and
other fees charged to customer accounts. Service fee income was $15.0 million
and $42.4 million for the quarter and nine-month periods ended September 30,
2004, compared to $13.6 million and $40.0 million for the same periods in 2003,
respectively. The increase reflects the additional revenue generated from the
Onyx Gold program. During the three and nine-month period ended September 30,
2004, the Gold program generated $0.8 million and $2.6 million in service fees,
respectively, versus $0.1 million for the nine months ended September 30, 2003.
As of September 30, 2004, and 2003, the Companys Gold portfolio was $602.7
million and $68.9 million, respectively. Gain on Sale of Contracts.The Company computes a gain on sale with
respect to Contracts securitized based on the present value of the estimated
future excess cash flows to be received from such Contracts using a market
discount rate. The present value of the estimated future excess cash flows is
recorded as a credit enhancement asset on the statement of financial condition.
The gain recorded in the statement of income is equal to the credit enhancement
asset recorded as adjusted for prepaid dealer participation, issuance costs,
the gain or loss on the termination of the cash flow hedge and impairment
charges. The gain on the sale of Contracts is affected by the amount of
Contracts securitized and the net interest rate spread on those Contracts. The Company completed one securitization in the amount of $450 million
during the quarter, resulting in a gain on sale of Contracts of $8.5 million or
1.9% of the dollar amount of Contracts securitized, compared to a
securitization of $400 million during the third quarter of 2003, which resulted
in a gross gain on sale of Contracts totaling $9.2 million or 2.3% of the
dollar amount of the Contracts securitized. The decrease in gain recorded for
2004 was principally due to the decrease in the weighted average net spread
realized. The net interest rate spread is the difference between the weighted
average Contract rate of the securitized assets and the weighted average
investor rate inclusive of all costs related to the transaction. Interest rate
spread is affected by product mix, general 14




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##### Table of Contents



market conditions and overall market interest rates. The risks inherent in
interest rate fluctuations are partially reduced through hedging activities. The table below depicts the major components of net spread. 2004-A
    
    2004-B
    
    2004-C
    
    2003-A
    
    2003-B
    
    2003-CWeighted average A.P.R
    
    
    8.97
    %
    
    
    8.90
    %
    
    
    9.63
    %
    
    
    9.79
    %
    
    
    9.14
    %
    
    
    8.75
    %Projected net annualized loss rate
    
    
    (2.05
    )
    
    
    (2.02
    )
    
    
    (1.86
    )
    
    
    (2.21
    )
    
    
    (2.20
    )
    
    
    (2.07
    )Service fee, dealer participation & other
    
    
    (1.96
    )
    
    
    (2.02
    )
    
    
    (1.97
    )
    
    
    (2.19
    )
    
    
    (2.01
    )
    
    
    (1.99
    )Cost of funds, including investor rate
    
    
    (2.93
    )
    
    
    (3.08
    )
    
    
    (3.66
    )
    
    
    (3.24
    )
    
    
    (2.78
    )
    
    
    (2.48
    )Net interest rate spread
    
    
    2.03
    %
    
    
    1.78
    %
    
    
    2.14
    %
    
    
    2.15
    %
    
    
    2.15
    %
    
    
    2.21
    %
 There was no impairment of RISA for the nine-month period ending September
30, 2004. The Company recorded $0.5 million and $8.7 million pre-tax
impairment charges on its RISA assets during the three and nine-month periods
ending September 30, 2003, respectively. Provision for Credit Losses.The provision for credit losses represents
net credit losses incurred on Contracts held for Investment and the future
provision based on the net change in Contracts held for Investment during the
period. The provision for credit losses decreased to $760 thousand for the
quarter ended September 30, 2004, compared to $967 thousand for the same period
in 2003. For the nine-month period ended September 30, 2004, the provision for
credit losses was $1.5 million, versus $2.2 million for the same period in
2003. The table below depicts the components of the provision for the relative
periods Three Months Ended
    
    Nine Months EndedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2004
    
    2003
    
    2004
    
    2003(In Thousands)Net change in
Contracts held for
Investment
    
    $
    2,479
    
    
    $
    1,194
    
    
    $
    2,676
    
    
    $
    1,841Net
Charge-offs-(Contracts held for
Investment)
    
    $
    215
    
    
    $
    704
    
    
    $
    927
    
    
    $
    1,817Future Provision
    
    
    545
    
    
    
    263
    
    
    
    588
    
    
    
    404Total provision
    
    $
    760
    
    
    $
    967
    
    
    $
    1,515
    
    
    $
    2,221
 Operating Expenses.For the three and nine-month periods ended September
30, 2004, total operating expenses were $22.8 million and $68.6 million, versus
$23.0 million and $69.0 million for the same periods in 2003. Total operating
expenses as a percent of the managed portfolio decreased to 2.6%, versus 3.2%
for the quarter ended September 30, 2003. For the nine-month period ended
September 30, 2004, operating expenses as a percent of the managed portfolio
were 2.8%, versus 3.2% for the same period in 2003. (The managed portfolio
includes contracts held for sale and investment, contracts sold on a whole loan
basis with retained servicing and outstanding securitized contracts). The Company has been able to keep operating expenses in check through
ongoing implementation of technology and automation to further enhance
operating efficiencies. However, higher health care and general insurance
premiums have contributed to increases in salary and benefit expenses during
the quarter and nine-month period ending September 2004. Increases in salary
and benefit expenses were offset with reductions in collection related expenses
stemming from the continued improvement of the performance of the serviced
portfolio. Collection related expenses decreased by approximately $1.0 million
for the quarter versus the same period in 2003 and by approximately $1.8
million for the nine-month period ending September 2004 versus the same period
in 2003. Additionally, as a direct result of the improved portfolio
performance, physical damage insurance related charges for uninsured motorists
decreased by approximately $0.8 million for the quarter and nine-month periods
ending September 2004 versus the same periods in 2003. Other operating expenses
include professional fees, marketing, supplies, facility related charges,
insurance fees, collection fees and credit bureau fees. The decrease in other
operating expense is principally due to reductions in collection related
charges as a result of the improved performance of the serviced portfolio. 15




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##### Table of Contents



Income Taxes.The Company files federal and certain state tax returns as a
consolidated group. Tax liabilities from the consolidated returns are allocated
in accordance with a tax sharing agreement based on the relative income or loss
of each entity on a stand-alone basis. The effective tax rate for Onyx was
40.0% for the nine months ended September 30, 2004 and 41.5% for the same
period in 2003. FINANCIAL CONDITION CONTRACTS HELD FOR SALE Contracts held for sale are presented at the lower of cost or market value
and totaled $161.6 million at September 30, 2004, compared to $195.3 million at
December 31, 2003. The number and principal balance of Contracts held for sale
is largely dependent upon the timing and size of the Companys securitizations. CONTRACTS HELD FOR INVESTMENT Contracts held for investment are net of a $3.1 million allowance for
probable losses as of September 30, 2004 and a $2.5 million allowance as of
December 31, 2003. Amounts held for investment include Contracts that do not
qualify for Contract securitizations as a result of delinquency status, minimum
balance or remaining term. The Company maintains an allowance for credit losses
to cover anticipated losses on the Contracts held for investment on the
statement of financial condition. The allowance for credit losses is increased
by charging the provision for credit losses and decreased by actual losses on
the Contracts held for investment. The level of the allowance is based
principally on the outstanding balance of Contracts held for investment and
historical loss trends. The following table illustrates the changes in the Companys Contract
acquisition volume, securitization activity and servicing portfolio during the
past five fiscal quarters: SELECTED QUARTERLY FINANCIAL INFORMATION For the Quarters EndedSept. 30,
    
    June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,2004
    
    2004
    
    2004
    
    2003
    
    2003(Dollars in Thousands)Contracts purchased during period
    
    $
    422,307
    
    
    $
    425,745
    
    
    $
    422,055
    
    
    $
    392,107
    
    
    $
    386,945Contracts purchased during period-Gold program
    
    $
    31,834
    
    
    $
    261,915
    
    
    $
    257,753
    
    
    $
    143,285
    
    
    $
    70,904Average combined monthly volume during period
    
    
    151,381
    
    
    
    229,220
    
    
    
    226,603
    
    
    
    178,464
    
    
    
    152,617Contracts securitized during period
    
    
    450,000
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    400,000
    
    
    
    400,000Servicing portfolio at period end
    
    
    2,852,609
    
    
    
    2,849,279
    
    
    
    2,847,039
    
    
    
    2,843,446
    
    
    
    2,849,201Managed portfolio at period end
    
    
    3,455,352
    
    
    
    3,480,864
    
    
    
    3,271,617
    
    
    
    3,041,726
    
    
    
    2,918,122
 ASSET QUALITY The Company monitors and attempts to minimize delinquencies and losses
through timely collections and the use of a predictive dialing system. At
September 30, 2004, 30+ day delinquencies represented 0.87% of the amount of
Contracts in its serviced portfolio compared to 1.37% at December 31, 2003. Net
charge-offs as a percentage of the average serviced portfolio were 1.23% for
the quarter ended September 30, 2004, compared to 1.98% for the quarter ended
September 30, 2003. For the nine-month periods ended September 30, 2004 and
2003, net charge-off as a percentage of the average serviced portfolio were
1.44% and 2.19%, respectively. In an effort to improve borrower credit
statistics, the Company modified its incentive compensation system during the
fourth quarter of 2000 to shift purchases of Contracts to a higher percentage
of higher credit quality product. The result has been increased credit scores
and an improvement in overall borrower statistics. 16




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##### Table of Contents



DELINQUENCY EXPERIENCE OF SERVICED PORTFOLIO Sept. 30, 2004
    
    December 31, 2003Amount
    
    Amount(Dollars in Thousands)Serviced portfolio
    
    $
    2,852,609
    
    
    $
    2,843,446Delinquencies(1)(2)30 - 59 days
    
    $
    16,315
    
    
    $
    28,08460 - 89 days
    
    
    4,735
    
    

    
    5,88990+ days
    
    
    3,812
    
    
    
    4,955Total
    
    $
    24,862
    
    
    $
    38,928Total delinquencies as a percent of Serviced portfolio
    
    
    0.87
    %
    
    
    1.37
    %
   (1)
    
    Delinquencies include principal amounts only, net of repossessed
inventory and accounts in bankruptcy. Delinquent thirty-plus day
repossessed inventory as a percent of the serviced portfolio was 0.42% and
0.58% at September 30, 2004 and December 31, 2003, respectively.
Delinquent thirty-plus day Contracts in bankruptcy as a percent of the
serviced portfolio were 0.75% and 0.90% at September 30, 2004 and December
31, 2003, respectively.(2)
    
    The period of delinquency is based on the number of days payments are
contractually past due. LOAN LOSS EXPERIENCE OF SERVICING PORTFOLIO For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in Thousands)Average servicing portfolio(1)
    
    $
    2,852,197
    
    
    $
    2,873,953
    
    
    $
    2,847,384
    
    
    $
    2,889,316Number of gross charge-offs
    
    
    2,420
    
    
    
    3,205
    
    
    
    8,647
    
    
    
    10,215Gross charge-offs
    
    $
    12,312
    
    
    $
    17,625
    
    
    $
    42,299
    
    
    $
    57,611Net charge-offs(2)
    
    $
    8,797
    
    
    $
    14,255
    
    
    $
    30,844
    
    
    $
    47,433Annualized net charge-offs as
a percent of average
Servicing portfolio
    
    
    1.23
    %
    
    
    1.98
    %
    
    
    1.44
    %
    
    
    2.19
    %
   (1)
    
    Average is based on daily balances.(2)
    
    Net charge-offs are gross charge-offs minus recoveries on Contracts
previously charged off. The following table illustrates the cumulative net credit loss performance
of each of the securitized pools outstanding for the period from the date of
securitization through September 30, 2004, stated as a percentage of the
original principal balance. Month
    
    00-A
    
    00-B
    
    00-C
    
    00-D
    
    01-A
    
    01-B
    
    01-C
    
    01-D
    
    02-A
    
    02-B
    
    02-C
    
    02-D
    
    03-A
    
    03-B
    
    03-C
    
    03-D
    
    04-A
    
    04-B
    
    04-C1
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %2
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %3
    
    0.02
    %
    
    0.02
    %
    
    0.01
    %
    
    0.00
    %
    
    0.00
    %
    
    0.01
    %
    
    0.00
    %
    
    0.00
    %
    
    0.01
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %
    
    0.01
    %
    
    0.00
    %
    
    0.01
    %
    
    0.02
    %
    
    0.01
    %4
    
    0.04
    %
    
    0.04
    %
    
    0.03
    %
    
    0.02
    %
    
    0.02
    %
    
    0.03
    %
    
    0.02
    %
    
    0.02
    %
    
    0.01
    %
    
    0.01
    %
    
    0.01
    %
    
    0.01
    %
    
    0.01
    %
    
    0.02
    %
    
    0.01
    %
    
    0.02
    %
    
    0.05
    %
    
    0.02
    %5
    
    0.11
    %
    
    0.10
    %
    
    0.06
    %
    
    0.07
    %
    
    0.07
    %
    
    0.10
    %
    
    0.05
    %
    
    0.04
    %
    
    0.02
    %
    
    0.04
    %
    
    0.06
    %
    
    0.03
    %
    
    0.02
    %
    
    0.04
    %
    
    0.03
    %
    
    0.05
    %
    
    0.09
    %
    
    0.05
    %6
    
    0.18
    %
    
    0.17
    %
    
    0.11
    %
    
    0.15
    %
    
    0.12
    %
    
    0.18
    %
    
    0.11
    %
    
    0.08
    %
    
    0.07
    %
    
    0.10
    %
    
    0.11
    %
    

    0.07
    %
    
    0.07
    %
    
    0.06
    %
    
    0.08
    %
    
    0.08
    %
    
    0.13
    %7
    
    0.37
    %
    
    0.30
    %
    
    0.26
    %
    
    0.26
    %
    
    0.20
    %
    
    0.30
    %
    
    0.18
    %
    
    0.14
    %
    
    0.12
    %
    
    0.17
    %
    
    0.17
    %
    
    0.15
    %
    
    0.11
    %
    
    0.12
    %
    
    0.11
    %
    
    0.15
    %
    
    0.22
    %8
    
    0.63
    %
    
    0.44
    %
    
    0.41
    %
    
    0.39
    %
    
    0.31
    %
    
    0.39
    %
    
    0.29
    %
    
    0.22
    %
    
    0.19
    %
    
    0.23
    %
    
    0.26
    %
    
    0.30
    %
    
    0.17
    %
    
    0.21
    %
    
    0.18
    %
    
    0.21
    %
    
    0.32
    %9
    
    0.87
    %
    
    0.67
    %
    
    0.65
    %
    
    0.50
    %
    
    0.47
    %
    
    0.50
    %
    
    0.38
    %
    
    0.32
    %
    
    0.26
    %
    
    0.33
    %
    
    0.34
    %
    
    0.37
    %
    
    0.24
    %
    
    0.27
    %
    
    0.23
    %
    
    0.27
    %10
    
    1.05
    %
    
    0.90
    %
    
    0.85
    %
    
    0.65
    %
    
    0.60
    %
    
    0.65
    %
    
    0.48
    %
    
    0.44
    %
    
    0.34
    %
    
    0.41
    %
    
    0.42
    %
    
    0.44
    %
    
    0.31
    %
    
    0.35
    %
    
    0.31
    %
    
    0.35
    %11
    
    1.27
    %
    
    1.11
    %
    
    1.08
    %
    
    0.85
    %
    
    0.77
    %
    
    0.77
    %
    
    0.59
    %
    
    0.51
    %
    
    0.39
    %
    
    0.49
    %
    
    0.51
    %
    
    0.51
    %
    
    0.39
    %
    
    0.42
    %
    
    0.35
    %
    
    0.43
    %12
    
    1.59
    %
    
    1.38
    %
    
    1.29
    %
    
    1.03
    %
    
    0.95
    %
    
    0.89
    %
    
    0.70
    %
    
    0.59
    %
    
    0.48
    %
    
    0.58
    %
    
    0.60
    %
    
    0.59
    %
    
    0.44
    %
    
    0.49
    %
    
    0.42
    %
    
    0.50
    %13
    
    1.82
    %
    
    1.57
    %
    
    1.42
    %
    
    1.25
    %
    
    1.14
    %
    
    1.04
    %
    
    0.78
    %
    
    0.69
    %
    
    0.56
    %
    
    0.68
    %
    
    0.70
    %
    
    0.67
    %
    
    0.50
    %
    
    0.54
    %
    
    0.46
    %
 17




---



##### Table of Contents



Month
    
    00-A
    
    00-B
    
    00-C
    
    00-D
    
    01-A
    
    01-B
    
    01-C
    
    01-D
    
    02-A
    
    02-B
    
    02-C
    
    02-D
    
    03-A
    
    03-B
    
    03-C
    
    03-D

    04-A

    04-B

    04-C14
    
    
    2.03
    %
    
    
    1.84
    %
    
    
    1.65
    %
    
    
    1.41
    %
    
    
    1.31
    %
    
    
    1.19
    %
    
    
    0.89
    %
    
    
    0.77
    %
    
    
    0.64
    %
    
    
    0.75
    %
    
    
    0.79
    %
    
    
    0.75
    %
    
    
    0.59
    %
    
    
    0.60
    %
    
    
    0.52
    %15
    
    
    2.25
    %
    
    
    2.08
    %
    
    
    1.93
    %
    
    
    1.62
    %
    
    
    1.47
    %
    
    
    1.33
    %
    
    
    1.00
    %
    
    
    0.85
    %
    
    
    0.74
    %
    
    
    0.84
    %
    
    
    0.89
    %
    
    
    0.79
    %
    
    
    0.67
    %
    
    
    0.63
    %
    
    
    0.61
    %16
    
    
    2.48
    %
    
    
    2.26
    %
    
    
    2.16
    %
    
    
    1.86
    %
    
    
    1.64
    %
    
    
    1.43
    %
    
    
    1.11
    %
    
    
    0.94
    %
    
    
    0.83
    %
    
    
    0.93
    %
    
    
    0.98
    %
    
    
    0.88
    %
    
    
    0.74
    %
    
    
    0.70
    %17
    
    
    2.64
    %
    
    
    2.42
    %
    
    
    2.42
    %

    
    
    2.04
    %
    
    
    1.78
    %
    
    
    1.55
    %
    
    
    1.23
    %
    
    
    1.03
    %
    
    
    0.91
    %
    
    
    1.02
    %
    
    
    1.07
    %
    
    
    0.99
    %
    
    
    0.81
    %
    
    
    0.80
    %18
    
    
    2.80
    %
    
    
    2.69
    %
    
    
    2.65
    %
    
    
    2.20
    %
    
    
    1.96
    %
    
    
    1.67
    %
    
    
    1.34
    %
    
    
    1.10
    %
    
    
    1.00
    %
    
    
    1.10
    %
    
    
    1.16
    %
    
    
    1.07
    %
    
    
    0.89
    %19
    
    
    2.98
    %
    
    
    2.96
    %
    
    
    2.97
    %
    
    
    2.41
    %
    
    
    2.10
    %
    
    
    1.80
    %
    
    
    1.45
    %
    
    
    1.19
    %
    
    
    1.12
    %
    
    
    1.16
    %
    
    
    1.29
    %
    
    
    1.15
    %
    
    
    0.97
    %20
    
    
    3.25
    %
    
    
    3.20
    %
    
    
    3.25
    %
    
    
    2.60
    %
    
    
    2.25
    %
    
    
    1.94
    %
    
    
    1.58
    %
    
    
    1.30
    %
    
    
    1.20
    %
    
    
    1.26
    %
    
    
    1.38
    %
    
    
    1.22
    %
    
    
    1.07
    %21
    
    
    3.52
    %
    
    
    3.44
    %
    
    
    3.48
    %
    
    
    2.75
    %
    
    
    2.36
    %
    
    
    2.09
    %
    
    
    1.71
    %
    
    
    1.39
    %
    
    
    1.27
    %
    
    
    1.34
    %
    
    
    1.48
    %
    
    
    1.30
    %
    
    
    1.15
    %22
    
    
    3.69
    %
    
    
    3.69
    %
    
    
    3.70
    %
    
    
    2.92
    %
    
    
    2.49
    %
    
    
    2.23
    %
    
    
    1.84
    %
    
    
    1.51
    %
    
    
    1.39
    %
    
    
    1.44
    %
    
    
    1.60
    %
    
    
    1.36
    %23
    
    
    3.91
    %
    
    
    3.94
    %
    
    
    3.95
    %
    
    
    3.03
    %
    
    
    2.61
    %
    
    
    2.35
    %
    
    
    1.92
    %
    
    
    1.59
    %
    
    
    1.49
    %
    
    
    1.52
    %
    
    
    1.69
    %
    
    
    1.43
    %24
    
    
    4.12
    %
    
    
    4.18
    %
    
    
    4.18
    %
    
    
    3.16
    %
    
    
    2.75
    %
    
    
    2.47
    %
    
    
    2.02
    %
    
    
    1.67
    %
    
    
    1.60
    %
    
    
    1.60
    %
    
    
    1.76
    %
    
    
    1.49
    %25
    
    
    4.32
    %
    
    
    4.39
    %
    
    
    4.37
    %
    
    
    3.32
    %
    
    
    2.86
    %
    
    
    2.57
    %
    
    
    2.13
    %
    
    
    1.73
    %
    
    
    1.69
    %
    
    
    1.66
    %
    
    
    1.82
    %26
    
    
    4.52
    %
    
    
    4.57
    %
    
    
    4.54
    %
    
    
    3.45
    %
    
    
    3.01
    %
    
    
    2.67
    %
    
    
    2.25
    %
    
    
    1.80
    %
    
    
    1.76
    %
    
    
    1.73
    %
    
    
    1.89
    %27
    
    
    4.71
    %
    
    
    4.74
    %
    
    
    4.74
    %
    
    
    3.59
    %
    
    
    3.12
    %
    
    
    2.77
    %
    
    
    2.33
    %
    
    
    1.89
    %
    
    
    1.82
    %
    
    
    1.77
    %
    
    
    1.96
    %28
    
    
    4.87
    %
    
    
    4.91
    %
    
    
    4.88
    %
    
    
    3.71
    %
    
    
    3.27
    %
    
    
    2.87
    %
    
    
    2.43
    %
    
    
    1.96
    %
    
    
    1.93
    %
    
    
    1.80
    %29
    
    
    5.04
    %
    
    
    5.07
    %
    
    
    5.03
    %
    
    
    3.86
    %
    
    
    3.41
    %
    
    
    2.96
    %
    
    
    2.52
    %
    
    
    2.01
    %
    
    
    1.99
    %
    
    
    1.85
    %30
    
    
    5.23
    %
    
    
    5.22
    %
    
    
    5.18
    %
    
    
    4.00
    %
    
    
    3.52
    %
    
    
    3.04
    %
    
    
    2.62
    %
    
    
    2.06
    %
    
    
    2.02
    %
    
    
    1.92
    %31
    
    
    5.35
    %
    
    
    5.36
    %
    
    
    5.33
    %
    
    
    4.09
    %
    
    
    3.60
    %
    
    
    3.11
    %
    
    
    2.72
    %
    
    
    2.09
    %
    
    
    2.06
    %32
    
    
    5.48
    %
    
    
    5.53
    %
    
    
    5.43
    %
    
    
    4.20
    %
    
    
    3.69
    %
    
    
    3.19
    %
    
    
    2.81
    %
    
    
    2.14
    %
    
    
    2.11
    %33
    
    
    5.61
    %
    
    
    5.67
    %
    
    
    5.57
    %
    
    
    4.28
    %
    
    
    3.78
    %
    
    
    3.28
    %
    
    
    2.89
    %
    
    
    2.19
    %
    
    
    2.15
    %34
    
    
    5.74
    %
    
    
    5.80
    %
    
    
    5.67
    %
    
    
    4.39
    %
    
    
    3.87
    %
    
    
    3.35
    %
    
    
    2.92
    %
    
    
    2.21
    %35
    
    
    5.85
    %
    
    
    5.91
    %
    
    
    5.77
    %
    
    
    4.47
    %
    
    
    3.93
    %
    
    
    3.41
    %
    
    
    2.97
    %
    
    
    2.26
    %36
    
    
    5.96
    %
    
    
    6.04
    %
    
    
    5.90
    %
    
    
    4.55
    %
    
    
    4.03
    %
    
    
    3.48
    %
    
    
    3.00
    %
    
    
    2.30
    %37
    
    
    6.06
    %
    
    
    6.15
    %
    
    
    5.99
    %
    
    
    4.64
    %
    
    
    4.10
    %
    
    
    3.51
    %
    
    
    3.05
    %38
    
    
    6.16
    %
    
    
    6.24
    %
    
    
    6.09
    %
    
    
    4.73
    %
    
    
    4.16
    %
    
    
    3.56
    %
    
    
    3.10
    %39
    
    
    6.25
    %
    
    
    6.35
    %
    
    
    6.17
    %
    
    
    4.81
    %
    
    
    4.20
    %
    
    
    3.59
    %
    
    
    3.13
    %40
    
    
    6.33
    %
    
    
    6.43
    %
    
    
    6.24
    %
    
    
    4.85
    %
    
    
    4.24
    %
    
    
    3.62
    %41
    
    
    6.41
    %
    
    
    6.53
    %
    
    
    6.31
    %
    
    
    4.91
    %
    
    
    4.28
    %
    
    
    3.65
    %42
    
    
    6.48
    %
    
    
    6.60
    %
    
    
    6.39
    %
    
    
    4.95
    %
    
    
    4.30
    %43
    
    
    6.54
    %
    
    
    6.67
    %
    
    
    6.47
    %
    
    
    4.98
    %
    
    
    4.33
    %44
    
    
    6.59
    %
    
    
    6.76
    %
    
    
    6.53
    %
    
    
    5.02
    %45
    
    
    6.62
    %
    
    
    6.82
    %
    
    
    6.60
    %
    
    
    5.05
    %46
    
    
    
    
    
    
    6.86
    %
 CREDIT ENHANCEMENT ASSETS Retained interest in securitized assets (RISA) capitalized upon
securitization of Contracts represents the present value of the estimated
future earnings to be received by the Company from the excess spread created in
securitization transactions. Excess spread is calculated by taking the
difference between the weighted average coupon rate of the Contracts sold and
the weighted average security rate paid to the investors less contractually
specified servicing and guarantor fees and projected credit losses, after
giving effect to estimated prepayments. Prepayment and credit loss assumptions are utilized to project future
earnings and are based on historical experience. Credit losses are estimated
using cumulative loss frequency and severity estimates by management. All
assumptions are evaluated each quarter and adjusted, if appropriate, to reflect
the actual performance of the underlying Contracts. Future earnings are
discounted at a rate management believes to be representative of market at the
time of securitization. LIQUIDITY AND CAPITAL RESOURCES The Company requires substantial cash and capital resources to operate its
business. Its primary uses of cash include: (i) acquisition of Contracts; (ii)
payments of dealer participation; (iii) securitization costs; (iv) settlements
of hedging transactions; (v) operating expenses; and (vi) interest expense. The
capital resources available to the 18




---



##### Table of Contents



Company include: (i) interest income during the warehousing period; (ii)
servicing fees; (iii) releases from spread accounts; (iv) settlements of
hedging transactions; (v) sales of Contracts in securitizations; and (vi)
borrowings under its credit facilities. Management believes that the resources
available to the Company will provide the needed capital to fund Contract
purchases, investments in origination and servicing capabilities, and ongoing
operations. The Companys primary source of funds from continuing operations is
securitization proceeds. The Company uses the cash generated from
securitizations to pay down outstanding warehouse facilities. These facilities
are then used to fund the purchase of Contracts. Although the Company has
historically operated on a negative cash flow basis, excluding the effects of
securitization transactions, from operating activities, the Company generated
positive cash flow beginning in the fourth quarter of 2003. The Company
finances dealer participation payments and daily operations principally through
credit facilities collateralized by its retained interest in securitized
assets, proceeds from subordinated debt offerings, and cash from operating
activities. Cash provided by operating activities was $75.4 million for the
nine months ended September 30, 2004, compared to $11.0 million used during the
same period in 2003. During the nine-month period ending September 2003, the
Company executed three securitizations in the amount of $1.2 billion, compared
to three securitizations during the nine-month period ending September 2004 in
the amount of $1.4 billion. The change in cash provided by operating activities
is also largely dependent upon the amount of cash released from spread
accounts, the timing of securitization transactions (including whether they
include pre-funding agreements) and the size of securitizations executed
relative to the volume of Contracts originated during the warehouse period. We have entered into an agreement and plan of merger with Capital One Auto
Finance, Inc.and its subsidiary, Foothill Services Corporation, under which the
Company will be acquired by Capital One Auto Finance for $28.00 per outstanding
share of Onyx common stock. The acquisition is expected to close in the first
quarter of 2005. Based upon discussions with Capital One Auto Finance
and given
the pending acquisition it is likely that we will not execute on our original
plans to complete a securitization transaction in the fourth quarter of 2004.
If a securitization transaction is not completed in the fourth
quarter, we will
likely experience a fourth quarter GAAP loss and lower than expected annual net
income for the full year 2004 due to the lost gain on sale income.
Additionally, we may need to request waivers of certain covenants in our
warehouse and residual facilities with respect to equity to asset ratios, and
we may need to obtain bridge financing if our warehouse facilities reach their
maximum capacity. However, we anticipate that following the expected closing
of the merger, the decreased liquidity we will experience in the fourth quarter
of 2004 should be alleviated by future securitization transactions or funding
access through Capital One Auto Finance. If the pending merger transaction
with Capital One Auto Finance fails to close, the decreased liquidity and net
earnings should still be alleviated by future securitization transactions. The Company continues to focus its efforts on building and maintaining its
dealer relations through its existing branch locations. Capital expenditures of
$364 thousand and $975 thousand during the nine-month periods ended September
30, 2004 and 2003, respectively, were due to the ongoing maintenance and
upgrade of the Companys servicing infrastructure. CP Facilities:As of September 30, 2004, the Company was party to two
warehouse facilities. The Company has a warehouse facility of $300 million (the
Triple-A CP Facility), with Triple-A One Funding Corporation (Triple-A).
Onyx Acceptance Financial Corporation (OAFC), a special purpose subsidiary of
the Company, is the borrower under the Triple-A CP Facility. The Triple-A CP
Facility is used to fund the purchase or origination of Contracts. Triple-A is
a rated commercial paper asset-backed conduit sponsored by MBIA Insurance
Corporation (MBIA). MBIA provides credit enhancement for the facility by
issuing a financial guarantee insurance policy covering all principal and
interest obligations owed for the borrowings under the facility. The Company
pledges certain of its Contracts held for sale to borrow from Triple-A. The
Triple-A CP Facility was renewed in November 2001 for a three-year term,
subject to annual renewals by liquidity providers. The Company is presently
negotiating the extension of this facility. A subsidiary of the Company, Onyx Acceptance Receivables Corporation
(OARC), has a $300 million warehouse facility with CDC Financial Products
Inc. (CDC) and Wachovia Bank, N.A., which provides warehouse funding for the
purchase or origination of Contracts and is used in concert with the Triple-A
CP Facility. XL Capital Assurance Inc. provides credit enhancement for the
facility by issuing a financial guarantee insurance policy covering all
principal and interest obligations owed for borrowings under the facility. The
Company pledges certain of its Contracts held for sale to borrow under the OARC
CP Facility. The facility expires in January 2005. The Triple-A CP Facility and the OARC CP Facility are sometimes referred
to herein as the CP Facilities. The Residual Lines:As of September 30, 2004, the Company, through a
special purpose subsidiary of the Company, Onyx Acceptance Funding Corporation
(OFC), had three residual financing facilities:  
    
    A $35 million line with Merrill Lynch International, as buyer
(MLI), and Merrill Lynch, Pierce, Fenner & Smith Inc., as agent
(Merrill). The MLI facility was renewed for another year in April
2004. Each loan under the MLI line has a nine-month revolver period
followed by a twelve-month amortization period.  
    
    A $20.0 million facility with Credit Suisse First Boston (Europe)
Limited, as buyer (CSFB-Europe), and Credit Suisse First Boston
Corporation, as agent (CSFB). In April 2004, this facility was renewed
for another year. 19




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
    
    A $30.0 million facility with Galleon Capital, LLC (Galleon)
executed in January of 2004. The Galleon facility provides for a
twelve-month revolving period followed by an accelerated amortization
period. The facilities described above are sometimes referred to herein as the
Residual Lines. Subordinated Debt:As of September 30, 2004, the Company had outstanding
approximately $52.8 million of subordinated debt, $12.0 million of which has a
stated interest rate of 12.5% and a maturity of June 2006. The remaining
balance of $40.8 million was raised through the Companys renewable unsecured
subordinated note program launched during the first quarter of 2002. The
weighted average interest rate on the balance of the renewable notes
outstanding as of September 30, 2004 was approximately 7.8%. The renewable
notes have varying maturities ranging from three months to ten years. As
part of the planned merger with Capital One Auto Finance, as
outlined in the merger agreement, as a condition to the closing of
the merger, all
outstanding unsecured subordinated notes with a maturity of June 2006 will be redeemed
as of the March 15, 2005 payment date. The facilities and lines above contain affirmative, negative and financial
covenants typical of such credit facilities. The Company was in compliance with
these covenants as of September 30, 2004. SECURITIZATIONS Off balance sheet arrangements are used in the ordinary course of
business. Generally, these transactions are structured as off balance sheet
sales of Contracts. One of the most common forms of off balance sheet
arrangements is Contract securitizations. Regular Contract securitizations are
an integral part of the Companys business plan because they allow the Company
to increase its liquidity, provide for redeployment of its capital and reduce
risks associated with interest rate fluctuations. The Company has developed a
securitization program that involves selling interests in pools of its
Contracts to investors through the public issuance of AAA/Aaa rated
asset-backed securities. Automobile securitizations are used by many financial
institutions and are part of a multi-billion dollar annual market for
asset-backed securities. As part of this process, management considers the
relative risks and returns prior to initiating each securitization. These risks
include, but are not limited to, interest rate fluctuations during the
warehouse period, increased prepayments speeds and losses, loss of credit
enhancement for the underlying securitization, loss of servicing rights and
adverse economic conditions. These factors are explained in further detail in
the section Risk Factors. The table below provides information about the
outstanding trusts assets and liabilities as of September 30, 2004 and
December 31, 2003. Sept. 30,
    
    December 31,2004
    
    2003(In millions)Total assets
    
    $
    2,793
    
    
    $
    2,750Total liabilities
    
    $
    2,702
    
    
    $
    2,642
 The Company completed one AAA/Aaa rated publicly underwritten asset-backed
securitization in the amount of $450 million during the third quarter of 2004.
Since 1994, the Company has securitized approximately $11.5 billion of its
Contracts in 37 separate transactions. In each of its securitizations, the
Company has sold its Contracts to a newly formed grantor or owner trust, which
issued certificates or notes in an amount equal to the aggregate principal
balance of the Contracts. The net proceeds of these securitizations were used
to pay down outstanding indebtedness incurred under the Companys warehouse
financing facilities to purchase Contracts, thereby creating availability for
the purchase of additional Contracts. To improve the level of profitability from the sale of securitized
Contracts, the Company arranges for credit enhancement to achieve an improved
credit rating on the asset-backed securities issued. This credit enhancement
has taken the form of a financial guaranty insurance policy or bond (the
Financial Guarantee Insurance Policy) insuring the payment of principal and
interest due on the asset-backed securities. The policies or bonds have been
issued by MBIA Insurance Corporation (or a predecessor) and XL Capital
Assurance Inc. The Company receives servicing fees for its duties relating to the
accounting for and collection of the Contracts. In addition, the Company is
entitled to the future excess cash flows arising from the trusts. Generally,
the Company sells the Contracts at face value and without recourse, except that
certain representations and warranties with respect to the Contracts are
provided by the Company as the servicer and OAFC as the seller to the trusts. 20




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Gains on sale of Contracts arising from securitizations provide a
significant portion of the Companys revenues. Several factors affect the
Companys ability to complete securitizations of its Contracts, including
conditions in the securities markets generally, conditions in the asset-backed
securities market specifically, the credit quality of the Companys portfolio
of Contracts and the Companys ability to obtain credit enhancement. As
described under Liquidity and Capital Resources
above, we do not anticipate completing a securitization transaction
in the 4th quarter of 2004, and, as a result, our revenues will be
significantly lower than previously expected. INTEREST RATE EXPOSURE AND HEDGING The Company is able, through the use of varying maturities on advances
from the CP Facilities, to lock in rates during the warehousing period, when in
managements judgment it is appropriate to limit interest rate exposure during
such warehousing period (See Risk Factors  Interest Rate Risk). The Company has the ability to move rates upward in response to rising
borrowing costs because the Company currently does not originate loans near the
maximum rates permitted by law. Further, the Company employs a hedging strategy
which primarily consists of the execution of forward interest rate swaps. These
hedges are entered into by the Company in numbers and amounts which generally
correspond to the anticipated principal amount of the related securitization.
Gains and losses relative to these hedges are recognized in full at the time of
securitization as an adjustment to the gain on sale of the Contracts. The
Company has only used counterparties with investment grade debt ratings from
national rating agencies for its hedging transactions. Management monitors the Companys hedging activities on a frequent basis
to ensure that the value of hedges, their correlation to the Contracts being
hedged and the amounts being hedged continue to provide effective protection
against interest rate risk. The Companys hedging strategy requires estimates
by management of monthly Contract acquisition volume and timing of its
securitizations. If such estimates are materially inaccurate, then the
Companys gain on sales of Contracts and results of operations and cash flows
could be adversely affected. The amount and timing of hedging transactions are
determined by senior management based upon the amount of Contracts purchased
and the interest rate environment. Senior management currently expects to hedge
substantially all of its Contract originations pending securitization. FORWARD LOOKING STATEMENTS The preceding Managements Discussion and Analysis of the Companys
Financial Condition and Results of Operations contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, which provides a safe harbor for these types of statements. This
Quarterly Report on Form 10-Q contains forward-looking statements which reflect
the current views of the Company with respect to future events and financial
performance, including the Companys expectation that it will
continue to generate positive cash flow. These forward looking statements are subject to certain risks and
uncertainties, including those identified below which could cause actual
results to differ materially from historical results or those anticipated.
Forward-looking terminology can be identified by the use of terms such as
may, will, expect, anticipate, estimate, should or continue or
the negative thereof or other variations thereon or comparable terminology.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. Except as required by law, the
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors, among others, could cause actual
results to differ materially from historical results or those anticipated: (1)
the level of demand for auto contracts, which is affected by such external
factors as the level of interest rates, the strength of the various segments of
the economy, debt burden held by consumers and demographics of the lending
markets of the Company; (2) continued dealer relationships; (3) fluctuations
between consumer interest rates and the cost of funds; (4) federal and state
regulation of auto finance operations; (5) competition within the consumer
lending industry; (6) the availability and cost of securitization
transactions; (7) the failure to close the pending acquisition of the
Company by Capital One Auto
Finance, Inc.; and (8) the availability and cost of warehouse and residual financing. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys earnings are affected by changes in interest rates as a
result of its dependence upon the issuance of interest-bearing securities and
the incurrence of debt to fund its lending activities. Several factors can
influence the Companys ability to manage interest rate risk. First, Contracts
are purchased at fixed interest rates, while the amounts borrowed under the
warehouse credit facilities bear interest at variable rates that are subject to
frequent adjustment to reflect prevailing market interest rates. Second, the
interest rate demanded by investors in a securitization is a function of
prevailing market rates for comparable transactions and the general interest
rate environment. Because the Contracts purchased by the Company have fixed
interest rates, the Company bears the risk of smaller gross interest rate
spreads in the event interest rates increase during the period between the date
Contracts are purchased and the completion and pricing of the related
securitization transaction. The Company uses several strategies to minimize interest rate risk,
including the utilization of derivative financial instruments, the regular
securitization of Contracts and the use of pre-funding in securitization
transactions. Pre-funding securitizations is the practice of issuing more
asset-backed securities than the amount of Contracts initially sold to the
securitization trust. The proceeds from the pre-funded portion are held in an
escrow account until additional Contracts are sold to the trust in amounts up
to the balance of the pre-funded escrow account. In pre-funded securitizations,
investor interest rates are locked in with respect to the Contracts
subsequently delivered to the securitization trust. However, the Company incurs
an expense in pre-funded securitizations equal to the difference between the
money market yields earned on the proceeds held in escrow prior to the
subsequent delivery of Contracts and the interest rate paid on the portion of
the securities proceeds related to the pre-fund amount. Derivative financial instruments are utilized to manage the gross interest
rate spread on the Companys securitization transactions. The Company sells
fixed rate Contracts to the trusts that, in turn, sell fixed rate securities to
investors. The fixed rates on securities issued by the trusts are indexed to
swap rates on U.S. Treasury Notes with similar average maturities or various
London Interbank Offered Rates (LIBOR). The Company periodically executes the
sale of forward swap agreements to lock in the indexed rate for specific
anticipated securitization transactions. The Company utilizes these derivative
financial instruments to modify its net interest sensitivity to 21




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levels deemed appropriate based on the Companys risk tolerance. All
transactions are entered into for purposes other than trading and are settled
quarterly upon pricing of the securitization. The Company remitted cash payments, net of expenses, of approximately $2.1
million during the third quarter of 2004 and received cash payments, net of
expenses, of approximately $0.8 million during the third quarter of 2003 to
settle forward interest rate swap agreements. These amounts were included in
the gain on sale of Contracts in the related securitization transactions. Cash
payments are recovered over time through a higher gross interest rate spread on
the related securitization transaction, while cash receipts are offset through
a lower gross interest rate spread on the related securitization transaction.
As of September 30, 2004, the Company had no forward interest rate swap
agreements outstanding. 
 ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. As
required by SEC rule 13a-15(b), the Company carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as
of the end of the quarter covered by this report. Based on the
foregoing, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures
are effective at the reasonable assurance level. There
has been no change in the Companys internal control over
financial reporting during the Companys most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial
reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS As a consumer finance company, the Company is subject to various consumer
claims and litigation seeking damages and statutory penalties based upon, among
other things, disclosure inaccuracies and wrongful repossession, which could
take the form of a plaintiffs class action complaint. The Company, as the
assignee of finance Contracts originated by dealers, may also be named as a
co-defendant in lawsuits filed by consumers principally against dealers.
Finally, the Company also is subject to other litigation common to the motor
vehicle finance industry and businesses in general. The damages and penalties
claimed by consumers and others in these types of matters can be substantial.
The relief requested by the plaintiffs varies but includes requests for
compensatory, statutory and punitive damages. Management believes that the Company has taken prudent steps to address
the litigation risks associated with the Companys business. However, there can
be no assurance that the Company will be able to successfully defend against
all such claims or that the determination of any such claim in a manner adverse
to the Company would not have a material adverse effect on the Companys
automobile finance business. 22




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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES The following table presents the total number of shares repurchased during
the third quarter of fiscal 2004, the average price paid per share, the number
of shares that were purchased as part of a publicly announced repurchase plan,
and the approximate dollar value of shares that were available for repurchase
as of September 30, 2004, pursuant to the $5.0 million share repurchase
program: (d)(c)
    
    Approximate DollarTotal Number of
    
    Value of SharesShares Purchased as
    
    that May Yet Be(a)
    
    (b)
    
    Part of Publicly
    
    Purchased Under theTotal Number of
    
    Average Price
    
    Announced Plans
    
    Plans orPeriod
    
    Shares Purchased
    
    Paid per Share
    
    or Programs
    
    Programs(1)July 1 through July 31
    
    
    14,400
    
    
    $
    15.84
    
    
    
    14,400
    
    
    $2.3 MillionAugust 1 through August 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    $2.3 MillionSept. 1 through Sept. 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    $2.3 MillionTotal
    
    
    14,400
    
    
    $
    15.84
    
    
    
    14,400
  (1)
    
    The Companys Board of Directors approved a share repurchase program
authorizing the repurchase of up to $5.0 million of the Companys Common
Stock in February 2004. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A
special meeting of stockholders will be scheduled for stockholders to consider and vote on a proposal to approve and
adopt the Agreement and Plan of Merger, dated as of September 21, 2004, by and
among Capital One Auto Finance, Inc. (Capital One Auto Finance), Foothill
Services Corporation, a wholly owned subsidiary of Capital One Auto Finance,
and the Company, providing for the acquisition of the Company by Capital One
Auto Finance and the other transactions contemplated by the merger agreement. 
 ITEM 5. OTHER INFORMATION PLANNED MERGER WITH CAPITAL ONE AUTO FINANCE On
September 21, 2004, the Company entered into an agreement and
plan of merger with Capital
One Auto Finance, Inc., a subsidiary of Capital One Financial
Corporation under which the Company will be acquired by Capital
One Auto Finance for $28.00 per outstanding share of Onyx common
stock. The acquisition is expected to close in the first quarter of 2005. 23




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BUSINESS RISKS You should carefully consider the following risks in your evaluation of us
and our common stock. The risks and uncertainties described below may not be
the only ones facing our Company. Additional risks and uncertainties,
including, but not limited to, credit, economic, competitive, governmental and
financial factors affecting our operations, markets, financial products, and
services and other factors discussed in our future filings with the Securities
and Exchange Commission may also adversely impact and impair our business. If
any of these risks actually occur, our business, results of operations, cash
flows or financial condition would likely suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of the
money you paid to buy our common stock. We Need Substantial Liquidity. We require a substantial amount of liquidity to operate our business.
Among other things, we use such liquidity to:  
    
    acquire Contracts;  
    
    pay dealer participation;  
    
    pay securitization costs and fund related accounts;  
    
    settle hedge transactions;  
    
    satisfy working capital requirements and pay operating expenses; and  
    
    pay interest expense. A substantial portion of our revenues in any period is represented by the
gain on sale of Contracts generated by a securitization in such period, but the
cash underlying such revenues is received over the life of the Contracts. 24




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We have historically operated on a negative cash flow basis. We generated
positive cash flow beginning in the fourth quarter of 2003, and will likely
continue to remain cash flow positive on a quarterly basis, provided the volume
of Contract purchases remains steady on an annual basis. We have historically
funded negative operating
cash flows principally through borrowings from financial institutions,
sales of equity securities and sales of subordinated debt. We cannot assure
you, however, that (1) we will remain cash flow positive, (2) we will have
access to capital markets in the future for equity, debt issuances or
securitizations, or (3) financing through borrowings or other means will be
available on acceptable terms to satisfy our cash requirements. If we are
unable to access the capital markets or obtain acceptable financing, our
results of operations, financial condition and cash flows would be materially
and adversely affected. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources. We Depend on Warehouse Financing. We depend on warehouse facilities with financial institutions to finance
the purchase or origination of Contracts pending securitization. Our business
strategy requires that such financing continue to be available during the
warehousing period. Whether the CP Facilities continue to be available to us depends on, among
other things, whether we maintain a target net yield for the Contracts financed
under the CP Facilities and comply with certain financial covenants contained
in the sale and servicing agreements between us, as seller, and our respective
wholly-owned special purpose subsidiary, OAFC or OARC, as purchaser. These
financial covenants include:  
    
    a minimum ratio of net worth plus subordinated debt to total assets;  
    
    a maximum ratio of credit enhancement assets to tangible net worth; and  
    
    an earnings before interest, depreciation and taxes coverage ratio. We cannot assure you that our CP Facilities will be available to us or
that they will be available on favorable terms. We currently do not
anticipate completing a securitization transaction in the
4th quarter
of 2004, and, as a result, we may need to request waivers of
certain covenants in our CP Facilities and we may need to negotiate increases to the capacity of
one or both of our CP Facilities. If we are unable to arrange new
warehousing credit facilities, extend our existing credit facilities when
they expire or increase the capacity under one or both of our CP
Facilities, our results of operations, financial condition and cash flows
could be materially and adversely affected. We Depend on Residual Financing. When we sell our Contracts in securitizations, we receive cash and a
residual interest in the securitized assets (RISA). The RISA represents the
future cash flows to be generated by the Contracts in excess of the interest
paid on the securities issued in the securitization and other costs of
servicing the Contracts and completing the securitization. (See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Securitizations). We can use the RISA from each securitization as collateral
to borrow cash under our Residual Lines to finance our operations. The amount
of cash advanced by our lenders under our Residual Lines depends on a
collateral formula that is determined in large part by how well our securitized
Contracts perform. If our portfolio of securitized Contracts experience higher
delinquency and loss ratios than expected, then the amount of money we can
borrow under the Residual Lines would be reduced. The reduction in availability
under these Residual Lines could materially and adversely affect our
operations, financial condition and cash flows. Additionally, we are subject,
under the documentation governing the Residual Lines, to certain financial
covenants. We Depend on Securitizations to Generate Revenue. We rely significantly upon securitizations to generate cash proceeds for
repayment of our warehouse and our residual credit facilities and to create
availability to purchase additional Contracts. Further, gain on sale of
Contracts generated by our securitizations represents a significant portion of
our revenues. Our ability to complete securitizations of our Contracts is
affected by the following factors, among other things:  
    
    conditions in the securities markets generally;  
    
    conditions in the asset-backed securities market specifically; 25




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
    
    the credit quality of our portfolio of Contracts; and
    
    our ability to obtain credit enhancement. If we were unable to profitably securitize a sufficient number of our
Contracts in a particular financial reporting period, then our revenues for
such period could decline and could result in lower net income or a loss for
such period. Currently, we do not anticipate completing a
securitization transaction in the 4th quarter of 2004,
and, as a result, our revenues will decline and we may incur a loss
for such quarter. In addition, unanticipated delays in closing a securitization
could also increase our interest rate risk by increasing the warehousing period
for our Contracts. See Managements Discussion and Analysis of Results of
Operations and Financial Condition  Liquidity and Capital Resources. We Depend on Credit Enhancement. From inception through September 30, 2004, each of our securitizations has
utilized credit enhancement in the form of a financial guarantee insurance
policy or bond in order to achieve AAA/Aaa ratings. This form of credit
enhancement reduces the cost of the securitizations relative to alternative
forms of credit enhancement currently available to us. We cannot assure you
that:  
    
    we will be able to continue to obtain credit enhancement in any form from our current providers;  
    
    we will be able to obtain credit enhancement from any other provider of
credit enhancement on acceptable terms; or  
    
    future securitizations will be similarly rated. We also rely on a financial guarantee insurance policy or bond to reduce
our costs of borrowing under the CP Facilities. If our current providers
credit ratings are downgraded or if they withdraw the credit enhancement, we
could be subject to higher interest costs for our future securitizations and
financing costs during the warehousing period. Such events could have a
material adverse effect on our results of operations, financial condition and
cash flows. We Are Subject to Interest Rate Fluctuations. Our profitability is largely determined by the difference, or spread,
between the effective rate of interest received by us on the Contracts acquired
and the interest rates payable under our credit facilities during the
warehousing period and for securities issued in our securitizations. Several factors affect our ability to manage interest rate risk. First,
the Contracts are purchased or originated at fixed interest rates, while
amounts borrowed under our credit facilities bear interest at variable rates
that are subject to frequent adjustment to reflect prevailing rates for
short-term borrowings. Our policy is to increase the buy rates we issue to
dealerships in response to increases in our cost of funds during the
warehousing period. However, there is generally a time lag before such
increased borrowing costs can be offset by increases in the buy rates for
Contracts and, in certain instances, the rates charged by our competitors may
limit our ability to pass through our increased costs of warehouse financing. Second, the spread can be adversely affected after a Contract is purchased
or originated and while it is held during the warehousing period by increases
in the prevailing rates in the commercial paper markets. While the CP
Facilities permit us to select maturities to coincide with the projected end of
the warehouse period, if we selected a shorter maturity or have a delay in
completing a securitization, we would face this risk. Third, the interest rate demanded by investors in securitizations is a
function of prevailing market rates for comparable transactions and the general
interest rate environment. Because the Contracts purchased or originated by us
have fixed rates, we bear the risk of spreads narrowing because of
interest-rate increases during the period from the date the Contracts are
purchased until the pricing of our securitization of such Contracts. We employ
a hedging strategy that is intended to minimize this risk and which
historically has involved the execution of forward interest rate swaps or use
of a pre-funding structure for our securitizations. However, we cannot assure
you that this strategy 26




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will consistently or completely offset adverse
interest-rate movements during the warehousing period or that we will not
sustain losses on hedging transactions. Our hedging strategy requires estimates
by management of monthly
Contract acquisition volume and timing of our securitizations. If such
estimates are significantly inaccurate, then our gains on sales of Contracts,
results of operations and cash flows could be materially and adversely
affected. We also have exposure to interest rate fluctuations under the Residual
Lines. In periods of increasing interest rates, our cash flows, results of
operations and financial condition could be materially adversely affected. In addition, we have some interest rate exposure to falling interest rates
to the extent that the interest rates charged on Contracts sold in a
securitization with a pre-funding structure decline below the rates prevailing
at the time that the securitization prices. Such a rate decline would reduce
the interest rate spread because the interest rate on the notes and/or the
certificates would remain fixed. This would negatively impact the gain on sale
of Contracts and our results of operations and cash flows. We Will Be Adversely Affected When Contracts are Prepaid or Defaulted. Our results of operations, financial condition, cash flows and liquidity
depend, to a material extent, on the performance of Contracts purchased,
originated, warehoused, and securitized by us. A portion of the Contracts
acquired by us may default or prepay during the warehousing period. We bear the
risk of losses resulting from payment defaults during the warehousing period.
In the event of payment default, the collateral value of the financed vehicle
may not cover the outstanding Contract balance and costs of recovery. We
maintain an allowance for credit losses on Contracts held for investment, which
reflects managements estimates of anticipated credit losses during such
period. If the allowance is inadequate, then we would recognize as an expense
the losses in excess of such allowance, and our results of operations could be
adversely affected. In addition, under the terms of the CP Facilities, we are
not able to borrow against defaulted Contracts. Our servicing income can also be adversely affected by prepayments of or
defaults under Contracts in the serviced portfolio. Our contractual servicing
revenue is based on a percentage of the outstanding principal balance of such
Contracts. Thus, if Contracts are prepaid or charged-off, then our servicing
revenue will decline to the extent of such prepaid or charged-off Contracts. The gain on sale of Contracts recognized by us in each securitization and
the value of the RISA in each transaction reflects managements estimate of
future credit losses and prepayments for the Contracts included in such
securitization. If actual rates of credit loss or prepayments, or both, on such
Contracts exceed those estimated, the value of the RISA would be impaired. We
periodically review our credit loss and prepayment assumptions relative to the
performance of the securitized Contracts and to market conditions. Our results
of operations and liquidity could be adversely affected if credit loss or
prepayment levels on securitized Contracts substantially exceed anticipated
levels. Under certain circumstances, we would be required to record an
impairment charge through a reduction to gain-on-sale. Further, an impairment
of RISA could reduce the amount available to us under our Residual Lines, thus
possibly requiring us to pay down amounts outstanding under these facilities or
provide additional collateral to cure any borrowing base deficiency. Effects of Terrorist Attacks and Military Response. The long-term economic impact of the events of September 11, 2001 and the
United States continuing military response, remain uncertain, but could have a
material effect on general economic conditions, consumer confidence and market
liquidity. No assurance can be given as to the effect of these events on the
performance of the Contracts. Any adverse impact resulting from these events
could materially affect our results of operations, financial condition and cash
flows. In addition, activation of a substantial number of U.S. military
reservists or members of the National Guard may significantly increase the
proportion of Contracts whose interest rates are reduced by the application of
the Servicemembers Civil Relief Act (the Relief Act, which amends and
replaces the Soldiers and Sailors Civil Relief Act of 1940). The Relief Act
provides, generally, that an obligor who is covered by the Relief Act may not
be charged interest on the related Contract in excess of 6% annually during the
period of the obligors active duty. 27




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We Will Be Adversely Affected If We Lose Servicing Rights. Our results of operations, financial condition and cash flows would be
materially and adversely affected if any of the following were to occur:  
    
    loss of the servicing rights under our sale and servicing agreements for the CP Facilities; or  
    
    loss of the servicing rights under the applicable sale and servicing agreement of an owner trust. We are entitled to receive servicing income only while we act as servicer
under the applicable sale and servicing agreement. Under the CP Facilities, our
right to act as servicer can be terminated by our lender or financial insurer
upon the occurrence of certain events. Our Quarterly Earnings May Fluctuate. Our revenues have fluctuated in the past and can be expected to fluctuate
in the future principally as a result of the following factors:  
    
    the timing and size of our securitizations;  
    
    the performance of our serviced portfolio;  
    
    variations in the volume of our Contract acquisitions;  
    
    the interest rate spread between our cost of funds and the average interest rate of purchased Contracts;  
    
    the effectiveness of our hedging strategies;  
    
    the investor rate for securitizations; and  
    
    a trigger event that would block release of excess cash flows from a securitization trusts spread account. Any significant decrease in our quarterly revenues could have a material
adverse effect on our results of operations, financial condition, cash flows
and stock price. We Depend on Key Personnel. Our future operating results depend in significant part upon the continued
service of our key senior management personnel, none of whom is presently bound
by an employment agreement. Our future operating results also depend in part
upon our ability to attract and retain qualified management, technical, sales
and support personnel for our operations. We cannot assure you that we will be
successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his or her current
position or our inability to attract and retain skilled employees, as needed,
could materially and adversely affect our results of operations, financial
condition and cash flows. Our Industry is Highly Competitive. Competition in the field of financing retail motor vehicle sales is
intense. The automobile finance market is highly fragmented and historically
has been serviced by a variety of financial entities including the captive
finance affiliates of major automotive manufacturers and distributors, as well
as banks, savings associations, independent finance companies, credit unions
and leasing companies. Several of these competitors have greater financial
resources than we do. Many of these competitors also have long-standing
relationships with automobile dealerships and offer dealerships or their
customers other forms of financing or services not provided by us. Our ability
to compete successfully depends largely upon our relationships with dealerships
and the willingness of dealerships to offer those Contracts that meet our
underwriting criteria to us for purchase. We cannot assure you that we will be
able to continue to compete successfully in the markets we serve. 28




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We May Be Harmed by Adverse Economic Conditions. We are a motor vehicle consumer auto finance company whose activities are
dependent upon the sale of motor vehicles. Our ability to continue to acquire
Contracts in the markets in which we operate and to expand into additional
markets is dependent upon the overall level of sales of new and used motor
vehicles in those markets. A prolonged downturn in the sale of new and used
motor vehicles, whether nationwide or in the California market, could have a
material adverse impact upon us, our results of operations and our ability to
implement our business strategy. The automobile industry generally is sensitive to adverse economic
conditions both nationwide and in California, where we have our largest
single-state exposure. Periods of rising interest rates, reduced economic
activity or higher rates of unemployment generally result in a reduction in the
rate of sales of motor vehicles and higher default rates on motor vehicle
contracts. We cannot assure you that such economic conditions will not occur,
or that such conditions will not result in severe reductions in our revenues or
the cash flows available to us to permit us to remain current on our credit
facilities. We Are Subject to System Risks. The Company maintains an in-house loan accounting and collections system
to service its Contract portfolio. If issues with the in-house system arise in
the future, we may be unable to acquire Contracts and service the outstanding
portfolio. The failure of this system could materially and adversely affect our
results of operations, financial condition and cash flows. We Are Subject to Many Regulations. Our business is subject to numerous federal and state consumer protection
laws and regulations, which, among other things:  
    
    require us to comply with certain requirements due to our being a publicly traded company;  
    
    require us to obtain and maintain certain licenses and qualifications;  
    
    limit the interest rates, fees and other charges we are allowed to charge;  
    
    limit or prescribe certain other terms of our Contracts;  
    
    require us to protect the privacy of consumer information;  
    
    require specific disclosures; and  
    
    define our rights to repossess and sell collateral. We believe that we are in compliance, in all material respects, with all
such laws and regulations, and that such laws and regulations have had no
material adverse effect on our ability to operate our business. However, we
will be materially and adversely affected if we fail to comply with:  
    
    applicable laws and regulations;  
    
    changes in existing laws or regulations;  
    
    changes in the interpretation of existing laws or regulations; or  
    
    any additional laws or regulations that may be enacted in the future. 29




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We Are Subject to Litigation Risks. We are party to various legal proceedings, similar to actions brought
against other companies in the motor vehicle finance industry and other
businesses. Companies in the motor vehicle finance industry have also been
named as defendants in an increasing number of class action lawsuits brought by
purchasers of motor vehicles and others claiming violation of various federal
and state consumer credit, as well as similar and other, laws and regulations. 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. We Are Subject to Risks if
the Merger with Capital One Auto Finance, Inc. Does Not
Close. Not all of the conditions to the closing of the merger, including the receipt
of the approval of our stockholders holding a majority of the
outstanding shares entitled to vote at the special meeting of our stockholders
and the receipt of necessary governmental approvals, may be
fulfilled. If the
merger agreement is terminated under certain circumstances set forth in the
merger agreement, the requirement to pay a termination fee of $9,000,000 in
cash to Capital One Auto Finance could adversely affect our business, financial
condition and results of operations. ITEM 2. PROPERTIES The
Company did not own any real property at September 30, 2004. The
Companys leases approximately 82,000 square feet of office
space for its headquarters located in Foothill Ranch, California. The
Company also leases office space for its
Auto Finance Centers and its Hazelwood, Missouri service center; the
average size of an Auto Finance Center is generally four to five
thousand square feet. The Hazelwood service center is in
approximately 20,000 square feet. One Auto Finance Center and the
centralized buying center are located in the corporate headquarters
building. 
 ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K (a) Exhibits EXHIBITNUMBER
    
    EXHIBIT TITLE2.1
    
    Agreement and Plan of Merger by and
among Capital One Auto Finance, Inc., Foothill Services Corporation
and Onyx Acceptance Corporation, dated as of September 21, 2004.
(3)10.156
    
    Sale and Servicing Agreement between Onyx Acceptance Owner Trust 2004-C, Onyx
Acceptance Financial Corporation, Onyx Acceptance Corporation and JPMorgan Chase
Bank in connection with the Onyx Acceptance Owner Trust 2004-C. (1)10.157
    
    Backup Servicing Agreement between Onyx Acceptance Corporation, Onyx Acceptance
Financial Corporation, JPMorgan Chase Bank, XL Capital Assurance Inc., Onyx
Acceptance Owner Trust 2004-C and Systems & Services Technologies, Inc. dated as
of August 26, 2004. (2)21.1
    
    Subsidiaries of the Registrant.*31
    
    Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*32
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith(1)
    
    Incorporated by reference from Onyx Acceptance Financial Corporations
Current Report on Form 8-K filed August 31, 2004  (File No. 333-28893)(2)
    
    Incorporated by reference from Onyx Acceptance Financial Corporations
Current Report on Form 8-K filed August 31, 2004  (File No. 333-28893) 30




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(3)
    
    Incorporated by reference from Onyx Acceptance Corporations
Form 8-K filed September 23, 2004  (File No. 000-28050)(b)
    
    REPORTS ON FORM 8-KNone. 31




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ONYX ACCEPTANCE CORPORATIONDate: November 12, 2004
    
    By:
    
    /s/ JOHN W. HALLJohn W. HallPresident, CEO and Principal Executive OfficerDate: November 12, 2004
    
    By:
    
    /s/ DON P. DUFFYDon P. DuffyExecutive Vice President, CFO and PrincipalFinancial Officer
 32




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EXHIBIT INDEX 21.1
    
    Subsidiaries of the Registrant.31
    
    Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 33