10-K 1 a31823.txt AGILITY CAPITAL 10-K WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period October 1, 2000 to September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-21673 AGILITY CAPITAL, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2487218 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1512 WEST 35TH STREET CUT-OFF, AUSTIN, TEXAS 78731 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (512) 472-3600 Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $56,691 on September 30, 2001 ------------ FOOTNOTE: 1 Calculated by excluding all shares that may be deemed to be beneficially owned by executive officers, directors and five percent, shareholders of the registrant, without conceding that all such persons are "affiliates" of the registrant for purposes of the Federal securities laws. As of September 30, 2001 there were 5,962,561 shares of the registrant's Common Stock, no par value, and 1,073,500 of the registrant's 15% Series A Cumulative Preferred Stock, no par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE TABLE OF CONTENTS PART I................................................................................................1 ITEM 1. BUSINESS.................................................................................1 ITEM 2. PROPERTIES...............................................................................6 ITEM 3. LEGAL PROCEEDINGS.......................................................................7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................7 PART II...............................................................................................7 ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................7 ITEM 6. SELECTED FINANCIAL DATA................................................................8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....8 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....13 PART III.............................................................................................13 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................13 ITEM 11. EXECUTIVE COMPENSATION.................................................................13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................13 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................13 PART IV..............................................................................................14 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K..........................14 SIGNATURES...........................................................................................15

PART I ITEM 1. BUSINESS RECENT DEVELOPMENTS On October 17, 2001, the Company agreed to purchase for $25,000 Southcoast Investment Group, Inc., a brokerage firm incorporated in the State of Texas. It will be used to support investment opportunities of the Company. The Company has limited operations and is not expected to be a significant source of short-term revenue. October 22, 2001, the Company's President, Tom Blinten, resigned. He will remain as a member of the Board of Directors. GROWTH AND BUSINESS STRATEGY THE COMPANY The Company is in the process of raising, pursuant to a private placement, a $100,000,000 venture capital investment fund with a projected 10-year term, to be called the Agility Capital Fund, LLC (the "Fund"). The Fund will sell and issue membership interests to accredited and institutional investors. The Company will invest in such interests and will also serve as the managing member and the initial advisor to the Fund. The Fund will invest in early stage, privately held companies operating in the e-commerce business services/internet, information technology and services, new media, enterprise and application software, and communications industries. On a select basis, later stage companies in other industries may also be considered. Initial Investments Prior to the initial closing of the Fund, the Company has and may advance funds on behalf of the Fund to make investments, which meet the Fund's investment criteria. At the election of the Company, as Fund Manager, such investments will be transferred to the Fund in return for the repayment of such advances, without interest, for Class A Membership Interests in an amount equal to the amount of funds advanced, be retained by the Company, or a combination of each. As of September 30, 2001, the Company, in anticipation of their transfer to the Fund, has made investments (aggregating approximately $800,000) in and purchased notes (aggregating $600,000) from the following: -a company that provides software technology that enables distribution and synchronization of image intensive data for the fashion modeling industry. This company's flagship offering is a proprietary distributed database product that links together industry participants, enabling business transactions and the distribution and synchronization of image intensive data. In this regard, the product acts in many ways like an Applications Service Provider ("ASP"), but is not limited or tied to the Internet. This service can be used real-time, on-line or downloaded to a user's network, where the distributed database will be updated automatically for data changes made by any user. -an e-Messaging software company delivering technologies that can significantly increase the probability of recipient's action when receiving e-mail, instant messages or other forms of electronic communications. This Company's intelligent solution provides ISPs and hosting companies the ability to generate annuity revenues in areas previously impossible. Their patent-pending solution has significant applications in the broadband and wireless sectors and can scale as these bandwidths increase their market share. -an investment fund that co-invests in private venture-stage companies with whom the principals of the fund have business or professional relationships. This fund's investments will be made in conjunction with top-tier venture capital funds, strategic corporate investors, and senior management teams. The fund is premised upon the belief that in the world of venture capital, relationships and successful deal flow are even more critical than in the public markets and that access to venture opportunities is based on the quality and depth of business and professional relationships. -a company that provides automated test equipment for a wide variety of semiconductor memory technologies, including DRAM, SDRAM, DDR, RDRAM(R) and Flash. The company provides production automation solutions for product testing and handling. The Company's current investments through this fund include (a) a global services marketplace that allows businesses to transact, develop and deliver services including software 1 programming, graphic design, translation and transcription, all developed remotely and delivered on-line, and (b) an Internet infrastructure company that provides an entirely new class of lightweight, collaborative applications through a proprietary platform whose applications can be created and used by knowledge workers and delivered to the inbox or browser, enabling people to assemble, communicate, and collaborate independent of time, location, and computing platform. Subsequent to September 30, 2001, the Company converted substantially all of its investment and its note receivable plus accrued interest in the software technology company into a secured promissory note in the principal amount of approximately $1,042,000 bearing interest at 9% and purchased a senior secured convertible promissory note from this company in the principal amount of approximately $800,000 bearing interest at 8%. The Company made an additional advance of $50,000 to the e-Messaging software company. Management Fee and Carried Interest It is currently proposed that for managing the Fund, the Company as Fund Manager will receive an annual management fee equal to 2.5% of committed capital through year five. Such annual management fee will decline .10% each year thereafter, but not less than 2%. In addition, it is currently proposed that the Company as the Fund Manager will be entitled to receive a carried interest fee equal to 20% of the net profit from the Fund's investments, with the remaining 80% allocated to the members in accordance with their ownership percentages. Establishment of the Fund on Terms Different From Those Proposed In order to accomplish the establishment of the Fund on terms acceptable to investors in the Fund, it may be necessary to amend certain of the proposed terms of the Fund. In particular, the size of the Fund may be reduced, the Company may be precluded from selling certain existing investments to the Fund, the amount of the management fee or 20% carry payable to the Company may be reduced or delayed, and/or the Company may be required to assume a greater share of placement agency fees. Such modifications could have an adverse effect on the potential and future profitability of the Company. Sharing of Management Fees with Managers The success of the Fund will primarily depend upon the efforts of individuals designated by the Company, in its capacity as Fund Manager, to manage the Fund's investments. The Company expects that the attraction and continued retention of qualified individuals will require compensating these individuals through the utilization of substantially all of the management fees received by the Company, as well as the reallocation to such individuals of a portion of the Company's 20% share of the Fund's net profits. Therefore, even if the Fund is successfully established, there can be no assurance as to the ultimate revenues available for the Company's shareholders. Expenses The Company, as the Fund's Managing Member, will pay all ordinary administrative and overhead expenses related to managing, originating and monitoring investments, including salaries, rent, equipment, administrative expenses which are incurred by the Fund Manager and the Managing Member (to the extent not reimbursed by a Portfolio Company) in connection with the operation of the Fund or an investment by the Fund. THE FUND The Fund's business model is to invest in companies that can benefit from the collective operating and financial experience of the Fund's managers and its advisors. The management and advisory team's business and industry experience and professional relationships will be relevant to the industries targeted and will be used to help the Fund achieve significant and timely venture capital rates of returns. In addition to providing growth capital to a selected group of companies, the Fund will provide these companies ("Portfolio Companies") with access to a network of contacts to help them anticipate and address challenges when they arise and help accelerate their path to profitability. The Fund can also provide Portfolio Companies with access to technology strategy and software development resources via its proposed relationship with a technological consulting and development firm, as well as management recruiting services through the Fund's proposed association with an executive recruitment firm. Portfolio Companies will be provided with access to marketing, advertising, and communication expertise to help them develop marketing strategies to build brand awareness in the digital marketplace through the Fund's association with a founder and former President of one of the largest advertising and communications agencies in the US. Access to significant debt and equity funding resources to help further portfolio company growth will be facilitated through the Fund's management team's extensive contacts in the financial community. Additionally, Portfolio Companies will have access to state of the art business, technology and consumer market intelligence through the Fund's association with a leading provider of business technology research, consumer and market intelligence and decision making tools. 2 The Fund's Vision and Mission In the past several years, the venture capital industry in the United States has experienced dramatic growth, both in terms of the number of venture capital funds operating and the amount of venture capital under management. As a result of this growth many venture capital funds have elected to concentrate on making investments in later-stage, well-developed companies that require large amounts of investment capital. Consequently, many deserving, less mature, early-stage companies are finding it difficult to find venture capital funds that are willing to invest more modest amounts while providing the hands-on attention they need to help them successfully grow and reach profitability. Consequently, the Fund believes many early stage companies in its targeted industries are under served by the venture capital industry. The Fund intends to take advantage of these conditions by identifying and investing in companies where the Fund can leverage its resources and help these companies create substantial value in accelerated timeframes, and produce investment returns for the Fund and its investors in excess of those which could be expected in alternative investment vehicles. These goals will be achieved by combining the talent, resources, and experiences of the Fund Manager and its network of personal and professional relationships with the talent, resources, and experiences existing in the Portfolio Companies. The Fund intends to reach its goals by: -Focusing its activities on private companies in the e-commerce business services/internet, information technology and services, new media, enterprise and application software, and communications industries. -Identifying significant venture investment opportunities based upon the quality and depth of the Fund's management, advisors, portfolio company management and business and professional relationships. -Providing Portfolio Companies with advice based upon the experience, contacts, and leadership of the Fund's management team. -Providing Portfolio Companies with assistance in raising equity capital, obtaining bridge and mezzanine financings and developing various buy-out structures, re-capitalizations, and with securing international investments. -Assisting Portfolio Companies to anticipate and address various operational problems by providing them with access to the Fund's network of advisors and service providers. Because of a highly competitive environment, companies with unique technologies and solutions need to be able to quickly achieve leadership positions by accelerating the development and commercialization of their offerings, and getting them to market faster. Venture capital is increasingly being targeted at later stage companies that require larger size amounts of investment capital, creating a gap in available financing sources between "angel" investors and large venture capital funds. Many of the entrepreneurial companies that could benefit from the Fund's value-added services are start-up or early stage companies that cannot qualify for consideration by larger venture capital funds and are too technical or require more handholding than "angel" investors want or are able to provide. The Fund will focus its activities on identifying and investing in companies that fall into this gap. Portfolio Strategy The Fund's objective is to create partnerships with its Portfolio Companies by not only providing capital, but also by actively providing useful advice and resources in the areas contributing to the development, execution, and operations of the company. In doing so, the Fund will constantly monitor its investments and assist Portfolio Companies to achieve greater efficiencies, accelerating their path to profitability and success. The Fund will encourage and promote all forms of synergies between the management teams of the Fund and the Portfolio Companies, including the sharing of management experience, legal and financial resources, and marketing, business development and technology advice. We believe our investment model has significant advantages over traditional venture capital funds because of our investment selection criteria and the collective knowledge, industry experience, and business contacts we will make available to our Portfolio Companies. The selection of a prospective Portfolio Company investment will be done carefully with an eye toward choosing companies that possess the characteristics and people with the greatest potential to succeed and the opportunity to become industry leaders. The Fund Manager will employ a research-based investment strategy, driven by a bottom-up analysis designed to identify emerging technology companies in high growth potential, technology-driven markets. After the investment is made, the Fund Manager plans to use its resources to add value to Portfolio Companies during the period when they have the best opportunity to rapidly create increased market value. This period often coincides with the period the prospective Portfolio Company is developing its product or service offering and its validation in the marketplace. Generally, this period of opportunity occurs when the prospective Portfolio Company is still privately held, and continues until its value is recognized by the market and it is acquired by another company at a premium or it has its initial public offering. The Fund Manager's 3 investment committee, consisting of all the executive management of the Fund Manager (the "Investment Committee") will be responsible for all of the Fund's investment decisions, with each investment decision requiring the unanimous approval of the Investment Committee. The Fund's primary focus is to invest in early stage companies, but we may choose to consider more developed, and even public, companies if the investment thesis is compelling and the Fund's involvement is deemed to add value to the opportunity. The Investment Committee's primary investment selection criteria will emphasize companies that have: -Unique technologies or solutions, which offer a competitive advantage. -Technology teams with the proven ability to successfully commercialize their concepts. -Large and growing market opportunities. Preference will be given to companies that have the potential to dominate their target markets. -A compelling, well articulated and proven business model that is sustainable. -A management team that displays entrepreneurial leadership, proven skills, a successful track record and relevant business experience, or a willingness to bring in professional management. The Fund expects that most of its investment opportunities will come principally from three areas: the Fund's network of professional and business relationships and its relationships with industry leaders, entrepreneurs, and legal, accounting, consulting, and executive recruiting firms, the network of professional, business and investor contacts of its Portfolio Companies, and from venture capital funds concentrating on later stage investments that see the Fund as a source for future investments. In addition to the management team comprised of the Company's current executive management, the Fund will have an active Advisory Board comprised of individuals from a wide variety of backgrounds who can be accessed for expert advice on matters that are relevant to the success of the Fund's Portfolio Companies. In addition, the Fund's investment team and contacts will seek to assist Portfolio Companies in locating significant debt and equity resources through access to leading venture capitalists, as well as Wall Street and regional investment and merchant banks. Overview and Diversity of Investments The Company expects that the size of most of the Fund's investments will be less than those of the typical venture capital fund, but greater than those made by the typical "angel" investor. Accordingly, each of the Fund's initial investments will generally range between $100,000 and $3,000,000 (with not more than 15% of the Fund's of such committed capital invested in a single Portfolio Company). Follow-on investments may be made in Portfolio Companies that are reaching agreed upon milestones. The Fund anticipates investing in approximately 10 to 15 Portfolio Companies, assuming the Fund raises $100,000,000 in its offering. The Fund's investment criterion is designed to produce a diversified investment portfolio. Exit Strategies for Investments The Fund will seek to realize returns from its investments through a variety of exit strategies including, but not limited to: (i) a sale of a Portfolio Company or the Fund's investment to a strategic or financial buyer and (ii) an initial public offering ("IPO"). Generally, it is expected that the Fund will not be able to achieve liquidity until the end of a "lock-up" period, generally 180 days following an IPO. Investment Monitoring; Board of Directors of Portfolio Companies The Fund expects to be involved on a strategic level with all of its Portfolio Companies. Unless it will benefit the Fund, the Fund does not expect to be active in the day-to-day operations of its Portfolio Companies. Depending on the circumstances, the Fund may make controlling or non-controlling investments in a Portfolio Company, and the Fund may or may not be represented on its board of directors. In the event that the Fund does appoint a director to the board of directors of a Portfolio Company, such directors may include the advisors, officers or directors of the Company, members of the Fund's Board of Advisors, investors, or upon the advice of the Fund, outside business executives that are capable of adding significant value to the Portfolio Company. Assignment of Fund Management Responsibilities to Management Company The Company may assign, or may be required by the Fund's Members to assign, all or a portion of the Company's investment advisory, management and/or administrative responsibilities to an affiliated "Management Company" and assign to such management company the right to receive all or any portion of the management fees otherwise payable to the Company. Expenses The Fund will pay all other costs and expenses relating to its activities (to the extent not reimbursed by a Portfolio Company or those paid by the Fund Manager), including the 4 management fees, legal, auditing, consulting and accounting expenses (including expenses associated with the preparation of Fund financial statements, tax returns and K-1s), expenses of the Advisory Board and meetings of the Members (annual or special), insurance and other expenses associated with the acquisition, holding and disposition of its investments, all third-party expenses in connection with transactions not consummated, and extraordinary expenses (such as litigation, if any). Risks Associated with the Company's New Business Plan Failure to Establish the Fund The Company's management is using its best efforts to raise the capital necessary to establish the Fund as a viable venture. The Company has engaged a securities broker/dealer to serve as placement agent, assembled an initial advisory board and engaged the services of two consultants. However, market conditions for private equity funds are challenging, competitive and volatile. Accordingly, there can be no assurance that the Company will be successful in establishing the Fund. If the Fund cannot be established within a reasonable timeframe, the Company's capital resources would eventually be strained and the Company could be unable to monetize the investments currently made in anticipation of their conveyance to the Fund, nor would the Company be able to support current investments. Risks Associated with the Fund Risks Associated with Portfolio Investments Identifying and participating in attractive investment opportunities and assisting in the building of successful young enterprises is difficult. There is no assurance that the Fund's investments will be profitable and there is a risk that the Fund's losses and expenses will exceed its income and gains. There generally will be little or no publicly available information regarding the status and prospects of Portfolio Companies or other private equity investments. Many investment decisions by the Fund Manager will be dependent upon the ability of its officers and agents to obtain relevant information from non-public sources. The marketability and value of each investment will depend upon many factors beyond the Fund Manager's control. The Fund may be represented by representatives of the Managing Member or the Fund Manager on a Portfolio Company's board of directors, although this cannot be assured and each Portfolio Company will be managed by its own officers (who may not be affiliated with the Fund, the Managing Member or the Fund Manager. Portfolio Companies may have substantial variations in operating results from period to period, face intense competition, and experience failures or substantial declines in value at any stage. The public market for high technology and other emerging growth companies is extremely volatile. Such volatility may adversely affect the development of Portfolio Companies, the ability of the Fund to dispose of investments, and the value of investment securities on the date of sale or distribution by the Fund. In particular, the receptiveness of the public market to initial public offerings by the Fund's Portfolio Companies may vary dramatically from period to period. An otherwise successful Portfolio Company may yield poor investment returns if it is unable to consummate an initial public offering at the proper time. Even if a Portfolio Company effects a successful public offering, the Fund may be subject to contractual "lock-up," securities laws or other restrictions which may, for a material period of time, prevent the Fund or the Class A Members from disposing of the Portfolio Company's securities. Generally, the investments made by the Fund will be illiquid and difficult to value, and there will be little or no collateral to protect an investment once made. At the time of the Fund's investment, a Portfolio Company may lack one or more key attributes necessary for success (e.g., proven technology, marketable product, complete management team, or strategic alliances). In most cases, investments will be long term in nature and may require many years from the date of initial investment before disposition. The Fund Manager will seek some investments that may yield short-term returns, but this cannot be assured. Although investments in Portfolio Companies by the Fund may occasionally generate some current income, the return of capital and the realization of gains, if any, from a Portfolio Company investment generally will occur only upon the partial or complete disposition of such investment. Although a Portfolio Company investment may be sold at any time, it is not generally expected that this will occur for a number of years after the Portfolio Company investment is made. Factors such as overall economic conditions, the competitive environment, the public market for initial public offerings, and the availability of potential acquirers, may shorten or lengthen the Fund's holding period. In addition, it is unlikely that there will be a public market for the securities held by the Fund at the time of their acquisition. The Fund will generally not be able to sell its Portfolio investments or its own securities unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. Highly Competitive Market; Limited Investment Opportunities The activity of identifying, completing and realizing on attractive private equity investments is highly competitive, and involves a high degree of uncertainty. 5 The success of the Fund may be influenced by other venture capital funds, which now exist or may be established in the same geographic location. In seeking attractive investment opportunities, the Fund may compete with other venture capital funds, some of which may have greater resources than the Fund, or be otherwise associated with other prominent executive recruiting firms. There can be no assurance that the Fund will be able to locate and complete investments in Portfolio Companies, which satisfy the Fund's objectives or realize upon their values. No Operating History; Unproven Business Model The Fund does not have any operating history, and has not made any investments. While the officers of the Fund Manager have experience with matters relating to private investments, they have no operating experience with respect to an independent private equity fund. In addition, this fund is a relatively new concept and the business model has not yet been successfully proven. Risk of Limited Number of Investments Although the Fund anticipates making between 15 and 30 investments, because of the early stage nature of its investments complete loss of capital in a Portfolio Company is possible. The aggregate return of the Fund may be substantially adversely affected by the unfavorable performance of one or a small number of the Fund's investments. Additional Financing Needs of Portfolio Companies Portfolio companies may need substantial additional capital to support growth or to achieve or maintain a competitive position. Such capital may not be available on attractive terms. The Fund's capital is limited and may not be adequate to protect the Fund from dilution in multiple rounds of Portfolio Company financing. If such financing were to be unavailable or more expensive than anticipated, the Fund's investments could be adversely affected or lost entirely. Reliance on Portfolio Company Management Although the Fund Manager will monitor the performance of each Portfolio Company and provide input at a strategic level, the Fund will rely upon management of each Portfolio Company to operate the Portfolio Companies on a day-to-day basis. While it is the intent of the Fund to invest in companies with proven operating management in place, there can be no assurance that such management will continue to operate successfully. While the Fund will attempt to assist a Portfolio company with finding effective management, there is no guarantee that either the Fund or the Portfolio Company will be successful in acquiring the necessary human resources. Legal, Tax, Accounting, and Regulatory Risks Legal, tax, accounting, and regulatory changes could occur during the term of the Fund that may adversely affect the Fund. For example, from time to time the market for private equity transactions has been adversely affected by adverse public markets, availability of equity and mezzanine financing, and a decrease in the availability of senior and subordinated financing for transactions. In addition, future changes in the accounting rules applicable to corporate partnership transactions may restrict the ability of corporations to achieve off-balance sheet treatment and thereby reduce their interest in pursuing such transactions. The Fund anticipates that many of its Portfolio Companies will be internet-based or facilitated. As of September 30, 2001, there were few laws or regulations directed specifically at Internet companies. However, because of the Internet's popularity and increasing use, new laws and regulations may be adopted, including taxes. These laws and regulations may cover issues such as the collection and use of data from Web Site visitors and related privacy issues, pricing, content, copyrights, online gambling, distribution, and the quality of goods and services. The enactment of any additional laws or regulations may impede the growth of the Internet, which could decrease the revenue of Portfolio Companies and place additional financial burdens on them. MANAGEMENT INFORMATION SYSTEMS The Company relies on standard accounting software that operates on a personal computer to assist in the maintenance of its records. EMPLOYEES As of September 30, 2001, the Company employed 7 persons. There are plans to hire additional personnel as the Company expands and the need arises. The Company believes that its relationship with its employees is satisfactory. ITEM 2. PROPERTIES 6 The Company has leased approximately 1000 square feet of office space at a monthly rent of $1,179. The Company's headquarters contain the Company's executive offices. ITEM 3. LEGAL PROCEEDINGS In the course of its previous business as a specialty finance company, the Company from time to time has been made a party to litigation involving consumer-law claims. These claims typically allege improprieties on the part of the originating dealer and name the Company and/or its assignees as subsequent holders of the finance contracts. To date, none of these actions have been certified as eligible for class-action status. In 1998, the Company initiated suit in state court in Houston, Texas against Progressive Northern Insurance Co. arising out of insurance policies issued by Progressive affiliates to the Company. The policies provided deficiency balance coverage and physical damage coverage on automobile loans acquired by the Company and sold into certain securitizations. Progressive contended that there was a cumulative limit on claims under the Deficiency Balance Policy of 88% of the total premiums paid on that Policy, which was contrary to the Company's position. On this point, the Company's position was confirmed by the court. Progressive also contended that it had the right to cancel the Policies, without any refund of the fully-paid premiums, at any time pursuant to 30 days' notice and in fact did so in March 1998. The Company and the securitization trustees disputed this termination as contrary to the terms and understandings reached with Progressive and relied upon by the parties in interest, including the securitization market. This issue was submitted by the court to the jury. After a three week trial in January 2000, the Company failed to win a verdict against Progressive. The Company filed a motion to set aside the verdict based on various legal issues and the court denied this motion and entered a take nothing judgment against the Company. The Company is currently appealing this verdict. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the security holders of the Company during the fourth quarter of fiscal 2001. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On November 8, 1996, the Company's Common Stock was listed for quotation and began trading on the NASDAQ National Market under the symbol "ABND". Prior to such date, the Company's stock was closely held and not traded on any regional or national exchange. On February 27, 1998, the Company's common stock listing was transferred to the American Stock Exchange and began trading under the symbol "ABD". As a result of the Company's deteriorating financial condition, the Company's Common Stock was delisted by the American Stock Exchange and October 5, 1999 was the last day the Company's common and preferred stock was traded on the exchange. The Company's common stock continues to be traded in the over the counter market under the symbol "AGTY". High and low quotations since October 5, 1999 represent bid prices derived from Nasdaq's website and do not reflect retail mark-ups or commissions and may not necessarily represent actual transactions. HIGH AND LOW BID SALE PRICES BY PERIOD

The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company. As of September 30, 2001 the Company had approximately 19 stockholders of record, exclusive of holders who own their shares in "street" or nominee names. The Company has not paid and does not presently intend to pay cash dividends on its common stock. The Company anticipates that its earnings for the foreseeable future will be retained for use in operation and expansion of business. Payment of cash dividends, if any, in 7 the future will be at the sole discretion of the Company's Board of Directors and will depend upon the Company's financial condition, earnings, current and anticipated capital requirements, terms of indebtedness and other factors deemed relevant by the Company's Board of Directors. In addition, dividends on the Company's common stock may not be paid until all cumulative dividends in arrears on the Company's preferred stock are paid in full. See "Liquidity and Capital Resources". ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for the Company and its subsidiaries for the periods and at the dates indicated. The selected financial data were derived from the financial statements and accounting records of the Company. The data presented below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. (Dollars in thousands, except for per share amounts.)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the preceding "Selected Financial Data" and the Company's Consolidated Financial Statements and Notes thereto and the other financial data included herein. Certain of the financial information set forth below has been rounded in order to simplify its presentation. However, the ratios and percentages set forth below are 8 calculated using the detailed financial information contained in the Financial Statements and the Notes thereto, and the financial data included elsewhere in this Form 10-K. REVENUES The Company's sources of revenue for the year ended September 30, 2001 consist of interest income on net cash received and invested on the settlement from Dynex. Revenue for the year ended September 30, 2000 consist of the Dynex settlement, and interest income related to it. RESULTS OF OPERATIONS Year Ended September 30, 2001 Compared To Nine Months Ended September 30, 2000 Net Income In the year ended September 30, 2001, net income decreased $17,828,529 to a net loss of $2,266,562 from net income of $15,561,967 for the nine months ended September 30, 2000. The decrease in net income was due to the Company establishing its new business plan. During the first nine months of 2000, the Company had pared its business operations to five employees, received a substantial cash settlement and forgiveness of $3 million in debt for its claims against Dynex (resulting in deemed income of $22,583,122) and saved significant interest expense through the payoff of debt owed to Bank Boston. The settlement with Bank Boston for an amount less than par also resulted in non-cash income of $1,804,345. During the year ended September 30, 2001, the Company devoted its resources to establish itself as a venture capital firm. Total Revenues Total revenues decreased $22,340,573 to $506,532 for the year ended September 30, 2001 from $22,847,105 for the nine months ended September 30, 2000 due to the Dynex settlement in June 2000. In 2001, income was generated from the Company's short-term investments. Interest Income. Interest income increased $60,788 to $298,178 from $237,390 Interest was generated from assets ultimately conveyed to Dynex as part of the settlement and from interest earned on the proceeds from the Dynex Settlement. Gain on Litigation Settlement. The Company recorded a gain of $22,583,122 from its lawsuit with Dynex in June 2000. Other Income. For the year ended September 30,2001 and nine months ended September 30, 2000 other income was $208,354 and $34,692, respectively, and consisted of insurance recoveries on auto finance contracts and dividends, and the reduction of $82,706 in previously accrued payables which the Company believes it will not be obliged to pay. Total Expenses Total expenses of the Company decreased $6,316,389 to $2,773,094 for the year ended September 30, 2001 from $9,089,483 for the nine months ended September 30, 2000. There was $4.8 million in professional services expenses incurred in the 2000 period, which the Company incurred mainly in its litigation with Dynex. Interest Expense. Interest expense decreased $897,744 for the year ended September 30, 2001. The decrease was the result of the extinguishment of $10.5 million in notes held by Dynex and Bank Boston, and the amortization of debt issuance costs. The Company had no interest bearing debt for the year ended September 30, 2001. Salaries and Benefits. Salaries and benefits decreased $703,369 to $1,053,911 for the year ended September 30, 2001 from $1,757,280. The Company paid bonuses to several key employees in the period ending September 30, 2000 for their hard work and dedication during the Company's litigation with Dynex. There were 7 employees as of September 30, 2001. General and Administrative Expenses. General and administrative expenses decreased $4,540,760 to $1,651,023 for the year ended September 30, 2001 from $6,191,783 for the nine months ended September 30, 2000. During the period ended September 30, 2000, there were high legal costs incurred by the Company in its litigation of Dynex and Progressive Insurance, including a final contingency fee and expense payment of $3.3 million out of settlement proceeds to counsel in the Dynex lawsuit. Other Operating Expenses. Other operating expenses (communications and insurance) decreased $174,516 to $68,160 for the year ended September 30, 2001 from $242,676 for the nine months ended September 30, 2000 because the Company does not service any loans and has eliminated a substantial portion of the communication system and need for insurance. Nine Months Ended September 30, 2000 Compared To Year Ended December 31, 1999 9 Net Income In the nine months ended September 30, 2000, net income increased $39,353,878 to a net income of $15,561,967 from a net loss of $23,791,911 for the year ended December 31, 1999. The increase in net income was due to the proceeds from the settlement with Dynex, as well as significant decreases in most operating expense categories. During 1999 the Company was struggling to maintain its business while receiving no funding from Dynex. During the first nine months of 2000, the Company had pared its business operations to five employees, received a substantial cash settlement and forgiveness of $3 million in debt for its claims against Dynex (resulting in deemed income of $22,583,122) and saved significant interest expense through the payoff of debt owed to Bank Boston. The settlement with Bank Boston for an amount less than par also resulted in non-cash income of $1,804,345. Total Revenues Total revenues increased $16,346,473 to $22,847,105 for the nine months ended September 30, 2000 from $6,500,632 for the year ended December 31, 1999. The increase was due to the Company winding down its operations and to the settlement of its litigation. Interest Income. Interest income decreased $508,662 to $237,390 from $746,052 primarily due to the sale in 1999 of the Company's interest-bearing assets. Interest in 2000 was generated from assets ultimately conveyed to Dynex as part of the settlement and from interest earned on the proceeds from the Dynex Settlement. Gain on Sale of Finance Contracts. The Company realized a loss on sale totaling $8,099 on finance contracts during the nine months ended September 30, 2000, reflecting whole loans sales at a loss. The Company realized gain on sale of finance contracts totaling $1,532,888 during the year ended December 31, 1999 reflecting securitization gains through the Dynex facility earlier in the year, offset by losses on whole loan sales later in the year. Servicing Fee Income. The Company earned no servicing fees for the nine months ended September 30, 2000. The Company transferred all servicing responsibilities to third parties during 1999. Servicing fee income for the year ended December 31, 1999 was $3,121,827. Gain on Litigation Settlement. The Company recorded a gain of $22,583,122 from its lawsuit with Dynex in June 2000 and the Company recorded a gain of $750,000 from its lawsuit with an automobile dealer in 1999. Other Income. For the nine months ended September 30,2000 and year ended December 31,1999 other income was $34,692 and $349,865, respectively, and consisted of insurance recoveries on auto finance contracts and dividends. Total Expenses Total expenses of the Company decreased $21,304,860 to $9,089,483 for the nine months ended September 30, 2000 from $30,394,343 for the year ended December 31, 1999, due to the Company winding down its operations, terminating employees and focusing on mitigating its losses caused by the cessation of funding by Dynex. There was $4.8 million in professional services expenses accrued in the 2000 period, which the Company incurred mainly in its litigation with Dynex. Provision for Credit Losses. There was no provision for credit losses for the nine months ended September 30, 2000. The Company owned no finance contracts or other receivable that was doubtful of collection. The provision for credit losses decreased $276,844 from the year ended December 31, 1999. Interest Expense. Interest expense decreased $1,144,706 to $897,744 for the nine months ended September 30, 2000 from $2,042,450 for the year ended December 31, 1999. The decrease was the result of the extinguishment of $10.5 million in notes held by Dynex and Bank Boston, and the amortization of debt issuance costs. Salaries and Benefits. Salaries and benefits decreased $6,514,916 to $1,757,280 for the nine months ended September 30, 2000 from $8,272,196 for the year ended December 31, 1999 because of layoffs due to the cessation of operations during 1999. The year 1999 began with over 225 employees. There were 5 employees as of September 30, 2000. General and Administrative Expenses. General and administrative expenses decreased $1,859,914 to $6,191,783 for the nine months ended September 30, 2000 from $8,051,697 for the year ended December 31, 1999. The cost savings program that was implemented in 1999 was more than offset by the high legal costs incurred by the Company in its litigation of Dynex and Progressive Insurance, including a final contingency fee and expense payment of $3.3 million out of settlement proceeds to counsel in the Dynex lawsuit. The Company reduced the amount of its office space with a corresponding reduction in rent, telephone, and other office related expenses. 10 Impairment of Retained Interest in Securitizations. The Company periodically reviews the fair value of the retained interest in securitizations. The Company recorded a charge against earnings for impairment of these assets of $8,907,970 for the year ending December 31, 1999. This impairment reflects the revaluation of expected future cash flows to the Company from securitizations. The revaluation of the retained interests to zero as of the beginning of the period ending September 30, 2000 reflects the transfer to Dynex of certain securitization interests as part of the settlement, and the uncertainty regarding the receipt of any future cash flows from those securitizations as to which the Company still maintains a retained interest. Other Operating Expenses. Other operating expenses (consisting principally of servicer fees, credit bureau reports, communications and insurance) decreased $2,600,510 to $242,676 for the nine months ended September 30, 2000 from $2,843,186 for the year ended December 31, 1999 because the Company does not service any loans and has eliminated a substantial portion of the communication system and need for insurance. FINANCIAL CONDITION Cash. Cash decreased $3,741,983 to $3,308,105 at September 30, 2001. The primary use of cash was for funding the operations of the Company while the Company seeks to execute its new business strategy. Investments. The Company made its first private equity investment of $100,000 under its new business plan in September 2000. The Company made $717,000 of additional investments throughout 2001. Note Receivable. The company advanced $500,000 to one of its portfolio companies. The Company earns 8% interest on the note. In addition, the Company advanced $100,000 to another of its portfolio companies. The Company earns 8.5% interest on this note. Other Assets. The Company engaged an investment firm to raise the venture capital fund and paid $125,000, of which $75,000 is reported as deferred offering costs representing the fee that will be refunded if the securities do not get placed. The Company accrued $46,105 of interest and prepaid one-month rent. LIQUIDITY AND CAPITAL RESOURCES As discussed in Note 10 to the financial statements, the Company received a legal judgment of $23.3 million in 2000. The Company entered into a settlement agreement with the defendant, pursuant to which (a) the defendant and the Company released all claims against each other; (b) the defendant paid $20 million to the Company (of which $3.3 million was paid to the Company's Texas trial counsel pursuant to a contingency fee and expense arrangement), (c) the defendant surrendered to the Company 51,500 shares of the Company's preferred stock, (d) the defendant cancelled the Company's indebtedness to the defendant under a $3 million note, and (e) the Company assigned to the defendant (i) a $1.1 million subordinated note from a securitization in which the defendant held the senior debt, and (ii) the common stock in two securitization subsidiaries in which defendant held the senior debt. This settlement represented the culmination of the Company's securitization operations. In light of the Company's cessation of it's specialty finance business, the company took the following additional steps to achieve a more disciplined cost structure, to lessen vulnerability to external factors and to position the Company to ultimately attain profitability: o The Company entered into an agreement in July 2000 with Bank Boston, N.A., whereby Bank Boston accepted $6.5 million in settlement of all claims against the Company for the Subordinated Notes including the outstanding principal of $7.5 million and accrued interest of approximately $1.1 million. This action combined with the above settlement eliminated the company's long term-debt. o Reduced headcount to 6 employees as of September 30, 2001 o Relocated offices to a lower cost facility o Hired a Managing Director to assist the company in raising a venture capital fund At September 30, 2000 the company completed the year with cash balances of approximately $7 million. During the year ended September 30, 2001, the company used cash of in its operations of $2.4 million, primarily for salaries and benefits and general and administrative expenses. Additionally the company made investments and loans under its new business strategy of $1.3 million. As of September 30, 2001, the Company had $3.3 million in cash and no indebtedness. Management believes the Company has sufficient liquidity to meet its obligations (primarily employee/consultancy fees and expenses, rent and professional expenses) and to make selected investments through 2002. Management hopes to generate additional liquidity and revenues through the establishment of the Agility Capital Fund (the "Fund") in the following ways: (i) the reimbursement from the Fund (at cost) of certain investments made by the Company in anticipation of the establishment of the Fund, (ii) a management fee of up to 2.5% per annum of committed funds, (iii) the pro rata share of realized investment gains on the Company's investment in the Fund (expected to be 1% of the size of the Fund, or a maximum of 11 $500,000), and (iv) additional fees of up to 20% of the realized gains on Fund investments (net of amounts utilized for compensation arrangements for the officers of the Fund Manager). Management has pursued establishment of the fund through the engagement of an investment firm and through other means; however, the current capital market conditions have made efforts to date to raise the Fund unsuccessful. There can be no assurance that the Fund will be established or managed in a manner in which those revenue goals are met. Subsequent to September 30, 2001, the Company converted substantially all of its investment and its note receivable plus accrued interest in the software technology company into a secured promissory note in the principal amount of approximately $1,042,000 bearing interest at 9% and purchased a senior secured convertible promissory note from this company in the principal amount of approximately $800,000 bearing interest at 8%. The Company made an additional advance of $50,000 to the e-Messaging software company. Also the company has made a capital commitment of $500,000 to an investment fund that co-invests in private venture-stage companies. As of September 30, 2001, $425,000 of the commitment has not been funded by the Company awaiting capital calls from the investment fund. The inability of the Company to raise the Fund has left the Company with the need to pursue other sources of revenue outside of interest income earned on existing cash balances. The Company has established a broker dealership, which should generate additional revenue and cash flow from commissions and capital gains. If these sources of revenue are not sufficient to cover the Company's operations and investment activities doubt may be raised about the Company's ability to continue as a going concern. Cash Flows. Significant cash flows related to the Company's operating activities included cash flows from its money market fund. Cash was used by investing activities to invest in equities of new technology companies. Series A Preferred Stock. In February 1998, the Company completed the underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10 per share. The price to public was $10 per share, with net proceeds to the Company of approximately $10,386,000. Such net proceeds have been utilized for working capital purposes, including the funding of finance contracts. Dividends on the Preferred Stock are cumulative and payable quarterly on the last day of March, June, September and December of each year, commencing on June 30, 1998, at the rate of 15% per annum. After three years from the date of issuance, the Company may, at its option, redeem one-sixth of the Preferred Stock each year, in cash at the liquidation price per share (plus accrued and unpaid dividends), or, if in Common Stock, that number of shares equal to $10 per share of Preferred Stock to be redeemed, divided by 85% of the average closing sale price per share for the Common Stock for the 5 trading days prior to the redemption date. The Preferred Stock is not redeemable at the option of the holder and has no stated maturity. As dividends on the Preferred Stock are in arrears for at least two quarterly dividend periods, holders of the Preferred Stock exercised their right to call a special meeting of the Preferred Stock holders for the purpose of electing two additional directors to serve on the Company's Board of Directors until such dividend arrearage is eliminated. Such meeting was held on October 1, 1999; however, because a quorum of preferred shareholders did not attend or provided proxies for the meeting, no additional directors were elected. The Board appointed David Wulf to the Board. As part of the issuance of the Preferred Stock in 1998, Robert Shuey was appointed to the Board. In addition, certain changes that could materially affect the holders of Preferred Stock, such as a merger of the Company, cannot be made without the affirmative vote of the holders of two-thirds of the shares of Preferred Stock, voting as a separate class. The Preferred Stock ranks senior to the Common Stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up. During the years 1999 through 2001, no dividends have been paid on the Preferred Stock and the Company at September 30, 2001 is $4,428,188 in arrears in dividend payments. FORWARD LOOKING STATEMENTS The statements contained in this document that are not historical facts are forward looking statements. Actual results may differ from those projected in the forward looking statements. These forward looking statements involve risks and uncertainties, including but not limited to the following risks and uncertainties: changes in the performance of the financial markets, in the demand for and market acceptance of the Company's services, and in general economic conditions, including interest rates, presence of competitors with greater financial resources and the impact of competitive products and pricing; the effect of the Company's policies; the ability of the Company to find adequate funding sources, the ability of the Company to raise a venture capital fund, and the ability of the Company to find suitable investments for the venture capital fund that provide an ongoing revenue stream to the Company. Investors also are directed to other risks discussed in documents filed by the Company with the SEC. 12 IMPACT OF INFLATION AND CHANGING PRICES The Company does not believe that inflation directly has a material adverse effect on its financial condition or results of operations. Inflation can adversely affect the Company's operating expenses, such as occupancy and employee expenses. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138, and as interpreted by the FASB and the Derivatives Implementation Group through "Statement 133 Implementation Issues", as of October 1, 2000. The Company has not engaged in any derivative instruments or any embedded derivative instruments that require bifurcation. The Company has not engaged in hedging activities. The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations" and Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15,2002. SFAS 144 clarifies the accounting for disposals of long-lived assets and is effective for fiscal years beginning after December 31, 2001. The Company does not believe that the adoption of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 will have a significant impact on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Market risk is inherent to both derivative and non-derivative financial instruments. The Company's market risk management procedures include all market risk sensitive financial instruments. The Company has no derivative financial instruments, exposure to currency exchange rates nor commodity risk exposure. The Company's fixed rate debt was paid off through settlement agreements with Dynex on June 9, 2000 and with Bank Boston on July 27, 2000. The Company's new business plan does not contemplate the incurrence by the Company of additional material long term indebtedness. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements are set forth in this report beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III The information required by Items 10 through 13 is incorporated by reference from the Company's definitive Information Statement or Proxy Statement pursuant to General Instruction G(3) to Form 10-K. The Company will file its definitive Information Statement or Proxy Statement pursuant to Regulation 14C or 14A respectively, by January 28, 2002. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. Financial Statements Report of Independent Accountants Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Shareholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 2. Exhibits

------------ (1) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.333-05359). (2) Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998 (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the year ended September 30, 2001. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. AUTOBOND ACCEPTANCE CORPORATION By: /s/ William O. Winsauer ---------------------------- William O. Winsauer, Chairman of the Board and Chief Executive Officer Date: December 28, 2001 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. /s/ William O. Winsauer Chairman of the Board and December 28, 2001 ----------------------- Chief Executive Officer William O. Winsauer /s/ A. Dale Henry Chief Financial Officer December 28, 2001 ----------------------- (Principal Accounting Officer) A. Dale Henry /s/ John S. Winsauer Secretary and Director December 28, 2001 ----------------------- John S. Winsauer

15 AGILITY CAPITAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

All schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements, related notes, or other schedules. F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Agility Capital, Inc. We have audited the accompanying consolidated balance sheets of Agility Capital, Inc. and subsidiaries (the "Company") as of September 30, 2001 and 2000 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity and of cash flows for the year ended September 30, 2001, the nine months ended September 30, 2000 and the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Agility Capital, Inc. and subsidiaries as of September 30, 2001 and 2000 and the results of their operations and their cash flows for the year ended September 30, 2001, the nine months ended September 30, 2000 and the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Austin, Texas December 27, 2001 F-2 AGILITY CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements F-3 AGILITY CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

The accompanying notes are an integral part of the consolidated financial statements F-4 AGILITY CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

F-5 AGILITY CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization Agility Capital, Inc. formerly known as AutoBond Acceptance Corporation (the "Company") was incorporated in June 1993 and commenced operations August 1, 1994. The Company and its wholly-owned subsidiaries (collectively, the "Company"), were engaged primarily in the business of acquiring, financing and servicing automobile installment loan contracts ("finance contracts") originated by franchised automobile dealers. The Company specialized in contracts to consumers who generally have limited access to traditional financing, such as that provided by commercial banks or captive finance companies of automobile manufacturers. The Company purchased contracts directly from automobile dealers or from other originators, and financed these purchases through whole loan sales or securitizations. In July 2000, the Board of Directors of the Company approved changing the Company's name to Agility Capital, Inc. ("Agility Capital") and the adoption of a new business plan. As Agility Capital, the Company plans to generate income by acting as an advisor to, and investor in, new economy ventures through the establishment of one or more investment funds. The Company is in the process of raising, pursuant to a private placement, a $100,000,000 venture capital investment fund with a projected 10-year term, to be called the Agility Capital Fund, LLC (the "Fund"). The Fund will sell and issue membership interests to accredited and institutional investors. The Company will invest up to $500,000 in such interests and will also serve as the managing member and the initial advisor to the Fund. The Fund will primarily invest in early stage, privately held companies operating in the e-commerce business services/internet, information technology and services, new media, enterprise and application software, and communications industries. On a select basis, later stage companies in other industries may also be considered. The Fund's business model is to invest in companies that can benefit from the collective operating and financial experience of the Fund's managers and its advisors. The management and advisory team's business and industry experience and professional relationships will be relevant to the industries targeted and will be used to help the Fund achieve significant and timely venture capital rates of returns. 2. Liquidity and Management's Plans As discussed in Note 10 to the financial statements, the Company received a legal judgment of $23.3 million in 2000. The Company entered into a settlement agreement with the defendant, pursuant to which (a) the defendant and the Company released all claims against each other; (b) the defendant paid $20 million to the Company (of which $3.3 million was paid to the Company's Texas trial counsel pursuant to a contingency fee and expense arrangement), (c) the defendant surrendered to the Company 51,500 shares of the Company's preferred stock, (d) the defendant cancelled the Company's indebtedness to the defendant under a $3 million note, and (e) the Company assigned to the defendant (i) a $1.4 million subordinated note from a securitization in which the defendant held the senior debt, and (ii) the common stock in two securitization subsidiaries in which defendant held the senior debt. This settlement represented the culmination of the Company's securitization operations. In light of the Company's cessation of it's specialty finance business, the company took the following additional steps to achieve a more disciplined cost structure, to lessen vulnerability to external factors and to position the Company to ultimately attain profitability: o The Company entered into an agreement in July 2000 with Bank Boston, N.A., whereby Bank Boston accepted $6.5 million in settlement of all claims against the Company for the Subordinated Notes including the outstanding principal of $7.5 million and accrued interest of approximately $1.1 million. This action combined with the above settlement eliminated the company's long term-debt. o Reduced headcount to 6 employees as of September 30, 2001 o Relocated offices to a lower cost facility o Hired a Managing Director to assist the company in raising a venture capital fund At September 30, 2000 the company completed the year with cash balances of approximately $7 million. During the year ended September 30, 2001 the company used cash of in its operations of $2.4 million, primarily for salaries and benefits and general and administrative expenses. Additionally the company made investments and loans under is new business strategy of $1.3 million. As of September 30, 2001, the Company had $3.3 million in cash and no indebtedness. Management believes the Company has sufficient liquidity to meet its obligations (primarily employee/consultancy fees and expenses, rent and professional expenses) and to make selected investments through 2002. Management hopes to generate additional liquidity and revenues through the establishment of the Agility Capital Fund (the "Fund") in the following ways: (i) the reimbursement from the Fund (at cost) of certain investments made by the Company in anticipation of the establishment of the Fund, (ii) a management fee of up to 2.5% per annum of committed funds, (iii) the pro rata share of realized investment gains on the Company's investment in the Fund (expected to be 1% of the size of the Fund, or a maximum of $500,000), and (iv) additional fees of up to 20% of the realized gains on Fund investments (net of amounts utilized for compensation arrangements for the officers of the Fund Manager). Management has F-7 pursued establishment of the fund through the engagement of an investment firm and through other means; however, the current capital market conditions have made efforts to date to raise the Fund unsuccessful. There can be no assurance that the Fund will be established or managed in a manner in which those revenue goals are met. Subsequent to September 30, 2001, the Company converted substantially all of its investment and its note receivable plus accrued interest in the software technology company into a secured promissory note in the principal amount of approximately $1,042,000 bearing interest at 9% and purchased a senior secured convertible promissory note from this company in the principal amount of approximately $800,000 bearing interest at 8%. The Company made an additional advance of $50,000 to the e-Messaging software company. Also the company has made a capital commitment of $500,000 to an investment fund that co-invests in private venture-stage companies. As of September 30, 2001, $425,000 of the commitment has not been funded by the Company awaiting capital calls from the investment fund. The inability of the Company to raise the Fund has left the Company with the need to pursue other sources of revenue outside of interest income earned on existing cash balances. The Company has established a broker dealership, which should generate additional revenue. If these sources of revenue are not sufficient to cover the Company's operations and investment activities doubt may be raised about the Company's ability to continue as a going concern. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient revenues and cash flows to cover operating expenses. Management is continuing its efforts to raise a venture capital fund on terms that will provide sufficient cash flow to the Company. 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Pervasiveness of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company recorded the present value of estimated future cash flows in connection with its determination of the carrying value of its retained interest in securitizations. Since such assumptions did not predict actual performance, the carrying value of the retained interest in securitizations was adjusted periodically in 1999, resulting in adverse effects on the Company's results of operations. As the Company no longer retains any interest in securitizations there was no effect on the financial statements for the year ended September 30, 2001 or the nine months ended September 30, 2000. Cash and Cash Equivalents The Company considers highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Investments. The Company records its investments at fair value. The fair value of investments is determined based upon the Company's valuation policy. Under the valuation policy of the Company, unrestricted securities are valued at the average closing price for publicly held securities for the last three days of the month. Investments in portfolio companies and restricted securities, including securities of publicly owned companies which are subject to restrictions on resale, are valued at cost at the date of acquisition until there is a sustained basis for recognizing appreciation or depreciation in the valuation. Estimated fair value is determined by the Board of Directors based on a number of factors including, if available, significant subsequent equity financings by unrelated new investors, secondary offerings, independent valuations, comparable publicly traded securities as well as current and projected operating performance and other analytical data relating to the investment. The valuations do not necessarily represent amounts which will ultimately be realized from the investments. Advertising F-8 Advertising costs are expensed as incurred. Advertising cost was $116,262 for the year ended December 31, 1999. The Company incurred no advertising costs for the nine months ended September 30, 2000 or the year ended September 30, 2001. Income Taxes The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the year in deferred tax assets and liabilities. The Company files a consolidated federal income tax return. Earnings per Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As the Company posted a net loss for the years ended December 31, 1999 and September 30, 2001, the effects of stock options and contingently issuable shares for those years were anti-dilutive and not included in the computation of diluted loss per share. The Company's market price for shares of its stock remained below all option and warrant prices and therefore all options and warrants were anti-dilutive and not included in the computation of diluted earnings per share for the nine months ended September 30, 2000. Interest Income The Company generally uses the simple interest method to determine interest. Recent Accounting Pronouncements The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138, and as interpreted by the FASB and the Derivatives Implementation Group through "Statement 133 Implementation Issues", as of October 1, 2000. The Company has not engaged in any derivative instruments or any embedded derivative instruments that require bifurcation. The Company has not engaged in hedging activities. The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations" and Statement of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15,2002. SFAS 144 clarifies the accounting for disposals of long-lived assets and is effective for fiscal years beginning after December 31, 2001. The Company does not believe that the adoption of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 will have a significant impact on its financial statements. 4. Investments and Notes Receivable The following table provides a listing of investments at September 30, 2000 and 2001:

F-9 The following table provides a listing of notes receivable at September 30, 2000 and 2001:

In October 2000, the Company purchased at par a $500,000 convertible note bearing interest at 8%(the "8% note") from Modelwire, Inc.("Modelwire"). The 8% note was convertible at the option of the Company into shares of securities being offered at the time of a Qualifying Financing. A Qualifying Financing is defined as a private financing resulting in proceeds before expenses of $5,000,000 or more to Modelwire. The number of shares was to be computed by dividing (i) the outstanding principal amount of the 8% note together with accrued interest on such principal amount as of the date of conversion by (ii) the lower of (x) $4.00 per common equivalent share or (y) the price per share of the securities issued in such Qualifying Financing discounted by 35% of such price. The 8% note was due and payable upon the earliest to occur of the following: (a) the second anniversary of the date issued; or (b) upon sale of all or substantially all of its assets; or (c) upon liquidation of Modelwire; or (d) upon any merger involving Modelwire in which Modelwire is not the resulting or surviving entity. In October 2001, substantially all of the Company's investment in Modelwire and the 8% note (including all accrued interest) was converted at par into a secured promissory note bearing interest at 9%(the "9% Note") from Modelwire in the principal amount of approximately $1,042,000. Subject to the Senior Note (as defined below), the 9% Note is secured by all of the tangible and intangible assets of Modelwire. The 9% Note is due and payable upon the earliest to occur of the following: (a) August 31, 2002; or (b) upon the sale, license or lease by Modelwire of all or substantially all of its assets; or (c) upon the liquidation, dissolution or winding up of Modelwire; or (d) upon any merger involving Modelwire in which Modelwire is not the resulting or surviving entity; or (e) upon the occurrence of certain events of default by Modelwire, such as any material breaches by Modelwire of any covenants contained in the 9% Note. In December 2001, the Company purchased at par a senior secured convertible promissory note bearing interest at 8% (the "Senior Note") from Modelwire in the principal amount of approximately $800,000. The Company may purchase an additional Senior Note in the principal amount of approximately $98,000, which purchase, if consummated, is expected to occur by the end of January 2002. The Senior Note is convertible at the option of the Company into shares of Series C Convertible Preferred Stock, par value $0.01, of Modelwire (the "Series C Stock"). The number of shares of Series C Stock to be issued to the Company upon conversion is computed by dividing (i) the outstanding principal amount of the Senior Note together with accrued interest on such principal amount as of the date of conversion by (ii) $0.05. The Senior Note is secured by a first priority lien on all of the tangible and intangible assets of Modelwire. The Senior Note is due and payable upon the earliest to occur of the following: (a) September 15, 2002; or (b) upon the occurrence of certain events of default by Modelwire, such as the failure of Modelwire to make payment of any amount due under the Senior Note or the default by Modelwire under certain agreements. In connection with the purchase of the 9% Note and the Senior Note, the Company received certain warrants to acquire equity securities of Modelwire. In March 2001, the Company purchased at par a $100,000 convertible note bearing interest at 8.5% from Yehti Corporation. The note is to be converted into Series B Preferred Stock at the time of a Qualifying Financing. A Qualifying Financing is defined as a financing resulting in proceeds before expenses of at least $1,500,000 to Yehti Corporation. Upon the consummation of the Qualified Financing, the unpaid principal on this Note shall be converted into shares of Series B Preferred Stock, and the Lender shall receive that number of shares of Series B Preferred Stock that is equal to the outstanding principal balance due to the Lender F-10 divided by the lesser of (i) $0.50 per share or (ii) the lowest per share purchase price of the Series B Preferred Stock issued in the Qualified Financing, rounded to the nearest whole share with 0.5 rounded upward to avoid fractional share interests. 5. Income Taxes The provision for income taxes for the nine months ended September 30, 2000 and for the year ended September 30, 2001 consisted of a provision for deferred taxes and the Company had no current tax liability. The reconciliation between the provision (benefit) for income taxes and the amounts that would result from applying the Federal statutory rate is as follows:

Deferred income tax assets and liabilities reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company's net deferred tax liability are as follows:

At September 30, 2001 the Company had tax net operating loss carryforwards of approximately $43 million expiring in fiscal years 2018 through 2020. 6. Shareholders' Equity Stock Based Compensation Plan The Company grants stock options under stock-based incentive compensation plans (the "Option Plans"). The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Option Plans. In 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued, which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Option Plans. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has elected not to adopt these provisions of SFAS 123. However, pro forma disclosures as if the Company adopted the expense recognition provisions of SFAS 123 are required by SFAS 123 and are presented below. Under the Option Plans, the Company is authorized to issue shares of Common Stock pursuant to "Awards" granted in various forms, including incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), non-qualified stock options, and other similar stock-based Awards. The Company granted stock options in 1996 through 2001 under the Option Plans in the form of non-qualified stock options. Stock Options The Company has granted stock options to employees and directors. The stock options granted have contractual terms of 5 to 10 years. All options granted to the employees and directors have an exercise price not less than the fair market value of the stock at the grant date. The options granted vest 33.33% per year beginning on the first anniversary of the date of grant. In accordance with APB 25, the Company has not recognized any compensation cost for the stock options granted. F-11 A summary of the status of the Company's stock options for the period January 1, 1999 through September 30, 2001 is presented below:

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; risk-free interest rates ranging from 4.4% to 5.3%, the expected lives of options of 5 years; and volatility ranging from 45% to 62% for all grants in 2001. There were no grants in 1999 or 2000.

Pro Forma Net Income and Net Income Per Common Share Had the compensation cost for the Company's Option Plan been determined consistent with SFAS 123, the Company's net income and net income per common share for 1999, 2000 and through September 30, 2001 would approximate the pro forma amounts below:

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Warrants In connection with the issuance of preferred stock, the Company sold to Tejas Securities Group, Inc. ("Tejas"), for $100, a warrant (the "Tejas Warrant") to purchase up to 100,000 shares of the Company's common stock at an exercise price equal to $7.75 per share. The Tejas Warrant is exercisable for a period of four years commencing February 17, 1999. The Tejas Warrant includes a net exercise provision permitting the holder, upon consent of the Company, to pay the exercise price by cancellation of a number of shares with a fair market value equal to the exercise price of such Tejas Warrant. F-12 In connection with the issuance of the Company's 15% Subordinated Notes $7,500,000 aggregate principal amount, in January 1998, the Company issued to Bank Boston a warrant (the "Subordinated Note Warrant"). The Subordinated Note Warrant entitled the holder, upon exercise of the Warrant, to purchase from the Company that number of shares of the Company's common stock, up to 368,462, which were available for conversion at the maturity of the Subordinated Notes on February 1, 2001. The holder could either convert the debt or exercise the warrant but not both. If certain major corporate events (such as a change in control or major stock offering) did not occur prior to February 1, 2001, then the holder will have the right to put the Warrant to the Company at the difference between the current market price and the warrant exercise price. The Subordinated Note Warrant was to expire on January 31, 2005. The warrant was valued at $375,831 which was recorded as a discount on the debt. On July 27, 2000 the Company and Bank Boston reached a settlement. The debt was paid and the warrants were canceled. In connection with the placement of the Subordinated Notes and the Subordinated Note Warrant, the Company, William O. Winsauer and John S. Winsauer, as principals (the "Principals") entered into a Shareholders Agreement with Bank Boston pursuant to which the Principals granted to Bank Boston certain "tag-along rights" in connection with sales of common stock by the Principals. Also, the Company paid a placement fee of 5% of the principal amount of the Subordinated Notes to Dresner Investment Services, Inc. and issued to the placement agent a warrant to purchase 65,313 shares of common stock of the Company, at an exercise price of $6.30 per share. The warrant expires January 30, 2005. In connection with a consulting agreement with Athens Group, the Company issued 110,000 warrants at an exercise price of $1.00. The warrants expire January 6, 2006. The value of the warrants was deemed to be insignificant and therefore not reflected in the financial statements. In connection with the appointment of Paul Ahern and Harsha Murthy to the Advisory Board, the Company issued 10,000 warrants each at an exercise price of $1.00. The warrants expire January 6, 2006. The value of the warrants was deemed to be insignificant and therefore not reflected in the financial statements. The Company's remaining outstanding warrant is held by Infinity Investors Limited and is exercisable for 100,000 shares of common stock of the Company at a price of $8.73 per share. The warrant expires March 31, 2002. Preferred Stock Pursuant to the Company's amended articles of incorporation; the Company is authorized to issue from time to time up to 5,000,000 shares of preferred stock, in one or more series. The Board of Directors is authorized to fix the dividend rights, dividend rates, any conversion rights or right of exchange, any voting right, any rights and terms of redemption (including sinking fund provisions), the redemption rights or prices, the liquidation preferences and any other rights, preferences, privileges and restrictions of any series of preferred stock and the number of shares constituting such series and the designation thereof. In February 1998, the Company completed the underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10 per share. The price to the public was $10 per share, with net proceeds to the Company of approximately $9,631,000. Dividends on the Preferred Stock are cumulative and payable quarterly on the last day of March, June, September and December of each year, commencing on June 30, 1998, at the rate of 15% per annum. After three years from the date of issuance, the Company may, at its option, redeem one-sixth of the Preferred Stock each year, in cash at the liquidation price per share (plus accrued and unpaid dividends), or, if in common stock, that number of shares equal to $10 per share of Preferred Stock to be redeemed, divided by 85% of the average closing sale price per share for the common stock for the 5 trading days prior to the redemption date. The Preferred Stock is not redeemable at the option of the holder and has no stated maturity. Cumulative unpaid dividends at September 30, 2001 were $4,428,188. The Company has not paid the quarterly dividend on its Preferred Stock since December 31, 1998. If dividends on the Preferred Stock are in arrears for two quarterly dividend periods, holders of the Preferred Stock will have the right to elect two additional directors to serve on the Company's Board until such dividend arrearage is eliminated. Two of the Company's directors are designated as representing the Preferred Stock holders. In addition, certain changes that could materially affect the holders of Preferred Stock, such as a merger of the Company, cannot be made without the affirmative vote of the holders of two-thirds of the shares of Preferred Stock, voting as a separate class. There have been no directors elected by the Preferred Shareholders. The Preferred Stock ranks senior to the common stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up. In the event of liquidation, dissolution or winding up of the Company, the amount required to satisfy the preferred shareholders is $15.2 million at September 30, 2001. During the nine months ended September 30, 2000 the Company received 51,500 shares of its Preferred Stock as part of its settlement from Dynex. These shares have been cancelled. See Note 10. F-13 Common Stock Investment Agreement On May 20, 1998, the Company and Promethean Investment Group, L.L.C. ("Promethean") entered into a common stock investment agreement (the "Investment Agreement") whereby Promethean agreed to purchase, subject to certain conditions, from the Company up to $20 million (subject to increase up to $25 million at Promethean's option) of the Company's common stock. In consideration of Promethean's obligations under the Investment Agreement, the Company paid $527,915 in cash on August 19, 1998, which was treated as an investment in a common stock agreement. The agreement expired August 20, 2000 and the investment in common stock was charged to capital in excess of stated capital. Earnings Per Share Basic earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Earnings per share is calculated as follows:

As the Company posted a net loss for the years ended December 31, 1999 and September 30, 2001, the effects of stock options and contingently issuable shares for those years were anti-dilutive and not included in the computation of diluted loss per share. The Company's market price for shares of its stock remained below all option and warrant prices and therefore all options and warrants were anti-dilutive and not included in the computation of diluted earnings per share for the nine months ended September 30, 2000. 7. Employment Agreements The Company and its chief executive officer ("CEO") entered into an employment agreement dated May 31, 1996 and effective from such date for five years. The agreement provides for compensation at a base salary of $240,000 per annum, which may be increased and may be decreased to an amount of not less than $240,000, at the discretion of the Board of Directors. The agreement entitles the CEO to receive the benefits of any cash incentive compensation as may be granted by the Board to employees, and to participate in any executive bonus or incentive plan established by the Board of Directors. The agreement also provides the CEO with certain additional benefits. The agreement automatically terminates upon (i) the death of the CEO, (ii) disability of the CEO for six continuous months together with the likelihood that the CEO will be unable to perform his duties for the following continuous nine months, as determined by the Board of Directors, (iii) termination of the CEO "for cause" (which termination requires the vote of a majority of the Board) or (iv) the occurrence of the five-year expiration date provided, however, the agreement may be extended for successive one-year intervals unless either party elects to terminate the agreement in a prior written notice. Neither party had submitted such notice upon expiration on May 31, 2001. The Company entered into an employment agreement, dated as of January 1, 1998, with a former outside director to serve as a consultant to the Company until February 1, 1998, whereupon he agreed to become President of the Company for a period of three years. The agreement provides for compensation at a base salary of $200,000 per annum, with a one time signing bonus of $100,000 and additional performance bonuses of up to $25,000 per quarter, as approved by the CEO and the Compensation Committee. In addition, the President received options under the Option Plan to purchase 100,000 shares of the Company's common stock, along with an agreement to grant additional options to purchase 50,000 of the Company's common stock on December 1, 1998. In June 2000, the Company released the President and paid him $90,000 for the remainder of his contract. 8. Leases The Company leased property under capital leases as follows:

F-14 There were no future minimum lease payments under capital leases as of September 30, 2001. The Company currently has no operating leases, which extend beyond one year. The Company is negotiating with the vendor regarding its obligations under the capital lease whereby the company has stored the equipment offsite and has offered to return the equipment to the vendor in satisfaction of its obligation. 9. Commitments and Contingencies The Company is the plaintiff or the defendant in several legal proceedings generally related to the repossession of vehicles that its management considers to be the normal kinds of actions to which an enterprise of its size and nature might be subject. The outcomes are not expected to be material to the Company's overall business or financial condition, results of operations or cash flows. In 1998, the Company initiated suit in state court in Houston, Texas against Progressive Northern Insurance Co. arising out of insurance policies issued by Progressive affiliates to the Company. The policies provided deficiency balance coverage and physical damage coverage on automobile loans acquired by the Company and sold into certain securitizations. Progressive contended that there was a cumulative limit on claims under the Deficiency Balance Policy of 88% of the total premiums paid on that Policy, which was contrary to the Company's position. On this point, the Company's position was confirmed by the court. Progressive also contended that it had the right to cancel the Policies, without any refund of the fully-paid premiums, at any time pursuant to 30 days' notice and in fact did so in March 1998. The Company and the securitization trustees disputed this termination as contrary to the terms and understandings reached with Progressive and relied upon by the parties in interest, including the securitization market. This issue was submitted by the court to the jury. After a three week trial in January 2000, the Company failed to win a verdict against Progressive. The Company filed a motion to set aside the verdict based on various legal issues and the court denied this motion and entered a take nothing judgment against the Company. The Company is currently appealing this verdict. In the Company's 1997-B and 1997-C securitization transactions, the Company sold a pool of finance contracts to a special purpose subsidiary, which then assigned the finance contracts to an indenture trustee. Under the trust indenture, the special purpose subsidiary issued three classes of fixed income investor notes, which were then sold to investors, generally at par, with fixed coupons. The subordinated notes represent a senior interest in the excess spread cash flows from the finance contracts. In connection with the 1997-B and 1997-C securitizations, $5.8 million in Class B Notes are exchangeable (at a rate of 117.5% of the principal amount of Class B Notes exchanged) for the Company's 17% Convertible Notes, solely upon the occurrence of a delinquency ratio trigger relating to the securitized pools. As of September 30, 2001, such trigger event has not been notified to the Company. In August 2000, the trustee for the Company's securitizations in 1995 and 1996 made demand, on behalf of the certificate holders, on the Company that it repurchase approximately $4.5 million in defaulted loans for which the trustee claimed Interstate Insurance was refusing to pay claims. The trustee claimed such refusal constituted a breach of representation by the Company regarding the insurance coverage on the finance contracts. On June 27, 2001 the Company entered into a settlement agreement whereby the Company and the trustee released each other from all claims, demands, actions, and liabilities with respect to each and all trusts. The Company has made a capital commitment of $500,000 to an investment fund that co-invests in private venture-stage companies with whom the principals of the fund have business or professional relationships. $75,000 of the commitment was paid in October 2000. There have been no further capital calls of the fund. On October 17, 2001, the Company agreed to purchase for $25,000 Southcoast Investment Group, Inc., a brokerage firm incorporated in the State of Texas. It will be used to support investment opportunities of the Company. 10. Gain on litigation settlement On June 9, 1998, the Company entered into a series of agreements with Dynex Capital, Inc. ("Dynex") whereby Dynex agreed to provide financing to the Company, with such financing to be secured by auto loans underwritten and acquired by the Company. Further, the Company was to service all such loans for a fee. Additionally, the three principal shareholders of the Company granted to an affiliate of Dynex, Dynex Holding, Inc., an option to acquire their stock. In February 1999, Dynex informed the Company that certain alleged "Funding Termination Events" had occurred and that Dynex would no longer honor its obligation to fund the Company as per the parties June 9, 1998, agreements. The Company vigorously disputed Dynex's allegations and, on February 8, 1999, filed suit against Dynex in the Texas case seeking to enforce Dynex's contractual obligations and/or to recover damages resulting from the breach thereof. After a four week jury trial, on March 9, 2000 the jury returned a verdict in favor of the Company. F-15 Specifically, the jury found that (a) the Company made no material, knowing or reckless misrepresentations to induce Dynex to enter in the June 9, 1998 agreements between the parties, (b) the Company did not breach its June 9, 1998 agreements with Dynex prior to Dynex's cessation of funding, and (c) Dynex maliciously or negligently made defamatory statements about the Company. Based on these findings, the jury awarded the Company $18.7 million in direct lost profits and approximately $50 million in consequential lost profits. After numerous motions by both parties, the court entered judgment reducing the amount of damages owed to the Company to $23.3 million. Thereafter, on June 9, 2000 the Company entered into a settlement agreement with Dynex, pursuant to which (a) Dynex and the Company released all claims against each other; (b) Dynex paid $20 million to the Company (of which $3.3 million was paid to the Company's Texas trial counsel pursuant to a contingency fee and expense arrangement), (c) Dynex surrendered to the Company 51,500 shares of the Company's preferred stock, (d) Dynex cancelled the Company's indebtedness to Dynex under a $3 million note, and (e) the Company assigned to Dynex (i) a $1.4 million subordinated note from a securitization in which Dynex held the senior debt, and (ii) the common stock in two securitization subsidiaries in which Dynex held the senior debt. The Company recorded a gain on litigation settlement of $22,583,122 in the nine month period ended September 30, 2000. In February 1997 the Company discovered certain breaches of representations and warranties by certain auto dealers with respect to finance contracts sold into a securitization. The Company honored its obligations to the securitization trust and repurchased finance contracts totaling $619,520 from that trust. The Company brought suit against a dealership and reached a settlement agreement whereby the Company received $750,000 from the dealership in February 1999 which was recorded in the year ended December 31, 1999. 11. Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of these assets. Investments The fair value of investments is determined based upon market value of the security. The carrying amount approximates fair value for all investments. 12. Supplemental Cash Flow Disclosures The Company paid interest of $1,032,677 and $17 for the year ended December 31, 1999 and the nine months ended September 30, 2000 respectively. The Company paid no interest for the year ended September 30, 2001. No income taxes were paid during fiscal 1999, 2000 or 2001. 13. Quarterly Information (unaudited) The following financial data summarizes quarterly results for the Company for the nine months ended September 30, 2000 and the year ended September 30, 2001.

F-16

AUTOBOND ACCEPTANCE CORP 10-K