2. Executive Summary
In the middle of the current economic “reset”, a great opportunity is evolving in the used automobile
financing market (non/sub-prime financing). This opportunity is being driven by the following factors:
Illiquidity
Eroding consumer credit scores
Maturing leases and fewer new attractive lease programs
Lower new cars sales resulting in lower used car supply
Sub-prime automobile portfolios have fared well during the capital market melt down...Loss rate
spikes were/are very manageable.
Used automobile wholesale prices continue to be strong
Inadequate public transportation (outside of NY)
Renting a car is still more expensive than owning one
Car payments are high on the priority list for most consumers
Hence, the AVI vertically integrated model evolved from the current unprecedented economic conditions
and the founder's domain expertise and vision.
AVI Ventures has been created by and will be managed by Mr. Dubuk who from 1992-2005 obtained
niche market investment experience leading up to the inception of Integrity Capital Management, LLC
(“ICM”). As CEO of ICM, Mr. Dubuk grew the company to be an opportunistic financier of automobile asset
backed lines of credit and consumer notes through a network of dealerships that primary served the
growing Hispanic market.
Mr. Dubuk is a strategic futuristic entrepreneur with strong analytical and organizational skills that lend
well to identifying and structuring a plan to profit from fragmented underserved markets. He has a
history of identifying, structuring, funding, and executing in niche markets. His effective leadership
abilities and solid analytical skills lend to his success as a valued business leader and problem-solver.
However, Mr. Dubuk’s greatest asset is his top to bottom detailed knowledge of the used automobile
business process (retail, finance, and servicing/collection) together with his ability to structure, control
and effectively manage AVI per capital market specifications.
The AVI model is a vertically integrated holding company engaged in the acquisition and management of
regional automobile finance, loan servicing, and sales organizations. AVI's goal is to control the pre-
owned automobile sales and finance process as much as possible, because the key to this business is the
correct pricing and structure of the notes, together with real time “tracking/watching the dollar” and
assets.
Furthermore, this type of vertical integration mitigates risk by i) directly controlling the underwriting
(structure) & vast cash-flows process, ii) minimizes retail inefficiencies, and iii) by controlling/owning
the retail operations, the model yields higher repo recovery rates because the asset is re-sold at retail
prices versus wholesale prices. Following is a simplified visual illustration of the business process that
we want to own and control:
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3. BUSINESS PROCESS CYCLE
Please note, the business process cycle typically generates the following cash flow (based on a pool of 100
loans):
$60,000
$50,000
Cash Flow Principle
Payment
$40,000 Loan
$30,000 Payoff
$20,000 Charge Off
$10,000
$- Recovery
$(10,000) 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47
Monthly
$(20,000) Interest
$(30,000) Income
Total Cash
$(40,000) Flow to
ICM
$(50,000)
The volatile cash flow is a representation of the deep understanding that is required to succeed in this
market. Again, our deep-rooted understanding of the business process and management skills is essential
to mitigating risk and generating consistent returns (to AVI investors) during liquid and illiquid market
conditions.
The used automobile market is comprised of 42K+ used car dealerships that generate in excess of $100B
sed exces
in annual revenue. The quality of credit is broken down as follows: A paper: $23.7B, B paper: $23.9B, C
he
paper: $43.2B, and D paper: $33.2B. Additionally, there is a deep sub-prime market that is underserved
prime
and extremely lucrative to the experienced deep susub-prime auto financiers.
3
4. The driving force behind used car sales volume is the amount of liquidity in the capital market. The
rce
diagram below plots the degree of correlation among the members of the vertically integrated model.
First, dealership profitability has a very strong (almost 1 to 1) correlation with the credit availability
(liquidity). The finance profitability is an inverse relationship with liquidity, and servicing profitability
increases as liquidity decreases.
As illustrated, consistent profits can be enhanced during the entire liquidity cycle IF, one controls all 3
core members and continues to fund: Risk Cost Average Funding…keep funding through the liquidity
Funding…keep
cycle.
AVI equity capital requirements are moderate considering the lucrative offer. The initial infrastructure
(business start up expenses and top management interim salaries) cost is approximately $600K. Initial
core acquisitions requirements will start at $10M and ramp up to $50M over 5 years (additional equity
cquisitions
capital can be deployed if the AVI board elects to do so). In addition, the AVI model will require debt
so).
financing for working capital, floor
floor-plans, and note-financing. Please note, Mr. Dubuk has an extensive
financing.
network of debt financiers that will be utilized.
rs
AVI will operate in a holding company structure which will give AVI the ownership and control of a
number of different regional companies that in the aggregate will decrease market fragmentation. The
CEO will be J. Danny Dubuk (founder) and his core responsibilities are to i) build the vision & strategy, ii)
founder)
build the culture, and iii) to build the team as well as to allocate and maximize the utilization of capital.
eam capital
The rest of the senior managers, CFO and COO (with the support of the office manager and staff), will
,
focus on tracking and accounting for the daily cash flow and the assets on a monthly basis with the
assistance/reliance of cutting edge technologies. In summary, AVI Holding Company will be responsible
technologies
for: adequate capitalization, consolidated accounting, cash-flow optimization, balance sheet leveraging,
a ,
portfolio risk management, strategic planning legal, IT management, operations management and client
trategic planning, perations management,
base & network leveraging…to generate economies of scale across all portfolio companies
economies companies.
Mr. Dubuk has identified a number of target acquisitions that are excellent candidates to fit into the
infrastructure and customer base we have built. The acquisition goal is to build a portfolio of companies
with: domain expertise, proven management team, sound infrastructure, cash flow positive,
team,
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5. undercapitalized existing lines of credit, and a pipeline of new opportunities. Such platforms together
ized
with our skill set, market band width, and domain expertise will result in large investment returns to AVI
investors.
The shareholder value potential of the AVI opportunity is vast and has many possible outcomes as any
one of the core entities is a standalone profit center. An initial benefit (especially in today’s economy) is
especially
the large amount of cash flow it generates immediately Our complex financial models in
immediately. indicate the
following investor IRR calculations based on a very conservative exit strategy and the 20% earn out
incentive to Mr. Dubuk:
High Probability: 25%+ Medium Probability: 35%+ Low Probability: 50%+
Probability
The AVI exit strategies will be to eventually sell the entire operation or carry out an IPO during the next
economic upturn. As we take the next 4 to 8 years to enter, build-out, and prepare for the exit, AVI
build out,
participants will realize significant cash flow profits. We welcome the opportunity to illustrate our
illu
complex models.
It is certain that people will need cars no matter the state of the economy. During uncertain times, used
ople
cars will be in demand more than other times, but bottom line is that most people cannot function
properly without a personal automobile. The majority of car sales are financed not purchased in cash.
finance
Prior to the current market meltdown the C & D paper market was larger than the prime financing
meltdown,
market. The sub-prime finance market is expanding because the Hispanic market is growing and the
prime market
general erosion of FICO scores (due to high foreclosures rates). Furthermore, the demand for quality
used cars is increasing as more consumers are choosing to own cars they can afford versu leasing a car
versus
that eventually has to be turned in. Below is recently released third party validation for the AVI
assumptions:
“According to Auto Data Corp., sales of “Any company who wants to grow
certified pre-owned cars in January 2009
owned must look at the Hispanic
were up 10 percent from the same time Market…”
last year…” --March 4th, 2009
--Feb. 19th, 2009
The combination of Mr. Dubuk's domain expertise and market band-width the current economic
width,
environment, and strong equity partner(s) is the ideal launching pad for the AVI venture to generate
immediate cash flow and future capital gains through an IPO or M&A exit strategy.
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