EXHIBIT 99
RISK FACTORS
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Company requires significant operating cash to purchase
Contracts. As a result of the Company's expansion since inception and its
program of securitizing and selling Contracts, the Company's cash requirements
have in the past exceeded cash generated from operations. The Company's
primary operating cash requirements include the funding of (a) purchases of
Contracts pending their pooling and sale, (b) Spread Accounts in connection with
sales or securitizations of Contracts, (c) fees and expenses incurred in
connection with its sales and securitizations of Contracts, (d) tax payments
and (e) ongoing administrative and other operating expenses. Net cash used in
operating activities during fiscal 1995, the nine-month transition period ended
December 31, 1995, and the year ended December 31, 1996 was $6.1 million, $18.5
million, and $9.7 million, respectively. The Company has obtained these funds in
three ways: (a) loans and warehouse financing arrangements, pursuant to which
Contracts are financed on a temporary basis; (b) securitizations or sales of
Contracts, pursuant to which Contracts are sold; and (c) external financing.
At December 31, 1996 the Company had cash of approximately $154,000.
CASH REQUIREMENTS ASSOCIATED WITH SECURITIZATION TRUSTS. Under the
financial structures the Company has used to date in its seventeen
securitizations, certain excess servicing cash flows generated by the
Contracts are retained in a Spread Account within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and mechanics
of the Spread Account vary slightly among transactions, the Company's agreements
with Financial Security Assurance, Inc. ("FSA"), the financial guaranty insurer
that has provided credit enhancements in connection with the Company's
securitizations since June 1994, generally provide that the Company is not
entitled to receive any excess servicing cash flows unless certain Spread
Account balances have been attained and/or the delinquency or losses related
to the Contracts in the pool are below certain predetermined levels. In the
event delinquencies and losses on the Contracts exceed such levels, the terms of
the securitization may require increased Spread Account balances to be
accumulated for the particular pool; may restrict the distribution to the
Company of excess cash flows associated with other pools in which asset-backed
securities are insured by FSA; or, in certain circumstances, may require the
transfer of servicing on some or all of the Contracts in FSA-insured pools to
another servicer. The imposition by FSA of any of these conditions could
materially adversely affect the Company's liquidity and financial condition. In
the past, delinquency and loss levels on ten of the FSA-insured pools have
attained levels which temporarily resulted in increased Spread Account
requirements for those pools. As of December 31, 1996, all FSA-insured pools
were performing within the guidelines required by their related insurance
policies and therefore were not subject to increased Spread Account
requirements.
DEPENDENCE ON WAREHOUSE FINANCING. One of the Company's primary sources
of financing is its $100.0 million warehouse line of credit (the "Warehouse Line
of Credit"), under which the Company borrows against Contracts held for sale,
pending their sale in securitization transactions. The Warehouse Line of
Credit expires in 1998. The Company expects to be able to maintain existing
warehouse arrangements (or to obtain replacement or additional financing) as
current arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms. To the
extent that the Company is unable to maintain its existing Warehouse Line of
Credit or is unable to arrange new warehouse lines of credit, the Company may
have to curtail Contract purchasing activities, which could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON SECURITIZATION PROGRAM. The Company is dependent upon its
ability to continue to pool and sell Contracts in order to generate cash
proceeds for new purchases. Adverse changes in the market for securitized
Contract pools, or a substantial lengthening of the warehousing period, would
burden the Company's financing capabilities, could require the Company to
curtail its purchase of Contracts, and could have a material adverse effect on
the Company. In addition, as a means of reducing the percentage of cash
collateral that the Company would otherwise be required to deposit and
maintain in Spread Accounts, all of the Company's securitizations since June
1994 have utilized credit enhancement in the form of financial guaranty
insurance policies issued by FSA to achieve "AAA/Aaa" ratings for the
asset-backed securities that have been sold to investors. The Company believes
that financial guaranty insurance policies reduce the costs of securitizations
relative to alternative forms of credit enhancements available to the Company.
FSA is not required to insure Company-sponsored securitizations and there can be
no assurance that it will continue to do so or that future securitizations will
be similarly rated. Similarly, there can be no assurance that any
securitization transaction will be available on terms acceptable to the Company,
or at all. The timing of any securitization transaction is affected by a number
of factors beyond the Company's control, any of which could cause substantial
delays, including, without limitation, market conditions and the approval by all
parties of the terms of the securitization. Any delay in the sale of a pool of
Contracts beyond a quarter-end could reduce the gain on sale recognized in such
quarter and could result in decreased earnings or possible losses for such
quarter being reported by the Company.
ECONOMIC CONSIDERATIONS
RISK OF GENERAL ECONOMIC DOWNTURN. The Company's business is directly
related to sales of new and used automobiles, which are affected by employment
rates, prevailing interest rates and other domestic economic conditions.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Company's focus on Sub-Prime
Borrowers, the actual rates of delinquencies, repossessions and losses on such
Contracts could be higher under adverse economic conditions than those currently
experienced in the automobile finance industry in general. Any sustained period
of economic slowdown or recession could adversely affect the Company's ability
to sell or securitize pools of Contracts. The timing of any economic changes is
uncertain, and sluggish sales of automobiles and weakness in the economy could
have an adverse effect on the Company's business and that of the Dealers from
which it purchases Contracts.
CREDITWORTHINESS OF BORROWERS. The Company specializes in the purchase,
sale and servicing of Contracts to finance automobile purchases by Sub-Prime
Borrowers, which entail a higher risk of non-performance, higher delinquencies
and higher losses than Contracts with more creditworthy borrowers. While the
Company believes that the underwriting criteria and collection methods it
employs enable it to control the higher risks inherent in Contracts with
Sub-Prime Borrowers, no assurance can be given that such criteria and methods
will afford adequate protection against such risks. Since inception, the
Company has expanded its operations significantly and has rapidly increased its
Servicing Portfolio. Because there is limited performance data available with
respect to that portion of the Company's Servicing Portfolio purchased most
recently, historical delinquency and loss statistics are not necessarily
indicative of future performance. The Company has experienced fluctuations in
the delinquency and charge-off performance of its Contracts, including an
upward trend for each. The Company believes, however, that such fluctuations
are normal and that the upward trend is the result of the seasoning of the
Servicing Portfolio. In the event that portfolios of Contracts sold and
serviced by the Company experience greater defaults, higher delinquencies or
higher losses than anticipated, the Company's earnings could be negatively
impacted. In addition, the Company bears the entire risk of loss on Contracts
it holds for sale. A larger number of defaults than anticipated could also
result in adverse changes in the structure of the Company's future
securitization transactions, such as increased interest rates on the
asset-backed securities issued in those transactions.
CONTRACTS MAY BE ONLY PARTIALLY SECURED. Although the Contracts are each
secured by a lien on the purchased vehicle, a repossession in the event of
default generally does not yield proceeds sufficient to pay all amounts owing
under a Contract. The actual cash value of the vehicle may be less than the
amount financed at inception of the Contract, and also thereafter, because the
amount financed may be as much as 115% of the wholesale book value in the case
of used vehicles or 110% of manufacturer's invoice in the case of new vehicles,
plus sales tax, licensing fees, and any service contract or credit life or
disability policy purchased by the borrower, less the borrower's down payment
and/or trade-in allowance (generally not less than 10% of the vehicle sales
price). In addition, the proceeds available upon resale are reduced by
statutory liens, such as those for repairs, storage, unpaid taxes and unpaid
parking fines, and by the costs incurred in the repossession and resale. Unless
the Contract is sufficiently seasoned that the borrower has substantial equity
in the vehicle, the proceeds of sale are generally insufficient to pay all
amounts owing. For that reason, the Company's collection policies aim to avoid
repossession to the extent possible.
GEOGRAPHIC CONCENTRATION OF BUSINESS. For the year ended December 31,
1996, the Company purchased 25.8% of its Contracts from Dealers located in
California, and its prospects are dependent, in part, upon economic conditions
prevailing in this state. Such geographic concentration increases the potential
impact of collection disruptions and casualty losses on the financed vehicles
which could result from regional economic or catastrophic events. Although the
percentage of the Servicing Portfolio purchased from Dealers in California has
been declining as the Company's volume of Contract purchases has increased, at
December 31, 1996, 33.3% of the Servicing Portfolio represents obligations of
automobile purchasers in California. Accordingly, an economic slowdown in
California could result in a decline in the availability of Contracts for
purchase by the Company as well as an increase in delinquencies and
repossessions. Such conditions could have a material adverse effect on the
Company's revenue and results of operations.
POSSIBLE INCREASE IN COST OF FUNDS. The Company's profitability is
determined by, among other things, the difference between the rate of interest
charged on the Contracts purchased by the Company and the pass-through rate of
interest (the "Pass-Through Rate") payable to investors on portfolios of
Contracts sold by the Company. The Contracts purchased by the Company
generally bear the maximum finance charges permitted by applicable state law.
The fixed Pass-Through Rates payable to investors on portfolios of Contracts
sold by the Company are based on interest rates prevailing in the market at the
time of sale. Consequently, increases in market interest rates tend to reduce
the "spread" or margin between Contract finance charges and the Pass-Through
Rates required by investors and, thus, the potential operating profits to the
Company from the purchase, sale and servicing of Contracts. Operating profits
expected to be earned by the Company on portfolios of Contracts previously sold
are insulated from the adverse effects of increasing interest rates because the
Pass-Through Rates on such portfolios were fixed at the time the Contracts
were sold. Any future increases in interest rates would likely increase the
Pass-Through Rates for future portfolios sold and could have a material
adverse effect on the Company's results of operations.
PREPAYMENT AND DEFAULT RISK. Gains from the sale of Contracts in the
Company's seventeen securitization transactions have constituted a significant
portion of the net earnings of the Company and are likely to continue to
represent a significant portion of the Company's net earnings. A portion of
the gains are based in part on management's estimates of future prepayment and
default rates and other considerations in light of then-current conditions. If
actual prepayments with respect to Contracts occur more quickly than was
projected at the time such Contracts were sold, as can occur when interest
rates decline, or if default rates are greater than projected at the time such
Contracts were sold, a charge to earnings may be required and would be taken
in the period of adjustment. If actual prepayments occur more slowly or if
default rates are lower than estimated with respect to Contracts sold, total
revenue
would exceed previously estimated amounts. Actual default and prepayment
performance, both in the aggregate and as to each securitization trust, has
been materially consistent with management's estimates. No material charges to
earnings have occurred as a result of default and prepayment performance.
However, there can be no assurance that charges to earnings will not occur
in the future as a result of actual default and prepayment performance
exceeding management's estimates.
COMPETITION
The automobile financing business is highly competitive. The Company
competes with a number of national, local and regional finance companies. In
addition, competitors or potential competitors include other types of
financial services companies, such as commercial banks, savings and loan
associations, leasing companies, credit unions providing retail loan financing
and lease financing for new and used vehicles and captive finance companies
affiliated with major automobile manufacturers such as General Motors Acceptance
Corporation, Ford Motor Credit Corporation, Chrysler Credit Corporation and
Nissan Motors Acceptance Corporation. Many of the Company's competitors and
potential competitors possess substantially greater financial, marketing,
technical, personnel and other resources than the Company. Moreover, the
Company's future profitability will be directly related to the availability
and cost of its capital relative to that of its competitors. The Company's
competitors and potential competitors include far larger, more established
companies that have access to capital markets for unsecured commercial paper
and investment grade rated debt instruments, and to other funding sources which
may be unavailable to the Company. Many of these companies also have
long-standing relationships with Dealers and may provide other financing to
Dealers, including floor plan financing for the Dealers' purchases of
automobiles from manufacturers, which is not offered by the Company. There can
be no assurance that the Company will be able to continue to compete
successfully.
MANAGEMENT OF RAPID GROWTH
The Company has experienced rapid growth and expansion of its business.
The Company's ability to support and manage continued growth is dependent upon,
among other things, its ability to hire, train, supervise and manage the
increased personnel. Furthermore, the Company's ability to manage portfolio
delinquency and loss rates is dependent upon the maintenance of efficient
collection procedures, adequate collection staffing, internal controls, and
automated systems. There can be no assurance that the Company's personnel,
procedures, staff, internal controls, or systems will be adequate to support
such growth.
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS
The Warehouse Line of Credit and the indentures governing the notes
("Notes") that the Company proposes to issue in April 1997("Indenture") and
the notes ("1995 Notes") that the Company issued in December 1995("1995
Indenture") contain covenants limiting, among other things, the nature and
amount of additional indebtedness that the Company may incur. These covenants
could limit the Company's ability to withstand competitive pressures or adverse
economic conditions, make acquisitions or take advantage of business
opportunities that
may arise. Failure to comply with these covenants could, as provided in the
Warehouse Line of Credit, permit the lender under the Warehouse Line of Credit
to accelerate payment of the amounts borrowed under the facility or, as
provided in the 1995 Indenture, permit the indenture trustee thereunder to
accelerate payment of the 1995 Subordinated Debt.
POTENTIAL FOR ADDITIONAL SENIOR INDEBTEDNESS
Under the Indenture and the 1995 Indenture, the Company will be permitted
to incur substantial additional senior indebtedness. Based on the Company's
consolidated stockholders' equity as of December 31, 1996, the Company would
be permitted to borrow approximately $328 million in Senior Indebtedness.
Effective January 17, 1997, an outstanding $3 million convertible subordinated
note was converted into 480,000 shares of the Company's Common Stock. The
anticipated sale of the Notes, as to which there can be no assurance, would
increase the Company's outstanding subordinated indebtedness. The interest
expense associated with the Notes and the potential interest expense associated
with the maximum permitted Senior Indebtedness could substantially increase the
Company's fixed charge obligations and could potentially limit the Company's
ability to meet its obligations under the Notes.
ABILITY TO REPAY NOTES UPON ACCELERATED REDEMPTION
Upon the occurrence of a Special Redemption Event (certain events or
transactions that result in a change in control of the Company), each holder
of the Notes or the 1995 Notes will have the right to require that the Company
purchase the holder's notes at 100% of the principal amount plus accrued
interest. If a Special Redemption Event should occur, there can be no assurance
that the Company will have available funds sufficient to pay that purchase price
for all of the notes that might be delivered by holders seeking to exercise such
rights. In the event the Company is required to purchase outstanding notes
pursuant to a Special Redemption Event, the Company expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing, and, if obtained, the terms of any such
financing may be less favorable than the terms of the notes.
LITIGATION
Because of the consumer-oriented nature of the industry in which the
Company operates and the application of certain laws and regulations, industry
participants are regularly named as defendants in class-action litigation
involving alleged violations of federal and state laws and regulations and
consumer law torts, including fraud. Many of these actions involve alleged
violations of consumer protection laws. Although the Company is not involved
in any material litigation, a significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON DEALERS
The Company is dependent upon establishing and maintaining relationships
with unaffiliated Dealers to supply it with Contracts. As of December 31, 1996
the Company was a party to Dealer Agreements with 2,182 Dealers. During the
year ended December 31, 1996, no Dealer accounted for more than 2.3% of the
Contracts purchased by the Company. The Dealer Agreements do not require Dealers
to submit a minimum number of Contracts for purchase by the Company. The failure
of Dealers to submit Contracts that meet the Company's underwriting criteria
would have a material adverse effect on the Company's financial condition and
results of operations.
CONTRACTUAL RECOURSE BY PURCHASERS OF CONTRACTS
Purchasers of Contracts have recourse against the Company in the event of
the Company's breach of its representations and warranties to the purchaser
(relating to the enforceability and validity of the Contracts) or certain
defaults with respect to the Contracts. In such cases, recourse is limited to
requiring the Company to repurchase the Contracts in question. In the event
the Company is required to repurchase a Contract, the Company will generally
have similar recourse against the Dealer from which it purchased the Contract;
however, there can be no assurance that any Dealer will have the financial
resources to satisfy its repurchase obligations to the Company. Subject to any
recourse against Dealers, the Company will bear any loss on repossession and
resale of vehicles financed under Contracts repurchased by it from investors,
which could have a material adverse effect on the financial condition and
results of operations of the Company.
At December 31, 1996, the Servicing Portfolio subject to recourse was
$483.1 million. To date, the Company has never been required to repurchase a
Contract due to a breach of its representations and warranties to the trust.
However, the Company has voluntarily repurchased Contracts from the trusts when
the collateral suffers an uninsured casualty loss. In the event of a repurchase,
the Company is not obligated to replace the Contract repurchased. For the year
ended December 31, 1996, aggregate repurchases of Contracts with uninsured
casualty losses, and the amount of losses thereon, were approximately $1.7
million. The Company may or may not continue its practice of voluntarily
repurchasing Contracts from the trusts.
GOVERNMENT REGULATION
The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of its Contracts; (iv) require
the Company to provide specified disclosures; and (v) regulate certain servicing
and collection practices and define its rights to repossess and sell collateral.
An adverse change in existing laws or regulations, or in the interpretation
thereof, the promulgation of any additional laws or regulations, the failure
to comply with such laws and regulations or the expansion of the Company's
business into jurisdictions with more stringent requirements could have a
material adverse effect on the Company's financial condition and results of
operations.
OPERATING LOSSES IN PRIOR YEARS
The Company incurred net losses for each of fiscal 1993 and 1994 of $1.5
million, and $1.8 million, respectively. Losses incurred through the end of
fiscal 1993 were attributable primarily to the Company's relatively high
degree of fixed operating costs as compared to its revenue in those years. The
net loss for fiscal 1994 was attributable entirely to a one-time, non-cash
accounting charge reflecting the release of the Escrow Shares. Although the
Company generated net income of $6.7 million for fiscal 1995, $7.6 million for
the nine-month transition period ended December 31, 1995, and $14.1 million for
the year ended December 31, 1996, there can be no assurance that the Company
will not sustain losses in the future.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the efforts of Charles E.
Bradley, Jr., its President, Jeffrey P. Fritz, its Senior Vice President--Chief
Financial Officer, and on Nicholas P. Brockman, William J. Brummund, Jr.,
Richard P. Trotter, Curtis K. Powell, and Mark A. Creatura, each of whom is a
Senior Vice President responsible for a different aspect of the Company's
operations. The Company has not entered into employment agreements with any of
these individuals and the loss of the services of any of these individuals
could have a material adverse effect on the Company. The Company has obtained
"key man" life insurance on Messrs. Bradley and Fritz in the amount of $1.0
million each.
CONTROL OF THE COMPANY
As of December 31, 1996, Charles E. Bradley, Jr., his father, Charles
Bradley, Sr., and other members of his family beneficially owned 3,847,497
shares of outstanding Common Stock, and held options or other rights to acquire
an additional 867,640 shares. Such shares represent approximately 27.0% of the
outstanding Common Stock of the Company (or 31.2%, upon assumed exercise of all
such options). As a result of their ownership of Common Stock, they and the
other directors of the Company collectively are able, as a practical matter, to
elect a majority of the Company's Board of Directors, to cause an increase in
the authorized capital or the dissolution, merger or sale of the assets of the
Company, and generally to direct the affairs of the Company.