EXHIBIT 99.1
We have received many thoughtful questions since our new policy was announced.
We have posted answers to questions we were able to respond to quickly, and are
researching several others that will require more time. Although the process is
new, we have now received enough questions to develop a sense for questions we
will not answer. Questions we will not answer fall into three categories:
(1) Questions requiring a projection (i.e. earnings, loan volume,
credit quality).
(2) Questions inquiring about our mental state (i.e. How do you
feel about credit quality?)
(3) Question that have been previously answered.
Thank you for your questions thus far.
SELECT INQUIRES RECEIVED THROUGH AUGUST 16, 2004
1. WHAT COMPRISES THE 'OTHER INCOME' LINE ITEM AND WHAT WAS THE PRIMARY REASON
FOR THE INCREASE IN 'OTHER INCOME'? WHAT WAS THE AMOUNT OF GAINS ON LEASES?
Other income includes monthly fees paid by our dealer-partners for access to
CAPS (our Internet based origination system), premiums earned on our credit life
insurance product, gains on operating leases at termination, dealer enrollment
fees and fees charged to dealer-partners for other services like training and
lead generation.
Other income increased, as a percentage of revenue, to 11.4 % and 12.3% for the
three and six month periods ended June 30, 2004, from 10.0% and 11.3% for the
same period of the prior year.
The increase is primarily due to an increase in monthly fees paid by
dealer-partners for access to CAPS. CAPS fees are expected to increase
proportionately with the active dealer-partner count. To a lesser extent, Other
Income increased as a result of an increase in lease termination gains, dealer
enrollment fees, and fees charged to dealer-partners for other products and
services relating to our core program such as training and lead generation
services.
Lease termination gains were $361,000 for the quarter, compared to $161,000 for
the same period of 2003.
2. WHY DID THE AVERAGE CONTRACT SIZE DECLINE TO $12,500 FROM $12,900 IN THE
FIRST QUARTER AND $13,000 IN THE SECOND QUARTER OF 2003?
The average contract size did not decline. The table in our earnings release
included the following data regarding contract size:
Three months ended June 30, Six months ended June 30,
---------------------------------- ---------------------------------
(Dollars in thousands) 2004 2003 % change 2004 2003 % change
---- ---- -------- ---- ---- --------
Average loan size 12.5 12.5 - 12.5 12.1 3.5%
We did, however, change the way we report this number. Reported loan
originations previously included transactions that increased our loan balance
but did not represent new loans. These transactions, the most common of which
are late fees charged to existing loans, are now reported in a separate line
item called Other fees, in Footnote 3 of our Financial Statements. Previously
the reported average loan size was calculated by dividing the reported dollar
amount of loan originations for the period, which included Other fees, by the
number of loans for the period. Average loan sizes reported in the current
period exclude Other fees. All prior period numbers reported in the current
period have been reclassified to conform to the new presentation.
3. IN YOUR 10Q, YOU PREVIOUSLY HAD A SUMMARY OF THE CHANGES IN THE INVESTMENT IN
OPERATING LEASES. WE NOTICED YOU DO NOT HAVE IT IN THE 2Q 10Q. WHY DID YOU
DECIDE TO STOP PROVIDING THIS?
We dropped this disclosure based on materiality. Our net investment in operating
leases has been reduced to $1.9 million. Our current projections show this
amount to be recoverable.
4. IN THE CASH FLOW STATEMENT THERE IS A NEW LINE ITEM 'ACCELERATED PAYMENTS OF
DEALER HOLDBACKS.' WHAT IS THIS?
We pay a portion of the dealer-holdback at the time a dealer-partner closes a
pool of loans. To be eligible for this payment, dealers must meet certain
criteria relating to the quality of their portfolio and the length of time that
they have been on our program. The amount of the payment is based upon a formula
that considers the forecasted collections of the pool of loans and the current
advance balance.
Prior to 2004, these payments were included in Payments of dealer holdbacks in
our cash flow statement.
5. WHY DID THE NUMBER OF LOANS PER ACTIVE DEALER DECLINE TO 19.2 LOANS FROM 21.8
LOANS IN THE SECOND QUARTER OF 2003?
The decline in loans per active dealer for the six-month period is the result of
an increase in new dealer-partner enrollments. The decline in loans per active
dealer-partner for the second quarter, compared to the same period in the prior
year, is partially explained by an increase in new dealer-partner enrollments.
The remainder of the decline in loans per active dealer-partner experienced in
the second quarter is either related to overall market conditions, or is not
fully understood at this stage.
To arrive at this conclusion, we performed the following analysis: First, we
segmented active dealer-partners into groups according to how long they had been
active on our program. We observed that loans per active dealer-partner increase
over time. We also
observed the percentage of dealers in the 0-1 year old and 1-2 year old segments
were higher in 2004 than in 2003.
To calculate the impact, we recalculated average volume per dealer-partner in
2004 assuming the distribution by age group was the same as in 2003. The results
are as follows:
2004
Q1 Q2 YTD
----- ------ -----
Change in average volume per dealer-
partner (reported) -1.7% -11.8% -6.1%
Change in average volume per dealer-
partner (recalculated assuming same
dealer-partner age as 2003) 3.3% -6.9% -1.1%
If the distribution by age group had not changed, we have reason to believe
average volume per dealer-partner in Q1 would have been higher than in 2003.
Although average volume per dealer-partner was negatively impacted by dealer age
in Q2 as well, after adjusting for this variable we still observe a 6.9% decline
compared to the same period in the prior year. We cannot explain the remaining
decline with confidence. We noticed other companies in our industry, like CarMax
and AutoNation, reported lower used vehicle sales volumes on a same store basis
during their most recent quarters. CarMax attributed the decline to higher gas
prices, interest rates and wholesale prices. These factors could have impacted
our volumes as well.
The significance of the trend in average dealer-partner volumes will be more
apparent at the end of the third quarter.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements in this document that are not historical facts, such as those
using terms like "believes," "expects," "anticipates," "assumptions,"
"forecasts," "estimates" and those regarding the Company's future plans and
objectives, are "forward-looking statements" within the meaning of the federal
securities laws. These forward-looking statements represent the Company's
outlook only as of the date of this document. While the Company believes that
its forward-looking statements are reasonable, actual results could differ
materially since the statements are based on current expectations, which are
subject to risks and uncertainties. Factors that might cause such a difference
include the following:
- the Company's potential inability to accurately forecast and estimate
the amount and timing of future collections,
- increased competition from traditional financing sources and from
non-traditional lenders,
- the unavailability of funding at competitive rates of interest,
- the Company's potential inability to continue to obtain third party
financing on favorable terms,
- the Company's potential inability to generate sufficient cash flow to
service its debt and fund its future operations,
- adverse changes in applicable laws and regulations,
- adverse changes in economic conditions,
- adverse changes in the automobile or finance industries or in the
non-prime consumer finance market,
- the Company's potential inability to maintain or increase the volume
of automobile loans,
- an increase in the amount or severity of litigation against the
Company,
- the loss of key management personnel,
- the effect of terrorist attacks and potential attacks, and
- various other factors discussed in the Company's reports filed with
the Securities and Exchange Commission.
Other factors not currently anticipated by management may also materially and
adversely affect the Company's results of operations. The Company does not
undertake, and expressly disclaims any obligation, to update or alter its
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.