CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- --------------------------------------------------------------
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is filing this cautionary
statement in connection with such safe harbor legislation. The Company's Form
10-K, Form 10-K/A, this Form 10-Q, any other Form 10-Q, any Form 8-K, Form
8-K/A, other SEC filings, or any other written or oral statements made by or
on behalf of the Company may include forward looking statements which reflect
the Company's current views with respect to future events and financial
performance. The words "believe," "expect," "anticipate," "intend," "forecast,"
"project," and similar expressions identify forward looking statements.
The Company wishes to caution investors that any forward looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not
limited to, the Risk Factors listed below (many of which have been discussed
in prior SEC filings by the Company). Though the Company has attempted to
list comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from forward looking statements.
Investors are further cautioned not to place undue reliance on such forward
looking statements as they speak only of the Company's views as of the date
the statement was made. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information, future events, or otherwise.
RISK FACTORS
- -------------
Investing in the stock of the Company involves certain risks. In addition to
the other information included elsewhere in this From 10-Q, investors should
give careful consideration to the following risk factors which may impact the
Company's performance and the price of its stock.
NO ASSURANCE OF CONTINUED PROFITABILITY; FLUCTUATIONS IN OPERATING RESULTS
- ------------------------------------------------------------------------------
The Company began operations in 1992 and incurred significant losses in 1994
and 1995. In 1996, however, the Company achieved profitability with net
earnings of approximately $5.9 million (including $4.4 million of gains
recognized from the sale of contract receivables pursuant to the
Securitization Program) on total revenues of $75.6 million. There can be no
assurance that the Company will remain profitable. Historically, the Company
has experienced higher car sales revenues in the first two quarters of the
year than in the latter half of the year. The Company believes that these
results are due to seasonal buying patterns resulting in part from the fact
that many of its customers receive income tax refunds during the first part of
the year, which are a primary source of down payments on used car purchases.
See Part 1, Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON SECURITIZATIONS
- -------------------------------
In recent periods, a significant portion of the Company's net earnings have
been attributable to gains on sales of contract receivables under its
Securitization Program. To date, all of the Company's securitization
transactions have been completed under the Securitization Program with
SunAmerica. Under this program, SunAmerica was granted the right to purchase
$175.0 million of Certificates. As of June 30, 1997, the Company had
substantially utilized its maximum commitment from SunAmerica under the
Securitization Program. The Company is actively seeking to identify
alternative securitization participants. Failure to identify new
securitization participants and to periodically engage in securitization
transactions will adversely affect the Company's cash flows and net earnings.
The Company's ability to successfully complete securitizations in the future
may also be affected by several factors, including the condition of securities
markets generally, conditions in the asset-backed securities markets
specifically, and the credit quality of the Company's portfolio. In addition,
with respect to securitization transactions that have closed in the past, the
amount of any gain on sale is based upon certain estimates and assumptions,
which may not subsequently be realized. To the extent that actual cash flows
on a securitization are materially below estimates, the Company would be
required to revalue the subordinate certificate portion of the securitization
which it retains, and record a charge to earnings based upon the reduction. In
addition, the Company records ongoing income based upon the cash flows on its
subordinate certificate portion. The income recorded on the subordinate
certificate portion will vary from quarter to quarter based upon cash flows
received in a given period. To the extent that cash flows are deficient,
charge-offs of finance receivables exceed original estimates, or assumptions
that were applied at the time of the securitization to the underlying
portfolio are not realized, the Company is required to revalue the residual
portion of the securitization which it retains, and record a charge to
operations. Champion Receivables Corporation ("CRC"), a bankruptcy remote
entity, is the Company's wholly-owned special purpose securitization
subsidiary. Its assets include residuals in finance receivables and
investments held in trust, in the amounts of $27.4 million and $7.2 million,
respectively, at June 30, 1997, which amounts would not be available to
satisfy claims of creditors of the Company on a consolidated basis. See Part
1, Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
- ----------------------------------------------------------------------
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories and/or low incomes,
Sub-Prime Borrowers are generally unable to obtain credit from traditional
financial institutions, such as banks, savings and loans, credit unions, or
captive finance companies owned by automobile manufacturers. The Company
typically charges fixed interest rates ranging from approximately 21.0% to
29.9% on contracts originated at Company Dealerships, while rates range from
approximately 17.6% to 29.9% on the Third Party Dealer contracts it purchases.
In addition, the Company has established an Allowance for Credit Losses, which
approximated 13.9% and 17.7% of contract principal balances as of December 31,
1996 and 1995, respectively, and 20.1% of contract principal balances as of
June 30, 1997, to cover anticipated credit losses on the contracts currently
in its portfolio. At December 31, 1996 and 1995, the principal balance of
delinquent contracts as a percentage of total outstanding contract principal
balances was 3.7% and 4.2%, respectively. The principal balance of delinquent
contracts as a percentage of total outstanding contract principal balances at
June 30, 1997 was 5.5%. The Company's net charge offs as a percentage of
average principal outstanding for the years ended December 31, 1996 and 1995
were 16.7% and 21.7%, respectively. The Company's annualized net charge offs
as a percentage of average principal outstanding for the six months ended June
30, 1997 were 20.3%. The Company believes its current Allowance for Credit
Losses is adequate to absorb anticipated credit losses. However, no assurance
can be given that the Company has adequately provided for, or will adequately
provide for, such credit risks or that credit losses in excess of its
Allowance for Credit Losses will not occur in the future. A significant
variation in the timing of or increase in credit losses on the Company's
portfolio would have a material adverse effect on the Company. See Part 1,
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Allowance for Credit Losses."
RISKS ASSOCIATED WITH GROWTH STRATEGY AND NEW PRODUCT OFFERINGS
- -----------------------------------------------------------------------
The Company's business strategy calls for aggressive growth in its sales and
financing activities through the development and acquisition of new Company
Dealerships and Branch Offices and the expansion of its existing operations to
include additional financing and insurance services. The Company's ability to
remain profitable as it pursues this business strategy will depend primarily
upon its ability to: (i) expand its revenue generating operations while not
proportionately increasing its administrative overhead; (ii) originate and
purchase contracts with an acceptable level of credit risk; (iii) effectively
collect payments due on the contracts in its portfolio; (iv) locate sufficient
financing, with acceptable terms, to fund the expansion of used car sales and
the origination and purchase of additional contracts; and (v) adapt to the
increasingly competitive market in which it operates. Outside factors, such as
the economic, regulatory, and judicial environments in which it operates, will
also have an effect on the Company's business. The Company's inability to
achieve or maintain any or all of these goals could have a material adverse
effect on the Company.
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company provides qualified Third Party Dealers with operating lines of credit
secured by such dealers' retail installment contract portfolios and/or
inventory. While the Company will require Third Party Dealers to meet certain
minimum net worth and operating history criteria to be considered for
inclusion in the Cygnet Dealer Program, the Company will, nevertheless, be
extending credit to dealers who are not otherwise able to obtain debt
financing from traditional lending institutions such as banks, credit unions,
and major finance companies. Consequently, similar to other financing
activities, the Company will be subject to a high risk of credit losses that
could have a material adverse effect on the Company's financial condition and
results of operations and on the Company's ability to meet its own financing
obligations. Further, there can be no assurance that the Company will be able
to obtain the financing necessary to fully implement the Cygnet Dealer
Program. In addition, there can be no assurance that the Company will be
successful in its efforts to expand its insurance services.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
- -------------------------------------------
The Company has recently completed two acquisitions and intends to consider
additional acquisitions, alliances and transactions involving other companies
that could complement the Company's existing business. There can be no
assurance that suitable acquisition parties, joint venture candidates, or
transaction counterparties can be identified, or that, if identified, any such
transactions will be consummated on terms favorable to the Company, or at all.
Furthermore, there can be no assurance that the Company will be able to
integrate successfully such acquired businesses, including those recently
acquired, into its existing operations, which could increase the Company's
operating expenses in the short-term and materially and adversely affect the
Company's results of operations. Moreover, these types of transactions by the
Company may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt, and amortization of expenses related to
goodwill and intangible assets, all of which could adversely affect the
Company's profitability. These transactions involve numerous risks, such as
the diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the
acquired company, all of which could have a material adverse effect on the
Company.
HIGHLY COMPETITIVE INDUSTRY
- -----------------------------
Although the used car sales industry has historically been highly fragmented,
it has attracted significant attention from a number of large companies,
including AutoNation, U.S.A. and Driver's Mart, which have entered the used
car sales business or announced plans to develop large used car sales
operations. Many franchised new car dealerships have also increased their
focus on the used car market. The Company believes that these companies are
attracted by the relatively high gross margins that can be achieved in this
market and the industry's lack of consolidation. Many of these companies and
franchised dealers have significantly greater financial, marketing, and other
resources than the Company. Among other things, increased competition could
result in increased wholesale costs for used cars, decreased retail sales
prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing contracts
originated from the sale of used cars to Sub-Prime Borrowers is highly
fragmented and very competitive. In recent years, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of contracts.
These companies have increased the competition for the purchase of contracts,
in many cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable of serving, this market, including traditional
financial institutions such as banks, savings and loans, credit unions, and
captive finance companies owned by automobile manufacturers, and other
non-traditional consumer finance companies, many of which have significantly
greater financial and other resources than the Company. Increased competition
may cause downward pressure on the interest rates the Company charges on
contracts originated by its Company Dealerships or cause the Company to reduce
or eliminate the nonrefundable acquisition discount on the contracts it
purchases from Third Party Dealers, which could have a material adverse effect
on the Company.
The Company believes that recent demographic, economic, and industry trends
favor growth in the used car sales and Sub-Prime Borrower financing markets.
To the extent such trends do not continue, however, the Company's
profitability may be materially and adversely affected.
GENERAL ECONOMIC CONDITIONS
- -----------------------------
The Company's business is directly related to sales of used cars, which are
affected by employment rates, prevailing interest rates, and other general
economic conditions. While the Company believes that current economic
conditions favor continued growth in the markets it serves and those in which
it seeks to expand, a future economic slowdown or recession could lead to
decreased sales of used cars and increased delinquencies, repossessions, and
credit losses that could hinder the Company's business. Because of the
Company's focus on the sub-prime segment of the automobile financing industry,
its actual rate of delinquencies, repossessions, and credit losses could be
higher under adverse conditions than those experienced in the used car sales
and finance industry in general.
INDUSTRY CONSIDERATIONS AND LEGAL CONTINGENCIES
- ---------------------------------------------------
In recent periods, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation, and other events. In addition, certain of these
companies have filed for bankruptcy protection. These announcements have had
and may continue to have a disruptive effect on the market for securities of
sub-prime automobile finance companies, are expected to result in a tightening
of credit to the sub-prime markets, and could lead to enhanced regulatory
oversight. Furthermore, companies in the used car financing market have been
subject to an increasing number of class action lawsuits brought by customers
alleging violations of various federal and state consumer credit and similar
laws and regulations. Although the Company is not currently subject to any
such lawsuits, no assurance can be given that such claims will not be asserted
against the Company in the future or that the Company's operations will not be
subject to enhanced regulatory oversight.
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
- ------------------------------------------------------------------------------
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. Pursuant to the Cygnet Dealer Program, the
Company enters into financing agreements with qualified Third Party Dealers.
The Company's Third Party Dealer financing activities depend in large part
upon its ability to establish and maintain relationships with such dealers.
While the Company believes that it has been successful in developing and
maintaining relationships with Third Party Dealers in the markets that it
currently serves, there can be no assurance that the Company will be
successful in maintaining or increasing its existing Third Party Dealer base,
that such dealers will continue to generate a volume of contracts comparable
to the volume of contracts historically generated by such dealers, or that any
such dealers will become involved in the Cygnet Dealer Program.
GEOGRAPHIC CONCENTRATION
- -------------------------
Company Dealership operations are currently located in Arizona, Texas,
Florida, Nevada, and New Mexico. In addition, a majority of the Company's
Branch Offices are located in Arizona, Texas, Florida, and Indiana. Because of
this concentration, the Company's business may be adversely affected in the
event of a downturn in the general economic conditions existing in the
Company's primary markets.
DEPENDENCE ON EXTERNAL FINANCING AND SECURITIZATION PROGRAM
- -----------------------------------------------------------------
The Company has borrowed, and will continue to borrow, substantial amounts to
fund its operations from financing companies and other lenders, some of which
are affiliated with the Company. Currently, the Company receives financing
pursuant to the Revolving Facility with GE Capital, which has a maximum
commitment of $50.0 million. Under the Revolving Facility, the Company may
borrow up to 65.0% of the principal balance of eligible Company Dealership
contracts and up to 90.0% of the principal balance of eligible Third Party
Dealer contracts. The Revolving Facility expires in September 1997, at which
time the Company has the option to renew the Revolving Facility for one
additional year. The Revolving Facility is secured by substantially all of the
Company's assets. In addition, the Revolving Facility contains various
covenants that limit, among other things, the Company's ability to engage in
mergers and acquisitions, incur additional indebtedness, and pay dividends or
make other distributions, and also requires the Company to meet certain
financial tests. Although the Company believes it is currently in compliance
with the terms and conditions of the Revolving Facility, there can be no
assurance that the Company will be able to continue to satisfy such terms and
conditions or that the Revolving Facility will be extended beyond its current
expiration date. For a discussion of certain possible amendments to the
Revolving Facility, see Part 1, Item 2. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Revolving Facility. In addition, the Company and SunAmerica have
entered into the Securitization Program pursuant to which SunAmerica may
purchase up to $175.0 million of Class A certificates. The Securitization
Program is subject to numerous terms and conditions, including the Company's
ability to achieve investment -grade ratings on Class A Certificates. As of
June 30, 1997, the Company had securitized an aggregate of $210.0 million in
contracts, and SunAmerica had purchased $170.4 million in Class A
Certificates, thereby substantially utilizing the maximum commitment from
SunAmerica. There can be no assurance that any further securitizations will
be completed or that the Company will be able to secure additional financing,
including the financing necessary to fully implement the Cygnet Dealer Program,
when and as needed in the future, or on terms acceptable to the Company. See
Part 1, Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
SENSITIVITY TO INTEREST RATES
- --------------------------------
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and
the rate of interest it earns on the contracts in its portfolio. While the
contracts the Company owns bear interest at a fixed rate, the indebtedness
that the Company incurs under its Revolving Facility bears interest at a
floating rate. In the event the Company's interest expense increases, it would
seek to compensate for such increases by raising the interest rates on its
Company Dealership contracts, increasing the acquisition discount at which it
purchases Third Party Dealer contracts, or raising the retail sales prices of
its used cars. To the extent the Company were unable to do so, the Company's
net interest margins would decrease, thereby adversely affecting the Company's
profitability.
IMPACT OF USURY LAWS
- -----------------------
The Company typically charges fixed interest rates ranging from approximately
21.0% to 29.9% on the contracts originated at Company Dealerships, while rates
range from approximately 17.6% to 29.9% on the Third Party Dealer contracts it
purchases. Currently, a significant portion of the Company's used car sales
activities are conducted in, and a significant portion of the contracts the
Company services are originated in, Arizona, which does not impose limits on
the interest rate that a lender may charge. However, the Company has expanded,
and will continue to expand, its operations into states that impose usury
limits, such as Florida and Texas. The Company attempts to mitigate these rate
restrictions by raising the retail prices of its used cars or purchasing
contracts originated in these states at a higher discount. The Company's
inability to achieve higher sales prices or adequate discounts in states
imposing usury limits would adversely affect the Company's planned expansion
and its results of operations. There can be no assurance that the usury
limitations to which the Company is or may become subject or that additional
laws, rules, and regulations that may be adopted in the future will not
adversely affect the Company's business.
DEPENDENCE UPON KEY PERSONNEL
- --------------------------------
The Company's future success will depend upon the continued services of the
Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car
sales and financing industry. The unexpected loss of the services of any of
the Company's key management personnel, or its inability to attract new
management when necessary, could have a material adverse effect upon the
Company. The Company has entered into employment agreements (which include
non-competition provisions) with certain of its officers. The Company does not
currently maintain any key person life insurance on any of its executive
officers.
CONTROL BY PRINCIPAL STOCKHOLDER
- -----------------------------------
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer, and
principal stockholder, holds approximately 25.1% of the outstanding Common
Stock, including 136,000 shares held by The Garcia Family Foundation, Inc., an
Arizona non-profit corporation. As a result, Mr. Garcia has a significant
influence upon the activities of the Company, as well as on all matters
requiring approval of the stockholders, including electing or removing members
of the Company's Board of Directors, causing the Company to engage in
transactions with affiliated entities, causing or restricting the sale or
merger of the Company, and changing the Company's dividend policy.
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK
- ------------------------------------------------------
The Company's Certificate of Incorporation authorizes the Company to issue
"blank check" Preferred Stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without stockholder approval, to issue Preferred Stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights
that could adversely affect the voting power or other rights of the holders of
the Common Stock. The Preferred Stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in
its best interests. Although the Company has no present intention of issuing
any additional shares of its authorized Preferred Stock, there can be no
assurance that the Company will not do so in the future.
REGULATION, SUPERVISION, AND LICENSING
- -----------------------------------------
The Company's operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain
and maintain certain licenses and qualifications, limit or prescribe terms of
the contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company believes that it is currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. There can
be no assurance, however, that the Company will be able to remain in
compliance with such laws, and such failure could result in fines or
interruption or cessation of certain of the business activities of the Company
and could have a material adverse effect on the operations of the Company. In
addition, the adoption of additional statutes and regulations, changes in the
interpretation of existing statutes and regulations, or the Company's entrance
into jurisdictions with more stringent regulatory requirements could have a
material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
- -----------------------------------
Approximately 5.0 million shares of Common Stock outstanding as of the date
of this Quarterly Report are "restricted securities," as that term is defined
under Rule 144 promulgated under the Securities Act. In general, under Rule
144 as currently in effect, subject to the satisfaction of certain other
conditions, if one year has elapsed since the later of the date of acquisition
of restricted shares from an issuer or an affiliate of an issuer, the acquiror
or subsequent holder is entitled to sell in the open market, within any
three-month period, a number of shares that does not exceed the greater of one
percent of the outstanding shares of the same class or the average weekly
trading volume during the four calendar weeks preceding the filing of the
required notice of sale. (A person who has not been an affiliate of the
Company for at least the three months immediately preceding the sale and who
has beneficially owned shares of Common Stock as described above for at least
two years is entitled to sell such shares under Rule 144 without regard to any
of the limitations described above.) Of the "restricted securities"
outstanding, substantially all of these shares have been held for the one-year
holding period required under Rule 144. In addition, approximately 3.4
million shares of common stock were recently registered for resale under the
Securities Act of 1933, as amended (the "Securities Act"). No predictions can
be made with respect to the effect, if any, that sales of the Common Stock in
the market or the availability of shares of Common Stock for sale under Rule
144 will have on the market price of Common Stock prevailing from time to
time. Nevertheless, the possibility that substantial amounts of Common Stock
may be sold in the public market may adversely affect prevailing market prices
for the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
- --------------------------------------
The market price of the Common Stock could be subject to significant
fluctuations in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies
in the used car sales and finance industry, changes in conditions affecting
the economy generally, analyst reports, or general trends in the industry.
TRANSACTIONS WITH FIRST MERCHANTS ACCEPTANCE CORPORATION
- -------------------------------------------------------------
On July 11, 1997, the Company entered into an agreement in principle with the
senior bank group of First Merchants Acceptance Corporation ("FMAC") to
purchase the secured debt of FMAC held by such group. The debt totals
approximately $103 million. FMAC filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code on that date. In connection with the bankruptcy
proceedings, the Company, which owns approximately 2 1/2% of FMAC's
outstanding common stock with a cost basis of $1.5 million, agreed to provide
up to $10 million of "debtor in possession" financing to FMAC, of which $3
million was outstanding at August 14, 1997. The more significant terms of the
proposed purchase of senior debt provide, among other things, for (i) purchase
by the Company of the debt at a 10% discount of the outstanding principal
amount; (ii) short-term financing by the bank group to the Company for the
purchase, with interest accruing at LIBOR plus 2% and an up-front payment by
the Company to the bank group equal to 20% of the purchase price; and (iii)
issuance of stock warrants to the bank group to purchase up to 500,000 shares
of the Company's common stock at an exercise price of $20 per share over a
thirty-month term and subject to a call feature by the Company. The purchase
is subject to certain conditions, including, but not limited to, bankruptcy
court approval, unless waived by the bank group, and execution of definitive
agreements. No assurance can be given that the foregoing transactions will be
consummated. Furthermore, no assurance can be given that the secured debt to
be purchased by the Company or the "debtor in possession" financing will be
repaid in full or that the Company will not be required to write off its $1.5
million investment in FMAC common stock as well as the professional fees
incurred in pursuing the foregoing transactions. See Part 1, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Introduction."
DATA PROCESSING AND TECHNOLOGY
- ------------------------------
The Company has dedicated significant resources to data processing and related
technologies, which management expects will enhance the Company's ability
to service loan portfolios, meet the Company's operational requirements, and
eventually reduce costs. The Company believes that its continuing investment
in data processing and technology will allow it to remain competitive in the
industry. The success of any competitor in the Sub-Prime industry, including
the Company, depends in part on its ability to continue to adapt its technology,
on a timely and cost-effective basis, to meet changing customer and industry
standards and requirements. Related to the preceding, the Company recently
converted to a new loan servicing and collection data processing system at its
Gilbert, Arizona facility which services the Company's Arizona, Nevada, and
New Mexico Company Dealership loan portfolios as well as the Third Party
Dealer loan portfolio. The system became operational in the first quarter of
1997; however, the Company continues to confront various implementation and
integration issues for the new loan servicing and collection data processing
system, which management believes have resulted in increases in both contract
delinquencies and charge offs. Delay or failure to resolve these issues could
have a material adverse affect on the Company.
The Company also services its loan portfolios on different loan servicing and
collection data processing systems in Tampa/St. Petersburg and San Antonio
which are also different from the loan servicing and collection data processing
system utilized at the Gilbert , Arizona facility. The Company expects to
migrate and convert all of its loan servicing and collection data processing
to a single loan servicing and collection data processing system which has
yet to be identified. Failure to identify and successfully migrate and
convert to a single loan servicing and data processing system could have a
material adverse affect on the Company.
The Company is dependent on its main processing facilities as well as long-
distance and local telecommunications access in order to transmit and process
information among its various facilities. The Company maintains a disaster
response plan, but a natural disaster, calamity or other significant event
that causes long-term damage to any of these facilities or that interrupts its
telecommunications networks could have a material adverse effect on the
Company. See Part 1, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations": "Allowance for Credit Losses
- - Net Charge Offs - Company Dealerships", "Net Charge Offs - Third Party
Dealerships", and "Static Pool Analysis", "Contracts Originated at Company
Dealerships", and "Contracts Purchased From Third Party Dealers."