CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS
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 securities of the Company involves certain risks. In addition
to the other information included elsewhere in this Form 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 PROFITABILITY
The Company began operations in 1992 and incurred significant operating losses
in 1994 and 1995. The Company experienced net earnings of $5.9 million in 1996
and net earnings for the nine month period ended September 30, 1997 of $5.7
million. However, the Company realized a net loss for the three month period
ended September 30, 1997 due in large part to a charge of $10.0 million
(approximately $6.0 million, net of income taxes) against the Residuals in
Finance Receivables Sold. There can be no assurance that the Company will
regain profitability in the next fiscal quarter or in future periods. See Part
1, Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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LIQUIDITY
The Company's cash and cash equivalents have decreased from $18.5 million at
December 31, 1996 to $4.4 million at September 30, 1997. This decrease is due
in large part to the Company's FMAC Secured Debt purchase and debtor in
possession loans, as well as the growth of the Cygnet Program loan portfolio.
The Company is currently in negotiations with a finance company to provide
financing for the Cygnet program and is in the process of evaluating its
alternatives for the financing of the FMAC Secured Debt and debtor in
possession loans.
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, substantially all of the Company's
securitization transactions have been completed under a 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. Beginning with the third fiscal quarter of 1997, the
Company expanded the Securitization Program to include CRC II (defined below)
and sales of CRC II securities through private placement of securities to
investors other than Sun America. 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. During the three month period ended September 30, 1997, the
Company recorded a charge of $10.0 million ($6.0 million, net of income taxes)
against the carrying value of the retained portion of its securitization. The
charge resulted from an upward revision in the Company's net loss assumptions
related to the underlying contract portfolios supporting the Company's
retained securitization assets. Although the Company believes the charge is
adequate to adjust the assumptions to a level which will more closely
approximate future net losses in the underlying contract portfolio, there can
be no assurance in that regard. To the extent that cash flows are deficient,
charge-offs of finance receivables exceed the revised estimates, or the
revised assumptions that were applied 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") and Champion Receivables Corporation II ("CRC
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II") (collectively referred to as "Securitization Subsidiaries"), are the
Company's wholly-owned special purpose "bankruptcy remote entities". Their
assets include residuals in finance receivables and investments held in trust,
in the amounts of $25.8 million and $15.1 million, respectively, at September
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."
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 $100.0 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 86.0% of the principal balance of eligible Third Party
Dealer contracts. The Revolving Facility expires in December 1998. 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. In addition, the
Company has established a Securitization Program pursuant to which the Company
is subject to numerous terms and conditions. Pursuant to the Securitization
Program, the Company and SunAmerica entered into an agreement under which
SunAmerica would purchase $175.0 million of certificates secured by contracts.
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. During the three month period ended September 30, 1997, the
Company completed a securitization transaction with private investors. 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 pay in full the FMAC Bank Group (defined below) note
payable of approximately $55.1 million, or to fully implement the Cygnet
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."
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 15.2% of contract principal balances as of
September 30, 1997, to cover anticipated credit losses on the contracts
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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 September 30, 1997 was 5.6%. 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 nine
months ended September 30, 1997 were 19.7%. 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
or pay in full the Bank Group debt which matures in February 1998. 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 three significant acquisitions (Seminole,
EZ Plan, and Kars) and intends to consider additional acquisitions, alliances
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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. As of September 30, 1997, the Company had Goodwill totaling
approximately $17.2 million, the components of which will be amortized over a
period of 15 to 20 years. 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.
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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 a
disruptive effect on the market for securities of sub-prime automobile finance
companies, to result in a tightening of credit to the sub-prime markets, and
could lead to enhanced regulatory oversight. Furthermore, companies in the
used vehicle financing market have been named as a defendant in 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 a named defendant in 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 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 Program.
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently located in Arizona, Georgia,
California, 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.
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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.
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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
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Securities Act of 1933, as amended (the "Securities Act"). 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 has been and may continue to be volatile
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
First Merchants Acceptance Corporation ("FMAC") filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code on July 11, 1997 ("Bankruptcy
Case"). In connection with the Bankruptcy Case, the Company, which owns
approximately 2 1/2% of FMAC's outstanding common stock with a cost basis of
approximately $1.5 million, agreed to provide up to $10 million of "debtor in
possession" financing to FMAC, of which approximately $3.8 million was
outstanding at September 30, 1997. On August 20, 1997, the Company acquired
approximately 78% of the senior secured debt ("Secured Debt") of FMAC from
certain members of the senior bank group (Bank Group) that held such debt.
The Senior Debt totaled approximately $97.8 million. The more significant
terms of the purchase of the Senior Debt included, among other things, the (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
389,800 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.
Subsequent to September 30, 1997, the Company entered into a contract to
acquire, subject to various conditions that have not yet been satisfied, the
remaining approximately 22% of the Secured Debt from two (2) unrelated third
parties (the "Sellers"). The more significant terms of the purchase include,
among other things, (i) the Company's right to purchase by an exercise of a
call right that expires on February 20, 1998 (the "Call Period"), and which is
followed by a put right by the Sellers that expires on March 15, 1998 (the
"Put Period"); (ii) a purchase price equal to ninety-five percent (95%) during
the Call Period (and one hundred percent (100%) during the Put Period) of the
outstanding principal balance of the purchased Secured Debt, plus interest on
such purchase price from November 12, 1997 through the closing date of such
purchase at approximately 8.0% per annum, less all payments received by the
Sellers with respect to the purchased Secured Debt through the date of
closing; and (iii) the issuance of stock warrants to the Sellers to purchase
up to 110,200 shares of the Company's common stock at an exercise price of
$20.00 per share over a 36 month term and subject to a call feature of the
Company.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
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 participant in the Sub-Prime industry, including
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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, although conditions have improved, 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 fully resolve these issues could have a material
adverse affect on the Company.
The Company also services its loan portfolios on loan servicing and collection
data processing systems in Tampa/St. Petersburg, San Antonio, and Dallas which
are 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 has commenced a study of its computer systems in order to assess
its exposure to year 2000 issues. The Company expects to make the necessary
modifications or changes to its computer information systems to enable proper
processing of transactions relating to the year 2000 and beyond. The Company
will evaluate appropriate courses of action, including replacement of certain
systems whose associated costs would be recorded as assets and subsequently
amortized. However, there can be no assurance that year 2000 costs and
expenses will not have a material adverse impact 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."