Exhibit-99
Risk Factors
There are various risks in purchasing our securities or investing in our
business, including those described below. You should carefully consider these
risk factors together with all other information included in the Form 10-Q.
Capitalized terms not otherwise defined in this Exhibit 99 shall have the
meaning assigned to them in the Form 10-Q.
Future losses could impair our ability to raise capital or borrow money, as well
as affect our stock price.
Although we recorded earnings from continuing operations of $6.1 million for
the nine months ended September 30, 1999, we incurred a net loss of $5.7 million
in 1998. We cannot assure you that we will be profitable in future periods.
Losses in subsequent periods could impair our ability to raise additional
capital or borrow money as needed, and could decrease our stock price.
We may not be able to continue to obtain the financing we need to fund our
operations.
Our operations require large amounts of capital. We have borrowed, and will
continue to borrow, substantial amounts to fund our operations. If we cannot
obtain the financing we need on a timely basis and on favorable terms, our
business and profitability could be materially affected. We currently obtain our
financing through three primary sources:
o a revolving credit facility with General Electric Capital Corporation;
o securitization transactions; and
o loans from other sources including a $38.0 million loan secured by
residual interests held by us in respect of our securitizations (the
"Residual Loan").
Revolving Credit Facility with GE Capital. Our revolving facility with GE
Capital is our primary source of operating capital. We have pledged
substantially all of our assets to GE Capital to secure the borrowings we make
under this facility. Although this facility has a maximum commitment of $125
million, the amount we can borrow is limited by the amount of certain types of
assets that we own. In addition, we cannot borrow approximately $3 million
attributable to a guarantee. As of September 30, 1999, we owed approximately
$60.0 million under the revolving facility, and had the ability to borrow an
additional $29.8 million. The revolving facility expires in June 2000. Even if
we continue to satisfy the terms and conditions of the revolving facility, we
may not be able to extend its term beyond the current expiration date.
Securitization Transactions. We can restore capacity under the GE facility
from time to time by securitizing portfolios of finance receivables. Our ability
to successfully complete securitizations in the future may be affected by
several factors, including:
o the condition of securities markets generally;
o conditions in the asset-backed securities markets specifically;
o the credit quality of our loan contract portfolio; and
o the performance of our servicing operations.
As a result of an increase in our delinquencies, distributions to us under
the residual interests we retain in some of our securitizations are being
withheld and our cash flow reduced. In addition, we could be terminated as
servicer under some of these securitizations. These events could also affect our
ability to obtain securitization or other financing in the future or the terms
offered to us for such financing.
Contractual Restrictions. The revolving facility, the securitization
program, and our other credit facilities contain various restrictive covenants.
Under these credit facilities, we must also meet certain financial tests. Except
as otherwise noted in our Form 10-Q, we believe that we are in compliance with
the material terms and conditions of the revolving facility and our other
material credit facilities. Failure to satisfy the covenants in our credit
facilities and/or our securitization program, could preclude us from further
borrowing under the defaulted facility and could prevent us from securing
alternate sources of funds necessary to operate our business.
Recent Waivers. From time to time, we may incur technical breaches under our
material credit facilities. To the extent we incur any such breaches, we obtain
or receive waivers from the applicable lender(s). As a result of an increase in
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delinquencies, we recently obtained a waiver to a technical covenant breach
under the Residual Loan. Although we have taken actions to seek to reduce our
delinquencies, there can be no assurance that delinquencies will decline, that
future covenant breaches will not occur relating to delinquencies or other
matters, and that waivers would be obtained in such event.
We have a high risk of credit losses because of the poor creditworthiness of our
borrowers.
Substantially all of the sales financing that we extend and the contracts
that we service are with sub-prime borrowers. Sub-prime borrowers generally
cannot obtain credit from traditional financial institutions, such as banks,
savings and loans, credit unions, or captive finance companies owned by
automobile manufacturers, because of their poor credit histories and/or low
incomes. Loans to sub-prime borrowers are difficult to collect and are subject
to a high risk of loss. We have established an allowance for credit losses to
cover our anticipated credit losses. However, we cannot assure you that we have
adequately provided for such credit risks or that we will continue to do so in
the future. A significant variation in the timing of or increase in credit
losses in our portfolio would have a material adverse effect on our net
earnings.
We also operate our Cygnet dealer program, under which we provide third
party dealers who finance the sale of used cars to sub-prime borrowers with
financing primarily secured by those dealers' retail installment contract
portfolios and/or inventory. While we require third party dealers to meet
certain minimum net worth and operating history criteria before we loan money to
them, these dealers may not otherwise be able to obtain debt financing from
traditional lending institutions. We have established an allowance for credit
losses to cover our anticipated credit losses. However, we cannot assure you
that we have adequately provided for such credit risks or that we will continue
to do so in the future. Like our other financing activities, these loans subject
us to a high risk of credit losses that could have a material adverse effect on
our net earnings and ability to meet our other financing obligations.
We are affected by various industry considerations and legal contingencies.
In recent years, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation, and other events. Companies in the used vehicle
sales and financing market have also been named as defendants in an increasing
number of class action lawsuits brought by customers claiming violations of
various federal and state consumer credit and similar laws and regulations. In
addition, some of these companies have filed for bankruptcy protection. These
events:
o have lowered the value of securities of sub-prime automobile finance
companies; o have made it more difficult for sub-prime lenders to borrow money;
and o could cause more restrictive regulation of this industry.
Compliance with additional regulatory requirements may also increase our
operating expenses and reduce our profitability.
Interest rates affect our profitability.
A substantial portion of our financing income results from the difference
between the rate of interest we pay on the funds we borrow and the rate of
interest we earn on the contracts in our portfolio. While we earn interest on
the contracts we own at a fixed rate, we pay interest on our borrowings under
our GE facility at a floating rate. When interest rates increase, our interest
expense increases and our net interest margins decrease. Increases in our
interest expense that we cannot offset by increases in interest income will
lower our profitability.
Laws that limit the interest rates we can charge can adversely affect our
profitability.
We operate in many states that do impose limits on the interest rate that a
lender may charge. When a state limits the amount of interest we can charge on
our installment sales contracts, we may not be able to offset any increased
interest expense caused by rising interest rates or greater levels of borrowings
under our credit facilities. Therefore, these interest rate limitations can
adversely affect our profitability.
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Government regulation may limit our ability to recover and enforce receivables
or to repossess and sell collateral.
We are subject to ongoing regulation, supervision, and licensing under
various federal, state, and local statutes, ordinances, and regulations. If we
do not comply with these laws, we could be fined or certain of our operations
could be interrupted or shut down. Failure to comply could, therefore, have a
material adverse effect on our operations. Among other things, these laws:
o require that we obtain and maintain certain licenses and qualifications; o
limit or prescribe terms of the contracts that we originate and/or purchase; o
require specified disclosures to customers; o limit our right to repossess and
sell collateral; and o prohibit us from discriminating against certain
customers.
We believe that we are currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. We may not,
however, be able to remain in compliance with such laws. In addition, the
adoption of additional statutes and regulations, changes in the interpretation
of existing statutes and regulations, or our entry into jurisdictions with more
stringent regulatory requirements could also have a material adverse effect on
our operations.
We are subject to pending actions and investigations relating to our
compliance with various laws and regulations. While we do not believe that
ultimate resolution of these matters will result in a material adverse effect on
the Company (such as fines, injunctions or damages), there can be no assurance
in this regard.
Our computer systems may be subject to a Year 2000 date failure.
We could be affected by failures of our business systems, as well as those
of our suppliers and vendors, due to Year 2000 issues. Any failure could result
in a disruption of our collection efforts, which would impair our operations. We
have evaluated and remediated our mission critical computer systems to determine
our exposure to Year 2000 issues. We have made modifications to our computer
systems that we believe will allow them to properly process transactions
relating to the Year 2000 and beyond. Even though we believe our Year 2000
issues have been resolved, there can be no assurances that all of these
modifications have been properly made or that the modifications will not cause
other system problems. We estimate that we will spend between $2.4 million to
$2.7 million for Year 2000 evaluation, remediation, testing, and replacement. We
have spent approximately $2.4 million through September 30, 1999. We can also be
adversely affected by Year 2000 issues in the business systems of our suppliers,
vendors, and business partners, such as utility suppliers, banking partners and
telecommunication service providers. We can also be adversely affected if Year
2000 issues result in business disruptions or failures that impact our
customers' ability to make their loan payments. Failure to fully address and
resolve these Year 2000 issues could have a material adverse effect on our
operations.
We could have a system failure if our current contingency plan is not adequate.
We depend on our loan servicing and collection facilities and on
long-distance and local telecommunications access to transmit and process
information among our various facilities. We use a standard program to prepare
and store off-site backup tapes of our main system applications and data files
on a routine basis. However, we believe that we need to revise our current
contingency plan because of our recent system conversions and significant
growth. Although we are updating our contingency plan during 1999, there could
be a failure in the interim. In addition, the plan as revised may not prevent a
systems failure or allow us to timely resolve any systems failure. Also, a
natural disaster, calamity, or other significant event that causes long-term
damage to any of these facilities or that interrupts our telecommunications
networks could have a material adverse effect on our operations.
We have certain risks relating to the First Merchants transaction.
We have entered into several transactions in the bankruptcy proceedings of
First Merchants, and have certain risks in the First Merchants' bankruptcy case:
o We purchased First Merchants` senior bank debt and sold the contracts
securing the bank claims at a profit to a third party purchaser (the
"Contract Purchaser"). We guaranteed the Contract Purchaser a
specified return on the contracts with a current maximum of $8
million. Although we obtained a related guarantee from First Merchants
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secured by certain assets, there is no assurance that the First
Merchants guarantee will cover all of our obligations under our
guarantee to the Contract Purchaser.
o We have made debtor-in-possession loans to First Merchants, secured
by certain assets. We have continuing obligations under our
debtor-in-possession credit facility. We have recently negotiated a
settlement with them that has cured an asserted default and increased
our funding obligation by $2.0 million, in exchange for other
concessions. Although repayment of the DIP Facility is secured by
certain assets of First Merchants, there is no guarantee that First
Merchants can fully repay the DIP Facility.
o We have the right to 17 1/2% of recoveries on the contracts sold to
the Contract Purchaser and from certain residual interests in First
Merchants' securitized loan pools, after First Merchants pays certain
other amounts ("Excess Collections"). We entered into various
agreements to service the contracts in the securitized pools of First
Merchants and the contracts sold to the Contract Purchaser. If we
lose our right to service these contracts, our share of the Excess
Collections can be reduced or eliminated.
Each of the risks described in this section could have a material adverse
effect on our operations.
We may make acquisitions that are unsuccessful or strain or divert our
resources.
In 1999, we have completed one acquisition and have another pending. We
intend to consider additional acquisitions, alliances, and transactions
involving other companies that could complement our existing business. We may
not, however, be able to identify suitable acquisition parties, joint venture
candidates, or transaction counterparties. Additionally, even if we can identify
suitable parties, we may not be able to consummate these transactions on terms
that we find favorable.
Furthermore, we may not be able to successfully integrate any businesses
that we acquire into our existing operations. If we cannot successfully
integrate acquisitions, our operating expenses may increase in the short-term.
This increase would affect our net earnings, which could adversely affect the
value of our outstanding securities. Moreover, these types of transactions 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 our profitability. In addition to
the risks already mentioned, these transactions involve numerous other risks,
including the diversion of management attention from other business concerns,
entry into markets in which we have had no or only limited experience, and the
potential loss of key employees of acquired companies. Occurrence of any of
these risks could have a material adverse effect on us.
Increased competition could adversely affect our operations and profitability.
Although a large number of smaller companies have historically operated in
the used car sales industry, this industry has attracted significant attention
from a number of large companies. These large companies include AutoNation,
U.S.A., CarMax, and Driver's Mart. These companies have either 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. We believe 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 we do.
Increased competition in our dealership operations could result in increased
wholesale costs for used cars, decreased retail sales prices, and lower margins.
There are numerous financial services companies serving, or capable of
serving, our market. These companies include traditional financial institutions
such as banks, savings and loans, credit unions, and captive finance companies
owned by automobile manufacturers, as well as other non-traditional consumer
finance companies, many of which have significantly greater financial and other
resources than our own. Increased competition may cause downward pressure on the
interest rates that we charge. This pressure could affect the interest rates we
charge on contracts originated by our dealerships or cause us to reduce or
eliminate the acquisition discount on the contracts we purchase from third party
dealers. Either change could have a material effect on the value of our
securities.
The success of our operations depends on certain key personnel.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team. The unexpected loss of the services of any of our key
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management personnel or our inability to attract new management when necessary
could have a material adverse effect on our operations. We currently maintain
key person life insurance on our President and Chief Executive Officer, Gregory
B. Sullivan. Other than Mr. Sullivan, we do not maintain key person life
insurance on any members of our senior management team.
We may be required to issue stock in the future that will dilute the value of
our existing stock.
We have the ability to issue common stock or securities exercisable for or
convertible into common stock which may dilute the securities our existing
stockholders now hold. In particular, issuance of any or all of the following
securities may dilute the value of the securities that our existing stockholders
now hold:
o we have granted warrants to purchase a total of approximately 1.2
million shares of our common stock to various parties with exercise
prices ranging from $6.75 to $20.00 per share;
o we may issue additional warrants in connection with future transactions;
o we may issue common stock under our various stock option plans; and
o we may issue common stock in the First Merchants transaction in
exchange for an increased share of collections on certain contracts
that we service for First Merchants.
The voting power of our principal stockholder may limit your voting rights.
Mr. Ernest C. Garcia, II, our Chairman, or his affiliates, held
approximately 32% of our outstanding common stock as of September 30, 1999. As a
result, Mr. Garcia has a significant influence upon our activities as well as on
all matters requiring approval of our stockholders. These matters include
electing or removing members of our board of directors, engaging in transactions
with affiliated entities, causing or restricting our sale or merger, and
changing our dividend policy. The interests of Mr. Garcia may conflict with the
interests of our other stockholders.
There is a potential anti-takeover or dilutive effect if we issue preferred
stock.
Our Certificate of Incorporation authorizes us to issue "blank check"
preferred stock. Our Board of Directors may fix or change from time to time the
designation, number, voting powers, preferences, and rights of this stock. Such
issuances could make it more difficult for a third party to acquire us by
reducing the voting power or other rights of the holders of our common stock.
Preferred stock can also reduce the market value of the common stock.