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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-11416
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 753-6800
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /x / No / /
As of August 20, 1999, the registrant had 20,107,501 common shares outstanding.
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of June 30, 1999 and
December 31, 1998.
Condensed consolidated statements of operations for the three
and six month periods ended June 30, 1999 and 1998.
Condensed consolidated statements of cash flows for the six
month periods ended June 30, 1999 and 1998.
Notes to condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
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PART I - FINANCIAL INFORMATION
<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
June 30, December 31,
-------------------- --------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 899 $ 1,940
Restricted cash 1,619 1,619
Contracts held for sale (note 2) 90,851 165,582
Servicing fees receivable 5,830 11,148
Residual interest in securitizations (note 3) 220,378 217,848
Furniture and equipment, net 3,663 4,272
Deferred financing costs 2,819 2,817
Investment in unconsolidated affiliates 2,154 4,145
Related party receivables 1,031 3,268
Other assets 31,433 19,323
-------------------- --------------------
$ 360,677 $ 431,962
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses $ 18,365 $ 9,267
Warehouse line of credit 72,801 151,857
Taxes payable 22,471 29,068
Capital lease obligation 1,839 2,132
Notes payable 3,644 2,557
Residual financing 31,625 33,000
Subordinated debt 70,000 65,000
Related party debt 20,000 20,000
-------------------- --------------------
240,745 312,881
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 20,107,501 and 15,658,501
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 62,421 52,533
Retained earnings 57,511 66,548
-------------------- --------------------
119,932 119,081
-------------------- --------------------
$ 360,677 $ 431,962
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Gain (loss) on sale of contracts, net (note 4) $ (4,877) $ 9,093 $ (6,436) $ 19,337
Interest income (note 5) 10,730 14,524 25,331 23,596
Servicing fees 8,029 5,896 15,947 10,992
Other income (loss) (476) 211 (611) 581
------------------ ----------------- ------------------ -----------------
13,406 29,724 34,231 54,506
------------------ ----------------- ------------------ -----------------
EXPENSES:
Employee costs 7,850 6,954 16,094 12,350
General and administrative 4,799 5,044 10,555 9,576
Interest 10,407 4,614 17,674 8,529
Marketing 1,103 2,085 2,986 2,533
Occupancy 734 498 1,444 979
Depreciation and amortization 361 270 894 603
Related party consulting fees 77 19 175 38
------------------ ----------------- ------------------ -----------------
25,331 19,484 49,822 34,608
------------------ ----------------- ------------------ -----------------
Income (loss) before income taxes (11,925) 10,240 (15,591) 19,898
Income taxes (5,015) 4,315 (6,554) 8,370
------------------ ----------------- ------------------ -----------------
Net income (loss) $ (6,910) $ 5,925 $ (9,037) $ 11,528
================== ================= ================== =================
Earnings (loss) per share (note 6):
Basic $ (0.37) $ 0.39 $ (0.52) $ 0.76
Diluted $ (0.37) $ 0.36 $ (0.52) $ 0.70
Number of shares used in computing
earnings (loss)per share (note 6):
Basic 18,773 15,215 17,224 15,215
Diluted 18,773 16,762 17,224 16,683
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,037) $ 11,528
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 894 603
Amortization of NIRs 14,790 10,424
Amortization of deferred financing costs 310 162
Provision for credit losses 2,593 10,004
NIR gains recognized -- (22,885)
Gain on sale of subsidiary -- (56)
Equity net (income) loss in unconsolidated affiliates 1,012 (322)
Net deposits into trusts (17,321) (26,979)
Changes in assets and liabilities:
Purchases of contracts held for sale (217,454) (592,624)
Liquidation of contracts held for sale 289,592 413,982
Net change in warehouse lines of credit (79,056) 171,559
Other assets 2,795 (6,161)
Accrued taxes and expenses 2,500 14,394
------------------ ------------------
Net cash used in operating activities (8,382) (16,371)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment in unconsolidated affiliate 979 --
Related party receivables (11) (1,113)
Repayment of related party receivables 2,248 165
Investment in unconsolidated affiliate -- (65)
Purchases of furniture and equipment (27) (1,157)
Net cash from sale of subsidiary -- 381
------------------ ------------------
Net cash provided by (used in) investing activities 3,189 (1,789)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in residual financing -- 16,000
Issuance of subordinated debt 5,000 --
Issuance of notes payable 1,395 1,453
Repayment of residual financing debt (1,375) --
Repayment of capital lease obligations (292) (267)
Repayment of notes payable (308) (332)
Payment of financing costs (312) --
Issuance of common stock 44 --
Exercise of options and warrants -- 543
------------------ ------------------
Net cash provided by financing activities 4,152 17,397
------------------ ------------------
Decrease in cash (1,041) (763)
Cash at beginning of period 1,940 1,745
------------------ ------------------
Cash at end of period $ 899 $ 982
================== ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 16,634 $ 7,842
Income taxes $ 43 $ 860
Supplemental disclosure of non-cash investing and
financing activities:
Furniture and equipment acquired through capital leases $ -- $ 482
Issuance and revaluation of common stock warrants 9,844 --
Sale of PIC Leasing, Inc.
Net assets sold $ -- $ 705
Net assets retained -- (155)
Gain on sale of subsidiary -- 56
------------------ ------------------
Cash received from sale of subsidiary -- 606
Less: cash relinquished upon disposition -- (225)
------------------ ------------------
Net cash received from sale of subsidiary $ -- $ 381
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements have been
reclassified for comparability to current period presentation. Results for the
three and six month periods ended June 30, 1999, are not necessarily indicative
of the operating results to be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Alton Receivables Corp., CPS
Receivables Corp., CPS Marketing, Inc., CPS Funding Corp., and CPS Warehouse
Corp. The consolidated financial statements also include the accounts of SAMCO
Acceptance Corp. ("SAMCO"), LINC Acceptance Company, LLC ("LINC") and CPS
Leasing, Inc., each of which is 80% owned by the Company. All significant
intercompany transactions and balances have been eliminated. Investments in
affiliates that are not majority owned are reported using the equity method.
During the six month period ended June 30, 1999, the Company terminated all
operations of SAMCO and LINC.
CONTRACTS HELD FOR SALE
Contracts held for sale include automobile installment sales contracts
(generally, "Contracts") on which interest is precomputed and added to the
principal amount financed. The interest on precomputed Contracts is included in
unearned financed charges. Unearned financed charges are amortized over the
remaining period to contractual maturity, using the interest method. Contracts
held for sale are stated at the lower of cost or market value. Market value is
determined by purchase commitments from investors and prevailing market prices.
Gains and losses are recorded as appropriate when Contracts are sold. The
Company considers a transfer of Contracts, where the Company surrenders control
over the Contracts, a sale to the extent that consideration, other than
beneficial interests in the transferred Contracts, is received in exchange for
the Contracts.
ALLOWANCE FOR CREDIT LOSSES
The Company provides an allowance for credit losses that management
believes provides adequately for known and inherent losses that may develop in
the Contracts held for sale. Provision for losses are charged to gain on sale of
Contracts. Charge-offs, net of recoveries, are charged to the allowance.
Management evaluates the adequacy of the allowance by examining current
delinquencies, the characteristics of the portfolio, the value of underlying
collateral, and general economic conditions and trends.
CONTRACT ACQUISITION FEES AND DISCOUNTS
Upon purchase of a Contract from an automobile dealer ("Dealer"), the
Company generally charges the Dealer an acquisition fee or purchases the
Contract at a discount from its face value (some Contracts are purchased at face
value). The acquisition fees and discounts associated with Contract purchases
are deferred until the Contracts are sold. At that time the deferred acquisition
fee or discount is recognized as a component of the gain on sale.
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RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS
The Company historically has purchased Contracts with the primary
intention of reselling them in securitization transactions as asset-backed
securities. The securitizations generally have been structured as follows:
First, the Company sells a portfolio of Contracts to a wholly owned subsidiary
("SPS"), which has been established for the limited purpose of buying and
reselling the Company's Contracts. The SPS then transfers the same Contracts to
either a grantor trust or an owner trust (the "Trust"). The Trust in turn issues
interest-bearing asset-backed securities (the "Certificates"), generally in an
amount equal to the aggregate principal balance of the Contracts. The Company
typically sells these Contracts to the Trust at face value and without recourse,
except that representations and warranties similar to those provided by the
Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Certificates issued by the Trust; the proceeds from the
sale of the Certificates are then used to purchase the Contracts from the
Company. The Company purchases a financial guaranty insurance policy,
guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. The agreements governing the
securitization transactions (collectively referred to as the "Servicing
Agreements") require that the initial deposits to the Spread Accounts be
supplemented by a portion of collections from the Contracts until the Spread
Accounts reach specified levels, and then maintained at those levels. The
specified levels are generally computed as a percentage of the principal amount
remaining unpaid under the related Certificates. The specified levels at which
the Spread Accounts are to be maintained will vary depending on the performance
of the portfolios of Contracts held by the Trusts and on other conditions, and
may also be varied by agreement among the Company, the SPS, the Certificate
Insurer and the trustee. Such levels have increased and decreased from time to
time based on performance of the portfolios, and have also been varied by
agreement. The specified levels applicable to the Company's sold pools increased
materially in 1998 and have recently been decreased. See note 7 - "Liquidity"
for a discussion of certain pre-conditions to the effectiveness of such
decrease.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the ownership interest that the Company retains in Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account and (b) the net interest receivables ("NIRs"). NIRs
represent the estimated discounted cash flows to be received from the Trust in
the future, net of principal and interest payable with respect to the
Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the
Certificates and the Residuals retained based on the relative fair values of
those portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as "held-for-trading"
securities. The Company is not aware of an active market for the purchase or
sale of interests such as the Residuals, and accordingly, the Company determines
the estimated fair value of the Residuals by discounting the amount and timing
of anticipated cash flows released from the Spread Account (the cash out
method), using a discount rate that the Company believes is appropriate for the
risks involved. For that valuation, the Company has used an effective discount
rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
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<PAGE>
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the Servicing Agreements. If the amount of cash
required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and the related Spread Account is at its required level, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization. If
the Spread Account balance is not at the required credit enhancement level, then
the excess cash collected is retained in the Spread Account until the specified
level is achieved. The cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Servicing Agreements. Spread
Account balances are held by the Trusts on behalf of the Company as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly
greater than the pass through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In determining
the value of the Residuals described above, the Company must estimate the future
rates of prepayments, delinquencies, defaults and default loss severity as they
affect the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effects of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
the original estimate, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company during 1998 established a
$7.8 million allowance for losses on the Residuals, which did not change during
the six month period ended June 30, 1999.
(2) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- --------------------
(in thousands)
<S> <C> <C>
Gross receivable balance................................................ $ 98,158 $ 183,876
Unearned finance charges................................................ (3,814) (10,949)
Deferred acquisition fees and discounts................................. (2,108) (4,594)
Allowance for credit losses............................................. (1,385) (2,751)
-------------------- --------------------
Net contracts held for sale............................................. $ 90,851 $ 165,582
==================== ====================
</TABLE>
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<PAGE>
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------- ---------------------
(in thousands)
<S> <C> <C>
Cash, commercial paper, US government securities and other qualifying
investments (Spread Account)............................................ $ 146,574 $ 130,394
NIRs.................................................................... 40,010 54,800
Over collateralization.................................................. 33,080 31,836
Funds held by investor.................................................. 511 480
Investment in subordinated certificates ................................ 203 338
--------------------- ---------------------
Residual interest in securitizations:................................... $ 220,378 $ 217,848
===================== =====================
</TABLE>
The following table presents the activity of the NIRs:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period........... $ 44,530 $ 50,910 $ 54,800 $ 45,112
NIR gains recognized................... -- 12,135 -- 22,885
Amortization of NIRs................... (4,520) (5,472) (14,790) (10,424)
------------------ ------------------ ------------------ ------------------
Balance, end of period................. $ 40,010 $ 57,573 $ 40,010 $ 57,573
================== ================== ================== ==================
</TABLE>
The following table presents estimated remaining undiscounted credit
losses included in the fair value estimated of the Residuals as a percentage of
the Company's servicing portfolio subject to recourse provisions:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(in thousands)
<S> <C> <C>
Undiscounted estimated credit losses.............................................. $ 119,369 $ 169,110
================= =================
Servicing subject to recourse provisions.......................................... $ 1,077,069 $ 1,362,801
================= =================
Undiscounted estimated credit loses as percentage of servicing subject to recourse
Provisions................................................................. 11.08% 12.41%
================= =================
</TABLE>
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(4) GAIN ON SALE OF CONTRACTS
The following table presents components of net gain (loss) on sale of
Contracts:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gains (loss) recognized on sale........ $ (9,273) $ 12,135 $ (9,273) $ 22,885
Deferred acquisition fees and discounts 5,851 5,386 5,851 8,311
Expenses related to sales.............. (240) (961) (421) (1,855)
Provision for credit losses............ (1,215) (7,467) (2,593) (10,004)
----------------- ----------------- ----------------- -----------------
Net gain (loss) on sale of contracts... $ (4,877) $ 9,093 $ (6,436) $ 19,337
================= ================= ================= =================
</TABLE>
(5) INTEREST INCOME
The following table presents the components of interest income:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Interest on Contracts held for sale $ 11,859 $ 10,793 $ 24,518 $ 18,632
Residual interest income......... 3,391 9,203 15,603 15,388
Amortization of NIRs............. (4,520) (5,472) (14,790) (10,424)
----------------- ----------------- ----------------- -----------------
Net interest income.............. $ 10,730 $ 14,524 $ 25,331 $ 23,596
================= ================= ================= =================
</TABLE>
(6) EARNINGS (LOSS) PER SHARE
Diluted loss per share for the three and six month periods ended June
30, 1999, was calculated using the weighted average number of shares outstanding
for the related period. Diluted earnings per share for the three and six month
periods ending June 30, 1998, was calculated using the weighted average number
of diluted common shares outstanding including common stock equivalents which
consist of certain outstanding dilutive stock options and warrants and
incremental shares attributable to conversion of certain subordinated debt. The
following table reconciles the number of shares used in the computations of
basic and diluted earnings (loss) per share for the three and six month periods
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding
during the period used to compute basic earnings per share 18,773 15,215 17,224 15,215
Incremental common shares attributable to exercise of
outstanding options and................................ - - 801 - - 722
Incremental common shares attributable to conversion
of subordinated debt...................................... - - 746 - - 746
--------------- --------------- --------------- ---------------
Number of common shares used to compute diluted
earnings (loss) per share................................. 18,773 16,762 17,224 16,683
=============== =============== =============== ===============
</TABLE>
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<PAGE>
If the anti-dilutive effects of common stock equivalents were not
considered, additional shares included in diluted loss per share calculation for
the three and six month periods ended June 30, 1999, would have included an
additional 1.0 million and 378,000, respectively, from outstanding stock options
and warrants and an additional 2.4 million from incremental shares attributable
to the conversion of certain subordinated debt, for an aggregate total of
approximately 22.2 million diluted shares for the three month period ending June
30, 1999 and 20.0 million diluted shares for the six month period ending June
30, 1999.
(7) LIQUIDITY
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been amounts borrowed under its various warehouse lines,
servicing fees on portfolios of Contracts previously sold, proceeds from the
sales of Contracts, customer payments of principal and interest on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary
uses of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts and income taxes. As a result, the Company has been dependent
on its warehouse lines of credit to purchase Contracts, and on the availability
of capital from outside sources in order to finance its continued operations. As
of the date of this report, the Company is unable to borrow under any warehouse
line of credit (due to certain defaults discussed below), and has not received
any material releases of cash from Spread Accounts since June 1998. The
inability to borrow and lack of releases have resulted in a liquidity
deficiency. The Company's plans for remedying that deficiency are discussed
below, after a review of the operating sources and uses of cash for the six
month period ended June 30, 1999.
Net cash used in operating activities was $8.4 million during the six
month period ended June 30, 1999, compared to $16.4 million for the six month
period ended June 30, 1998. Net cash deposited into trusts was $17.3 million, a
decrease of $9.7 million, or 35.8%, over net cash deposited into trusts in the
six month period ended June 30, 1998.
During the six month period ended June 30, 1999, the Company did not
complete a securitization transaction, and therefore, did not use any cash for
initial deposits to Spread Accounts, compared to $17.1 million used during the
six month period ended June 30, 1998. Cash used for subsequent deposits to
Spread Accounts for the six month period ended June 30, 1999, was $18.0 million,
a decrease of $7.7 million, or 30.0%, over cash used for subsequent deposits to
Spread Accounts in the six month period ended June 30, 1998. Such subsequent
deposits into Spread Accounts in the six month period ended June 30, 1999,
include $1.2 million of cash used to pay down certain senior series of
Certificates to create over-collateralization. "Over-collateralization," as used
herein, means that the principal amount payable on the underlying automobile
purchase contracts is greater than the total principal amount payable on the
Certificates issued by the Trust. Cash released from Spread Accounts for the six
month period ended June 30, 1999, was $665,000, a decrease of $15.2 million, or
95.8%, over cash released from Spread Accounts in the six month period ended
June 30, 1998. Changes in deposits to and releases from Spread Accounts are
affected by the relative size, seasoning and performance of the various pools of
sold Contracts that make up the Company's Servicing Portfolio.
As of June 30, 1999, 15 of the 21 Trusts had incurred cumulative net
losses as a percentage of the original Contract balance or average delinquency
ratios in excess of the predetermined levels specified in the respective
Servicing Agreements. Accordingly, pursuant to the Servicing Agreements, the
specified levels applicable to the Company's Spread Accounts were increased. Due
to cross collateralization provisions of the Servicing Agreements, the increased
specified levels are applicable to 19 of the Company's 21 Trusts. The higher
requisite Spread Account levels range from 30% to 100% of the outstanding
principal balance of the Certificates issued by the related Trusts. In addition
to requiring higher Spread Account levels, the Servicing Agreements provide the
Certificate Insurer with certain other rights and remedies, some of which have
been waived on a monthly basis by the Certificate Insurer. Increased specified
levels for the Spread Accounts have been in effect from time to time in the
past, including the entire period from June 1998 to the present. As a result of
the increased Spread Account specified levels and cross collateralization
provisions, excess cash flows that would otherwise have been released to the
Company instead have been retained in the Spread Accounts to bring the balance
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of those Spread Accounts up to a higher level. Due to the increase in the Spread
Account requirements, there have been no significant releases of cash from the
Trusts since June 1998. Funding such balance increases has materially increased
the Company's capital requirements, while the absence of cash releases has
materially decreased its liquidity. As a result of the increased specified
levels applicable to the Spread Accounts, approximately $47.7 million of cash
that would otherwise have been available to the Company has been delayed and
retained in the Spread Accounts as of June 30, 1999.
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases discussed below), the required level of initial Spread
Account deposits, and the extent to which the Spread Accounts either release
cash to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 has materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999 and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has not purchased any of
such additional notes.
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
In April 1999 the Company entered into an amendment agreement (the
"Amendment") with the Certificate Insurer of the Company's asset-backed
securities to cap the amount of cash retained in the Spread Accounts at 21% of
the outstanding securities balance for 19 of the Company's 21 securitized pools,
computed on a pool by pool basis. The Amendment is subject to certain
performance measures that may result in an increase in the maximum level to 25%
of the outstanding principal balance of such Certificates. The effectiveness of
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the Amendment is contingent upon approval by the holders of the subordinated
Certificates issued by the related Trusts, and certain other conditions. As of
July 31, 1999, the aggregate Spread Account balance of the related 19 Trusts was
19.2% of the outstanding principal balance of the securities. That percentage
should increase as additional collections are deposited into the Spread
Accounts, and as the principal of the related asset-backed securities is paid
down. The Company is in discussions with the Certificate Insurer regarding
proposed revisions to the Amendment, which would clarify its effect, and provide
assurances requested by certain holders of the subordinated Certificates. There
can be no assurance that such revisions will be agreed to.
As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below, and expects to purchase Contracts only on a flow
basis in the remainder of 1999. The reduction in the amount of Contracts
purchased for the Company's own account has materially reduced the Company's
capital requirements.
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to liquidate its existing portfolio of Contracts held for sale, (2) to
increase the quantity of Contracts that it purchases and sells on a flow basis,
thus increasing the fees that it receives in connection with such purchases and
sales, and (3) to await releases of cash from its Spread Accounts, pursuant to
the Amendment. There can be no assurance that this plan will be successful.
During the second quarter, the Company sold, on a servicing released
basis, $234.4 million of its Contracts held for sale. As of the date of this
report, the Company is engaged in negotiations regarding the sale of all or
substantially all of its remaining Contracts held for sale. Such sales are
expected to be on a servicing released basis, and the Company will recognize a
loss upon such sales. The Company expects to effect such sales at an aggregate
cash price in excess of the indebtedness outstanding under its warehouse line of
credit. To the extent that it is successful in doing so, the sales would release
cash to the Company, which would be applied to meet in part the Company's
liquidity and capital requirements identified herein. Substantially all of the
Contracts that the Company proposes to sell are pledged to the lender under the
Company's warehouse line of credit. That lender on August 4, 1999, declared the
line to be in default, and has taken the position that it is not obligated to
release its interest in any of the pledged Contracts unless it receives adequate
assurances that it will be repaid all of the indebtedness outstanding under the
warehouse line. Under the terms of the agreements related to the LLCP Notes and
certain outstanding senior secured indebtedness of the Company (the "Senior
Secured Line"), the consent of those respective lenders is also required to a
sale by the Company of any material assets outside the ordinary course of
business. Such lenders' consents to the proposed sales of Contracts may or may
not be granted, depending on such lenders' evaluation of the proposed sale.
Although the Company believes that the lenders will consent to the sales as
proposed by the Company, there can be no assurance that such consents will be
forthcoming.
The Company's ability to increase the quantity of Contracts that it
purchases and sells on a flow basis will be subject to general competitive
conditions and other factors.
Obtaining release of cash from the Spread Accounts is dependent on the
Amendment's becoming effective, and on collections from the related Trusts
generating sufficient cash to bring the Spread Accounts to the amended specified
levels. Effectiveness of the Amendment, in turn, is dependent on the Company's
obtaining consents from holders of the subordinated Certificates issued by the
related Trusts, and on certain other conditions. The existing terms of the
Senior Secured Line require that any such releases be used to repay principal
outstanding under that line. The Company has commenced discussions with the
holders of the subordinated Certificates and with the senior secured lenders
regarding the consents and amendments that would be necessary to allow the
Company to receive cash released from the Spread Accounts, but there can be no
assurance that the necessary consents and amendments will be obtained and agreed
to.
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The Company is also exploring additional financing possibilities,
focussing on issuance of additional secured debt. Although such explorations
have involved discussions with, and expressions of interest from, various
investment banks, there can be no assurance that any such transactions will take
place.
(8) SUBSEQUENT EVENTS
On July 22, 1999, Bank of America commenced a lawsuit against the
Company in the Superior Court of California, Orange County, seeking repayment of
approximately $3 million advanced to the Company under an overdraft line of
credit, plus interest, costs and attorneys' fees. The Company and Bank of
America have entered into a settlement agreement, pursuant to which the Company
shall repay all amounts owing, in specified installments through November 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consumer Portfolio Services, Inc. and its subsidiaries (collectively,
the "Company") primarily engage in the business of purchasing, selling and
servicing retail automobile installment sale contracts ("Contracts") originated
by automobile dealers ("Dealers") located throughout the United States. In
recent months, the Company has suspended its solicitation of Contract purchases
in 20 states, and as of the date of this report is active in 29 states. There
can be no assurance as to resumption of Contract purchasing activities in other
states. Through its purchase of Contracts, the Company provides indirect
financing to Dealer customers with limited credit histories, low incomes or past
credit problems, who generally would not be expected to qualify for financing
provided by banks or by automobile manufacturers' captive finance companies.
The major components of the Company's revenue are gains recognized on
the sale or securitization of its Contracts, servicing fees earned on Contracts
sold in securitizations, interest earned on Contracts held for sale, and fees
earned upon sale of Contracts that were purchased on a flow basis. Because the
servicing fees are dependent in part on the collections received on sold
Contracts, the Company's income is affected by losses incurred on Contracts,
whether such Contracts are held for sale or have been sold in securitizations.
The Company has purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities. From
late May 1999 to the present, the Company has purchased Contracts on a flow
basis for a third party; that is, the Company purchases a Contract from a
Dealer, and sells the Contract the next day to the third party for the same
price the Company paid. The Company also receives from the third party a fee for
its services. The Company retains no interest in such Contracts, and neither
services such Contracts nor earns a servicing fee.
Although the Company has been unable to sell Contracts in a
securitization transaction since December 1998, it does plan to securitize in
the future, as to which there can be no assurance. The Company's securitization
structure has been as follows:
First, the Company sells a portfolio of Contracts to a wholly owned
subsidiary ("SPS"), which has been established for the limited purpose of buying
and reselling the Company's Contracts. The SPS then transfers the same Contracts
to either a grantor trust or an owner trust (the "Trust"). The Trust in turn
issues interest-bearing asset-backed securities (the "Certificates"), generally
in a principal amount equal to the aggregate principal balance of the Contracts.
The Company typically sells these Contracts to the Trust at face value and
without recourse, except that representations and warranties similar to those
provided by the Dealer to the Company are provided by the Company to the Trust.
One or more investors purchase the Certificates issued by the Trust; the
proceeds from the sale of the Certificates are then used to purchase the
Contracts from the Company. The Company purchases a financial guaranty insurance
policy, guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. The agreements governing the
securitization transactions (collectively referred to as the "Servicing
Agreements") require that the initial deposits to the Spread Accounts be
supplemented by a portion of collections from the Contracts until the Spread
Accounts reach specified levels, and then maintained at those levels. The
specified levels are generally computed as a percentage of the principal amount
remaining unpaid under the related Certificates. The specified levels at which
the Spread Accounts are to be maintained will vary depending on the performance
of the portfolios of Contracts held by the Trusts and on other conditions, and
may also be varied by agreement among the Company, the SPS, the Certificate
Insurer and the trustee. Such levels have increased and decreased from time to
time based on performance of the portfolios, and have also been varied by
agreement. The specified levels applicable to the Company's sold pools increased
materially in 1998. The Company and the Certificate Insurer have entered into an
agreement to decrease such levels, as is discussed under the heading "Liquidity
and Capital Resources." There can be no assurance that such agreement will take
effect.
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At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the ownership interest that the Company retains in the Contracts sold
in the securitization. That retained interest (the "Residual") consists of (a)
the cash held in the Spread Account and (b) the net interest receivables
("NIRs"). NIRs represent the estimated discounted cash flows to be received by
the Trust in the future, net of principal and interest payable with respect to
the Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the
Certificates and the Residuals retained based on the relative fair values of
those portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as "held-for-trading"
securities. The Company is not aware of an active market for the purchase or
sale of interests such as the Residuals, and accordingly, the Company determines
the estimated fair value of the Residuals by discounting the amount and timing
of anticipated cash flows released from the Spread Account (the cash out
method), using a discount rate that the Company believes is appropriate for the
risks involved. For that valuation, the Company has used an effective discount
rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the Servicing Agreements. If the amount of cash
required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company, or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization,
that is, to reduce the aggregate principal balance of outstanding Certificates
below the aggregate principal amount of the related automotive receivables. If
the Spread Account balance is not at the required credit enhancement level, then
the excess cash collected is retained in the Spread Account until the specified
level is achieved. The cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Servicing Agreements. Spread
Account balances are held by the Trusts on behalf of the Company as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly
greater than the rates payable on the Certificates. Accordingly, the Residuals
described above are a significant asset of the Company. In determining the value
of the Residuals described above, the Company must estimate the future rates of
prepayments, delinquencies, defaults and default loss severity as they affect
the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effect of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
originally estimated, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company has established a provision
for future losses on the Residuals.
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The structure described above is applicable to securitization
transactions conducted at least once quarterly from June 1994 through December
1998. The Company did not sell any Contracts in securitization transactions
during the six month period ended June 30, 1999, and there can be no assurance
as to when it will next sell Contracts using the structure described above.
During the quarter ended June 30, 1999, the Company has changed its
basic system of doing business. Previously, the Company would acquire Contracts
for its own account, borrowing from 88% to 97% of the principal balance of such
Contracts under "warehouse" lines of credit. Periodically (approximately once
every quarter) the Company would then sell most or all of the recently acquired
Contracts in a securitization transaction as described above. In such a sale,
the Company would retain (1) a residual ownership interest in the Contracts
sold, (2) the obligation to service the Contracts sold, and (3) the right to
receive servicing fees. At the end of March 1999, the Company learned that it
would be unable to sell Contracts in securitization transactions for an
indeterminate period. Accordingly, the Company commenced purchasing Contracts
for immediate re-sale to a third party, which third party purchases the
Contracts in turn on a daily basis. In this arrangement, the Company retains no
residual interest in the Contracts, has no servicing obligation, and receives no
servicing fee. For its services in acquiring Contracts for purchase, the Company
receives a per-Contract fee from the third party.
RESULTS OF OPERATIONS
The three month period ended June 30, 1999 compared to the three month period
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ended June 30, 1998
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REVENUES. During the three months ended June 30, 1999, revenues
decreased $16.3 million, or 54.9%, compared to the three month period ended June
30, 1998. Gain on sale of Contracts decreased by $14.0 million, or 153.6%, from
a $9.1 million gain on sale in the second quarter of 1998 to a $4.9 million loss
in the second quarter of 1999. The decrease in gain on sale is due to the
Company selling Contracts only on a servicing released basis and thus not
recording any NIR gains during the period. During the three month period ended
June 30, 1999, the Company sold $234.4 million of Contracts on a servicing
released basis, that is, with no residual interest retained, with no servicing
obligation, and with no right to receive a servicing fee. That sale resulted in
a net loss of approximately $9.3 million. Expenses of approximately $240,000
were incurred related to previous securitization transactions, including the
amortization of a warrant issued to the Certificate Insurer in November 1998. In
addition, for the three month periods ended June 30, 1999 and 1998, the Company
charged against gain on sale $1.2 million and $7.5 million, respectively, of
provision for losses on Contracts held for sale. The Company plans to sell,
within the third quarter of 1999 and on a servicing released basis,
substantially all of the remainder of its portfolio of Contracts held for sale.
Although there can be no assurance as to whether such sales will take place or
the exact terms thereof, the Company anticipates that it will incur a loss on
such sales. Interest income decreased by $3.8 million, or 26.1%, and
represented 79.9% of total revenues for the three month period ended June 30,
1999. The decrease is primarily due to the Company not selling any Contracts in
securitization structures and an increase in the amortization of NIRs in
accordance with the seasoning of the underlying securitized pools, as compared
to the same period in the prior year. That decrease in average aggregate
balance, in turn, was due primarily to the Company selling the majority of its
Contracts held for sale during the second quarter. As that sale took place in
the latter part of the quarter, and as the Company anticipates selling most or
all of its remaining Contracts held for sale in the third quarter, interest
income can be expected to decrease further in future quarters.
Servicing fees increased by $2.1 million, or 36.2%, and represented
59.9% of total revenues. The increase in servicing fees is due to the increase
in the servicing portfolio. As of June 30, 1999, the Company was earning
servicing fees on 128,150 sold Contracts with aggregate outstanding principal
balances approximating $1,307.9 million, compared to 98,772 Contracts with
aggregate outstanding principal balances approximating $1,048.6 million as of
June 30, 1998. In addition to the $1,307.9 million in sold Contracts, on which
servicing fees were earned, the Company was holding for sale and servicing an
additional $98.8 million in Contracts, for an aggregate total servicing
portfolio of $1.4 billion. The Company is not currently acquiring Contracts for
its servicing portfolio, and is actively seeking to sell those Contracts in its
servicing portfolio that it holds for its own account. In addition, those
Contracts that remain in the Company's servicing portfolio are self-amortizing,
and the aggregate principal balance of the servicing portfolio therefore
decreases over time. Accordingly, the Company expects that its servicing
portfolio will continue to decrease throughout 1999, and that servicing fees to
be earned in the remainder of 1999 will therefore also decrease.
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EXPENSES. During the three month period ended June 30, 1999, operating
expenses increased $5.8 million, or 30.0%, compared to the three month period
ended June 30, 1998. Employee costs increased by $896,000, or 12.9%, and
represented 31.0% of total operating expenses. The increase is due to the
addition of staff necessary to accommodate the increase in the Company's
servicing portfolio, to increases in the cost of fringe benefits provided to
employees, and to increases in salaries of existing staff. General and
administrative expenses decreased by $245,000, or 4.9% and represented 18.9% of
total operating expenses.
Interest expense increased $5.8 million, or 125.6%, and represented
41.1% of total operating expenses. See "Liquidity and Capital Resources." The
increase is primarily due to the interest paid on an additional $35.0 million in
subordinated debt securities and $33.0 million of senior secured debt (the
"Senior Secured Line"), most of which was issued by the Company at various times
after June 30, 1998, or had a higher outstanding balance during 1999, and was
outstanding throughout most of the second quarter of 1999. Interest expense has
also been increased by the Company's being required to pay higher interest rates
on money borrowed in the current period, as compared with the prior year's
period.
The Company expects to purchase and hold for sale fewer Contracts in
1999 than it did in 1998, which would be expected to result in a decrease in
interest earned on Contracts held for sale, and a decrease in interest expense
incurred.
The six month period ended June 30, 1999, compared to the six month period ended
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June 30, 1998
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REVENUES. During the six months ended June 30, 1999, revenues decreased
$20.3 million, or 37.2%, compared to the six month period ended June 30, 1998.
Net gain on sale of Contracts decreased by $25.8 million, or 133.3%, for the six
month period ended June 30, 1999.
Interest income increased by $1.7 million, or 7.4%, and represented 74%
of total revenues for the six month period ended June 30, 1999. The increase is
primarily due to a higher average balance of Contracts held for sale during the
six month period ending June 30, 1999.
Servicing fees increased by $5.0 million, or 45.1%, and represented
46.6% of total revenues. The increase in servicing fees is due to the increase
in the Company's servicing portfolio over the prior year's period.
EXPENSES. During the six month period ended June 30, 1999, operating
expenses increased $15.2 million, or 44.0%, compared to the six month period
ended June 30, 1998. Employee costs increased by $3.7 million, or 30.3%, and
represented 32.3% of total operating expenses. The increase is due to the
addition of staff necessary to accommodate the increase in the Company's
servicing portfolio and increases in salaries of existing staff. General and
administrative expenses increased by $979,000, or 10.2%, and represented 21.2%
of total operating expenses. Increases in general and administrative expenses
included increases in telecommunications, stationery, credit reports and other
related items as a result of the increase in the Company's servicing portfolio.
Interest expense increased $9.1 million, or 107.2%, and represented
35.5% of total operating expenses. See "Liquidity and Capital Resources." The
increase is primarily due to the interest paid on an additional $35.0 million in
subordinated debt securities and $33.0 million borrowed under the Senior Secured
Line. Most of such debt was issued by the Company at various times after June
30, 1998, or had a higher outstanding balance during 1999, and was outstanding
throughout most of the second quarter of 1999. Interest expense has also been
increased by the Company being required to pay higher interest rates on money
borrowed in the current period, as compared with the prior year's period.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been amounts borrowed under its various warehouse lines,
servicing fees on portfolios of Contracts previously sold, proceeds from the
sales of Contracts, customer payments of principal and interest on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary
uses of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts and income taxes. As a result, the Company has been dependent
on its warehouse lines of credit to purchase Contracts, and on the availability
of capital from outside sources in order to finance its continued operations. As
of the date of this report, the Company is unable to borrow under any warehouse
line of credit (due to certain defaults discussed below), and has not received
any material releases of cash from Spread Accounts since June 1998. The
inability to borrow and lack of releases has resulted in a liquidity deficiency.
The Company's plans for remedying that deficiency are discussed below, after a
review of the operating sources and uses of cash for the six month period ended
June 30, 1999.
Net cash used in operating activities was $8.4 million during the six
month period ended June 30, 1999, compared to $16.4 million for the six month
period ended June 30, 1998. Net cash deposited into trusts was $17.3 million, a
decrease of $27.0 million, or 35.8%, over net cash deposited into trusts in the
six month period ended June 30, 1998.
During the six month period ended June 30, 1999, the Company did not
complete a securitization transaction, and therefore, did not use any cash for
initial deposits to Spread Accounts, compared to $17.1 million used during the
six month period ended June 30, 1998. Cash used for subsequent deposits to
Spread Accounts for the six month period ended June 30, 1999, was $18.0 million,
a decrease of $7.7 million, or 30.0%, from cash used for subsequent deposits to
Spread Accounts in the six month period ended June 30, 1998. Such subsequent
deposits into Spread Accounts in the six month period ended June 30, 1999,
include $1.2 million of cash used to pay down certain senior series of
Certificates to create over-collateralization. "Over-collateralization," as used
herein, means that the principal amount payable on the underlying automobile
purchase contracts is greater than the total principal amount payable on the
Certificates issued by the Trust. Cash released from Spread Accounts for the six
month period ended June 30, 1999, was $665,000, a decrease of $15.2 million, or
95.8%, from cash released from Spread Accounts in the six month period ended
June 30, 1998. Changes in deposits to and releases from Spread Accounts are
affected by the relative size, seasoning and performance of the various pools of
sold Contracts that make up the Company's Servicing Portfolio.
As of June 30, 1999, 15 of the 21 Trusts had incurred cumulative net
losses as a percentage of the original Contract balance or average delinquency
ratios in excess of the predetermined levels specified in the respective
Servicing Agreements. Accordingly, pursuant to the Servicing Agreements, the
specified levels applicable to the Company's Spread Accounts were increased. Due
to cross collateralization provisions of the Servicing Agreements, the increased
specified levels are applicable to 19 of the Company's 21 Trusts. The higher
requisite Spread Account levels range from 30% to 100% of the outstanding
principal balance of the Certificates issued by the related Trusts. In addition
to requiring higher Spread Account levels, the Servicing Agreements provide the
Certificate Insurer with certain other rights and remedies, some of which have
been waived on a monthly basis by the Certificate Insurer. Increased specified
levels for the Spread Accounts have been in effect from time to time in the
past, including the entire period from June 1998 to the present. As a result of
the increased Spread Account specified levels and cross collateralization
provisions, excess cash flows that would otherwise have been released to the
Company instead have been retained in the Spread Accounts to bring the balance
of those Spread Accounts up to a higher level. Due to the increase in the Spread
Account requirements, there have been no significant releases of cash from the
Trusts since June 1998. Funding such balance increases has materially increased
the Company's capital requirements, while the absence of cash releases has
materially decreased its liquidity. As a result of the increased specified
levels applicable to the Spread Accounts, approximately $47.7 million of cash
that would otherwise have been available to the Company has been delayed and
retained in the Spread Accounts as of June 30, 1999.
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<PAGE>
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases), the required level of initial credit enhancement in
securitizations, and the extent to which the Spread Accounts either release cash
to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 has materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999, and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has not purchased any of
such additional notes.
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
In April 1999, the Company entered into an amendment agreement (the
"Amendment") with the Certificate Insurer of the Company's asset-backed
securities. The Amendment by its terms would cap the amount of cash retained in
the Spread Accounts for 19 of the Company's 21 securitization Trusts. The
amended maximum would be 21% of the outstanding principal balance of the
Certificates issued by such Trusts, computed on a pool by pool basis. The
Amendment is subject to certain performance measures that may result in an
increase in the maximum level to 25% of the outstanding principal balance of
such Certificates. The effectiveness of the Amendment is contingent upon
approval by the holders of the subordinated Certificates issued by the related
Trusts, and certain other conditions. As of July 31, 1999, the aggregate Spread
Account balance of the related 19 Trusts was 19.2% of the outstanding principal
balance of the related Certificates. That percentage should increase as
additional collections are deposited into the Spread Accounts, and as the
principal of the related Certificates is paid down. The Company is in
discussions with the Certificate Insurer regarding proposed revisions to the
Amendment, which would clarify its effect, and provide assurances requested by
certain holders of the subordinated Certificates. There can be no assurance that
such revisions will be agreed to.
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<PAGE>
As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below. The Company expects to purchase Contracts only on a
flow basis in the remainder of 1999. The reduction in the amount of Contracts
purchased for the Company's own account has materially reduced the Company's
capital requirements
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to liquidate its existing portfolio of Contracts held for sale, (2) to
increase the quantity of Contracts that it purchases and sells on a flow basis,
thus increasing the fees that it receives in connection with such purchases and
sales, and (3) to await releases of cash from its Spread Accounts, pursuant to
the Amendment. There can be no assurance that this plan will be successful.
During the second quarter, the Company sold, on a servicing released
basis, $234.4 million of its Contracts held for sale. As of the date of this
report, the Company is engaged in negotiations regarding the sale of all or
substantially all of its remaining Contracts held for sale. Such sales are
expected to be on a servicing released basis, and the Company will recognize a
loss upon such sales. The Company expects to effect such sales at an aggregate
cash price in excess of the indebtedness outstanding under its warehouse line of
credit. To the extent that it is successful in doing so, the sales would release
cash to the Company, which would be applied to meet in part the Company's
liquidity and capital requirements identified herein. Substantially all of the
Contracts that the Company proposes to sell are pledged to the lender under the
Company's warehouse line of credit. That lender on August 4, 1999, declared the
line to be in default, and has taken the position that it is not obligated to
release its interest in any of the pledged Contracts unless it receives adequate
assurances that it will be repaid all of the indebtedness outstanding under the
warehouse line. Under the terms of the agreements related to the LLCP Notes and
the Senior Secured Line, the consent of those respective lenders is also
required to a sale by the Company of any material assets outside the ordinary
course of business. Such lenders' consents to the proposed sales of Contracts
may or may not be granted, depending on such lenders' evaluation of the proposed
sale. Although the Company believes that the lenders will consent to the sales
as proposed by the Company, there can be no assurance that such consents will be
forthcoming.
The Company's ability to increase the quantity of Contracts that it
purchases and sells on a flow basis will be subject to general competitive
conditions and other factors.
Obtaining releases of cash from the Spread Accounts is dependent on the
Amendment's becoming effective, and on collections from the related Trusts
generating sufficient cash to bring the Spread Accounts to the amended specified
levels. Effectiveness of the Amendment, in turn, is dependent on the Company's
obtaining consents from holders of the subordinated Certificates issued by the
related Trusts, and on certain other conditions. The existing terms of the
Senior Secured Line require that any such releases be used to repay principal
outstanding under that line. The Company has commenced discussions with the
holders of the subordinated Certificates and with the senior secured lenders
regarding the consents and amendments that would be necessary to allow the
Company to receive cash released from the Spread Accounts, but there can be no
assurance that the necessary consents and amendments will be obtained and agreed
to.
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<PAGE>
The Company is also exploring additional financing possibilities,
focussing on issuance of additional secured debt. Although such explorations
have involved discussions with, and expressions of interest from, various
investment banks, there can be no assurance that any such transactions will take
place.
YEAR 2000
OVERVIEW. The Year 2000 issue is predicated on the concept that some
database files may contain date fields that will not support century functions
and that some programs may not support century functions even if the date fields
are present. With the change of millennium, the inability to properly process
century functions may create halts or sort/calculation errors within programs
that use century information in calculation and functions.
The Company predominantly uses accounting and installment loan
application processing software against defined relational database files. Most
financial software has long ago been forced to deal with a four byte date field
due to long term maturity dates, bond yield calculations and mortgage
amortization schedules. The Company has been cognizant of Year 2000
considerations since late 1994, when contracts with maturity dates in the year
2000 were first purchased.
PLAN. The Company's plan to assess the Year 2000 issue consists of a
three-phase process. The first phase of the process, which has been completed,
consisted of assessing all user programs of the Company's mainframe computer.
Those user programs that were not compliant were either corrected or the
necessary software patches have been identified and ordered. There were no
critical user programs identified that could not be modified to be compliant. In
addition, the Company's mainframe computer's operating system was also tested
and was deemed to be compliant as well.
The second phase of the Company's testing consisted of testing all
personal computers for compliance. An outside specialist was engaged to
administer the testing of hardware and software. This testing was completed in
April, 1999. Corrective measures have been put into place for any personal
computer and its software not in compliance at that time.
The third and final stage of testing consists of identifying key
vendors of the Company's operations and requesting that those vendors complete a
Year 2000 compliance questionnaire. Any vendors found to be non-compliant will
be continuously monitored for progress towards compliance. The Company estimates
this phase of testing will also be completed by September 30, 1999.
COSTS. As the majority of the testing was performed internally by the
Company's information systems department, the Company estimates the costs to
complete all phases of testing, including any necessary modifications, to be
insignificant to the results of operations.
At this time, the risks associated with the Company's Year 2000 issues,
both internally and as related to third party business partners and suppliers
are not completely known. Through the Company's plan of analysis and
identification, it expects to identify substantially all of its Year 2000
related risks. Although the risks have not been completely identified, the
Company believes that the most realistic worst case scenario would be that the
Company would suffer from full or intermittent power outages at some or all of
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<PAGE>
its locations. Depending upon the locations affected and estimated duration,
this would entail recovery of the main application server systems at other
locations and or move to manual processes. Manual processes have been developed
as part of the overall contingency plan. In relation to this, complete system
data dumps are scheduled to take place prior to the millennium date change to
ensure access to all Company mission critical data should any system not be
accessible for any reason.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains certain "forward-looking statements,"
including, without limitation, the statements to the effect that the Company
expects that (i) the Amendment will take effect, the Spread Account Balances
will reach the amended specified levels, and that the lenders under the Senior
Secured Line will agree to such modifications as will permit the Company to
receive material cash releases prior to such lenders being repaid in full, (ii)
it plans to securitize Contracts in the future, (iii) it will sell Contracts on
a servicing-released basis in the third quarter in transactions that would yield
cash to the Company, over and above the warehouse indebtedness secured by such
Contracts, and (iv) forbearances and waivers will be granted, and amendments
agreed to, with respect to defaults under existing indebtedness. All of these
expectations are based on the Company's assessment of the decisions likely to be
made by third parties, over which the Company has no control.
Specifically, the reader should bear in mind the following
considerations: As to the Amendment, and release of cash from Spread Accounts,
the effectiveness of the Amendment is dependent on the consent of certain
holders of subordinated interest in the related securitization trusts, on the
performance of the receivables included in such trusts, and on certain other
conditions. Such holders may give or withhold such consent in their discretion,
and may or may not agree that it is in their best interest to do so. The
performance of the receivables in the trusts is dependent on various factors,
including their inherent credit quality and the effectiveness of the Company's
collection efforts. The Company's liquidity shortage identified herein could
impair the effectiveness of its collection efforts. Should the Amendment take
effect, the existing terms of the Senior Secured Line require that all
outstanding indebtedness thereunder (approximately $31.6 million) be repaid
prior to the Company's receiving any portion of such cash; accordingly, an
amendment of such terms would be required for the Company to receive any such
cash in the current year. The lenders under the Senior Secured Line will
determine whether to agree to such an amendment based on their independent
evaluation of their best interest, which in turn may depend on the Company's
short-term liquidity and on the availability of consents and waivers from other
lenders to the Company. The liquidity shortage identified in this report could
adversely influence the willingness of all such lenders (under the Senior
Secured Line and others) to grant such waivers or agree to such amendments.
As to future securitization, there can be no assurance that the Company
will have the liquidity or capital resources to enable it to post the reserves
required for credit enhancement of such a transaction, or that the
securitization markets will be receptive at the time that the Company seeks to
engage in such a transaction.
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<PAGE>
As to the intended sale of Contracts in the third quarter, although the
Company plans to sell the remainder of its portfolio of Contracts held for sale,
servicing-released, in the third quarter in transactions that would release cash
to the Company, definitive agreements relating to such transactions have been
executed only with respect to a portion of such Contracts. The lender to which
such Contracts are pledged has declared a default under, and accelerated the
indebtedness outstanding under, the related warehouse line of credit. The
intended sales will not take place unless that lender receives assurances that
it deems adequate that it will be repaid in full from the proceeds of such
sales. The prospective purchasers might decline to purchase sufficient Contracts
to repay such indebtedness, or the prices on which the Company and such
purchasers may agree may be inadequate to provide for repayment in full of such
indebtedness, or some combination of those factors may apply. As to the
Contracts for which no definitive agreement has been reached, the prospective
purchasers may decline to proceed with such transactions in their discretion, or
the Company and the purchasers might be unable to reach mutually acceptable
terms. Furthermore, the terms of the Company's Senior Secured Line and of the
LLCP Notes require that such lenders consent to the Company's sale of such
Contracts. The Company is in default with respect to its indebtedness to such
lenders, which may adversely affect their willingness to grant such consents.
As to defaults under existing indebtedness, the Company's ability to
cure such defaults and ultimately repay such debt is dependent on the
willingness of the various lenders and the Certificate Insurer to agree to a
number of waivers and amendments. Although the lenders under the Company's
Senior Secured Line, its warehouse line of credit, the LLCP Notes and certain
other indebtedness may agree to grant such waivers and execute such amendments,
their decisions will be determined by their evaluation of their own interest,
and there can be no assurance that any such waivers will be granted. Certain of
such lenders have indicated that their willingness to grant waivers or to agree
to amendments (such as a re-scheduling of principal repayment) may be dependent
on other lenders' or the Certificate Insurer's also agreeing to waive certain
rights. There can be no assurance that such mutually acceptable agreements will
be reached.
In addition to the statements identified above, descriptions of the
Company's business and activities set forth in this report and in other past and
future reports and announcements by the Company may contain forward-looking
statements and assumptions regarding the future activities and results of
operations of the Company. Actual results may be adversely affected by various
factors including the following: increases in unemployment or other changes in
domestic economic conditions which adversely affect the sales of new and used
automobiles and may result in increased delinquencies, foreclosures and losses
on Contracts; adverse economic conditions in geographic areas in which the
Company's business is concentrated; changes in interest rates, adverse changes
in the market for securitized receivables pools, or a substantial lengthening of
the Company's warehousing period, each of which could restrict the Company's
ability to obtain cash for new Contract originations and purchases; increases in
the amounts required to be set aside in Spread Accounts or to be expended for
other forms of credit enhancement to support future securitizations; the
reduction or unavailability of warehouse lines of credit which the Company uses
to accumulate Contracts for securitization transactions; increased competition
from other automobile finance sources; reduction in the number and amount of
acceptable Contracts submitted to the Company by its automobile Dealer network;
changes in government regulations affecting consumer credit; and other economic,
financial and regulatory factors beyond the Company's control.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's funding strategy is largely dependent upon acquiring
interest-bearing assets (the Contracts), issuing interest bearing asset-backed
securities and incurring debt. Therefore, upward fluctuations in interest rates
may adversely affect the Company's profitability, while downward fluctuations
may improve the Company's profitability. The Company uses several strategies to
minimize the risk of interest rate fluctuations, including offering only fixed
rate contracts to obligors, regular sales of auto Contracts to the Trusts, and
pre-funding securitizations, whereby the amount of asset-backed securities
issued in a securitization exceeds the amount of Contracts initially sold to the
Trusts. The proceeds from the pre-funded portion are held in an escrow account
until the Company sells the additional Contracts to the Trust in amounts up to
the balance of the pre-funded escrow account. In pre-funded securitizations, the
Company locks in the borrowing costs with respect to the loans it subsequently
delivers to the Trust. However, the Company incurs an expense in pre-funded
securitizations equal to the difference between the money market yields earned
on the proceeds held in escrow prior to subsequent delivery of Contracts and the
interest rate paid on the asset-backed securities outstanding. As the Company
has not sold any Contracts in a securitization transaction, all strategies
related to securitizations have not been applied in the current period.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 18, 1999, Kevin Gilmore commenced a lawsuit against the Company
in the Superior Court of California, San Francisco County. The lawsuit alleges
certain defects in repossession notices used by the Company in the State of
California, and seeks injunctive relief, including "restitution" of an
unspecified amount. The Company has not been required to respond to this lawsuit
as of the date of this report, and has not yet evaluated the amount of
"restitution" that it could be required to pay, should the plaintiff be
successful. It is possible that such liability could be material. The Company
plans to contests vigorously this litigation.
On July 22, 1999, Bank of America commenced a lawsuit against the
Company in the Superior Court of California, Orange County, seeking repayment of
approximately $3 million advanced to the Company under an overdraft line of
credit, plus interest, costs and attorneys' fees. The Company and Bank of
America have entered into a settlement agreement, pursuant to which the Company
shall repay all amounts owing, in specified installments through November 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's having incurred a loss in two consecutive quarters has
placed it in default under its Senior Secured Line. The Company's failure to
obtain at least $7.5 million of the $15.0 million of capital committed by SFSC
has placed it in default under the LLCP Notes.
On August 4, 1999, General Electric Capital Corporation ("GECC")
notified the Company that GECC was declaring a default under the Company's
warehouse line of credit, and that the approximately $69 million of indebtedness
then outstanding was immediately due and payable. GECC declared there to be
multiple defaults under the warehouse line, including (i) failure of SFSC to
provide capital to the Company, (ii) outstanding indebtedness under the
warehouse line in excess of borrowing base formula, and (iii) failure to deliver
a covenant compliance certificate for the month of June 1999. The Company, as of
the date of this report, has not been able to repay the warehouse indebtedness
in favor of GECC; accordingly, the cross-default provisions of other outstanding
indebtedness of the Company have been triggered. The Company is therefore also
in default with respect to (i) $31.6 million of outstanding indebtedness in
favor of a group of lenders represented by State Street Bank and Trust, and (ii)
$30 million in total of indebtedness to Levine Leichtman Capital Partners, L.P.
Furthermore, should such defaults not be cured within 30 days, the Company would
also be in default with respect to (i) its $20 million of Rising Interest
Subordinated Redeemable Securities due 2006, and (ii) its Participating Equity
Notes (subordinated partially convertible debt securities) due 2004. There can
be no assurance that the Company will be successful in curing its existing
defaults or averting any such further defaults.
The Company is seeking waivers and/or forbearance agreements from the
lenders of all such defaulted indebtedness, but there can be no assurance that
its efforts to obtain such waivers and/or forbearance agreements will be
successful. Failure to obtain such waivers and/or forbearance agreements could
have a material adverse effect on the Company's ability to continue its regular
business operations.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on May 26,
1999. At the meeting, each of the six nominees to the Board of Directors was
elected for a one-year term by the shareholders. The directors elected were the
incumbent members of the board, Charles E. Bradley, Sr., Charles E. Bradley,
Jr., Thomas L. Chrystie, John G. Poole, William B. Roberts, and Robert A. Simms.
The shareholders also approved each other proposal placed before the annual
meeting. Such proposals were (i) approval of the issuance of a warrant initially
exercisable to purchase 1,335,000 shares of common stock, granted as a condition
of the issuance of $5 million of debt, and (ii) ratification of the appointment
of KPMG LLP as independent auditors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
10.40 Agreement dated May 20, 1999 for Sale of Contracts on a Flow
Basis
27 Financial Data Schedule
During the quarter for which this report is filed, the Company filed
three reports on Form 8-K. Such reports were dated April 15, May 15 and
June 15, 1999. Each was filed solely to include as an exhibit thereto,
Item 7, the Company's monthly Servicer Report with respect to certain
securitization trusts. The assets of such trusts consist of automotive
receivables serviced by the Company. No financial statements were filed
with any of such reports.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)
Date: August 23, 1999 /s/ Charles E. Bradley, Jr.
------------------------------------------
Charles E. Bradley, Jr., Director,
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 23, 1999 /s/ James L. Stock
------------------------------------------
James L. Stock, Acting Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
10.40 Agreement dated May 20, 1999 for Sale of Contracts on a Flow Basis
27 Financial Data Schedule
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CONTRACT SALE AGREEMENT
DATED AS OF MAY ___, 1999
BY AND BETWEEN
CONSUMER PORTFOLIO SERVICES, INC.
AND
FAIRLANE CREDIT, L.L.C.
1
<PAGE>
CONTRACT SALE AGREEMENT ( the "Sale Agreement"), dated as of May __,
1999 by and between CONSUMER PORTFOLIO SERVICES, INC. (the "Seller") a
California Corporation, its successors and permitted assigns and FAIRLANE
CREDIT LLC (the "Purchaser") a Delaware limited liability company, its
successors and assigns.
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, the Seller purchases from Dealers certain retail installment
sales contracts secured by new and used automobiles and light-duty trucks
("Contracts");
WHEREAS, the Seller desires to purchase Contracts in accordance with
terms of the Originator's Manual, as described in Exhibit A, for sale and
assignment to the Purchaser;
WHEREAS, the Seller intends to sell and the Purchaser intends to
purchase, certain of such Contracts together with all of its rights
thereunder, as described herein;
NOW, THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS.
"Adverse Claim" means a claim of ownership or any lien, security
interest, title retention, trust or other charge or encumbrance, either
legal or in equity, or other type of preferential arrangement having the
effect of a lien or security interest upon or with respect to the Sold
Program Contracts or Purchased Assets other than in favor of the Purchaser
with respect to this Sale Agreement.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or
indirect common control with such specified Person. For the purposes of
this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Amount Financed" has the meaning ascribed thereto in the applicable
Truth-in-Lending disclosure in the Program Contract given to the Obligor.
"Automobiles" means new and used automobiles and light-duty trucks, the
purchase of which the Obligors financed by the Program Contracts.
"Business Day" means any day other than a Saturday or a Sunday, or
another day on which banks in the State of Colorado are required, or
authorized by law to close.
"Buy Rate" means with respect to any Sold Program Contract the rate
specified as such in Exhibit A in effect on the Closing Date.
"Closing Date" means ________________, 1999.
"Contract File" means those documents described in Exhibit C. Seller
may modify the content of Exhibit C with prior written approval from
Purchaser.
2
<PAGE>
"Contract Rate" means with respect to any Sold Program Contract, the
interest rate on such Sold Program Contract as disclosed as the Annual
Percentage Rate.
"Dealer" means a franchise automobile dealer, or its Affiliate, who has
entered into a Dealer Agreement with the Seller with respect to, among
other things, the origination of the Sold Program Contracts.
"Dealer Agreement" means an agreement between the Seller and a Dealer
setting forth the terms for the purchase of Contracts by the Seller.
"Debt" means (a) indebtedness of the Seller for borrowed money, (b)
obligations of the Seller evidenced by bonds, debentures, notes or other
similar instruments, (c) obligations of the Seller to pay the deferred
purchase price of property or services, (d) obligations of the Seller as
lessee under leases which have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases, (e)
obligations secured by any lien or through the Seller, even though Seller
has not assumed or become liable for the payment of such obligations, (f)
obligations of the Seller under direct or indirect guaranties in respect
of, and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to ensure a creditor against loss in respect of
indebtedness or obligations of others of the kinds referred to in clause
(a) through (e) above, and (g) liabilities in respect of unfunded vested
benefits under plans covered by the ERISA, as amended, and regulations
promulgated thereunder.
"Eligible Program Contracts" means all Program Contracts which, in the
sole judgment of the Purchaser, comply with the representations and
warranties set forth in Section 5(b) of this Sale Agreement, including
Program Contracts that, as of the Closing Date, have not been funded and
the Obligor's first payment is not yet due or Obligor's first payment is
included in the Contract File endorsed in favor of Purchaser.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended.
"Event of Purchase Termination" has the meaning ascribed thereto in
Section 9 of this Sale Agreement.
"Fee Schedule" means the schedule agreed to between the Seller and the
Purchaser in the form of Exhibit D hereto, which schedule the Seller and
Purchaser may modify and which modification shall be effective with respect
to Sold Program Contracts having Sale Dates ten (10) Business Days
following the receipt of such acknowledged notice by the Seller of such
modification.
"Governmental Authority" means the United States of America, any
federal, state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions thereof or pertaining thereto.
"Indemnified Amounts" means any and all amounts necessary to indemnify
such Indemnified Party from and against any and all claims, losses and
liabilities and related costs and expenses, including reasonable attorneys'
fees and disbursements and any court costs.
"Indemnified Party" means the Purchaser or any employee, officer or
agent thereof.
"Obligor" means, with respect to any Program Contract, the Persons
obligated to make payments in respect thereto.
"Officer's Certificate" (Exhibit E) means, with respect to any Person,
a certificate signed by the Chairman of the Board, Vice Chairman of the
Board, the President, a Vice President, the Treasurer, the secretary, or
any other duly authorized officer of such Person.
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"Originator's Manual" shall mean the materials provided by Seller to
Purchaser as Exhibit A setting forth, among other things, Dealer
Agreements, Schedule A and its Exhibit A, rate participation, Buy Rate and
Contract Rate schedule, and Approval Authority Summary for Eligible Program
Contracts. Seller may modify the Originator's Manual with written approval
to be given by Purchaser within ten (10) business days from the date of
request.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, limited liability company, trust,
association, joint venture, Governmental Authority or any other entity of
whatever nature.
"Principal Balance" of a Program Contract means, on any date of
determination, the Amount Financed reduced by that portion of all prior
payments received by the Purchaser with respect to such Program Contract
allocable to principal as reflected on the records maintained by the
Purchaser.
"Program Contracts" means Contracts originated by Seller pursuant to
Section 2 hereof and in accordance with the Originator's Manual
"Purchased Assets" means (a) with respect to each Sold Program
Contract, all of the Seller's right, title and interest in and to (i) the
Program Contract (including its interest in the proceeds of such Sold
Program Contract), including all payments on or with respect to such Sold
Program Contract after the Sale Date (ii) the security interests in the
Automobiles granted to the Seller by the Dealer pursuant to the Sold
Program Contract and to the Purchaser pursuant to this Sale Agreement,
(iii) any proceeds with respect to the Sold Program Contract from recourse
to the Dealer, if any, under the related Dealer Agreement, (iv) any
documents in the Contract File for such Sold Program Contract, (v) the
proceeds of any insurance policies maintained with respect to the
Automobile and Sold Program Contract, (vi) all income and proceeds of the
foregoing or relating thereto, and (vii) with respect to each Sold Program
Contract, all of the Seller's rights against the Dealer as described in the
Dealer Agreement .
"Purchase Price" means with respect to any Eligible Program Contract
the Amount Financed including rate participation minus any dealer discount
or fee, as described in Exhibit A.
"Repurchase Price" means with respect to any Sold Program Contract
which the Seller is obligated to repurchase, an amount equal to the sum of
(a) the outstanding Principal Balance of such Program Contract plus rate
participation and fees paid to Seller by Purchaser, as set forth in Exhibit
D, less any dealer discount or fee(b) any accrued but unpaid interest up to
180 days in respect thereof, and (c) any other amounts owing to Purchaser
by Obligor under the Sold Program Contract for collection, repossession or
other costs related to the enforcement of Purchaser's security interest in
the Vehicle or collection under the account, minus (c) all payments
received by the Purchaser but not applied as a reduction with respect to
such Sold Program Contract.
"Sale" means a sale of a Program Contract from the Seller to the
Purchaser pursuant to this Sale Agreement.
"Sale Agreement" means this Contract Sale Agreement including the
Originator's Manual and any other exhibits to this Sale Agreement.
"Sale Assignment" means, with respect to any Sold Program Contract, the
assignment in the form of Exhibit F hereto.
"Sale Date" means the date on which each Sold Program Contract is sold
pursuant to this Sale Agreement.
"Sales Finance Company License" means a current license issued to the
Seller authorizing it to purchase and sell consumer Contracts in each state
in which such license is required.
"Securities" has the meaning ascribed thereto in Section 6(g).
"Sold Program Contract" means a Program Contract sold by the Seller
pursuant to Section 2 of this Sale Agreement.
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"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting
power to elect a majority of the Board of Directors or other Persons
performing similar functions are at the time directly or indirectly owned
by such Person.
"Termination Date" has the meaning specified in Section 8.
"UCC" means the Uniform Commercial Code as in effect in the state where
the Program Contract is originated.
SECTION 2. SALE OF PROGRAM CONTRACTS. (a) From time to time, Seller
shall offer to sell to the Purchaser, subject to the terms and conditions
of this Sale Agreement, Eligible Program Contracts from Dealers and the
Purchaser agrees to purchase Eligible Program Contracts from the Seller
subject to the terms and conditions hereof. During the term of this
Agreement, the Seller shall sell, on the terms and conditions herein, to
the Purchaser Eligible Program Contracts which meets the underwriting
criteria set out in the Originator's Manual and Seller's credit scoring
criteria, such criteria as mutually agreed upon between Seller and
Purchaser. Seller shall begin offering Program Contracts commencing on the
Closing Date and continuing at least every third Business Day thereafter.
(b) In offering an Eligible Program Contract for sale to the Purchaser
pursuant to this Section 2,, the Seller shall deliver to the Purchaser, on
a Business Day (i) the Contract File, (ii) a copy of the consumer credit
report, (iii) a fully executed Sale Assignment in respect of such Program
Contracts, and (iv) a copy of the buy sheet evidencing the all amounts paid
by Seller to Dealer. Each Sale from the Seller to the Purchaser shall be
subject to the effectiveness of this Sale Agreement in accordance with the
provisions of Section 4(a) hereof and the satisfaction of the conditions
precedent specified in Section 4(b). Upon receipt of the complete Contract
File and the duly executed Sale Assignment by the Purchaser and subject to
the terms of this Sale Agreement, the Purchaser will pay the Purchase Price
with respect to such Program Contracts within 48 hours following the
receipt of each Contract File (or, if such day is not a Business Day by
5:00 p.m. California time on the second Business Day following the receipt
of such Contract File). Notwithstanding the provision of this Section 2,
Purchaser may decline to purchase a Program Contract if Purchaser
determines that it has not received the entire Contract File with respect
to such Program Contract.
(c) The Purchaser shall pay the Seller the Purchase Price and the Fee,
as described in Exhibit D hereunder, by electronic funds transfer and
check, respectively, to an account designated by the Seller in writing from
time to time, acceptable to the Purchaser. The Purchaser shall pay the
Seller the Purchase Price with respect to each Sold Program Contract within
the time period specified in Section 2 (b).
(d) Following payment of the Purchase Price and execution of the Sale
Assignment, the ownership of each Sold Program Contract specified in such
Sale Assignment and the Purchased Assets shall be vested in the Purchaser,
and the Seller shall not take any action inconsistent with such ownership
and shall not claim any ownership interest in any such Sold Program
Contract.
(e) The Seller shall indicate in its records that ownership of each
Sold Program Contract and the Purchased Assets is held by the Purchaser or
its assignee. In addition, the Seller shall respond to any inquiries with
respect to ownership of any Sold Program Contract by stating that it is no
longer the owner of such Sold Program Contract and that ownership of such
Sold Program Contract is held by Purchaser or its assignee. Seller agrees
to hold in trust for Purchaser any cash payments received in connection
with a Sold Program Contract and shall remit such funds by wire transfer or
in the form received within twenty-four hours of their receipt to an
account established by Purchaser.
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(f) The Seller agrees that, from time to time, at its expense, it will
promptly execute and deliver all further instruments, notices and
documents, and take all further action, that may be necessary or
appropriate, or that the Purchaser may reasonably request, in order to
perfect, protect or more fully evidence the transfer of ownership of the
Sold Program Contracts or to enable the Purchaser or its assignee to
exercise or enforce any of its rights hereunder or under any Sale
Assignment. Without limiting the generality of the forgoing, the Seller
will promptly, upon the request of the Purchaser, execute and file or cause
to be filed such financing or continuation statements, certificates of
title or other title documentation in support of the lien of the
Purchaser's assignee in the related Automobile, or amendments thereto or
assignments thereof. The Seller hereby authorizes the Purchaser to file one
or more financing or continuation statements, and amendments thereto and
assignments thereof, relating to all or any of the Sold Program Contracts
and proceeds thereof without the signature of the Seller. Seller also
hereby constitutes Purchaser, its permitted successors and assigns, as
Seller's true and lawful attorneys, with full power of substitution, in the
name of Seller or otherwise, whether in relation to tangible or intangible
property, to transfer all right title, title and interest in and to any
Automobile, to execute and deliver any and all certificates, instruments
and other documents necessary to effect such transfer of title, to endorse
and collect any checks or other payments owed to Purchaser under the Sold
Program Contract, to discharge any liens on Automobiles and to modify or
change or request modification or change of, the loss payee or additional
insured endorsement with respect to any insurance policy on an Automobile.
Seller also grants Purchaser the right to use its name to collect from
Dealers refundable insurance and warranty premiums included in the Amount
Financed. Seller will provide Purchaser with its logo and any applicable
trademarks for use on documents seeking collection of these amounts. Seller
agrees that the foregoing powers are irrevocable notwithstanding any reason
whatsoever, including without limitation Seller's dissolution, merger,
consolidation or any other change in Seller. Seller will, at Purchaser's
reasonable request, execute appropriate separate instruments evidencing the
forgoing powers. Purchaser will indemnify and hold Seller harmless from any
claims or liabilities arising from Purchaser's exercise of the powers
granted in this Section. A copy of that Power of Attorney is attached
hereto as Exhibit G.
(g) Notwithstanding any other rights or remedies afforded to Purchaser
under this Agreement, Purchaser may either terminate this Agreement
pursuant to Section 9 or require that the parties renegotiate the Fee, if
during any calendar month the aggregate random samples of Purchased
Contracts during that calendar month indicate that less than 90% of the
Purchased Contracts fail to meet the purchasing requirements in Section 2.
Before Purchaser may exercise any rights under this subsection (g), Seller
shall have the opportunity to cure the non-conforming Purchased Contracts
during the next calendar month. If Purchaser elects to renegotiate the Fee,
such reestablished Fee must be mutually agreed upon by the parties within
10 days of Seller's receipt of a notice from Purchaser indicating
Purchaser's intent to renegotiate the Fee. If the parties fail to
renegotiate the fee, then Purchaser may terminate this Agreement.
SECTION 3. INTENDED CHARACTERIZATION; GRANT OF SECURITY INTEREST. It is
the intention of the parties hereto that each transfer of Sold Program
Contracts to be made hereunder shall constitute a purchase and sale and not
a loan. In the event, however, that a court of competent jurisdiction were
to hold that the transaction evidenced hereby constitutes a loan and not a
purchase and sale, or a Governmental Authority determines that the
Purchaser may not purchase or acquire Program Contracts, it is the
intention of the parties hereto that this Sale Agreement shall constitute
as security agreement under applicable law and that the Seller shall be
deemed to have granted to the Purchaser as of the date hereof a first
priority security interest in all of the Seller's right, title and interest
in, to and under each Sold Program Contract, and all proceeds thereof.
SECTION 4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF SALE AGREEMENT AND
TO EACH SALE. (a) The effectiveness of this Sale Agreement is subject to
the conditions precedent that the Purchaser shall have satisfactorily
completed its due diligence review of the Seller and its operations and
that the Purchaser shall have received the following, in form and substance
satisfactory to the Purchaser, within 30 days of the Closing Date. In the
event Seller has not provided the following as set forth herein, an Event
of Purchase Termination shall automatically occur.
(i) the articles of incorporation of the Seller certified, as of a date
no more than ten days prior to the Closing Date, by the Secretary of
State of California.
(ii) a good standing certificate, dated no later than March, 1999, from
its jurisdiction of organization and each state in which the Seller is
required to qualify to do business;
(iii) a copy of each Sales Finance Company License;
(iv) a certificate of the Secretary or Assistant Secretary of the
Seller (on which certificate the Purchaser may conclusively rely until
such time as it shall receive from the Seller a revised certificate
meeting the requirements of the subsection) certifying as of the
Closing Date: (A) the names and true signature of the officers
authorized on its behalf to sign this Sale Agreement, (B) a copy of the
Seller's articles of incorporation and bylaws, and (C) a copy of the
resolutions of the board of directors of the Seller approving this Sale
Agreement and the transactions contemplated thereby;
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(v) an Officer's Certificate in the form of Exhibit E hereto;
(vi) acknowledgment copies of proper financing statements (Form UCC-1),
duly filed, in respect of Sold Program Contracts, naming the Seller as
the debtor and the Purchaser as the secured party, or other, similar
instruments or documents, as may be necessary or, in the opinion of the
Purchaser, desirable under the UCC of all appropriate jurisdictions or
any comparable law to perfect the Purchaser's ownership interests in
all Sold Program Contracts in which an interest may be assigned
hereunder;
(vii) the favorable opinion of Seller's outside counsel satisfactory to
the Purchaser in form and substance satisfactory to the Purchaser;
(viii) such other approvals, consents, opinions, documents and
instruments, as the Purchaser may reasonably request.
Upon the receipt by the Purchaser of the items referred to in paragraphs
(i) through (viii) of this section 4(a), the Purchaser shall notify the
Seller in writing that the conditions precedent to the effectiveness of
this Sale Agreement have been satisfied and that this Sale Agreement is
effective as of the date and time specified in such notice.
(b) Each Sale from the Seller to the Purchaser shall be subject to the
further conditions precedent that on the related date of such Sale, the
Seller shall have certified in the related Sale Assignment that, (except as
specifically disclosed in such Sale Assignment or in writing) and
specifically consented to by the Purchaser in its sole discretion
(provided, that no such consent shall be given as to any of the Events of
Purchase Termination described in subsections (c) and (h) of section 9):
(i) the representations and warranties of the Seller set forth in
Section 5 are true and correct on and as of such date, before and after
giving effect to such Sale and to the application of the proceeds
therefrom, as though made on and as of such date;
(ii) no event has occurred, or would result from such sale or from the
application of the proceeds therefrom, which constitutes an Event of
Purchase Termination or would constitute an Event of Purchase
Termination under Section 9 but for the requirement that notice be
given or time elapse or both; and
(iii) the Seller is in compliance with each of its covenants set forth
herein;
(iv) the Termination Date shall not have occurred;
(v) each Program Contract submitted by the Seller for purchase is an
Eligible Program Contract; and
(vi) the Seller shall have taken such other actions, including delivery
to the Purchaser of such approvals, consents, opinions, additional
information with respect to the Seller, documents and instruments, as
the Purchaser may reasonably request.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Purchaser, as of the date hereof and on each
subsequent date on which a Sale is made, as follows:
(a) With respect to the Seller:
(i) the Seller is a corporation duly organized, validly
existing and in good standing under the laws of California, is
duly qualified to do business and is in good standing in every
jurisdiction in which the nature of its business requires it
to be so qualified and which failure to qualify could have a
material adverse affect on Seller;
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(ii) the Seller has the power and authority to own and convey
all of its properties and assets and to execute and deliver
this Sale Agreement and to perform the transactions
contemplated hereby;
(iii) the execution, delivery and performance by the Seller of
this Sale Agreement and the transactions contemplated hereby,
(A) have been duly authorized by all necessary action on the
part of the Seller, (B) do not contravene or cause the Seller
to be in default under (1) the Seller's articles of
incorporation and bylaws, (2) any contractual restriction with
respect to any debt of the Seller or contained in any
indenture, loan or credit agreement, lease, mortgage, security
agreement, bond, note, or other agreement or instrument
binding on or affecting the Seller or its property or (3) any
law, rule, regulation, order, writ, judgment, award,
injunction or decree applicable to, binding on or affecting
the Seller or its property, and (C) do not result in or
require the creation of any Adverse Claim;
(iv) each of this Sale Agreement and each Sale Assignment
executed on or prior to the Closing Date or the related Sale
Date has each been duly executed and delivered on behalf of
the Seller;
(v) no consent of, or other action by, and no notice to or
filing with, any Governmental Authority or any other party, is
required for the due execution, delivery and performance by
the Seller of this Sale Agreement or for the perfection of or
the exercise by the Purchaser of any of its rights or remedies
thereunder, each of which has been obtained and complete
copies of which have been provided to the Purchaser;
(vi) each Sale Agreement and each Sale Assignment delivered by
the Seller is (or will be if not executed and delivered as of
the date hereof) the legal, valid and binding obligation of
the Seller enforceable against the Seller in accordance with
their respective terms;
(vii) there is no pending or threatened action, suit or
proceeding, against or affecting the Seller, its Affiliates,
its officers , or the property of the Seller, in any court or
tribunal, or before any arbitrator of any kind or before or by
any Governmental Authority (A) asserting the invalidity of
this Sale Agreement, (B) seeking to prevent the sale and
assignment of any Program Contract or the consummation of any
of the transactions contemplated thereby, (C) seeking any
determination or ruling that might materially and adversely
affect (1) the performance by this Sale Agreement, (2) the
validity or enforceability of this Sale Agreement, (3) any
Program Contract or (4) the federal income tax attributes of
the Sales.
(viii) no injunction, writ, restraining order or other order
of any material nature adverse to the Seller or the conduct of
its business or which is inconsistent with the due
consummation of the transactions contemplated by this Sale
Agreement has been issued by a Governmental Authority;
(ix) no defaulted Debt exists under any instrument or
agreement evidencing, securing or providing for the issuance
of Debt of the Seller;
(x) the principal place of business and chief executive office
of the Seller are located at the address of the Seller set
forth in the designated space beneath its signature line in
this Sale Agreement and, there are now no, and during the past
four months there have not been, any other locations where the
Seller is located (as that term is used in the UCC in the
state of such location) except that, with respect to such
changes occurring after the date of this Sale Agreement, as
shall have been specifically disclosed to the Purchaser in
writing;
(xi) the legal name of the Seller is as set forth at the
beginning of this Sale Agreement and the Seller has not
changed its name in the last six years, and during such
period, the Seller did not use, nor does the Seller now use
any trade-names, fictitious names, assumed names or "doing
business as" names except that, with respect to such changes
occurring after the date of this Sale Agreement, as shall have
been specifically disclosed to the Purchaser in writing;
(xii) the Seller is solvent and will not become insolvent
after giving effect to the transactions contemplated by this
Sale Agreement; the Seller is paying its debts as they mature;
the Seller has not sold any Program Contract to the Purchaser
with intent to hinder, delay or defraud any entity to which
the Seller was, or became, after the date that such transfer
was made, indebted; the Seller's sales of the Program Contract
to the Purchaser have been and will be made for reasonably
equivalent value and fair consideration; the Seller has not
incurred debts beyond its ability to pay as they mature; and
the Seller, after giving effect to the transactions
contemplated by this Sale Agreement, will have an adequate
amount of capital to conduct its business in the foreseeable
future;
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(xiii) for federal income tax, reporting and accounting
purposes, the Seller will treat the sale of each Sold Program
Contract sold pursuant to this Sale Agreement as a sale, or
absolute assignment, of its full right, title and ownership
interest in such Sold Program Contract to the Purchaser, and
the Seller has not and will not account for or treat the
transactions contemplated by this Sale Agreement in any other
manner;
(xiv) the Seller has and maintains all permits, licenses,
authorizations, registrations, approvals and consents of
Governmental Authorities (including, without limitation, Sales
Finance Company Licenses, if any, necessary for (A) the
activities and business of the Seller as currently conducted
and as proposed to be conducted, (B) the ownership, use,
operation and maintenance of its properties, facilities and
assets and (C) the performance by the Seller of this Sale
Agreement;
(xv) the Seller has filed on a timely basis all tax returns
(federal, state, and local) required to be filed and has paid
or made adequate provisions for the payment of all taxes,
assessments and other governmental charges due from the
Seller;
(xvi) each pension plan or profit sharing plan to which the
Seller is a party has been fully funded in accordance with the
obligations of the Seller set forth in such plan;
(xvii) with respect to the Seller, there has occurred no event
which has or is reasonably likely to have a material adverse
effect on its ability to perform its obligations under this
Sale Agreement;
(xviii) the consolidated balance sheets of the Seller and its
consolidated Subsidiaries as of the date of its most recently
completed fiscal year and the related statements of income and
shareholders' equity of the Seller and its consolidated
Subsidiaries for the fiscal year then ended, and commencing
with the fiscal year ending December 31, 1999 certified by an
independent certified public accountant together with all
quarterly reports with respect to completed fiscal quarters
occurring after such fiscal year until the date of this
representation and warranty, copies of which have been
furnished to the Purchaser, fairly present the consolidated
financial condition, business and operations of the Seller and
its consolidated Subsidiaries as at such date and the
consolidated results of operations of the Seller and its
consolidated Subsidiaries for the period ended on such date,
all in accordance with generally accepted accounting
principles consistently applied, and since such date there has
been no material adverse change in any such condition,
business or operations;
(xix) the Seller has valid business reasons for selling its
interests in the Sold Program Contracts rather than obtaining
a loan with the Sold Program Contracts as collateral;
(xx) the Seller has not disclosed and will not disclose to any
Dealer or Obligor under a Program Contract the existence of
any insurance which has been or may be purchased by the
Purchaser to protect its interests under the Program
Contracts,
(xxi) all information heretofore or hereafter furnished with
respect to the Seller to the Purchaser in connection with any
transaction contemplated by this Sale Agreement is and will be
true and complete in all material respects and does not and
will not omit to state a material fact necessary to make the
statements contained therein not misleading.
(b) with respect to each Program Contract sold pursuant to this Sale
Agreement, Seller shall represent and warrant to Purchaser as follows
on such Sale Date:
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(i) Each Program Contract (1) arises from the sale of an
Automobile and which delivery and acceptance has been fully
performed by the Obligor and the Dealer party thereto, (2)
arises from the normal course of the Dealer's business, (3)
the Obligor of which is a natural person residing in any
state, (4) the Obligor of which is not a government or a
governmental subdivision or agency, (5) the Obligor of which
is not a minor and has full power and capacity to enter into
such Program Contract, (6) is denominated and payable in
dollars in the United States, (7) is in full force and effect
and constitutes the legal, valid and binding obligation of the
Obligor in accordance with its terms, (8) is not subject to
any dispute, litigation, counterclaim or defense, or any
offset, right of offset, and any exercisable right of
rescission, (9) has an original term to maturity of not less
than 24 nor more than 72 months, (10) provides for equal
monthly payments which will cause the Program Contract to
fully amortize during its term (11) has an Amount Financed
that has been fully disbursed of not less than $5,000 or more
than $30,000, (12) has an annual percentage rate of not less
than the lesser of (A) rates as determined in the Originator's
Manual, and (B) the maximum interest rate permissible by law
with respect to such Program Contract, (13) together with the
contract applicable thereto, does not contravene any
requirements of law applicable thereto, (14) is a Program
Contract with respect to which all required consents,
approvals and authorizations have been obtained, (15) is a
Program Contract secured by a purchase money security interest
in the Automobile that has been recorded or applied for in the
name of the Seller and assigned to the Purchaser which
security interest is or is reasonably expected to be in full
force and effect, in each case, subject to no prior or equal
liens, claims or encumbrances, (16) was purchased by the
Seller using and conforming to the Originator's Manual, (17)
requires the Seller to be named as loss payee or beneficiary
(as applicable) under an insurance policy with respect to the
Automobile related to such Program Contract and entitles the
Seller to the benefits of such insurance policy, (18) requires
no additional action by the Seller before becoming a valid and
binding obligation of the Obligor thereunder, enforceable
against such Obligor in accordance with its terms, (19)
relates to an Automobile with respect to which the Obligor
made at least the minimum down payment as specified in the
Originator's Manual and in the form and manner described in
the Originator's Manual, including, but not limited to a down
payment that is made with the Obligor's own cash money and
which is not borrowed, deferred (except for deferred payments
that are allowed by law and disclosed as deferred in the
Contract) or obtained as a cash advance on a credit card or
other open line of credit, and (20) complies in all respects
with the requirements of the Originator's Manual .
(ii) Each Program Contract was originated by a Dealer that had
all necessary licenses and permits to originate Program
Contracts in the state where such Dealer was located, was
fully and properly executed by the parties thereto, was
purchased by the Seller from such Dealer under an existing
Dealer Agreement with the Seller, was a Dealer and was validly
assigned by the Dealer to the Seller.
(iii) Each Program Contract contains customary and enforceable
provisions such as to render the rights and remedies of the
holder thereof adequate for realization against the collateral
security.
(iv) Each Program Contract was originated by a Dealer to an
Obligor and was sold by the Dealer to the Seller without any
fraud or material misrepresentation on the part of such Dealer
or on the part of the Obligor.
(v) Such Program Contract complied at the time it was
purchased by the Seller including the sale of any related
physical damage, credit life and credit accident and death
insurance, Gap or debt cancellation coverage, and any extended
service contracts at the time it was originated or made, as of
the date hereof in all material respects with all requirements
of applicable federal, state and local laws and regulations
thereunder, including usury laws, the federal Truth-in-Lending
Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, the Fair Debt Collection
Practices Act, the Federal Trade Commission Act, the
Rees-Levering Act, and state adaptations of the National
Consumer Act and of the Uniform Consumer credit Code, other
consumer credit laws and equal credit opportunity and
disclosure laws and other applicable legal requirements.
(vi) Such Program Contract has not been satisfied,
subordinated or rescinded, nor has the related Automobile been
released from the lien granted by such Program Contract, in
whole or in part.
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(vii) No provision of any Program Contract has been waived,
altered, extended, revised or otherwise modified in any
respect since its origination. No Program Contract has been
modified as a result of the Soldier's and Sailor's Relief Act
of 1940, as amended.
(viii) No right of rescission, setoff, counterclaim or defense
has been asserted or threatened against the Seller with
respect to such Program Contract.
(ix) The lien certificate for each Automobile either (i) shows
the Purchaser or Seller or their nominee named as the original
secured party under each Program Contract or (ii) has been
applied for in the name of the Purchaser or Seller or their
nominee. If the Program Contract was originated in a state in
which a filing or recording is required of the secured party
to perfect a security interest in motor vehicles, such filing
or recording has been duly made to show the Purchaser or
Seller or their nominee named as the original secured party
under the related Program Contract. Immediately after the
sale, transfer and assignment thereof to the Purchaser, each
Program Contract will be secured by an enforceable and
perfected security interest in the Automobile in favor of the
Purchaser or Seller as secured party, which security interest
is prior to all other liens and security interests in such
Automobile (except, as to priority, for any lien for taxes,
labor or materials affecting an Automobile that attach to the
Automobile after the sale of the Program Contract) and which
lien is not a preference under Section 544 of the United
States Bankruptcy Code. For purposes of this section, Seller
also represents and warrants that the lien, as applied for
pursuant to the requirements herein, will be obtained in a
timely manner such as not to adversely affect the interests of
Purchaser in the Automobile.
(x) No liens or claims have been asserted or filed for taxes,
work, labor or materials relating to the Automobile that are
liens prior to, or equal or coordinate with, the security
interest in the Automobile granted by any Program Contract,
and the Obligor has good and marketable title to the
Automobile subject to no liens other than the security
interest under the Program Contract.
(xi) Upon sale hereunder, such Program Contract has not been
sold, transferred, assigned, offered for purchase, or pledged
by the Seller to any Person or Financial Institution other
than the Purchaser; the Seller has good and marketable title
to such Program Contract free and clear of all liens and
rights of others claiming by or through the Purchaser (other
than the rights of the Obligor to the Automobile thereunder)
and, following the Sale Date, the Purchaser shall have good
and marketable title to such Program Contract, free and clear
of all liens and rights of others claiming by or through the
Purchaser (other than the rights of the Obligor to the
Automobile thereunder); and the transfer has been perfected
under UCC for the applicable jurisdiction.
(xii) Such Program Contract has not been purchased by the
Seller from a Dealer in, nor is subject to the laws of, any
jurisdiction under which the sale, transfer and assignment of
such Program Contract pursuant to the Sale Agreement is
unlawful, void or voidable. No agreement has been entered into
with any Obligor that prohibits, restricts or conditions the
assignment of any portion of the Program Contracts.
(xiii) There is only one originally executed contract for each
Program Contract.
(xiv) Such Program Contract constitutes "chattel paper" as
defined in the UCC.
(xv) Such Program Contract has not been included in a "fleet
sale" (i.e., a sale to a single Obligor of more than five
vehicles).
( xvi) all amounts due and payable by the Seller to the Dealer
under the Dealer Agreement with respect to such Program
Contracts have been paid and no Dealer has any rights in, or
claims against, the Program Contracts.
(xvii) The Seller has indicated in its computer files that
such Program Contract has been sold to the Purchaser.
11
<PAGE>
(xviii) The Seller has taken such action as is necessary to
obtain a first perfected security interest in favor of the
Purchaser in such Program Contract, and the proceeds thereof.
(xix) The Seller has done nothing to convey any right to any
Person that would result in such Person having a right to
payments due under such Program Contract or otherwise to
impair the rights of the Purchaser in any Program Contract or
the proceeds thereof.
(xx) No Program Contract is assumable by another Person in a
manner which would release the Obligor thereof from such
obligor's obligations to the Purchaser with respect to such
Program Contract.
(xxi) No selection procedures adverse to the Purchaser have
been utilized in selecting such Program Contract from all
other Program Contracts owned by the Seller.
(xxii) As of the Sale Date, no Obligor is subject to a current
bankruptcy proceedings and the Program Contract is current
with regard to payment and is not otherwise in default
according to its terms and conditions.
(xxiii) Each Program Contract is a fully amortizing simple
interest receivable which provides for level monthly payments
which, if made when due, shall fully amortize the Amount
Financed over the original term.
(c) It is understood and agreed that the representations and warranties
set forth in this Section 5, measured as of the dates made, shall survive
the sale of the Sold Program Contract to the Purchaser and any assignment
of the Sold Program Contract by the Purchaser to any subsequent assignee
and shall continue so long as any Sold Program Contract shall remain
outstanding with regard to payment thereunder and shall remain subject to
any outstanding terms and conditions. The Seller acknowledges that the
Purchaser may assign all of its right, title and interest in and to the
Sold Program Contract and its right to exercise the remedies created by
this Section 5 hereof to a subsequent assignee. The Seller agrees that,
upon such assignment, any subsequent assignee may enforce directly, without
joinder of the Purchaser, the repurchase obligations of the Seller set
forth in Section 5(d) with respect to breaches of the representations and
warranties set forth in section 5(a) and Section 5(b) hereof.
(d) Upon discovery by the Seller, the Purchaser or any subsequent
assignee of a breach of any of the representations and warranties in
Section 5(a) or Section 5(b) hereof , the party discovering such breach
shall give prompt written notice to the other parties. Thereafter, if
requested by notice from the Purchaser or any subsequent assignee, the
Seller shall immediately repurchase such Sold Program Contract by remitting
the Repurchase Price in the manner specified in such notice. Any such
repurchase shall be made without recourse against, or warranty, express or
implied, of such party. Seller will not be under an obligation to
repurchase a Sold Program Contract but will assist Purchaser in obtaining a
Dealer repurchase where a Sold Program Contract involves fraud or a
material misrepresentation that the Seller had no knowledge of provided
Seller completed all required verification steps set forth in the
Originator's Manual .
(e) Upon such repurchase and the payment of the Repurchase Price, the
Purchaser or any subsequent assignee shall execute and deliver an
assignment and the Purchaser or any subsequent assignee shall assign to
Seller, all of the Purchaser's or any subsequent assignee's right, title
and interest in such repurchased Program Contract, without recourse,
representation or warranty, except as to the absence of liens, charges or
encumbrances created by or arising as a result of actions of the Purchaser
or any subsequent assignee other than liens, charges or encumbrances
created or arising out of this Sale Agreement. The Purchaser and any
subsequent assignee agree that it will promptly execute and deliver and
take all further action, that may be necessary or appropriate, or that the
Seller may reasonably request, in order to perfect, protect or more fully
evidence the transfer of ownership of such Program Contract to Seller
pursuant to Section 5(d). It is understood and agreed that the obligation
of the Seller to repurchase any Program Contract pursuant to Section 5(d)
shall constitute the sole remedy for the breach of any representation or
warranty under Section 5(b); provided, that the foregoing limitation shall
not be construed to limit in any manner the Purchaser's rights to (i)
declare the Termination Date to have occurred to the extent that such
breach also constitutes, or contributes to the determination of, an Event
of Purchase Termination, (ii) indemnification to the extent available under
Section 10, or (iii) offset the amount of the Repurchase Price from the
Purchase Price of any Sold Program Contracts.
13
<PAGE>
SECTION 6. ADDITIONAL COVENANTS OF THE SELLER. The Seller shall, unless
the Purchaser shall otherwise consent in writing:
(a) Comply in all material respects with all applicable laws, rules,
regulations and orders with respect to it, its business and properties and
all Program Contracts;
(b) Preserve and maintain its existence, rights, franchises and
privileges in the jurisdiction of its organization and all necessary Sales
Finance Company Licenses;
(c) Cause to be delivered to the Purchaser on, or within 30 days prior
to, each anniversary of the date of this Agreement, (i) an Officer's
Certificate of the Seller in the form of Exhibit E, dated the date of such
delivery; (ii) a certificate in the form required by Section 4(a)(vii); and
(iii) an opinion of counsel, in form and substance satisfactory to the
Purchaser, reaffirming as of the date of its delivery the opinion of
counsel with respect to the Seller and delivered to the Purchaser on the
Closing Date pursuant to Section 4(a)(viii);
(d) Furnish, or cause to be furnished, to the Purchaser, as soon as
available and in any event within 120 days after the end of each fiscal
year of the Seller, a copy of the consolidated financial statement of the
Seller, its consolidated Subsidiaries, as of the end of such year beginning
with the year ending December 31, 1999, and the related Consolidated
statements of income and retained earnings, and of cash flow, of the
Seller, and its consolidated Subsidiaries for such year, certified by a
firm of independent certified public accountants;
(e) Promptly after the occurrence thereof, notice of any pending or
threatened action, suit or proceeding of a type described in Section
5(a)(vii);
(f) As soon as possible and in any event within five days after the
occurrence of an Event of Purchase Termination (including without
limitation a material adverse change in the financial condition of the
Seller as determined by the Purchaser) or each event which, with the giving
of notice or lapse of time or both, would constitute an Event of Purchase
Termination, the statement of an officer of the Seller setting forth
complete details of such Event of Purchase Termination or event and the
action which the Seller has taken, is taking and proposes to take with
respect thereto;
(g) Promptly provide and verify the accuracy of any information
concerning the Seller required for any offering document with respect to
the sale of asset-backed securities backed by the Sold Program Contract
(the "Securities"), which may include information relating to the Seller
and its operations in connection with the origination of Program Contracts,
and such information may be published in such offering documents and relied
upon by the Purchaser and the assignee of the Purchaser;
(h) Acquire, maintain, and provide to the Purchaser such information as
the Purchaser may reasonably require (at least semi-annually) from time to
time regarding any Dealer whose Automobile sales are financed or are to be
financed by Program Contracts which are sold or to be sold hereunder and
shall represent that such information is, to the best knowledge,
information, and belief of the Seller, true and correct. To the extent
Seller has the right, by agreement or otherwise, to inspect or audit the
books and records of any Dealer, the Seller shall allow the Purchaser, at
its expense, to exercise such right on the Seller's behalf;
(i) Maintain, at its own expense, with responsible insurance companies
such insurance on such of its properties, in such amounts and against such
risks as is customarily maintained by similar businesses. No provision of
this Section 6(i) requiring insurance shall relieve the Seller from its
duties and obligations as set forth in this Sale Agreement. The Seller
shall be deemed to have complied with this provision in whole or in
applicable part if one of its Affiliates has such applicable policy or
policies and, by the terms thereof, the coverage afforded thereunder
extents to the Seller. The Seller shall, upon the request of the Purchaser,
file with the Purchaser a list of the insurance then in effect, stating the
names of the insurance companies, the amounts of the insurance, the dates
of the expiration thereof, and the properties and risks covered thereby.
Each policy required by this Section 6(i) shall not be canceled or modified
in a materially adverse manner without ten days' prior written notice to
the Purchaser; and
13
<PAGE>
(j) Promptly, deliver to the Purchaser, from time to time, such other
information, documents, records or reports respecting the Program Contract
or the condition or operations, financial or otherwise, of the Seller or
any of its Subsidiaries, as the Purchaser may, from time to time,
reasonably request (including, but not limited to, such information,
document, records or reports which the Purchaser is requested or required
by applicable law to provide to a third party -- including any Governmental
Authority).
(k) Upon receipt of seven days prior written notice, Seller shall
permit Purchaser to audit Seller's operations at Seller's locations. Such
audit shall be limited to a review of those items that relate to this
Agreement. Such audit shall be during Seller's normal business hours. All
of Purchaser's costs for such audit shall be borne by Purchaser. In lieu of
an audit at the Seller's location, Purchaser may, from time to time,
request that information, documents, or records required pursuant to such
audit be sent to Purchaser.
(l) Seller shall provide Purchaser with copies of all contracts,
agreements or other forms that will be included in the Contract File or
included in the Purchased Assets. Purchaser shall have the right to approve
all such forms before its purchase of any Program Contracts under this
Agreement.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Seller as follows:
(a) Purchaser is duly organized, validly existing and in good standing
as a limited liability company under the laws of Delaware, with the power and
authority to own its properties and to conduct its business.
(b) Purchaser is duly qualified to do business, in good standing and
possesses all of the necessary licenses and approvals in all jurisdictions where
failure to do so would adversely affect its ability to perform its obligations
under this Sale Agreement or the enforceability or collectibility of the Sold
Program Contracts.
(c) Purchaser has the power, authority and legal right to execute and
deliver this Sale Agreement and to carry out its terms, and the execution,
delivery and performance of this Sale Agreement has been duly authorized by
Purchaser by all necessary corporate action.
(d) this Sale Agreement constitutes a legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms.
(e) the execution, delivery and performance of this Sale Agreement, the
consummation of the transaction contemplated hereby and the fulfillment of the
terms hereof will not conflict with, result in any breach of or constitute (with
or without notice or lapse of time) a default under the charter or bylaws of the
Purchaser, or conflict with or breach any of the terms or provisions of, or
constitute (with or without notice or lapse of time) a default under, any
indenture, agreement, mortgage, deed of trust or other instrument to which
Purchaser is a party or by which Purchaser is bound or to which any of its
properties are subject, or result in the creation or imposition of any lien upon
any of its properties pursuant to the terms of any such indenture, agreement,
mortgage, deed of trust or other instrument, or constitute a violation of any
law, order, rule or regulation applicable to Purchaser or its properties of any
Governmental Authority having jurisdiction over Purchaser or any of its
properties.
(f) There are no proceedings, investigations pending, or, to
Purchaser's knowledge, threatened, before any Governmental Authority having
jurisdiction over Purchaser or any of their respective properties: (i) asserting
the invalidity of this Sale Agreement, (ii) seeking to prevent the consummation
of any of the transactions contemplated by this Sale Agreement, or (iii) seeking
any determination or ruling that might materially and adversely affect the
performance by Purchaser of its respective obligations under, or the validity or
enforceability of, this Sale Agreement.
SECTION 8. TERMINATION. This Sale Agreement will terminate on the
earlier to occur of (such date, the "Termination Date") the following
events:
(a) The date of Event of Purchase Termination shall have been declared
or automatically occurred in accordance with the provisions of Section 9;
or
14
<PAGE>
(b) The first anniversary of the date hereof (it being understood that
if neither party has notified the other before 45 days of said anniversary
date of its intention to terminate then the term of this Sale Agreement
will automatically be renewed for successive one-year terms, provided that
Purchaser or Seller can terminate this Agreement without cause during the
renewal period by providing 90 days prior written notice ).
SECTION 9. EVENTS OF PURCHASE TERMINATION. If any of the following
events (each an "Event of Purchase Termination") shall occur and be
continuing:
(a) The Seller shall materially fail to perform or observe any term,
covenant or agreement contained in this Sale Agreement and such
failure shall remain unremedied for thirty days after written
notice thereof shall have been given by the Purchaser to the
Seller; or
(b) The Purchaser shall materially fail to perform or observe any
term, covenant or agreement contained in this Sale Agreement and
such failure shall remain unremedied for thirty days after written
notice thereof shall have been given by the Seller to the
Purchaser; or
(c) A default shall have occurred and be continuing under any
instrument or agreement evidencing, securing or providing for the issuance
of Debt of the Seller; or
(d) The Seller shall generally not pay any of its respective Debts as
such Debts become due, or the Seller shall admit in writing its inability
to pay its Debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or against
the Seller seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or any of its Debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors,
or seeking the entry of an order for relief or the appointment of a
conservator, receiver, trustee, custodian or other similar official for it
or for any substantial part of its property, or any of the actions sought
in such proceeding (including, without limitation, the entry of and order
for relief against, or the appointment of a receiver, trustee, custodian or
other similar official for, it or for any substantial part of its property)
shall occur; or the Seller shall take any corporate action to authorize any
of the actions set forth in this subsection; or
(e) Judgments or orders for the payment of money (other than such
judgments or orders in respect of which adequate insurance is maintained
for the payment thereof) in excess of $15,000 in the aggregate against the
Seller shall remain unpaid, unstayed on appeal, undischarged, unbonded or
undismissed for a period of 30 days or more; or
(f) There is a material breach of any of the representations and
warranties of the Seller set forth in Section 5(a);
(g) Any Governmental Authority (including the Internal Revenue Service
or the Pension Benefit Guaranty Corporation) shall file notice of a lien
with regard to the assets of the Seller other than a lien (i) limited by
its terms to assets other than Program Contracts and (ii) not materially
adversely affecting the financial condition of the Seller; or
(h) A deterioration has taken place in the quality of the Sold Program
Contracts (and Seller and Purchaser are unable to renegotiate the Fee
Schedule within 10 days of Purchaser's notice of deterioration of the Sold
Program Contracts) or in the collectibility thereof which the Purchaser, in
its sole discretion, determines to be material; or
(i) This Sale Agreement shall for any reason cease to evidence the
transfer to the Purchaser of the legal and equitable title to, and
ownership of the Sold Program Contracts; or
(j) any company providing insurance to the Purchaser in respect of the
Sold Program Contracts determines that the Sold Program Contracts
originated by the Seller are, as a general matter, ineligible for insurance
coverage; or the rating agency rating the Securities determines that
inclusion of Sold Program Contracts originated by the Seller in the
applicable trust will result in a review with negative implications,
suspension, downgrade, withdrawal or other impairment of the rating
assigned to such Securities.
15
<PAGE>
(k) Seller does not offer at least 500 Eligible Program Contracts per
month beginning three (3) months after the Closing Date.
(l) In the event that any of the Events of Purchase Termination
described above (except for subsections (d) or (i)) herein shall have
occurred, the Purchaser shall have provided the Seller (or the Seller shall
have provided the Purchaser) with a written notice of its intent to
terminate this Sale Agreement and 30 Business Days shall have lapsed since
such notice; then and in any such event, the Purchaser (or the Seller) may,
by notice to the Seller (or the Purchaser) declare an Event of Purchase
Termination to have occurred, whereupon the Termination Date shall
forthwith occur, without demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Seller (or the Purchaser). In
the event that any of the Events of Purchase Termination described in
subsections (d) or (i) herein shall have occurred, an Event of Purchase
Termination shall automatically occur, without demand, protest or any
notice of any kind, all of which are hereby expressly waived by the Seller
and the Purchaser. Upon any such declaration or automatic occurrence, the
Purchaser shall have, in addition to all other rights and remedies under
this Sale Agreement, all other rights and remedies provided under the UCC
and other applicable law, which rights shall be cumulative.
SECTION 10. INDEMNIFICATION. Without limiting any other rights that an
Indemnified Party may have hereunder or under applicable law, the Seller
hereby agrees to pay on demand to each Indemnified Party Indemnified
Amounts which may be imposed on, incurred by or asserted against an
Indemnified Party in any way arising out of or resulting from this Sale
Agreement including without limitation:
(a) use by the Seller of proceeds of any Sale or in respect of any Sold
Program Contract;
(b) reliance on any representation or warranty made or deemed made by
the Seller (or any of its officers) under or in connection with this Sale
Agreement;
(c) the failure by the Seller to comply with any term, provision or
covenant contained in this Sale Agreement, or any agreement executed in
connection with this Sale Agreement; or
(d) the failure to vest and maintain vested in the Purchaser, or to
transfer to the Purchaser, legal and equitable title to and ownership of
the Program Contracts which are, or are purported to be, Sold Program
Contracts, together with all proceeds in respect thereof, free and clear of
any Adverse Claim (except as permitted hereunder) whether existing at the
time of the proposed sale of such Program Contract or at any time
thereafter and without limitation to the remedies set forth in Section 5;
excluding, however, (a) recourse for any uncollectible Sold Program
Contract (provided that the foregoing shall not be deemed to limit the
Purchaser's rights under Sections 5(d) and 9(c )), and (b) Indemnified
Amounts to the extent resulting from the negligence or willful misconduct
on the part of such Indemnified Party. The Seller acknowledges that the
Purchaser may assign its rights of indemnity granted hereunder to an
assignee and upon such assignment, such assignee shall have all rights of
the Purchaser hereunder and may in turn assign such rights. The Seller
agrees that, upon such assignment, such assignee may enforce directly,
without joinder of the Purchaser, the indemnities set forth in this
Section.
(e) any actions by Seller that result in a loss by or claim against
Purchaser arising out of Seller's performance under this Agreement,
provided this indemnification shall not cover loss or claims that are the
result of any actions by Purchaser.
SECTION 11. CONFIDENTIALITY; NONCOMPETITION. Except to the extent
otherwise required by applicable law or unless the Purchaser shall
otherwise consent in writing, the Seller (including directors, officers,
employees, and counsel) agrees to keep confidential the existence of this
Agreement and to maintain the confidentiality of the original or any copy
of all or any part of this Sale Agreement (and all drafts hereof and
documents ancillary hereto including any letters of intent) and all
proprietary information relating to Purchaser's business, including but not
limited to, credit underwriting criteria, products, customer lists, pricing
policies, employment records and policies, operational methods, marketing
plans and strategies, product development techniques or inventions and
research programs, trade know-how, trade secrets, specific software,
algorithms, computer processing systems, object and source codes, user
manuals, systems documentation, and other business and financial affairs of
Purchaser in its communications with third parties and otherwise and agrees
not to disclose, deliver or otherwise make available such materials to any
third party (other than its directors, officers, employees, accountants or
counsel).
16
<PAGE>
SECTION 12. NO PROCEEDINGS. The Seller hereby agrees that it will not,
directly or indirectly, institute, or cause to be instituted, against the
Purchaser any proceeding of the type referred to in Section 9(dc) so long
as there shall not have elapsed one year plus one day since the latest
maturing Securities issued by the Purchaser have been paid in full in cash
it being understood that such provision in no way limits the Seller's
rights and remedies pursuant to this Sale Agreement.
SECTION 13. NOTICES, ETC. All notices and other communications provided
for hereunder shall, unless otherwise stated herein, be in writing and
mailed or telecommunicated, or delivered as to each party hereto, at its
address set forth under its name on the signature page hereof or at such
other address as shall be designated by such party in a written notice to
the other parties hereto. All such notices and communications shall not be
effective until received by the party to whom such notice or communication
is addressed.
SECTION 14. NO WAIVER; REMEDIES. No failure on the part of the Seller
or the Purchaser to exercise, and no delay in exercising, any right
hereunder or under any Sale Assignment shall operate as a waiver thereof;
nor shall any single or partial exercise of any right hereunder preclude
any other or further exercise thereof or the exercise of any other right,
The remedies herein provided are cumulative and not exclusive of any other
remedies provided by law.
SECTION 15. BINDING EFFECT; ASSIGNABILITY. This Sale Agreement shall be
binding upon and inure to the benefit of the Seller and the Purchaser, and
their respective successors and permitted assigns. The Seller may not
assign any of its rights and obligations hereunder or any interest herein
without the prior written consent of the Purchaser. The Purchaser may,
assign all of its rights hereunder to one or more Persons. This Sale
Agreement shall create and constitute the continuing obligations of the
parties hereto in accordance with its terms, and shall remain in full force
and effect until its termination; provided, that the rights and remedies
with respect to any breach of any representation and warranty made by the
Seller pursuant to Section 5 and the indemnification and payment provisions
of Section 10 shall be continuing and shall survive any termination of this
Sale Agreement.
SECTION 16. AMENDMENTS; CONSENTS AND WAIVERS; ENTIRE AGREEMENT. No
modification, amendment or waiver of, or with respect to, any provision of
this Sale Agreement, and all other agreements, instruments and documents
delivered hereto, nor consent to any departure by the Seller from any of
the terms or conditions hereof shall be effective unless it shall be in
writing and signed by each of the parties hereto. Any waiver or consent
shall be effective only in the specific instance and for the purpose for
which given. No consent to or demand by the Seller in any case shall, in
itself, entitle it to any other consent or further notice or demand in
similar or other circumstances. This Sale Agreement and the documents
referred to herein embody the entire agreement of the Seller and the
Purchaser with respect to the Sold Program Contracts and supersede all
prior agreements and understandings relating to the subject hereof.
SECTION 17. SEVERABILITY. In case any provision in or obligation under
this Sale Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provision or obligations, or of such provision or obligation, shall not in
any way be affected or impaired thereby in any other jurisdiction.
SECTION 18. MISCELLANEOUS.
Purchaser shall provide Seller data relating to the
performance of all Sold Program Contracts. Such data will be of the type
and level of detail considered necessary by the Seller, in its sole
discretion, to allow Seller to perform static pool and other analyses on
such Sold Program Contracts. It is understood that this condition becomes
effective once the volume of Sold Program Contracts reaches a level where
such analyses would be considered by the Seller to be meaningful. It is
also understood that, once effective, this provision shall apply to all
Sold Program Contracts since the date of this Sale Agreement and for the
life of all such Sold Program Contracts.
SECTION 19. GOVERNING LAW. THIS SALE AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICT
OF LAWS PROVISIONS) OF THE STATE OF COLORADO.
17
<PAGE>
SECTION 20. EXECUTION IN COUNTERPARTS. This Sale Agreement may be
executed by the parties hereto in separate counterparts, each of which when
so executed shall be deemed to be an original and both of which when taken
together shall constitute one and the same agreement.
IN WITNESS WHREOF, the parties have cause this Sale Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CONSUMER PORTFOLIO SERVICES, INC.
By _________________________________
Name: Charles E. Bradley, Jr.
Title: President and CEO
Address: Consumer Portfolio Services, Inc.
16355 Laguna Canyon Road
Irvine, California 92618
Attention: Charles E. Bradley, Jr. , President/CEO
With a copy to:
Dick Trotter, Senior Vice President Originations
Telephone number: (800) 898-6814
Facsimile number: (800) 881-6950
FAIRLANE CREDIT LLC
By _________________________________
Name: Jerry L. Heimlicher
Title: President
Address:
1755 Telstar Drive
Suite 400
Colorado Springs, CO 80920
Attention: Jerry L. Heimlicher
With a copy to: Doug Hubler, Vice President,
Marketing and Strategic Planning
Telephone number: 719-266-7564
Facsimile number: 719-266-7572
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,518
<SECURITIES> 0
<RECEIVABLES> 90,851
<ALLOWANCES> 1,358
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<PP&E> 3,663
<DEPRECIATION> 3,262
<TOTAL-ASSETS> 360,677
<CURRENT-LIABILITIES> 113,637
<BONDS> 40,000
0
0
<COMMON> 62,421
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<TOTAL-LIABILITY-AND-EQUITY> 360,677
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<NET-INCOME> (9,037)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
