<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 1-14116
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0459135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 753-6800
Securities registered pursuant to section 12(b) of the Act:
Title of each class:
RISING INTEREST SUBORDINATED REDEEMABLE SECURITIES DUE 2006
10.50% PARTICIPATING EQUITY NOTES DUE 2004
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 / /
Indicate by check mark if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value on April 14, 1999 (based on the $3.50 closing price
on the Nasdaq Stock Market on that date) of the voting stock beneficially held
by non-affiliates of the registrant was $29,506,281. The number of shares of the
registrant's Common Stock outstanding on April 14, 1999 was 15,658,501.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for its 1999 annual meeting of shareholders is
incorporated by reference into Part III of this report.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
General
Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries,
the "Company") is a consumer finance company specializing in the business of
purchasing, selling and servicing retail automobile installment contracts
("Contracts") originated by licensed motor vehicle dealers ("Dealers") in the
sale of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides indirect financing to Dealer customers with
limited credit histories, low incomes or past credit problems ("Sub-Prime
Customers"). The Company serves as an alternative source of financing for
Dealers, allowing sales to customers who otherwise might not be able to obtain
financing. The Company does not lend money directly to consumers. Rather, it
purchases installment Contracts from Dealers.
The Company has various wholly owned and partially owned subsidiaries. The
wholly owned subsidiaries include CPS Marketing, Inc., Alton Receivables Corp.
("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding Corp. ("CPSFC") and CPS
Warehouse Corp. ("CPSWC"). Alton, CPSRC, CPSFC and CPSWC are limited purpose
corporations formed to accommodate the structures under which the Company
purchases and sells its Contracts. CPS Marketing, Inc. employs marketing
representatives who solicit business from Dealers. The Company's partially owned
subsidiaries include Samco Acceptance Corp., Linc Acceptance Company, LLC, and
CPS Leasing, Inc., each of which is 80% owned by the Company.
CPS was incorporated and began its operations in 1991. From inception through
December 31, 1998 the Company has purchased approximately $2.4 billion of
Contracts, and as of December 31, 1998, had an outstanding servicing portfolio
of approximately $1.5 billion. The Company makes the decision to purchase
Contracts exclusively from its headquarters location. It obtains the funds for
such purchases primarily by reselling the Contracts in securitization
transactions. The Company services the Contracts from two regional centers, one
in its California headquarters, and the other in Virginia.
Prior to December 11, 1995, the Company was a majority-owned subsidiary of
CPS Holdings, Inc., a Delaware corporation ("Holdings"). In September 1995, the
shareholders of the Company approved the merger of Holdings into the Company.
The merger was completed on December 11, 1995, and had no effect on the
Company's consolidated financial statements. Prior to the merger, Charles E.
Bradley, Sr., the Company's Chairman of the Board, was the principal shareholder
of Holdings.
The Market We Serve
The Company's automobile financing programs are designed to serve customers
who generally would not qualify for automobile financing from traditional
sources, such as commercial banks, credit unions and the captive finance
companies affiliated with major automobile manufacturers. Such customers
("Sub-Prime Customers") generally have limited credit histories, low incomes or
past credit problems, and are therefore often unable to obtain credit from
traditional sources of automobile financing. (The terms "prime" and "sub-prime"
reflect the Company's categorization of customers and bear no relationship to
the prime rate of interest or persons who are able to borrow at that rate.)
Because the Company serves customers who are unable to meet the credit standards
imposed by most traditional automobile financing sources, the Company generally
receives interest at rates higher than those charged by traditional automobile
financing sources. The Company also expects to sustain a higher level of credit
losses than traditional automobile financing sources since the Company provides
financing in a relatively high risk market.
2
<PAGE> 3
Marketing
The Company directs its marketing efforts to Dealers, rather than to
consumers. As of December 31, 1998, the Company was a party to its standard form
dealer agreements ("Dealer Agreements") with 4,547 Dealers. Approximately 93.0%
of these Dealers are franchised new car dealers that sell both new and used cars
and the remainder are independent used car dealers. For the year ended December
31, 1998, approximately 92.0% of the Contracts purchased by the Company
consisted of financing for used cars and the remaining 8.0% for new cars.
The Company establishes relationships with Dealers through Company
representatives who contact a prospective Dealer to explain the Company's
Contract purchase programs, and who and thereafter provide Dealer training and
support services. As of December 31, 1998, the Company had 72 representatives,
69 of whom are employees and 3 of whom are independent. The representatives are
contractually obligated to represent the Company's financing program
exclusively. The Company's representatives present the Dealer with a marketing
package, which includes the Company's promotional material containing the terms
offered by the Company for the purchase of Contracts, a copy of the Company's
standard-form Dealer Agreement, examples of monthly reports and required
documentation relating to Contracts. Marketing representatives have no authority
relating to the decision to purchase Contracts from Dealers. The Company's
acceptance of a Dealer is subject to its analysis of, among other things, the
Dealer's operating history.
Most of the Dealers under contract with CPS regularly submit Contracts to the
Company for purchase, although they are under no obligation to submit any
Contracts to the Company, nor is the Company obligated to purchase any
Contracts. During the year ended December 31, 1998, no Dealer accounted for more
than 1.0% of the total number of Contracts purchased by the Company. The
following table sets forth the geographical sources of the Contracts purchased
by the Company (based on the addresses of the customers as stated on the
Company's records) during the years ended December 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
Contracts Purchased During Year Ended
----------------------------------------------------------
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Number Percent Number Percent
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
California 13,960 16.7% 9,035 18.1%
Florida 5,832 7.0% 3,404 6.8%
North Carolina 5,304 6.3% 1,613 3.2%
Texas 5,193 6.2% 3,649 7.3%
Alabama 4,707 5.6% 2,070 4.1%
Louisiana 4,355 5.2% 3,142 6.3%
Pennsylvania 4,239 5.1% 3,622 7.2%
Michigan 4,119 4.9% 1,954 3.9%
Illinois 3,808 4.6% 2,413 4.8%
Tennessee 2,997 3.6% 2,012 4.0%
Georgia 2,738 3.3% 1,503 3.0%
New York 2,690 3.2% 2,941 5.9%
South Carolina 2,152 2.6% 715 1.4%
Maryland 1,859 2.2% 1,586 3.2%
Ohio 1,768 2.1% 992 2.0%
Hawaii 1,585 1.9% 867 1.7%
Other States 16,261 19.5% 8,545 17.1%
------------- -----------
Total 83,567 50,063
============= ===========
</TABLE>
As discussed in greater detail below (see "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources"), the Company has recently elected to conserve captial by materially
reducing its Contract purchase activities. In connection with this decision, the
Company has reduced the number of its marketing representatives to 48, as of
April 10, 1999, and as of that
3
<PAGE> 4
date was purchasing Contracts in 23 states. Dealers in such states under
contract with the Company totaled 2,837 as of April 10, 1999.
Origination of Contracts
Dealer Origination. When a retail automobile buyer elects to obtain financing
from a Dealer, the Dealer takes a credit application to submit to its financing
sources. Typically, a Dealer will submit the buyer's application to more than
one financing source for review. The Company believes the Dealer's decision to
finance the automobile purchase with the Company, rather than other financing
sources, is based primarily upon an analysis of the monthly payment that will be
offered to the automobile buyer, the discounted purchase price offered for the
Contract, the timeliness, consistency and predictability of response, the cash
resources of the financing source, and any conditions to purchase.
Upon receipt of an application from a Dealer, the Company's administrative
personnel order a credit report to document the buyer's credit history. If, upon
review by a Company loan officer, it is determined that the application meets
the Company's underwriting criteria, or would meet such criteria with
modification, the Company requests and reviews further information and
supporting documentation and, ultimately, decides whether to purchase the
Contract. When presented with an application, the Company attempts to notify the
Dealer within four hours as to whether it intends to purchase such Contract.
The actual agreement for purchase of the vehicle ("Contract") is prepared by
the Dealer. The Dealer also arranges for recording the Company's lien on the
vehicle. After the appropriate documents are signed by the Dealer and the
customer, the Dealer sells the Contract to the Company. The customer then
receives monthly billing statements.
Through December 1996, the Company had purchased Contracts from Dealers at
percentage discounts ranging from 0% to 10% of the total amount financed under
the Contracts, depending on the perceived credit risk of the Contract, plus a
flat acquisition fee, generally $200, for each Contract purchased. Percentage
discounts averaged 4.1% and 2.8% for the years ended December 31, 1995 and 1996,
respectively. The Company believes that the level of discounts and fees are a
significant factor in the Dealer's decision to submit a Contract to the Company
for purchase, and will continue to play such a role in the future. Effective
January 10, 1997, the Company began purchasing Contracts in general without a
percentage discount, charging Dealers only an acquisition fee ranging from zero
to $1,195 for each Contract purchased. The fees vary based on the perceived
credit risk and, in some cases, the interest rate on the Contract. The
acquisition fees instituted in January 1997 are larger, on average, than the
acquisition fees previously charged in conjunction with percentage discounts, so
as to result in a similar net purchase price on a typical Contract. For the
years ended December 31, 1998 and 1997, the average amount charged per Contract
purchased was $418 and $438, respectively, or 3.2% and 3.5%, respectively, of
the amount financed. In addition, during 1998 the Company began purchasing
certain Contracts of higher credit quality for which the Company pays a fee to
the Dealer. During 1998, the Company purchased 1,583 of these Contracts
representing approximately 1.9% of all Contracts purchased. The average fee paid
to Dealers on these Contracts was $531.
The Company attempts to control misrepresentation regarding the customer's
credit worthiness by carefully screening the Contracts it purchases, by
establishing and maintaining professional business relationships with Dealers,
and by including certain representations and warranties by the Dealer in the
Dealer Agreement. Pursuant to the Dealer Agreement, the Company may require the
Dealer to repurchase any Contract in the event that the Dealer breaches its
representations or warranties. There can be no assurance, however, that any
Dealer will have the financial resources to satisfy its repurchase obligations
to the Company.
4
<PAGE> 5
Objective Contract Purchase Criteria. To be eligible for purchase by the
Company, a Contract must have been originated by a Dealer that has entered into
a Dealer Agreement to sell Contracts to the Company. The Contracts must be
secured by a first priority lien on a new or used automobile, light truck or
passenger van and must meet the Company's underwriting criteria. In addition,
each Contract requires the customer to maintain physical damage insurance
covering the financed vehicle and naming the Company as a loss payee. The
Company or any purchaser of the Contract from the Company may, nonetheless,
suffer a loss upon theft or physical damage of any financed vehicle if the
customer fails to maintain insurance as required by the Contract and is unable
to pay for repairs to or replacement of the vehicle or is otherwise unable to
fulfill his or her obligations under the Contract.
The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Sub-Prime Customers and the
adequacy of the financed vehicle as security for a Contract. These criteria
include standards for price; term; amount of down payment, installment payment
and add-on interest rate; mileage, age and type of vehicle; principal amount of
the Contract in relation to the value of the vehicle; customer income level, job
and residence stability, credit history and debt serviceability; and other
factors. Specifically, the Company's guidelines limit the maximum principal
amount of a purchased Contract to 115% of wholesale book value in the case of
used vehicles or to 110% of the manufacturer's invoice in the case of new
vehicles, plus, in each case, sales tax, licensing and, when the customer
purchases such additional items, a service contract or a credit life or
disability policy. The Company does not finance vehicles that are more than
eight model years old or have in excess of 85,000 miles. Under most CPS
programs, the maximum term of a purchased Contract is 60 months; a shorter
maximum term may be applied based on the year and mileage of the vehicle, and
contracts with terms up to 72 months may be purchased if the customer is among
the more creditworthy of CPS' obligors. Contract purchase criteria are subject
to change from time to time as circumstances may warrant. Upon receiving this
information with the customer's application, the Company's underwriters verify
the customer's employment, residency, insurance and credit information provided
by the customer by contacting various parties noted on the customer's
application, credit information bureaus and other sources.
Credit Scoring. In November 1996, the Company implemented a proprietary
scoring model that assigns each Contract a numeric value, (a "credit score") at
the time the application is received from the Dealer and the customers credit
information is retrieved from the credit reporting agencies. The credit score is
based on a variety of parameters, such as the customer's job and residence
stability, the amount of the down payment, and the age and mileage of the
vehicle. The Company has developed the credit score as a means of identifying
Contracts where a review by a supervisor or manager, prior to approval, is
warranted. Regardless of the credit score a Contract originally receives, the
Company's underwriters perform the same extensive review and verification
procedures on all Contracts that are purchased. During 1998, the Company made
significant enhancements to its scoring model. These enhancements included
incorporating more of the obligor's past credit history.
Characteristics of Contracts. All of the Contracts purchased by the Company
are fully amortizing and provide for level payments over the term of the
Contract. The average original principal amount financed under Contracts
purchased in the year ended December 31, 1998 was approximately $12,903 with an
average original term of approximately 57 months and an average down payment of
14.6%. Based on information contained in customer applications, for this
twelve-month period, the retail purchase price of the related automobiles
averaged $13,202 (which excludes tax and license fees, and any additional costs
such as a maintenance contract), the average age of the vehicle at the time the
Contract was purchased was 3.5 years, and the Company's average customer at the
time of purchase was approximately 36 years old, with approximately $35,227 in
average annual household income and an average of 4.4 years' history with his or
her current employer.
5
<PAGE> 6
All Contracts may be prepaid at any time without penalty. In the event a
customer elects to prepay a Contract in full, the payoff amount is calculated by
deducting the unearned interest from the Contract balance, in the case of a
pre-computed Contract, or by adding accrued interest to the Contract balance, in
the case of a simple interest Contract.
Each Contract purchased by the Company prohibits the sale or transfer of the
financed vehicle without the Company's consent and allows for the acceleration
of the maturity of a Contract upon a sale or transfer without such consent. In
most circumstances, the Company will not consent to a sale or transfer of a
financed vehicle unless the related Contract is prepaid in full.
Dealer Compliance. The Dealer Agreement and related assignment contain
representations and warranties by the Dealer that an application for state
registration of each financed vehicle, naming the Company as secured party with
respect to the vehicle, was effected at the time of sale of the related Contract
to the Company, and that all necessary steps have been taken to obtain a
perfected first priority security interest in each financed vehicle in favor of
the Company under the laws of the state in which the financed vehicle is
registered. If a Dealer or the Company, because of clerical error or otherwise,
has failed to take such action in a timely manner, or to maintain such interest
with respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in
the financed vehicle and its security interest may be subordinate to the
interest of, among others, subsequent purchasers of the financed vehicle,
holders of perfected security interests and a trustee in bankruptcy of the
customer. The security interest of the Company or the purchaser of a Contract
may also be subordinate to the interests of third parties if the interest is not
perfected due to administrative error by state recording officials. Moreover,
fraud or forgery by the customer could render a Contract unenforceable against
third parties. In such events, the Company could suffer a loss with respect to
the related Contract. In the event the Company suffers such a loss, it will
generally have recourse against the Dealer from which it purchased the Contract.
This recourse will be unsecured, and there can be no assurance that any Dealer
will have the financial resources to satisfy its repurchase obligations to the
Company.
Servicing of Contracts
General. The Company's servicing activities consist of collecting, accounting
for and posting of all payments received; responding to customer inquiries;
taking all necessary action to maintain the security interest granted in the
financed vehicle or other collateral; investigating delinquencies; communicating
with the customer to obtain timely payments; repossessing and reselling the
collateral when necessary; and generally monitoring each Contract and any
related collateral.
Collection Procedures. The Company believes that its ability to monitor
performance and collect payments owed from Sub-Prime Customers is primarily a
function of its collection approach and support systems. The Company believes
that if payment problems are identified early and the Company's collection staff
works closely with customers to address these problems, it is possible to
correct many of them before they deteriorate further. To this end, the Company
utilizes pro-active collection procedures, which include making early and
frequent contact with delinquent customers; educating customers as to the
importance of maintaining good credit; and employing a consultative and customer
service approach to assist the customer in meeting his or her obligations, which
includes attempting to identify the underlying causes of delinquency and cure
them whenever possible. In support of its collection activities, the Company
maintains a computerized collection system specifically designed to service
automobile installment sale contracts with Sub-Prime Customers and similar
consumer obligations.
With the aid of its high penetration auto dialer, the Company typically
attempts to make telephonic contact with delinquent customers on the sixth day
after their monthly payment due date. Using coded instructions from a collection
supervisor, the automatic dialer will attempt to contact customers based on
their physical
6
<PAGE> 7
location, state of delinquency, size of balance or other parameters. If the
automatic dialer obtains a "no-answer" or a busy signal, it records the attempt
on the customer's record and moves on to the next call. If a live voice answers
the automatic dialer's call, the call is transferred to a waiting collector at
the same time that the customer's pertinent information is simultaneously
displayed on the collector's workstation. The collector then inquires of the
customer the reason for the delinquency and when the Company can expect to
receive the payment. The collector will attempt to get the customer to make a
promise for the delinquent payment for a time generally not to exceed one week
from the date of the call. If the customer makes such a promise, the account is
routed to a pending queue and is not contacted until the outcome of the promise
is known. If the payment is made by the promise date and the account is no
longer delinquent, the account is routed out of the collection system. If the
payment is not made, or if the payment is made, but the account remains
delinquent, the account is returned to the automatic dialing queue for
subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer
is uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the customer's payment due date, but could
occur sooner or later, depending on the specific circumstances.
If CPS elects to repossess the vehicle, it assigns the task to an independent
local repossession service. Such services are licensed and/or bonded as required
by law. When the vehicle is recovered, the repossessor delivers it to a
wholesale auto auction, where it is kept until sold, usually within 30 days of
the repossession. The UCC and other state laws regulate repossession sales by
requiring that the secured party provide the customer with reasonable notice of
the date, time and place of any public sale of the collateral, the date after
which any private sale of the collateral may be held and of the customer's right
to redeem the financed vehicle prior to any such sale and by providing that any
such sale be conducted in a commercially reasonable manner. Financed vehicles
repossessed generally are resold by the Company through unaffiliated wholesale
automobile networks or auctions, which are attended principally by used car
dealers. Net liquidation proceeds are applied to the customer's outstanding
obligation under the Contract.
Under the UCC and other laws applicable in most states (including
California), a creditor is entitled to obtain a deficiency judgment from a
customer for any deficiency on repossession and resale of the motor vehicle
securing the unpaid balance of such customer's Contract. However, some states
impose prohibitions or limitations on deficiency judgments. When obtained,
deficiency judgements are entered against defaulting individuals who may have
little capital or income. Therefore, in many cases, it may not be useful to seek
a deficiency judgment against a customer or, if one is obtained, it may be
settled at a significant discount.
7
<PAGE> 8
Credit Experience
The Company's financial results are dependent on the performance of the
Contracts it has purchased. The tables below document the delinquency,
repossession and net credit loss experience of all Contracts purchased by the
Company:
DELINQUENCY EXPERIENCE (1)
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Number Number Number
of of of
Contracts Amount Contracts Amount Contracts Amount
--------- ---------- --------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross servicing portfolio....... 141,396 $1,674,417 83,414 $1,031,573 47,187 $604,092
Period of delinquency (2)
31-60 days...................... 4,202 48,324 3,092 36,609 1,801 22,099
61-90 days...................... 1,869 22,335 1,243 15,303 724 9,068
91+ days........................ 1,694 20,096 1,393 17,869 768 9,906
------- ---------- ------ ---------- ------ --------
Total delinquencies(2).......... 7,765 90,755 5,728 69,781 3,293 41,073
Amount in repossession (3)...... 2,961 32,772 1,977 24,463 1,168 14,563
------- ---------- ------ ---------- ------ --------
Total delinquencies and amount
in repossession (2)............. 10,726 $123,527 7,705 $94,244 4,461 $55,636
======= ========== ====== ========== ====== ========
Delinquencies as a percent of
gross servicing portfolio....... 5.5% 5.4% 6.9% 6.8% 7.0% 6.8%
Total delinquencies and amount
in repossession as a percent of
gross servicing portfolio....... 7.6% 7.4% 9.2% 9.1% 9.5% 9.2%
</TABLE>
(1) All amounts and percentages are based on the full amount remaining to be
repaid on each Contract, including, for pre-computed Contracts, any unearned
finance charges. The information in the table represents the principal
amount of all Contracts purchased by the Company, including Contracts
subsequently sold by the Company, which it continues to service.
(2) The Company considers a Contract delinquent when an obligor fails to make at
least 90% of a contractually due payment by the following due date, which
date may have been extended within limits specified in the Servicing
Agreements. The period of delinquency is based on the number of days
payments are contractually past due. Contracts less than 31 days delinquent
are not included.
(3) Amount in repossession represents financed vehicles that have been
repossessed but not yet liquidated.
8
<PAGE> 9
NET CHARGE-OFF EXPERIENCE(1)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(Dollars in thousands)
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Average servicing portfolio outstanding.... $1,300,519 $703,100 $397,430
Net charge-offs as a percent of average
servicing portfolio (2).................... 6.5% 5.9% 5.1%
</TABLE>
(1) All amounts and percentages are based on the principal amount scheduled to
be paid on each Contract. The information in the table represents all
Contracts purchased by the Company including Contracts subsequently sold by
the Company that it continues to service.
(2) Net charge-offs include the remaining principal balance, after the
application of the net proceeds from the liquidation of the vehicle
(excluding accrued and unpaid interest).
Securitization and Sale of Contracts to Institutional Investors
The Company purchases Contracts with the primary intention of reselling them
to investors as asset-backed securities through securitizations. In connection
with the sale of the Contracts, the Company is required to make certain
representations and warranties, which are generally similar to the
representations and warranties made by Dealers in connection with the Company's
purchase of the Contracts. If the Company breaches any of its representations or
warranties to a purchaser of the Contracts, the Company will be obligated to
repurchase the Contract from such purchaser at a price equal to such purchaser's
purchase price less the related cash securitization reserve and any payments
received by such purchaser on the Contract. The Company may then be entitled
under the terms of its Dealer Agreement to require the selling Dealer to
repurchase the Contract at a price equal to the Company's purchase price, less
any payments made by the customer. Subject to any recourse against Dealers, the
Company will bear the risk of loss on repossession and resale of vehicles under
Contracts repurchased by it.
Upon the sale of a portfolio of Contracts, to an investor or a trust, the
Company mails to obligors monthly billing statements directing them to mail
payments on the Contracts to a lock-box account. The Company engages an
independent lock-box processing agent to retrieve and process payments received
in the lock-box account. This results in a daily deposit to the investor's or
the Trust's bank account of the entire amount of each day's lock-box receipts
and the simultaneous electronic data transfer to the Company of customer payment
data records. Pursuant to the Servicing Agreements, the Company is required to
deliver monthly reports to the investor or the Trust reflecting all transaction
activity with respect to the Contracts. The reports contain, among other
information, a reconciliation of the change in the aggregate principal balance
of the Contracts in the portfolio to the amounts deposited into the investor's
or the Trust's bank account as reflected in the daily reports of the lock-box
processing agent.
Pursuant to its securitization purchase commitments, the Company generally
warrants that, to the best of the Company's knowledge, no such liens or claims
are pending or threatened with respect to a financed vehicle, which may be or
become prior to or equal with the lien of the related Contracts. In the event
that any of the Company's representations or warranties proves to be incorrect,
the Trust or the investor would be entitled to require the Company to repurchase
the Contract relating to such financed vehicle.
9
<PAGE> 10
The Servicing Portfolio
The Company currently services all Contracts that it owns, as well as those
Contracts included in portfolios that it has sold to investors or securitization
trusts. Pursuant to the Company's usual form of servicing agreement (the
Company's servicing agreements with purchasers of portfolios of Contracts are
collectively referred to as the "Servicing Agreements"), CPS is obligated to
service all Contracts sold to the investors or Trusts in accordance with the
Company's standard procedures. The Servicing Agreements generally provide that
the Company will bear all costs and expenses incurred in connection with the
management, administration and collection of the Contracts serviced. The
Servicing Agreements also provide that the Company will take all actions
necessary or reasonably requested by the investor to maintain perfection and
priority of the investor's or the Trust's security interest in the financed
vehicles. CPS may in the future sell Contracts "servicing - released," that is,
with the purchaser assuming the future servicing of the purchased Contracts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The Company is entitled under most of the Servicing Agreements to receive a
base monthly servicing fee of 2.0% per annum computed as a percentage of the
declining outstanding principal balance of the non-defaulted Contracts in the
portfolio. Each month, after payment of the Company's base monthly servicing fee
and certain other fees, the investor or trust receives the paid principal
reduction of the Contracts in its portfolios and interest thereon at the fixed
rate that was agreed when the Contracts were sold to the Trust. If, in any
month, collections on the Contracts are insufficient to pay such amounts and any
principal reduction due to charge-offs, the shortfall is satisfied from the
"Spread Account" established in connection with the sale of the portfolio. The
"Spread Account" is an account established at the time the Company sells a
portfolio of Contracts, to provide security to the purchaser of the portfolio.
If collections on the Contracts exceed such amounts, the excess is utilized,
first, to build up or replenish the Spread Account to the extent required, next,
to cover deficiencies in Spread Accounts for other portfolios, and the balance,
if any, constitutes excess cash flows, which are distributed to the Company. The
Company has not received any such distributions since June 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Servicing Agreements also
provide that the Company is entitled to receive certain late fees collected from
customers.
Pursuant to the Servicing Agreements, the Company is generally required to
charge off the balance of any Contract by the earlier of the end of the month in
which the Contract becomes five scheduled installments past due or, in the case
of repossessions, the month that the proceeds from the liquidation of the
financed vehicle are received by the Company. In the case of a repossession, the
amount of the charge-off is the difference between the outstanding principal
balance of the defaulted Contract and the net repossession sale proceeds. In the
event collections on the Contracts are not sufficient to pay to the investors
the entire principal balance of Contracts charged off during the month, the
trustee draws on the related Spread Account to pay the investors. The amount
drawn would then have to be restored to the Spread Account from future
collections on the Contracts remaining in the portfolio before the Company would
again be entitled to receive excess cash. In addition, the Company would not be
entitled to receive any further monthly servicing fees with respect to the
defaulted Contracts. Subject to any recourse against the Company in the event of
a breach of the Company's representations and warranties with respect to any
Contracts and after any recourse to any insurer guarantees backing the
Certificates, the investor bears the risk of all charge-offs on the Contracts in
excess of the Spread Account. The investors' rights with respect to
distributions from the Trusts are senior to the Company's rights. Accordingly,
variation in performance of pools of Contracts affects the Company's ultimate
realization of value derived from such Contracts.
The Servicing Agreements are terminable by the trust (or by the insurer of
certificates issued by the trust) in the event of certain defaults by the
Company and under certain other circumstances. As of December 31, 1998, 7 of the
Company's 22 securitized pools had incurred cumulative losses exceeding certain
predetermined levels, which in turn has
10
<PAGE> 11
given the insurer the right to terminate the Servicing Agreements. To date, the
insurer has waived its right to terminate the Servicing Agreements.
Competition
The automobile financing business is highly competitive. The Company competes
with a number of national, local and regional finance companies with operations
similar to those of the Company. In addition, competitors or potential
competitors include other types of financial services companies, such as
commercial banks, savings and loan associations, leasing companies, credit
unions providing retail loan financing and lease financing for new and used
vehicles, and captive finance companies affiliated with major automobile
manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit
Corporation, Chrysler Credit Corporation and Nissan Motors Acceptance
Corporation. Many of the Company's competitors and potential competitors possess
substantially greater financial, marketing, technical, personnel and other
resources than the Company. Moreover, the Company's future profitability will be
directly related to the availability and cost of its capital in relation to the
availability and cost of capital to its competitors. The Company's competitors
and potential competitors include far larger, more established companies that
have access to capital markets for unsecured commercial paper and investment
grade-rated debt instruments and to other funding sources which may be
unavailable to the Company. Many of these companies also have long-standing
relationships with Dealers and may provide other financing to Dealers, including
floor plan financing for the Dealers' purchase of automobiles from
manufacturers, which is not offered by the Company.
The Company believes that the principal competitive factors affecting a
Dealer's decision to offer Contracts for sale to a particular financing source
are the monthly payments made available to the vehicle purchaser, the purchase
price offered for the Contracts, the reasonableness of the financing source's
underwriting guidelines and documentation requests, the predictability and
timeliness of purchases and the financial stability of the funding source. The
Company believes that it can obtain from Dealers sufficient Contracts for
purchase at attractive prices by consistently applying reasonable underwriting
criteria and making timely purchases of qualifying Contracts.
Government Regulation
Several federal and state consumer protection laws, including the federal
Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair
Debt Collection Practices Act and the federal Trade Commission Act, regulate the
extension of credit in consumer credit transactions. These laws mandate certain
disclosures with respect to finance charges on Contracts and impose certain
other restrictions on Dealers. In many states, a license is required to engage
in the business of purchasing Contracts from Dealers. In addition, laws in a
number of states impose limitations on the amount of finance charges that may be
charged by Dealers on credit sales. The so-called Lemon Laws enacted by the
Federal government and various states provide certain rights to purchasers with
respect to motor vehicles that fail to satisfy express warranties. The
application of Lemon Laws or violation of such other Federal and state laws may
give rise to a claim or defense of a customer against a Dealer and its
assignees, including the Company and purchasers of Contracts from the Company.
The Dealer Agreement contains representations by the Dealer that, as of the date
of assignment of Contracts, no such claims or defenses have been asserted or
threatened with respect to the Contracts and that all requirements of such
Federal and state laws have been complied with in all material respects.
Although a Dealer would be obligated to repurchase Contracts that involve a
breach of such warranty, there can be no assurance that the Dealer will have the
financial resources to satisfy its repurchase obligations to the Company.
Certain of these laws also regulate the Company's servicing activities,
including its methods of collection.
Although the Company believes that it is currently in material compliance
with applicable statutes and regulations, there can be no assurance that the
Company will be able to maintain such compliance. The
11
<PAGE> 12
failure to comply with such statutes and regulations could have a material
adverse effect upon the Company. Furthermore, the adoption of additional
statutes and regulations, changes in the interpretation and enforcement of
current statutes and regulations or the expansion of the Company's business into
jurisdictions that have adopted more stringent regulatory requirements than
those in which the Company currently conducts business could have a material
adverse effect upon the Company. In addition, due to the consumer-oriented
nature of the industry in which the Company operates and the application of
certain laws and regulations, industry participants are regularly named as
defendants in litigation involving alleged violations of Federal and state laws
and regulations and consumer law torts, including fraud. Many of these actions
involve alleged violations of consumer protection laws. A significant judgment
against the Company or within the industry in connection with any such
litigation could have a material adverse effect on the Company's financial
condition, results of operations or liquidity. See "Legal Proceedings."
Alternative Marketing Programs
From 1996 through 1998, the Company invested in an 80 percent-owned
subsidiary, Samco Acceptance Corporation ("Samco"), which pursued a business
strategy of purchasing Contracts from independent finance companies that had in
turn purchased the Contracts from Dealers. The Contracts purchased from Samco
showed consistently higher losses than Contracts purchased by CPS directly from
Dealers. In December 1998, the Company ceased further investments in Samco, and
terminated all operations during the first quarter of 1999. The Company believes
that any credit losses related to Samco-originated Contracts have been
adequately reserved for, and that no material losses will result from Samco's
terminated operations.
For the year ended December 31, 1998, Samco purchased 5,337 Contracts with
original balances aggregating $64.3 million. During the first quarter of 1999,
the Company terminated all operations of Samco in conjunction with the Company's
plan to reduce the level of Contract purchases and thus to decrease future
capital requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
In May 1996, CPS formed LINC Acceptance Corp. ("LINC"), an 80 percent-owned
subsidiary based in Norwalk, Connecticut. LINC provides the Company's sub-prime
auto finance products to credit unions, banks and savings and loans ("Depository
Institutions"). The Company believes that Depository Institutions do not
generally make loans to Sub-Prime Customers, even though they may have
relationships with Dealers and have Sub-Prime Customers.
LINC calls on various Depository Institutions and presents them with a
financing program that is similar to those that CPS markets directly to Dealers
through its marketing representatives. The LINC program is intended to result in
a slightly more creditworthy customer than the Company's regular programs, by
requiring slightly higher income and lower debt-to-income ratios. LINC's
customers may offer its financing program to customers directly or to local
Dealers. Unlike Samco, which has employees who evaluate applications and make
decisions to purchase Contracts, LINC applications are submitted by the
Depository Institution directly to CPS, where the approval, underwriting and
purchase procedures are performed by CPS staff who work with LINC as well as
with CPS Dealers. Servicing and collection procedures on LINC Contracts are
performed entirely by the Company's collections personnel. For the year ended
December 31, 1998, LINC purchased 1,813 Contracts with original balances
aggregating $24.3 million. CPS intends to terminate the separate operations of
LINC during the second quarter of 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
12
<PAGE> 13
Employees
As of December 31, 1998, the Company had 666 full-time and 2 part-time
employees, of whom 11 are senior management personnel, 316 are collections
personnel, 152 are Contract origination personnel, 81 are marketing personnel
(72 of whom are marketing representatives), 81 are operations and systems
personnel, and 27 are accounting and human resource personnel. The Company
believes that its relations with its employees are good. The Company is not a
party to any collective bargaining agreement.
ITEM 2. PROPERTY
The Company's headquarters are located in Irvine, California, where it leases
approximately 115,000 square feet of general office space from an unaffiliated
lessor. The annual rent is approximately $1.9 million for the first five years
of the lease term, and increases to $2.1 million for years six through ten. The
Company has the option to cancel the lease after five years without penalty. In
addition to the foregoing base rent, the Company has agreed to pay the property
taxes, maintenance and other expenses of the premises. Prior to November 1998,
the Company's headquarters were located in a different facility of approximately
51,400 square feet, also in Irvine, California. The Company has subleased its
former headquarters location, on terms that should yield immaterial sublease
income through the remainder of that lease.
The Company in March 1997 established a branch collection facility in
Chesapeake, Virginia. The Company leases approximately 27,988 square feet of
general office space in Chesapeake, Virginia at a base rent that is currently
$401,628 per year, increasing to $504,545 over a ten-year term.
ITEM 3. LEGAL PROCEEDINGS
CPS is party to litigation in the ordinary course of business, generally
involving actions against automobile purchasers to collect amounts due on
purchased Contracts or to recover vehicles. In one such case, relating to the
Chapter 13 bankruptcy of obligors Madeline and Darryl Brownlee, of Chicago,
Illinois, the obligors counterclaimed against CPS on June 30, 1997 in the
bankruptcy court for the Northern District of Illinois. The obligors seek
class-action treatment of their allegation that the cost of an extended service
contract on the automobile they purchased was inadequately disclosed by the
automobile dealer, Joe Cotton Ford of Carol Stream, Illinois. The disclosure
allegedly violated the federal Truth in Lending Act and Illinois consumer
protection statutes. The plaintiffs amended their complaint in September 1998,
dropping all Truth in Lending allegations against CPS. The court in February
1999, dismissed all remaining claims against CPS. The case remains pending
against the dealer, and there is a remote chance that a possible appeal could
result in a reinstatement of claims against the Company.
In another proceeding, arising out of efforts to collect a deficiency balance
from Joseph Barrios of Chicago, Illinois, the debtor has brought suit against
CPS alleging defects in the notice given upon repossession of the vehicle. This
lawsuit was filed on February 18, 1998, in the circuit court of Cook County,
Illinois and sought relief for a punitive class of persons who have received
such notice. A settlement of this litigation has been reached on a class basis,
which does not involve material expense.
It is management's opinion that all litigation of which it is aware,
including the matters discussed above, will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 14
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers follows:
Charles E. Bradley, Jr., 39, has been the President and a director of the
Company since its formation in March 1991. In January 1992, Mr. Bradley was
appointed Chief Executive Officer of the Company. From March 1991 until December
1995 he served as Vice President and a director of CPS Holdings, Inc. From April
1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr.
Bradley, Jr. was an associate of The Harding Group, a private investment banking
firm. Mr. Bradley, Jr. is currently serving as a director of NAB Asset
Corporation, Chatwins Group, Inc., Texon Energy Corporation, and Thomas Nix
Distributor, Inc. Charles E. Bradley, Sr., Chairman of the board of directors of
the Company, is his father.
Jeffrey P. Fritz, 39, has been Senior Vice President - Chief Financial
Officer and Secretary of the Company since March 1991. From December 1988 to
March 1991, Mr. Fritz was Vice President and Chief Financial Officer of Far
Western Bank. From 1985 to December 1988, Mr. Fritz was a management consultant
for Price Waterhouse in St. Louis, Missouri.
William L. Brummund, Jr., 46, has been Senior Vice President - Systems
Administration since March 1991. From 1986 to March 1991, Mr. Brummund was Vice
President and Systems Administrator for Far Western Bank.
Nicholas P. Brockman, 54, has been Senior Vice President - Asset Recovery &
Liquidation since January 1996. He was Senior Vice President of Contract
Originations from April 1991 to January 1996. From 1986 to March 1991, Mr.
Brockman served as a Vice President and Branch Manager of Far Western Bank.
Richard P. Trotter, 55, has been Senior Vice President-Contract Origination
since January 1996. He was Senior Vice President of Administration from April
1995 to December 1995. From January 1994 to April 1995 he was Senior Vice
President-Marketing of the Company. From December 1992 to January 1994, Mr.
Trotter was Executive Vice President of Lange Financial Corporation, Newport
Beach, California. From May 1992 to December 1992, he was Executive Director of
Fabozzi, Prenovost & Normandin, Santa Ana, California. From December 1990 to May
1992 he was Executive Vice President/Chief Operating Officer of R. Thomas
Ashley, Newport Beach, California. From April 1984 to December 1990, he was
President/Chief Executive Officer of Far Western Bank, Tustin, California.
Curtis K. Powell, 42, has been Senior Vice President - Marketing of the
Company since April 1995. He joined the Company in January 1993 as an
independent marketing representative until being appointed Regional Vice
President of Marketing for Southern California in November 1994. From June 1985
through January 1993, Mr. Powell was in the retail automobile sales and leasing
business.
Mark A. Creatura, 39, has been Senior Vice President - General Counsel since
October 1996. From October 1993 through October 1996, he was Vice President and
General Counsel at Urethane Technologies, Inc., a polyurethane chemicals
formulator. Mr. Creatura was previously engaged in the private practice of law
with the Los Angeles law firm of Troy & Gould Professional Corporation, from
October 1985 through October 1993.
Thurman Blizzard, 56, has been Senior Vice President - Collections since
January 1998. The Company had previously engaged Mr. Blizzard as a consultant
from October 1997 to December 1997 to provide recommendations to the Company
concerning its collections operation. Prior thereto, Mr. Blizzard served as
Chief Operations Officer of Monaco Finance from May 1994 to March 1997. Mr.
Blizzard was previously an Asset Liquidation Manager with the Resolution Trust
Corporation, from November 1991 to May 1994.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System,
under the symbol "CPSS." The following table sets forth the high and low closing
prices reported for the Common Stock for the periods. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
January 1 - March 31, 1997.................................. $ 13.875 $ 7.375
April 1 - June 30, 1997..................................... 12.375 7.000
July 1 - September 30, 1997................................. 18.250 10.500
October 1 - December 31, 1997............................... 17.750 7.500
January 1-March 31, 1998.................................... 12.750 9.000
April 1-June 30, 1998....................................... 15.063 10.000
July 1-September 30, 1998................................... 12.875 1.813
October 1-December 31, 1998................................. 5.125 2.000
</TABLE>
As of April 13, 1999, there were 69 holders of record of the Company's Common
Stock. To date, the Company has not declared or paid any dividends on its Common
Stock. The payment of future dividends, if any, on the Company's Common Stock is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition, and other
relevant factors. The instruments governing the Company's outstanding debt place
certain restrictions on the payment of dividends. The Company does not intend to
declare any dividends on its Common Stock in the foreseeable future, but instead
intends to retain any earnings for use in the Company's operations.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
Year ended December 31, December 31, March 31,
--------------------------------------- ------------ -----------------
1998 1997 1996 1995 1995
----------- ---------- ---------- ------------ -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gain on sale of Contracts, net .... $ 58,306 $ 35,045 $ 20,565 $ 10,721 $ 8,922
Interest income.................... 41,841 23,526 19,980 9,220 10,561
Servicing fees..................... 25,156 14,487 7,893 3,485 2,489
Total revenue...................... 126,280 75,251 48,438 23,426 21,972
Operating expenses ................ 81,960 43,292 24,746 10,769 10,825
Net income......................... $ 25,703 $ 18,532 $ 14,097 $ 7,575 $ 6,666
Basic earnings per share (1)....... $ 1.67 $ 1.29 $ 1.05 $ 0.65 $ 0.75
Diluted net earnings per share (1). $ 1.50 $ 1.17 $ 0.93 $ 0.52 $ 0.61
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------------------------- -------------------
1998 1997 1996 1995 1995 1994
-------- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Contracts held for sale......... $ 165,582 $ 68,271 $ 21,657 $ 19,549 $ 21,896 $ 647
Residual interest in
securitizations............... 217,848 124,616 67,252 41,586 5,154 2,294
Total assets.................... 431,962 225,895 101,946 77,878 57,975 16,538
Total liabilities............... 312,881 143,288 44,989 36,397 30,981 6,337
Total shareholders' equity...... $ 119,081 $ 82,607 $ 56,957 $ 41,481 $ 26,994 $ 10,201
</TABLE>
(1) All prior periods have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition of the Company should be
read in conjunction with "Selected Financial Data" and the Company's
Consolidated Financial Statements and the Notes thereto and the other financial
data included elsewhere in this report.
Overview
Consumer Portfolio Services, Inc. (the "Company") and its subsidiaries
primarily engage in the business of purchasing, selling and servicing retail
automobile installment sale contracts ("Contracts") originated by automobile
dealers ("Dealers") located throughout the Unites 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 Company generates revenue primarily from the gains recognized on the sale
or securitization of its Contracts, servicing fees earned on Contracts sold, and
interest earned on Residuals (as defined below) and on Contracts held for sale.
Revenues from gains on sale, interest and servicing fees for the year ended
December 31, 1998, were $58.3 million, $41.8 million, and $25.2 million,
respectively. Such revenues for the year ended December 31, 1997, were $35.0
million, $23.5 million, and $14.5 million, respectively, and for the year ended
December 31, 1996, such revenues were $20.6 million, $20.0 million and $7.9
million, respectively. 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's cash requirements have been and will continue to
be significant. Net cash used in operating activities for the years ended
December 31, 1998, 1997 and 1996, were $71.1 million, $26.1 million and $8.4
million, respectively. See "Liquidity and Capital Resources."
The Company purchases Contracts with the primary intention of reselling them
in securitization transactions as asset-backed securities. The securitizations
are generally 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, as is discussed
under the heading "Liquidity and Capital Resources."
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
17
<PAGE> 18
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 excess collateral
(over-collateralization or OC account). 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.
Such balances are generally defined as percentages of the principal amount
remaining unpaid on the balance.
The annual percentage rate ("APR") payable on the Contracts is significantly
greater than the interest rate 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 would recognize additional revenue from the
Residuals if the actual performance of the Contracts were to be better than the
original estimate, or the Company would 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
18
<PAGE> 19
to the inherent uncertainty of the future performance of the underlying
Contracts, the Company during 1998 established a provision for future losses on
the Residuals.
RESULTS OF OPERATIONS
The Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. During the year ended December 31, 1998, revenue increased $51.0
million, or 67.8%, compared to the year ended December 31, 1997. Gain on sale of
Contracts, net, increased by $23.3 million, or 66.4%, and represented 46.2% of
total revenue for the year ended December 31, 1998. The increase in gain on sale
is largely due to the volume of Contracts which were sold in the period. During
the year ended December 31, 1998, the Company sold $948.3 million in Contracts,
compared to $573.3 million in the year ended December 31, 1997. For the years
ended December 31, 1998 and 1997, $3.5 million and $4.1 million, respectively,
of provision for losses on Contracts held for sale was charged against gain on
sale. Due to the inherent uncertainty of the future performance of the
underlying Contracts, the Company during 1998 established a provision for future
losses on the Residuals in the amount of $7.8 million that was charged against
gain on sale.
Interest income increased by $18.3 million, or 77.8%, representing 33.1% of
total revenues for the year ended December 31, 1998. The increase is due to the
increase in the volume of contracts purchased and held for sale. During the year
ended December 31, 1998, the Company purchased $1,076.5 million in Contracts
from Dealers, compared to $632.1 million in the year ended December 31, 1997.
The Company expects that Contract purchases in the near future will be
significantly reduced. Such a reduction in Contract purchases are expected to
cause a reduction in revenues (both interest and gain on sale) in future
periods. (See "Liquidity and Capital Resources").
Servicing fees increased by $10.7 million, or 73.6%, and represented 19.9% of
total revenue. The increase in servicing fees is due to the increase in Contract
purchase, sale and servicing activities. As of December 31, 1998, the Company
was earning servicing fees on 128,025 Contracts approximating $1,362.8 million
compared to 77,731 Contracts approximating $830.9 million as of December 31,
1997. In addition to the $1,362.8 million in sold Contracts on which servicing
fees were earned, the Company was holding for sale and servicing an additional
$176.1 million in Contracts for an aggregate servicing portfolio of $1,538.9
million. Amortization of NIRs increased by $22.2 million and represented 104.9%
of residual interest income for the year ended December 31, 1998, versus 59.0%
for year ended December 31, 1997. The increase is due to higher losses on the
servicing portfolio and the increase in the NIRs from 1997 to 1998.
Expenses. During the year ended December 31, 1998, operating expenses
increased $38.7 million, or 89.3%, compared to the year ended December 31, 1997.
Employee costs increased by $12.9 million, or 81.5%, and represented 35.2% of
total operating expenses. The increase is due to the addition of staff necessary
to accommodate the Company's growth and certain increases in salaries of
existing staff. In light of the Company's decision to reduce its level of
Contract purchases, it anticipates reducing certain expenses in the immediate
future, and maintaining such expenses at levels appropriate for the Company's
level of activity in future periods. General and administrative expenses
increased by $6.5 million, or 45.7% and represented 25.2% of total operating
expenses. Increases in general and administrative expenses included increases in
telecommunications, stationary, credit reports and other related items as a
result of increases in the volume of purchasing and servicing of Contracts.
Interest expense increased $12.8 million, or 139.7%, and represented 26.9% of
total operating expenses. The increase is due in part to the interest paid on an
additional $30.0 million in subordinated debt securities issued by the Company
during 1998 as well as interest paid on the outstanding balance on a revolving
line of credit (the "Residual Line"). Interest expense was also affected by the
volume of Contracts held for sale as well as by the Company's cost of borrowed
funds. (See "Liquidity and Captial Resources").
Marketing expenses increased by $5.0 million or 272.7%, and represented 8.4%
of total expenses. The increase is primarily due to the increase in printing,
travel, promotion and convention expenses. Fees paid to
19
<PAGE> 20
marketing representatives for their role in the submission of Contracts
ultimately purchased by the Company are included as a component in gain on sale
of Contracts, net.
Occupancy expenses increased by $863,000 or 61.5%, and represented 2.8% of
total expenses. Depreciation and amortization expenses increased by $498,000 or
65.8%, and represented 1.5% of total expenses. In November 1998, the Company
moved its headquarters to a new 115,000 square foot facility. The Company has
agreed to lease the new headquarters facility for a ten-year term, with base
rent of $1.9 million for the first five years, and $2.1 million for years six
through ten. In addition to base rent, the Company has agreed to pay property
taxes, maintenance, and other expenses of the property. Occupancy of the new
building can be expected to increase the Company's overall occupancy expenses in
the future beginning with commencement of the lease. The Company has subleased
its former headquarters location.
The result for the year ended December 31, 1998, includes a net operating
loss of $1.1 million from the Company's subsidiary Samco. For the year ended
December 31, 1997, Samco had net income of $1.2 million. The Company terminated
all operations of Samco during the first quarter of 1999.
The result for the year ended December 31, 1998, includes net income of $1.2
million from the Company's subsidiary LINC. For the year ended Decmber 31, 1997,
LINC had a net operating loss of $11,000. The Company intends to terminate the
operations of LINC during the second quarter of 1999.
The result for the year ended December 31, 1998, includes net income of
$298,000 from the Company's subsidiary CPS Leasing, Inc. For the year ended
Decmber 31, 1997, CPS Leasing, Inc. had a net operating loss of $88,000. The
Company intends to sell CPS Leasing, Inc. during the second quarter of 1999.
The results for the years ended December 31, 1998 and 1997, include $52,000
and $849,000, respectively, in net income from the Company's investment in 38%
of NAB Asset Corp.
The Company's effective tax rate was 42.0% for the years ended December 31,
1998 and 1997.
The Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenue. During the year ended December 31, 1997, revenue increased $26.8
million, or 55.4%, compared to the year ended December 31, 1996. Gain on sale of
Contracts, net, increased by $14.5 million, or 70.4%, and represented 46.6% of
total revenue for the year ended December 31, 1997. The increase in gain on sale
is largely due to the volume of Contracts which were sold in the period. During
the year ended December 31, 1997, the Company sold $573.3 million in Contracts,
compared to $341.0 million in the year ended December 31, 1996. For the years
ended December 31, 1997 and 1996, $4.1 million and $2.8 million, respectively,
of provision for losses on Contracts held for sale was charged against gain on
sale.
Interest income increased by $3.5 million, or 17.7%, representing 31.3% of
total revenues for the year ended December 31, 1997. The increase is due to the
increase in the volume of contracts purchased and held for sale. During the year
ended December 31, 1997, the Company purchased $632.1 million in Contracts from
Dealers, compared to $351.4 million in the year ended December 31, 1996.
Servicing fees increased by $6.6 million, or 83.5%, and represented 19.3% of
total revenue. The increase in servicing fees is due to the Company's continued
expansion of its Contract purchase, sale and servicing activities. As of
December 31, 1997, the Company was earning servicing fees on 77,731 Contracts
approximating $830.9 million compared to 45,363 Contracts approximating $483.1
million as of December 31, 1996. In addition to the $830.9 million in sold
Contracts on which servicing fees were earned, the Company was holding for sale
and servicing an additional $71.8 million in Contracts for an aggregate
servicing portfolio of $902.7 million. Amortization of NIRs increased by $7.2
million and represented 59.0% of residual interest income for the year ended
December 31, 1997 versus 38.0% for year ended December 31, 1996. The increase is
primarily due to the increase in the average age of the Contracts making up the
Company's servicing portfolio and consequently the increase in charge-offs and
corresponding reduction of residual interest income. The Company expects these
increases in the ratio of amortization of NIRs to Residual interest income to
continue until the size and average age of the servicing portfolio stabilizes.
20
<PAGE> 21
Expenses. During the year ended December 31, 1997, operating expenses
increased $18.5 million, or 75.0%, compared to the year ended December 31, 1996.
Employee costs increased by $7.0 million, or 78.0%, and represented 36.7% of
total operating expenses. The increase is due to the addition of staff necessary
to accommodate the Company's growth and certain increases in salaries of
existing staff. General and administrative expenses increased by $6.9 million,
or 95.2% and represented 32.7% 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 increases in
the volume of purchasing and servicing of Contracts.
Interest expense increased $3.4 million, or 58.9%, and represented 21.2% of
total operating expenses. The increase is due in part to the interest paid on an
additional $35.0 million in subordinated debt securities issued by the Company
during 1997. Interest expense was also impacted by the volume of Contracts held
for sale as well as by the Company's cost of borrowed funds.
Marketing expenses increased by $170,789 or 10.2%, and represented 4.3% of
total expenses. The increase is primarily due to the increase in printing,
travel, promotion and convention expenses. Fees paid to marketing
representatives for their role in the submission of Contracts ultimately
purchased by the Company are included as a component in gain on sale of
Contracts, net.
Occupancy expenses increased by $635,506 or 82.7%, and represented 3.2% of
total expenses. Depreciation and amortization expenses increased by $481,548 or
174.9%, and represented 1.8% of total expenses. During 1997, the Company
established a satellite collection branch in Chesapeake, Virginia and leased
additional office space near its headquarters in Irvine, California. This
resulted in an increase in base rent expense of $906,066 for the year ended
December 31, 1997. The increase in occupancy, depreciation and amortization is
due primarily to the establishment of this additional office space and the
related furniture, fixtures and equipment. The Company has agreed to lease a new
headquarters facility, which is currently under construction. The lease will be
for a ten-year term, with base rent of $1.9 million for the first five years,
and $2.1 million for years six through ten. In addition to base rent, the
Company has agreed to pay property taxes, maintenance, and other expenses of the
property. Occupancy of the new building can be expected to increase the
Company's overall occupancy expenses in the future beginning with commencement
of the lease, which will commence upon completion of the building, currently
scheduled for September 1998.
The results for the year ended December 31, 1997 include net income of $1.2
million from the Company's subsidiary Samco. For the year ended December 31,
1996, Samco incurred a net operating loss of $491,000.
The results for the year ended December 31, 1997 also include net operating
losses of $11,000 from the Company's subsidiary LINC. For the year ended
December 31, 1996, LINC incurred a net operating loss of $324,000.
In addition, the Company's results for the year ended December 31, 1997,
include $88,000 in net operating losses from the Company's subsidiary, CPS
Leasing, Inc., which was acquired in January 1997, and $849,000 in net income
from the Company's investment in 38% of NAB Asset Corp.
The Company's effective tax rate was 42.0% for the year ended December 31,
1997 and 40.5% for the year ended December 31, 1996. See note 12 to the Notes to
Consolidated Financial Statements.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's business requires substantial cash to support its operating
activities. The Company's primary sources of cash from operating activities are
amounts borrowed under its various warehouse lines, servicing fees on portfolios
of Contracts previously sold, proceeds from the sales of Contracts, customer
payments on Contracts held for sale, interest earned on Contracts held for sale,
and releases of cash from Spread Accounts. The Company's primary uses of cash
are 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 is dependent on its warehouse lines of
credit and its residual financing facility in order to finance its continued
operations. If the Company's principal lenders decided to terminate or not to
renew any of these credit facilities with the Company, the loss of borrowing
capacity would have a material adverse effect on the Company's results of
operations unless the Company found a suitable alternative source.
Net cash used in operating activities was $71.1 million during the year ended
December 31, 1998, compared to net cash used of $26.1 million during the year
ended December 31, 1997. Cash used for purchasing Contracts was $1,076.5
million, an increase of $444.4 million, or 70.3%, over cash used for purchasing
Contracts in the year ended December 31, 1997. Cash provided from the
liquidation of Contracts was $975.6 million, an increase of $394.2 million, or
67.8%, over cash provided from liquidation of Contracts in the year ended
December 31, 1997.
On a day-to-day basis, the Company funds its purchases of Contracts from
Dealers by drawing on either of two warehouse lines of credit (collectively
referred to as the "Warehouse Lines"), and pledges the purchased Contracts to
one or the other warehouse lender. The amount borrowed under the Warehouse Lines
increases until the Company sells the pledged Contracts in a securitization
transaction, at which time the majority of the proceeds of the sale are used to
pay down the related balance of the Warehouse Lines. Securitization transactions
are typically completed on a quarterly basis. The amount of Contracts that the
Company can hold for sale prior to a securitization is limited by its available
cash and the Warehouse Lines, which permit borrowings of up to a maximum total
of $300.0 million.
The Company's cash requirements have been and will continue to be
significant. The Company may borrow under the Warehouse Lines no more than an
amount generally defined as a percentage ("advance rate") of the principal
amount of the Contracts pledged to the respective warehouse lenders. The
difference between what the Company may borrow and what it pays Dealers for
Contracts must come from the Company's working capital.
Under one of the Company's two Warehouse Lines, an affiliate of First Union
National Bank lends to the Company, with the loans funded by commercial paper
issued by that affiliate, and secured by Contracts pledged periodically by the
Company. The First Union line has a maximum lending amount of $200.0 million.
Under the Company's second warehouse line of credit, the Company borrows from
General Electric Capital Corporation ("GECC"). The GECC line was entered into in
November 1998, and replaced a prior line of credit arrangement under which an
affiliate of GECC lent money to the Company in a structure similar to that of
the First Union line. The GECC line has an aggregate maximum lending amount of
$100.0 million. The maximum amount outstanding under the GECC line or its
predecessor line in 1998 was $100.0 million and the average was $51.3 million.
Interest under the First Union line is at a variable rate, indexed to prevailing
rates for commercial paper. Interest under the GECC line is payable at a rate of
3.75% per annum over LIBOR. The two lines together had an outstanding balance of
$151.9 million at December 31, 1998, as compared to $61.7 million at December
31, 1997. The Company uses the two Warehouse Lines in tandem, pledging specific
Contracts to each lender alternatively.
22
<PAGE> 23
The amount of cash that the Company needs for daily operations is most
heavily dependent on (i) its level of Contract purchases, and (ii) the amount
that the Company may borrow under its Warehouse Lines, secured by the Contracts
purchased. Over the three-year period 1996 through 1998, the Company's annual
Contract purchases increased from $351.4 million in 1996 to $1,076.5 million in
1998. From January 1996 through November 1997, the Company was able to borrow,
under the predecessor to the GECC Line, 97% of the principal amount of the
Contracts purchased. The First Union Line allows the Company to borrow a varying
percentage (not in excess of 95%) of Contract balances, depending on the
performance of Contracts pledged to that lender. The advance rate under the
First Union Line decreased during 1998 to an average of approximately 91% in the
fourth quarter, and the Company has no expectation that it will be able to
borrow a higher percentage with respect to Contracts pledged to the First Union
Line in the immediate future. The GECC Line (entered into in November 1998)
allows the Company to borrow no more than 88% of the principal amount of the
pledged Contracts. The reduction in the relative advance rates under the
Warehouse Lines, combined with the Company's increased Contract purchase
activity in 1998 as compared with previous years, has materially increased the
Company's working capital requirements.
When the Company subsequently sells the warehoused Contracts in
securitization transactions, the Servicing Agreements require the Company
to make a significant initial cash deposit, for purposes of credit enhancement,
to the Spread Accounts. Excess cash flows from the securitized Contracts are
also deposited into the Spread Accounts until such time as the Spread Account
balance reaches its requisite level, which is computed as a specified percent of
the outstanding balance of the related asset-backed securities or collateral.
During the year ended December 31, 1998, cash used for initial deposits to
Spread Accounts was $45.6 million, an increase of $25.6 million, or 127.4%, from
the amount of cash used for initial deposits to Spread Accounts in the year
ended December 31, 1997. The cash used increased because (i) the Company sold
more Contracts in 1998 than in 1997, and (ii) in order to achieve the desired
ratings for the Certificates, the required percentage initial deposit was raised
from 3.5% in the prior year's transactions to 8.0% in the transaction completed
in the third quarter, with an additional credit enhancement of 2.0%
over-collateralization. The Company subsequently reached an agreement, discussed
below, that allowed a reduced initial cash deposit of 3.0% in the Company's
fourth quarter 1998 securitization transaction. Cash used for subsequent
deposits to Spread Accounts for the year ended December 31, 1998, was $54.0
million, an increase of $22.3 million, or 70.4%, over cash used for subsequent
deposits to Spread Accounts in the year ended December 31, 1997. Such subsequent
deposits into Spread Accounts in 1998 include $22.2 million of cash used to pay
down certain senior series of Certificates to create excess collateral in an
over-collateralization account. Cash released from Spread Accounts for the year
ended December 31, 1998, was $16.1 million, an increase of $229,000, or 1.5%,
over cash released from Spread Accounts in the year ended December 31, 1997.
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.
During 1998, 13 of the 22 Trusts incurred cumulative net losses as a
percentage of the original contract balance in excess of the predetermined
levels specified in the respective Servicing Agreements. Accordingly, pursuant
to the Servicing Agreements, the specified credit enhancement levels were
increased. As a result of this and certain cross collateralization arrangements,
excess cash flows that would otherwise have been released to the Company were
retained in the Spread Accounts to bring the balance of those Spread Accounts up
to a higher level. In addition to requiring higher Spread Account levels, the
Servicing Agreements provide the Certificate Insurer with certain other rights
and remedies which have been waived on a monthly basis by the Certificate
Insurer. Approximately $24.3 million of cash flows were delayed and retained in
the Spread Accounts as of December 31, 1998. The higher requisite Spread Account
levels ranged from 30% to 100% of the related outstanding balance of the
securitized pools. In April 1999, the Company entered into an 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 22 securitized pools. The agreement is subject
to certain performance measures that may
23
<PAGE> 24
result in an increase in the maximum level to 25% of the outstanding principal
balance of the securities. The effectiveness of the amendment is contingent upon
approval by holders of certain subordinated interests in several of the Trusts.
As of March 31, 1999, the aggregate Spread Account balance of the related 19
securitized pools was 15.9% of the outstanding principal balance of the
securities.
The Servicing Agreements call for the requisite levels of the various Spread
Accounts to increase if the related receivables experience delinquencies,
repossessions or net losses in excess of certain predetermined levels. During
the Company's history, the predetermined levels have frequently been reached or
exceeded, causing the requisite levels of certain Spread Accounts to be raised.
During 1998, the requisite levels of the Spread Accounts were raised to the
extent that the Company did not receive any releases of cash from the Spread
Accounts subsequent to June 1998. The requisite levels of the Spread Accounts
may be returned to the original lower levels if the delinquency, repossession
and net loss performance of the related receivables is reduced below the
pre-determined levels. In addition, on two occasions, the parties to the
pertinent agreements have made modifications that effectively raised the
permissible delinquency, repossession and net loss levels, thus resulting in
Spread Accounts reverting to their original requisite levels. As of December 31,
1998, the Spread Accounts for 18 of the Company's 22 securitized pools had
greater cash balances than original requisite levels would require due to
delinquency, repossession or net loss performance of 13 of the 22 securitized
pools. Such Spread Account balances therefore included approximately $24.3
million more than would have been required at the original requisite levels.
Funding such increased balances has materially increased the Company's capital
requirements.
The Company did not sell any Contracts in the first quarter of 1999, and is
currently evaluating alternative structures for selling its Contracts during the
second quarter of 1999. Due to the absence of any gain on sale in the first
quarter, the Company expects to report a loss for such quarter. Alternatives
being considered by the Company include various securitization structures,
unsecuritized sale of Contracts, or perhaps, some combination of those
structures for future Contract sales. The Company expects that if an
unsecuritized sale of Contracts is completed on a servicing released basis, a
loss on sale of such Contracts would be incurred, which may result in the
Company's reporting a loss for the second quarter. The Company has entered into
a letter of intent regarding a proposed sale in the second quarter of up to
$300.0 million of Contracts on an unsecuritized basis, servicing-released. Such
a sale would be at a price in excess of the blended warehouse line advance rates
applicable to the Contracts to be sold, but slightly less than the Company's
cost basis in such Contracts. Accordingly, such a transaction (as to which there
can be no assurance) would result in the Company's (i) recording a loss on such
sale, and (ii) receiving net cash. Recording such a loss may result in the
Company reporting a loss for the second quarter. Cash received in such a
transaction would be applied to meet in part the Company's liquidity and capital
requirements identified herein. If the Company were to incur a loss for the
second quarter of 1999 it would be in default under its agreements regarding the
Residual Line. Unless waived by the lender, the default could result in
acceleration of the indebtedness under the Residual Line and a cross default on
the Warehouse Lines. The lender would receive any releases from Spread Accounts
to retire outstanding principal and interest. The Company believes that the
lender would waive such a default. In the event the lender does not waive the
default, the Company believes that cash flows from operations would be
sufficient to fund its obligations as they become due and payable. There can be
no assurance, however, that the lender would waive the default or that other
cash flows would be sufficient to fund the Company's operations.
The Company is also exploring additional financing possibilities, focusing
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.
Capital Resources
The Company funds the increase in its servicing portfolio through off balance
sheet securitization transactions, as discussed above, and funds its other
capital needs with cash from operations and with the proceeds from the issuance
of long-term debt and/or equity. During the year ended December 31, 1998, the
Company completed four securitization transactions, borrowed $33.0 million under
a new revolving line of credit, issued $25.0 million of subordinated debt, sold
common stock to an affiliated party for $5.0 million, and received $5.0 million
in loans from affiliated parties. The interest rate payable on the senior
Certificates issued in the Company's 1998 securitization transactions ranged
from 5.47% - 6.09%, as compared with 6.07% - 6.65% payable on the similar
securities issued in 1997. The reduction in the rates payable is primarily due
to reductions in rates payable on U.S. Treasuries of similar maturity.
The table below documents the Company's history of Contract securitizations,
comprising sales to 25 securitization trusts.
24
<PAGE> 25
<TABLE>
<CAPTION>
Securitized
Period Funded Dollar Amount Ratings(1) Rating Agency Pool Name
- - ------------- ------------- ---------- ------------- ---------
(In thousands)
<S> <C> <C> <C> <C>
April 1993 $4,990 A Duff & Phelps Alton Grantor Trust 1993-1
May 1993 3,933 A Duff & Phelps Alton Grantor Trust 1993-1
June 1993 3,467 A Duff & Phelps Alton Grantor Trust 1993-1
July 1993 5,575 A Duff & Phelps Alton Grantor Trust 1993-2
August 1993 3,336 A Duff & Phelps Alton Grantor Trust 1993-2
September 1993 3,578 A Duff & Phelps Alton Grantor Trust 1993-2
October 1993 1,921 A Duff & Phelps Alton Grantor Trust 1993-2
November 1993 1,816 A Duff & Phelps Alton Grantor Trust 1993-3
December 1993 6,694 A Duff & Phelps Alton Grantor Trust 1993-3
January 1994 1,998 A Duff & Phelps Alton Grantor Trust 1993-3
March 1994 20,787 A Duff & Phelps Alton Grantor Trust 1993-4
June 1994 24,592 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-1
September 1994 28,916 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-2
October 1994 13,136 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-3
December 1994 28,893 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-4
February 1995 20,084 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-1
June 1995 49,290 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-2
September 1995 45,009 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-3
September 1995 2,369 BB S&P CPS Auto Grantor Trust 1995-3
December 1995 53,634 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-4
December 1995 2,823 BB S&P CPS Auto Grantor Trust 1995-4
March 1996 63,747 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-1
March 1996 3,355 BB S&P CPS Auto Grantor Trust 1996-1
June 1996 (2) 84,456 Aaa/AAA Moody's/S&P Fasco Auto Grantor Trust 1996-1
June 1996 4,445 BB S&P Fasco Auto Grantor Trust 1996-1
September 1996 87,523 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-2
September 1996 4,606 BB S&P CPS Auto Grantor Trust 1996-2
December 1996 88,215 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-3
December 1996 4,643 BB S&P CPS Auto Grantor Trust 1996-3
March 1997 97,211 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1997-1
March 1997 5,116 BB S&P CPS Auto Grantor Trust 1997-1
May 1997 113,394 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1997-2
May 1997 5,968 BB S&P CPS Auto Grantor Trust 1997-2
August 1997 142,500 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-3 (3)
August 1997 7,499 BB S&P CPS Auto Receivables Trust 1997-3 (3)
October 1997 100,568 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-4 (3)
October 1997 5,293 BB S&P CPS Auto Receivables Trust 1997-4 (3)
December 1997 90,925 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-5 (3)
December 1997 4,781 BB S&P CPS Auto Receivables Trust 1997-5 (3)
March 1998 177,607 Aaa/AAA Moody's/S&P CPS Grantor Trust 1998-1
March 1998 9,348 BB S&P CPS Grantor Trust 1998-1
May 1998 200,490 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1998-2
May 1998 10,552 BB S&P CPS Auto Grantor Trust 1998-2
July 1998 (4) 36,000 P-1/A-1+ Moody's/S&P CPS Auto Receivables Trust 1998-3 (3)
July 1998 199,532 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1998-3 (3)
December 1998 32,500 P-1/A-1+ Moody's/S&P CPS Auto Receivables Trust 1998-4 (3)
December 1998 277,500 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1998-4 (3)
---------
TOTAL 2,184,615
</TABLE>
(1) Commencing with the securitization completed on June 28, 1994, the
principal and interest due on the asset-backed securities issued by the
various trusts have been guaranteed by Financial Security Assurance Inc.
("FSA"), enabling the issuer to obtain Aaa/AAA or P-1/A-1+ ratings for the
asset-backed securities issued in such transactions. See "Business --
Purchase and Sale of Contracts -- Securitization and Sale of Contracts to
Institutional Investors."
(2) Commencing with the securitization completed on June 27, 1996, asset-backed
securities with Aaa/AAA or P-1/A-1+ ratings have been sold through public
offerings pursuant to registration statements filed with the Securities and
Exchange Commission.
(3) These Trusts are structured as "owner trusts" rather than as "grantor
trusts".
(4) Commencing with the securitization completed on July 28, 1998, the Company
began using a structure that included a guaranteed money market tranche of
asset-backed securities, rated P-1/A-1+.
In April 1998, the Company established a $33.3 million Residual Line with
State Street Bank and Trust Company, Prudential Insurance and an affiliate of
Prudential. Borrowings under the Residual Line bear
25
<PAGE> 26
interest at LIBOR + 4.0%, and are secured by all of the Company's assets,
including its residual interest in securitizations. The Residual Line is a
revolving facility for one year, after which it converts into a loan with a
maximum term of four years, due and payable earlier if and to the extent that
the Company has "available cash," as defined in the Residual Line.
Due to the Company's continuing purchases of Contracts and the need to fund
Spread Accounts when those Contracts are sold in securitization transactions,
the Company has a continuing need for capital. The amount of capital required is
most heavily dependent on the rate of the Company's Contract purchases, 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 releases of
cash from Spread Accounts since June 1998, together with the reduction in
advance rates available to the Company under its Warehouse Lines, has materially
increased the Company's capital requirements. To reduce its capital requirements
and to meet those requirements, the Company has begun 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 issued $25.0
million of subordinated promissory notes due November 30, 2003, to an affiliate
of Levine Leichtman Capital Partners, Inc. ("LLCP"), and received the proceeds
(net of fees and expenses) of approximately $23.7 million. The Company also
issued warrants to purchase up to 3,450,000 shares of common stock at $3.00 per
share, exercisable through November 30, 2005. The debt bears interest at 13.5%
per annum, and may not be prepaid without penalty prior to November 1, 2002.
Simultaneously with the consummation of that transaction, certain affiliates of
the Company, who had lent the Company an aggregate of $5.0 million on a
short-term basis in August and September 1998, agreed to subordinate their
indebtedness to the indebtedness in favor of LLCP, to extend the maturity of
their debt until June 2004, and to reduce their interest rate from 15% to 12.5%.
Such affiliates received in return the option to convert such debt into an
aggregate of 1,666,667 shares of common stock at the rate of $3.00 per share
through maturity at June 30, 2004. The effective cost of this new capital is
affected by the valuation of the warrant and the conversion option, but in all
events represents a material increase in the cost of capital resources as
compared with the Company's previous issuances of senior or subordinated debt,
which are reviewed below. Additional capital will be required and the Company is
exploring its alternatives to raise such capital of approximately $15.0 million,
which could include sale of debt or equity instruments. Any debt issued may
involve some equity participation. The sale of any equity or convertible debt
could be dilutive to existing stockholders. The terms of any such additional
issuance have not been determined as of the date of this report, and there can
be no assurance that any such transaction will occur.
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 has 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
26
<PAGE> 27
market conditions. Of the $560.0 million committed, $310.0 million was used in
the Company's December 1998 securitization transaction. The Company expects to
use the balance of that commitment in its next 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 common
stock at $3.00 per share, exercisable through the fifth anniversary of the
warrant's issuance. Such warrants are exercisable with respect to 2,525,114 of
the Company's common shares, subject to standard anti-dilution adjustments. In
April 1999, the Company entered into an amendment with the Certificate Insurer
to reduce and limit the maximum levels for the Spread Accounts of certain pools
to 21% of the outstanding principal balance of the securities. The agreement is
subject to certain performance measures that may result in an increase in the
maximum level to 25% of the outstanding principal balance of the securities. The
effectiveness of the amendment is contingent upon approval of certain
subordinated Certificateholders.
As the 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 in November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. Since such time, the Company has further reduced
Contract purchases and expects to purchase less than $100.0 million for the
second quarter of 1999. Such reductions in Contract purchases will reduce
materially the Company's capital requirements.
Over the three-year period ended December 31, 1998, the Company has increased
its capitalization by issuing $33.0 million of senior debt, an aggregate of
$65.0 million of subordinated debt (which is convertible into, or was issued
with warrants to purchase, common stock), $20.0 million of related party debt
($15.0 million of which is partially convertible and $5.0 million which is
entirely convertible) and $5.0 million of capital stock. The following review of
the terms of such issuances shows that the cost of such capital increased
materially in 1998:
In April 1997 the Company issued, in a public offering, $20.0 million of
subordinated partially convertible notes due 2004, which bear an interest rate
of 10.50% per annum. These notes are convertible as to 25% of their principal
amount into common stock of CPS at $10.15 per share. In June 1997 the Company
issued to a related party $15.0 million of partially convertible notes due 2004.
These notes are convertible as to 20% of their principal amount into common
stock of CPS at $11.25 per share. In April 1998, the Company borrowed $33.0
million as a senior secured loan, which may commence amortization in April 1999.
This loan bears interest at a rate equal to 4% of per annum over LIBOR (9.54% at
December 31, 1998. CPS borrowed $5.0 million from related parties in August and
September 1998, the terms of which were renegotiated in November 1998, in
connection with the issuance of $25.0 million of subordinated notes to LLCP, now
restructured as described below. A related party also purchased $5.0 million of
Company common stock in July 1998, at $11.275 per share.
The cost of capital has increased further in 1999. To meet a portion of its
capital requirements, the Company on April 15, 1999, issued $5.0 million in
subordinated notes to LLCP (the "New LLCP Notes"). The notes bear interest at
14.5% per annum and include warrants to purchase 1,335,000 shares of the
Company's common stock at $0.01 per share. As part of the agreement to issue the
New LLCP Notes, the Company was required to restructure the terms of the $25.0
subordinated promissory notes discussed above. Such restructuring included an
increase in the interest rate from 13.5% to 14.5%, a reduction in the number of
warrants issued to purchase the Company's common stock from 3,450,000 to
3,115,000, a waiver by LLCP of certain defaults under the notes sold to LLCP in
November 1998, and a reduction in the exercise price of the warrants from $3.00
per share to $0.01 per share. Among the agreements entered into in connection
with the issuance of the New LLCP Notes are agreements by Stanwich Financial
Services Corp. ("SFSC"), an affiliate of the chairman of the Company's board of
directors, to purchase an additional $15.0 million of notes, and of the Company
to sell such notes. The terms of such notes are to be not less favorable to the
Company then (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the New LLCP Notes. Sale of such
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, the New LLCP Notes have been personally guaranteed by the chairman
of the Company's board of directors and the president of the Company.
27
<PAGE> 28
Forward-Looking Statements
The 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. A further discussion of factors that may cause
actual results to differ, or may otherwise have an adverse effect on the
Company's financial condition or results of operations, is contained in the
exhibit to this report titled "cautionary statement," incorporated herein by
this reference.
New Accounting Pronouncements
The Company has adopted in 1998 and will adopt in future periods new
accounting pronouncements. For information on how adoption has affected and will
affect the Financial Statements, see Note 1 of Notes to Consolidated Financial
Statements.
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
28
<PAGE> 29
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 will consist of testing all
personal computers for compliance. The Company has engaged an outside specialist
to facilitate testing and administering corrective procedures where needed. The
Company estimates that phase two will be completed by June 30, 1999.
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 June 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 its locations. Depending
upon the locations affected and estimated duration, this would entail recovery
of the main application 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, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company's funding strategy is largely dependent upon issuing interest
bearing asset-backed securities and incurring debt. Therefore, upward
fluctuations in interest rates may adversely impact 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This report includes Consolidated Financial Statements, Notes thereto and an
Independent Auditors' Report, at the pages indicated below. Certain unaudited
quarterly financial information is included in the Notes to Consolidated
Financial Statements, as Note 18.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Independent Auditors' Report.............................................................................F-1
Consolidated Balance Sheets as of December 31, 1998, and 1997............................................F-2
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996..................F-3
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1997, and 1996..................................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996..............F-5
Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997, and 1996.........F-6
</TABLE>
29
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the registrant is incorporated by
reference to the registrant's definitive proxy statement for its annual meeting
of shareholders to be held in 1999 (the "1999 Proxy Statement"). The 1999 Proxy
Statement will be filed not later than April 30, 1999. Information regarding
executive officers of the registrant appears in Part I of this report, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the 1999 Proxy Statement.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements listed above under the caption "Index to Financial
Statements" are filed as a part of this report. No financial statement schedules
are filed as the required information is inapplicable or the information is
presented in the consolidated financial statements or the related notes.
Separate financial statements of the Company have been omitted as the Company is
primarily an operating company and its subsidiaries are wholly owned and do not
have minority equity interests and/or indebtedness to any person other than the
Company in amounts which together exceed 5% of the total consolidated assets as
shown by the most recent year-end consolidated balance sheet.
The following exhibits are filed as part of this report:
3.1 Restated Articles of Incorporation (incorporated by reference to exhibit
filed with registrant's report on Form 10-KSB dated December 31, 1995)
3.2 Amended and Restated Bylaws. (incorporated by reference to exhibit filed
with registrant's report on Form 10-K dated December 31, 1997)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities ("RISRs")
(incorporated by reference to exhibit filed with registrant's report on
Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRs (incorporated by reference to
exhibit filed with registrant's report on Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")
(incorporated by reference to exhibit filed with registrant's
registration statement on Form S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (incorporated by reference
to exhibit filed with registrant's registration statement on Form S-3,
no. 333-21289)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder
(incorporated by reference to exhibit filed with registrant's report on
Form 10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (incorporated by reference to exhibit
filed with registrant's report on Form 10-K dated December 31, 1997)
10.3 Purchase Agreement relating to PENs. (incorporated by reference to
exhibit filed with registrant's registration statement on Form S-3 no.
333-21289)
10.4 Lease Agreement, First Amendment to Lease, Assignment and Assumption of
Lease (incorporated by reference to exhibit filed with registrant's
registration statement on Form S-1, no. 33-49770)
10.5 Amendment #2 to Lease Agreement, First Amendment to Lease and Assignment
and Assumption of Lease. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB, dated March 31, 1995)
10.6 Lease Agreement re Chesapeake Collection Facility. (incorporated by
reference to exhibit filed with registrant's report on Form 10-K dated
December 31, 1996)
10.7 Consulting Agreement. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB dated December 31, 1995)
10.8 Agreement to Build and Lease Headquarters Building. (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q dated
September 30, 1997)
10.9 Lease of Headquarters Building. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
31
<PAGE> 32
10.10 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement re Redwood Warehouse Line. (incorporated by reference to
exhibit filed with registrant's report on Form 10-KSB dated December 31,
1995)
10.11 The Receivables Funding and Servicing Agreement re Redwood Warehouse
Line. (incorporated by reference to exhibit filed with registrant's
report on Form 10-KSB dated December 31, 1995)
10.12 Partially Convertible Subordinated Note. (incorporated by reference to
exhibit filed with registrant's report on Form 10-Q dated September 30,
1997)
10.13 Registration Rights Agreement. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
10.14 Receivables Funding and Servicing Agreement relating to First Union
Warehouse Line (incorporated by reference to exhibit filed with
registrant's report on Form 10-K dated December 31, 1997)
10.14a Amendment dated July 17, 1998 to the Receivables Funding and Servicing
Agreement relating to First Union Warehouse Line (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.15 Receivables Transfer Agreement relating to First Union Warehouse Line
(incorporated by reference to exhibit filed with registrant's report on
Form 10-K dated December 31, 1997)
10.16 Residual Interest in Securitizations Revolving Credit and Term Loan
Agreement dated as of April 30, 1998, between registrant and State Street
Bank and Trust Company (incorporated by reference to exhibit filed with
registrant's report on 10-Q filed 5/15/98)
10.16a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement (filed herewith)
10.17 Pledge and Security Agreement dated as of April 30, 1998, between the
Company and State Street Bank and Trust Company (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
May 15, 1998)
10.18 Revolving Credit and Term Note dated April 30, 1998, (the "State Street
Note") (incorporated by reference to exhibit filed with registrant's
report on Form 10-Q filed May 15, 1998)
10.19 Subscription Agreement regarding shares issued in July 1998 (incorporated
by reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.20 Registration Rights Agreement regarding shares issued in July 1998
(incorporated by reference to exhibit filed with registrant's report on
Form 10-Q filed August 14, 1998)
10.21 Line of Credit Note Issued to Stanwich Financial Services Corp. (the "
1998 Stanwich Note") (incorporated by reference to exhibit filed with
registrant's report on Form 10-K filed March 3, 1998)
10.22 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement (filed herewith)
10.23 FSA Warrant Agreement dated November 30, 1998 (filed herewith)
10.24 Securities Purchase Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the statement on Schedule 13D filed with
respect to the registrant on November 25, 1988, by Levine Leichtman
Capital Partners II L.P. and others (the "LLCP report")
32
<PAGE> 33
10.25 Senior Subordinated Primary Note dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.26 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998 (incorporated by reference to exhibit filed with the
LLCP report)
10.27 Investor Rights Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.28 Registration Rights Agreement dated as of November 17, 1998 (incorporated
by reference to exhibit filed with the LLCP report)
10.29 Subordination Agreement dated as of November 17, 1998 re: Stanwich Note
and Poole Note (filed herewith)
10.30 Consolidated Registration Rights Agreement dated November 17, 1998 re:
1997 Stanwich Notes (filed herewith)
23.1 Consent of independent auditors. (filed herewith)
27 Financial Data Schedule. (filed herewith)
99.1 Cautionary Statements.*
- - ----------
* To be filed by amendment
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 1998, the Company
filed ten reports on Form 8-K.
Five of the ten reports on Form 8-K were monthly servicing reports for
several of the Company's trusts. The following five reports were monthly
servicing reports for several securitization trusts sponsored by the Company:
(i) report dated March 15, 1996 and filed October 1, 1998; (ii) report dated
October 15, 1998 and filed October 30, 1998; (iii) report dated November 16,
1998 and filed November 17; (iv) report dated November 15 and filed November 25,
1998; and (v) report dated December 15, 1998 and filed December 28, 1998. These
reports include monthly performance statements (which are not financial
statements) of certain of the Company's securitization trusts.
Each of the remaining five reports on Form 8-K related to the Company's
December 1998 securitization transaction. Three of these six reports were made
pursuant to Item 7, as follows: (i) report dated November 16, 1998 and filed
November 17, 1998; (ii) report dated and filed November 25, 1998; and (iii)
report dated and filed December 1, 1998. The remaining two reports on Form 8-K
were made pursuant to Items 5 and 7, as follows: (i) report dated December 4,
1998 and filed December 18, 1998; and (ii) report dated December 18, 1998 and
filed December 31, 1998. None of the reports included financial statements.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC. April 15, 1999
(Registrant)
By: /s/ Charles E. Bradley, Jr.
-------------------------------
Charles E. Bradley, Jr.,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Charles E. Bradley, Sr. April 15, 1999
----------------------------
Charles E. Bradley, Sr.
Chairman of the Board
By: /s/ Charles E. Bradley, Jr. April 15, 1999
----------------------------
Charles E. Bradley, Jr., Director,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William B. Roberts April 15, 1999
----------------------------
William B. Roberts, Director
By: /s/ John G. Poole April 15, 1999
----------------------------
John G. Poole, Director
By: /s/ Thomas L. Chrystie April 15, 1999
----------------------------
Thomas L. Chrystie, Director
By: /s/ Robert A. Simms April 15, 1999
----------------------------
Robert A. Simms, Director
By: /s/ Jeffrey P. Fritz April 15, 1999
----------------------------
Jeffrey P. Fritz, Chief Financial Officer
(Principal Financial Officer)
By: /s/ James L. Stock April 15, 1999
----------------------------
James L. Stock, Controller
(Principal Accounting Officer)
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Consumer Portfolio Services, Inc.:
We have audited the accompanying consolidated balance sheets of Consumer
Portfolio Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consumer
Portfolio Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Orange County, California
March 3, 1999, except as to
notes 13, 16 and 17 to the
consolidated financial statements,
which are as of April 15, 1999.
F-1
<PAGE> 36
PART I - FINANCIAL INFORMATION
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 1,940 $ 1,745
Restricted cash (note 2) 1,619 --
Contracts held for sale (note 3) 165,582 68,271
Servicing fees receivable 11,148 5,425
Residual interest in securitizations (note 4) 217,848 124,616
Furniture and equipment, net (note 8) 4,272 3,128
Taxes receivable (note 12) -- 1,528
Deferred financing costs (note 13) 2,817 1,840
Investment in unconsolidated affiliates (note 9) 4,145 3,892
Related party receivables (note 9) 3,268 7,295
Other assets (notes 9 and 10) 19,323 8,155
--------- ---------
$ 431,962 $ 225,895
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 9,267 $ 10,426
Warehouse lines of credit (note 13) 151,857 61,666
Taxes payable (note 12) 1,821 --
Deferred tax liability (note 12) 27,247 13,143
Capital lease obligations (note 11) 2,132 1,492
Notes payable (note 13) 2,557 1,506
Residual financing (note 13) 33,000 --
Subordinated debt (note 13) 65,000 40,000
Related party debt (note 9) 20,000 15,055
--------- ---------
312,881 143,288
Shareholders' Equity (notes 10 and 13)
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; 15,658,501 and 15,210,042
shares issued and outstanding at December 31,
1998 and December 31, 1997, respectively 52,533 42,262
Notes receivable from exercise of options -- (500)
Retained earnings 66,548 40,845
--------- ---------
119,081 82,607
--------- ---------
Commitments and contingencies (notes 3,4,6,11
12,13,and 14) $ 431,962 $ 225,895
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 37
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gain on sale of contracts, net (notes 3, 4 and 5) $ 58,306 $ 35,045 $ 20,565
Interest income (note 6) 41,841 23,526 19,980
Servicing fees 25,156 14,487 7,893
Other (note 9) 977 2,193 --
-------- -------- --------
126,280 75,251 48,438
-------- -------- --------
Expenses:
Employee costs 28,812 15,875 8,921
General and administrative (note 9) 20,618 14,147 7,247
Interest 22,019 9,185 5,780
Marketing 6,891 1,849 1,679
Occupancy 2,267 1,404 769
Depreciation and amortization 1,255 757 275
Related party consulting fees (note 9) 98 75 75
-------- -------- --------
81,960 43,292 24,746
-------- -------- --------
Income before income taxes 44,320 31,959 23,692
Income taxes (note 12) 18,617 13,427 9,595
-------- -------- --------
Net income $ 25,703 $ 18,532 $ 14,097
======== ======== ========
Earnings per share (note 1):
Basic $ 1.67 $ 1.29 $ 1.05
Diluted $ 1.50 $ 1.17 $ 0.93
Number of shares used in computing
earnings per share (note 1):
Basic 15,412 14,332 13,489
Diluted 17,500 16,053 15,330
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 38
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Notes Receivable
------------------ -------------------- From Exercise Retained
Shares Amount Shares Amount of Options Earnings Total
------ -------- ------ -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- 13,299 $ 33,265 $ -- $ 8,216 $ 41,481
Common stock issued upon exercise
of warrants (note 10) -- -- 86 259 -- -- 259
Common stock issued upon exercise
of options (note 10) -- -- 395 1,121 -- -- 1,121
Net income -- -- -- -- -- 14,097 14,097
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1996 -- $ -- 13,780 $ 34,645 $ -- $ 22,313 $ 56,958
Common stock issued upon exercise
of warrants (note 10) -- -- 14 42 -- -- 42
Common stock issued upon exercise
of options (note 10) -- -- 937 2,464 (500) -- 1,964
Common stock issued upon
conversion of debt (note 13) -- -- 480 3,000 -- -- 3,000
Income tax benefit from
exercise of options (note 12) -- -- -- 2,111 -- -- 2,111
Net income -- -- -- -- -- 18,532 18,532
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1997 -- $ -- 15,211 $ 42,262 $ (500) $ 40,845 $ 82,607
Common stock issued upon exercise
of options (note 10) -- -- 5 43 500 -- 543
Common stock issued (note 9) -- -- 443 5,000 -- -- 5,000
Valuation of warrants issued (note 13) -- -- -- 5,228 -- -- 5,228
Net income -- -- -- -- -- 25,703 25,703
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1998 -- $ -- 15,659 $ 52,533 $ -- $ 66,548 $119,081
====== ======== ====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 39
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,703 $ 18,532 $ 14,097
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,255 757 275
Amortization of NIRs 35,540 13,310 6,119
Amortization of deferred financing costs 356 268 157
Provision for credit losses 3,544 4,088 2,756
Provision for loss on NIRs 7,762 -- --
NIR gains recognized (52,990) (34,767) (18,665)
Loss on sale of fixed asset -- 13 --
Gain on sale of subsidiary (56) -- --
(Gain) loss on investment in unconsolidated affiliates (187) (912) 595
Gain on redemption of related party preferred stock -- (145) --
Changes in operating assets and liabilities:
Restricted cash (1,619) -- --
Purchases of contracts held for sale (1,076,457) (632,096) (351,350)
Liquidation of contracts held for sale 975,602 581,394 346,486
Servicing fees receivable (5,723) (2,338) (1,631)
Initial deposits to spread accounts (45,623) (20,064) (12,270)
Deposits to spread accounts and overcollateralization
accounts (53,996) (31,689) (18,790)
Release of cash from spread accounts 16,075 15,846 17,941
Deferred tax liability 14,104 6,116 5,384
Other assets (7,163) (2,146) (2,053)
Accounts payable and accrued expenses (962) 8,269 355
Warehouse lines of credit 90,191 48,401 5,765
Taxes payable/receivable 3,509 1,032 (3,523)
----------- ----------- -----------
Net cash used in operating activities (71,135) (26,131) (8,352)
Cash flows from investing activities:
Proceeds from sale of subordinated certificates -- -- 2,022
Related party receivables (3,239) (9,987) (1,308)
Repayment of related party receivables 7,266 4,000 --
Purchase of related party preferred stock -- (14,500) --
Proceeds from sale of related party preferred stock -- 14,645 --
Investment in unconsolidated affiliate (65) (716) (4,277)
Purchases of furniture and equipment (1,308) (1,032) (358)
Payments received on subordinated certificates -- -- 152
Net cash from sale of subsidiary 382 -- --
Purchase of subsidiary, net of cash acquired -- 92 --
----------- ----------- -----------
Net cash provided by (used in) investing activities 3,036 (7,498) (3,769)
Cash flows from financing activities:
Increase in residual financing 33,000 -- --
Issuance of related party debt 5,000 54,500 --
Issuance of subordinated debt 25,000 20,000 --
Issuance of notes payable 2,461 -- --
Repayment of capital lease obligations (553) (166) --
Repayment of notes payable (824) (10) --
Repayment of related party debt -- (39,945) --
Payment of financing costs (1,333) (1,165) --
Issuance of common stock 5,000 -- --
Exercise of options and warrants 543 2,006 1,380
----------- ----------- -----------
Net cash provided by financing activities 68,294 35,220 1,380
----------- ----------- -----------
Increase (decrease) in cash 195 1,591 (10,741)
Cash at beginning of year 1,745 154 10,895
----------- ----------- -----------
Cash at end of year $ 1,940 $ 1,745 $ 154
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 21,542 $ 8,476 $ 5,214
Income taxes $ 1,013 $ 6,204 $ 6,679
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock upon conversion of debt $ -- $ 3,000 $ --
Note receivable from exercise of options $ -- $ 500 $ --
Income tax benefit from exercise of options $ -- $ 2,111 $ --
Furniture and equipment acquired through capital leases $ 1,193 $ 1,658 $ --
Issuance of common stock warrants $ 5,228 $ -- $ --
Purchase of CPS Leasing, Inc.
Assets acquired $ -- $ 2,718 $ --
Liabilities assumed -- (2,638) --
----------- ----------- -----------
Cash paid to acquire business -- 80 --
Less: cash acquired -- (172) --
----------- ----------- -----------
Net cash received upon acquisition $ -- $ (92) $ --
=========== =========== ===========
Sale of PIC Leasing, Inc.
Net assets sold $ 706 $ -- $ --
Net assets retained (155) -- --
Gain on sale of subsidiary 56 -- --
----------- ----------- -----------
Cash received from sale of subsidiary 607 -- --
Less: cash relinquished upon disposition (225) -- --
----------- ----------- -----------
Net cash received from sale of subsidiary $ 382 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 40
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on
March 8, 1991. CPS and its subsidiaries (collectively, the "Company") engage
primarily in the business of purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by dealers located
throughout the United States. The Company specializes in Contracts with obligors
who generally would not be expected to qualify for traditional financing, such
as that provided by commercial banks or automobile manufacturers' captive
finance companies. The Company's headquarters and principal collection
facilities are located in Irvine, California and a satellite collection facility
is located in Chesapeake, Virginia. The Company has purchased Contracts from
dealers in California since its inception. During the year ended December 31,
1998, Contract purchases relating to obligors who resided in California totaled
16.7% of all Contract purchases. Moreover, at December 31, 1998, obligors who
resided in California made up 20.0% of the servicing portfolio of Contracts
serviced by the Company. A significant adverse change in the economic climate in
California or other states could result in fewer Contracts available for sale
and potentially less revenue.
Principles of Consolidation
The consolidated financial statements include the accounts of Consumer
Portfolio Services, Inc. and its wholly-owned subsidiaries, CPS Marketing, Inc.,
Alton Receivables Corp. ("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding
Corp. ("CPSFC") and CPS Warehouse Corp. ("CPSWC"). Alton, CPSRC, CPSFC and CPSWC
are limited purpose corporations formed to accommodate the structures under
which the Company purchases and sells its Contracts. CPS Marketing, Inc. employs
marketing representatives who solicit business from dealers. The consolidated
financial statements also include the accounts of Samco Acceptance Corp., LINC
Acceptance Company, LLC, and CPS Leasing, Inc., which are 80% owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Investments in unconsolidated affiliates that are
not majority owned are reported using the equity method. The excess of the cost
of the stock over the Company's share of the net assets at the acquisition date
("goodwill") is being amortized over a period of up to fifteen years.
Contracts Held for Sale
Contracts held for sale include automobile installment sales contracts on
which interest is precomputed and added to the face of the loan. The interest on
such contracts is included in unearned financed charges. Unearned financed
charges are amortized using the interest method over the remaining period to
contractual maturity. 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 to be 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 estimates an allowance for credit losses, which 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 a dealer, the Company generally charges the
dealer an acquisition fee or purchases the Contract at a discount from its face
value. The acquisition fees and discounts associated with Contract purchases are
F-6
<PAGE> 41
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
deferred until the Contracts are sold, at which time the deferred acquisition
fees or discounts are recognized as a component of the gain on sale.
Investments
The Company determines the appropriate classification of its investments in
debt securities at the time of purchase or creation. Debt securities for which
the Company does not have the intent or ability to hold to maturity are
classified as available for sale. Securities available for sale are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity as accumulated other comprehensive income.
The amortized cost of debt securities classified as available for sale is
adjusted for amortization of premiums and accretion of discounts, over the
estimated life of the security. Such amortization and interest earned on the
debt securities are included in interest income.
Residual Interest in Securitizations and Gain on Sale of Contracts
The Company purchases Contracts with the primary intention of reselling them
in securitization transactions as asset-backed securities. The securitizations
are generally 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 16 -
"Liquidity".
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
F-7
<PAGE> 42
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 excess collateral
(over-collateralization or OC account). 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. Such
balances are generally defined as as percentages of the principal amount
remaining unpaid on the balance.
The annual percentage rate ("APR") 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 would recognize additional revenue from the
Residuals if the actual performance of the Contracts were to be better than the
original estimate, or the Company would 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
provision for losses on the Residuals.
Servicing
Servicing fees are reported as income when earned. Servicing costs are
charged to expense as incurred. Servicing fees receivable represent fees earned
but not yet remitted to the Company by the trustee.
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation.
The Company calculates depreciation using the straight-line method over the
estimated useful lives of the assets which range from three to five years.
Assets held under capital leases and leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the related lease
terms.
F-8
<PAGE> 43
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per Share
The following table illustrates the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Numerator:
- - ----------
Numerator for basic earnings per share --
net income ................................... $25,703 $18,532 $14,097
Interest on borrowings, net of tax effect on
conversion of convertible subordinated debt .... 590 313 170
------- ------- -------
Numerator for diluted earnings per share ....... $26,293 $18,845 $14,267
======= ======= =======
Denominator:
- - ------------
Denominator for basic earnings per share --
weighted average number of common shares
outstanding during the year .................. 15,412 14,332 13,489
Incremental common shares attributable to
exercise of outstanding options and warrants . 881 1,212 1,361
Incremental common shares attributable to
conversion of subordinated debt .............. 1,207 509 480
------- ------- -------
Denominator for diluted earnings per share ..... 17,500 16,053 15,330
======= ======= =======
Basic earnings per share ....................... $ 1.67 $ 1.29 $ 1.05
======= ======= =======
Diluted earnings per share ..................... $ 1.50 $ 1.17 $ 0.93
======= ======= =======
</TABLE>
Income Taxes
The Company and its subsidiaries file a consolidated Federal income and
combined state franchise tax returns. The Company utilizes the asset and
liability method of accounting for income taxes, under which deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock Split
Effective March 7, 1996, all outstanding shares of common stock were split
two-for-one. All references in the consolidated financial statements to number
of shares, per share amounts and market prices of the Company's common stock
have been retroactively restated to reflect the increased number of common
shares outstanding.
Stock Option Plan
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company accounts
for stock-based employee compensation plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The Company provides the pro forma net income, pro
forma earnings per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews identifiable intangibles, goodwill and other long-lived
assets for impairment whenever events or circumstances indicate the carrying
amounts may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
an asset, an impairment loss is recognized.
F-9
<PAGE> 44
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment Reporting
The Company adopted, effective December 31, 1997, Statement of Financial
Accounting Standards No. 131, "Diclosures about Segments of an Enterprise and
Related Information," ("SFAS No. 131"). SFAS No. 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reporting.
Operations are managed and financial performance is evaluated on a Company
wide basis by chief decision makers. Accordingly, all of the Company's
operations are considered by management to be aggregated in one reportable
operating segment.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in foreign
operation, an unrecognized firm commitment, an available for sale security, or a
foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is in the process of assessing the effect of implementing SFAS No.
133, which is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
In October 1998, the FASB issued Statement of Financial Accouting Standards
No. 134 ("SFAS No. 134"), "Accounting for Mortgage-Backed Securities after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 amends SFAS No. 65 to require that, after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities, classify, in accordance with the provisions of SFAS No. 115,
the resulting mortgage-backed securities or other retained interests, based on
its ability and intent to sell or hold those investments. However, a mortgage
banking enterprise must classify as held for trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998. Management does not anticipate the adoption
of this statement will have a material affect on the Company's financial
condition and results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements, as well as the reported amounts of income and expenses
during the reported periods. Specifically, a number of estimates were made in
connection with determining an appropriate allowance for credit losses, valuing
the Residuals and computing the related gain on sale on the transactions that
created the Residuals. Actual results could differ from those estimates
depending on the future performance of the related Contracts.
Reclassification
Certain amounts for the prior years have been reclassified to conform to the
current year's presentation.
F-10
<PAGE> 45
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) RESTRICTED CASH
Restricted cash in the amount of $1.6 million is required as part of the
agreement related to a $33.3 million revolving line of credit established by the
Company in April 1998 (see note 13). The agreement requires the Company to post
a cash reserve equal to the greater of $1.0 million or six months of interest
based on the outstanding balance of the line at the end of the month. Borrowings
under the revolving line bear interest at LIBOR + 4% (9.54% at December 31,
1998).
(3) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Gross receivable balance .............. $ 183,876 $ 81,645
Unearned finance charges .............. (10,949) (10,078)
Deferred acquisition fees and discounts (4,594) (1,092)
Allowance for credit losses ........... (2,751) (2,204)
--------- ---------
$ 165,582 $ 68,271
========= =========
</TABLE>
The following table presents the activity in the allowance for credit losses:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year ....... $ 2,204 $ 723 $ 330
Provisions ....................... 3,544 4,088 2,756
Charge-offs ...................... (2,535) (2,935) (2,755)
Allowance allocated to repossessed
inventory ...................... (1,349) (261) --
Recoveries ....................... 887 589 392
------- ------- -------
Balance, end of year .......... $ 2,751 $ 2,204 $ 723
======= ======= =======
</TABLE>
The Company is required to represent and warrant certain matters with respect
to the Contracts sold to investors, which generally duplicate the substance of
the representations and warranties made by the dealers in connection with the
Company's purchase of the Contracts. In the event of a breach by the Company of
any representation or warranty, the Company is obligated to repurchase the
Contracts from the investors at a price equal to the investors' purchase price
less the related credit enhancement and any principal payments received from the
obligor. In most cases, the Company would then be entitled under the terms of
its agreements with dealers to require the selling dealer to repurchase the
Contracts at the Company's purchase price less any principal payments received
from the obligor.
As of December 31, 1998 and 1997, the Company had commitments to purchase
$2.3 million and $3.8 million, respectively, of Contracts from Dealers in the
ordinary course of business.
F-11
<PAGE> 46
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Cash, commercial paper, US government
securities and other qualifying
investments (Spread Account) ........ $130,394 $ 68,513
NIRs .................................. 54,800 45,112
OC accounts ........................... 31,836 9,621
Funds held by investor ................ 480 579
Investment in subordinated certificates 338 791
-------- --------
$217,848 $124,616
======== ========
</TABLE>
The following table presents the activity of the NIRs :
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year .. $ 45,112 $ 23,655 $ 11,109
NIR gains recognized (note 5) 52,990 34,767 18,665
Amortization of NIRs (note 6) (35,540) (13,310) (6,119)
Provision for loss on NIRs .. (7,762) -- --
-------- -------- --------
Balance, end of year ........ $ 54,800 $ 45,112 $ 23,655
======== ======== ========
</TABLE>
The following table presents the estimated remaining undiscounted credit
losses included in the fair value estimate of the Residuals as a percentage of
the Company's servicing portfolio subject to recourse provisions:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Undiscounted estimated credit losses ... $ 169,110 $ 90,814 $ 45,881
Servicing subject to recourse provisions $1,362,801 $ 830,918 $ 483,106
========== ========== ==========
Undiscounted estimated credit losses
as percentage of servicing subject to
recourse provisions ................... 12.41% 10.93% 9.50%
========== ========== ==========
</TABLE>
F-12
<PAGE> 47
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) GAIN ON SALE OF CONTRACTS
The following table presents the components of the net gain on sale of
Contracts:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
NIR gains recognized ........ $ 52,990 $ 34,767 $ 18,665
Deferred acquisition fees
and discounts ............. 23,330 8,925 6,890
Provision for loss on NIRs .. (7,762) -- --
Expenses related to sales ... (6,708) (4,559) (2,234)
Provision for credit losses . (3,544) (4,088) (2,756)
-------- -------- --------
$ 58,306 $ 35,045 $ 20,565
======== ======== ========
</TABLE>
(6) INTEREST INCOME
The following table presents the components of interest income:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Interest on Contracts held for sale $ 43,493 $ 14,279 $ 9,981
Residual interest income .......... 33,888 22,557 16,118
Amortization of NIRs .............. (35,540) (13,310) (6,119)
-------- -------- --------
$ 41,841 $ 23,526 $ 19,980
======== ======== ========
</TABLE>
(7) SERVICING
The following table presents the components of the Company's servicing
portfolio:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Contracts held for sale ................. $ 176,108 $ 71,829 $ 22,827
Servicing subject to recourse provisions:
Whole loan portfolios .............. 1,463 4,839 11,212
Alton Receivables Corp. ............ 259 3,073 10,241
CPS Receivables Corp. .............. 1,361,079 823,006 461,653
---------- ---------- ----------
$1,538,909 $ 902,747 $ 505,933
========== ========== ==========
</TABLE>
(8) FURNITURE AND EQUIPMENT
The following table presents the components of furniture and equipment:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Furniture and fixtures ....................... $ 2,973 $ 1,869
Computer equipment ........................... 2,365 1,895
Leasing assets ............................... 882 916
Leasehold improvements ....................... 644 127
Other fixed assets ........................... 34 55
------- -------
6,898 4,862
Less accumulated depreciation and amortization (2,626) (1,734)
------- -------
$ 4,272 $ 3,128
======= =======
</TABLE>
F-13
<PAGE> 48
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) RELATED PARTY TRANSACTIONS
Investment in Unconsolidated Affiliates
Investment in unconsolidated affiliates primarily consists of a 38% interest
in NAB Asset Corporation ("NAB") that was acquired by the Company on June 6,
1996, for approximately $4.3 million. At the time of the acquisition, NAB had
approximately $3.5 million in cash and no significant operations. The Company's
investment in NAB exceeded the Company's share of the net assets of NAB at the
acquisition date by approximately $1.4 million. This amount, which is included
in other assets in the accompanying balance sheet, has been recorded by the
Company as goodwill. Based on the closing price on the Nasdaq, the market value
of the investment in NAB was approximately $2.9 million and $4.0 million at
December 31, 1998 and 1997, respectively. Charles E. Bradley, Sr., Chairman of
the Company's Board of Directors and principal shareholder and Charles E.
Bradley, Jr., President, Chief Executive Officer and a member of the Company's
Board of Directors are both on the Board of Directors of NAB. Included in
general and administrative expenses for the year ended December 31, 1996, is
$595,352, which represents the Company's share of NAB's loss from June 6,
through December 31, 1996.
Subsequent to the Company's investment in NAB, NAB purchased Mortgage
Portfolio Services, Inc. ("MPS") from the Company for $300,000. MPS, formed by
the Company in April 1996, is a mortgage broker-dealer based in Texas. In July
1996, NAB formed CARSUSA, Inc. ("CARSUSA"), which purchased, and now owns and
operates, a Mitsubishi automobile dealership in Southern California. On June 27,
1997, NAB sold CARSUSA to Charles E. Bradley, Sr. and Charles E. Bradley, Jr.,
for $1.5 million. Included in other income for the years ended December 31, 1998
and 1997, is $51,593 and $848,920, respectively, which represents the Company's
share of NAB's net income.
Related Party Receivables
The following table presents the components of related party receivables:
<TABLE>
<CAPTION>
December 31,
------------------
Related Party 1998 1997
- - ------------- ------ ------
(in thousands)
<S> <C> <C>
NAB Asset Corporation $2,100 $5,602
CARSUSA, Inc. 904 1,351
Service and Management Cooperative, Inc. 139 128
Loan to Subsidiary Officer 125 --
Global Equipment Leasing, LLC -- 114
Stanwich Partners, Inc. -- 100
------ ------
$3,268 $7,295
====== ======
</TABLE>
Included in the receivable from CARSUSA at December 31, 1998 and 1997, is
$329,500 and $790,000, respectively, related to a flooring line of credit
provided to CARSUSA. The remainder relates to amounts owed by CARSUSA for other
borrowings.
During fiscal 1998 and 1997, respectively, the Company sold 51 and 107
automobiles to CARSUSA and received proceeds of $432,790 and $749,800,
respectively. Additionally, the Company purchased 296 and 183 Contracts from
CARSUSA, with an aggregate principal balance of approximately $4.2 million and
$2.4 million, respectively.
Included in the receivable from NAB at December 31, 1997, is $5.5 million
arising from the issuance of two promissory notes totaling $9.5 million, bearing
interest at 13% annually. On December 31, 1997, one of the promissory notes for
$4.0 million was sold to Stanwich Financial Services Corp. ("SFSC") for $4.0
million, the proceeds of which were received on December 31, 1997. Charles E.
Bradley, Sr., Charles E. Bradley, Jr., and John G. Poole, who are officers and
directors of the Company, collectively own 92.5% of the common stock of Stanwich
Holdings, Inc. ("Stanwich Holdings"), and Mr. Bradley, Sr., is the president and
a director of Stanwich Holdings. SFSC is a wholly-owned subsidiary of Stanwich
Holdings. During 1998, NAB repaid approximately $3.4 million of the $5.5 million
promissory note, leaving a balance of approximately $2.1 million at December 31,
1998. The remaining unpaid balance of the note is due April 30, 1999.
F-14
<PAGE> 49
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 1998, the Company issued an additional promissory note to NAB for
$3.0 million, bearing interest at 14% annually. During 1998, the note was
repaid in full.
On March 2, 1998, NAB acquired Stanwich Holdings. At that time the Company
received a note from NAB for $530,835 in exchange for an option it had held to
acquire 100% of the outstanding common stock of Stanwich Holdings. In June 1998,
NAB rescinded the transaction to acquire Stanwich Holdings, with an effective
date of March 2, 1998.
At December 31, 1998 and 1997, respectively, $139,229 and $128,421 is due
from Service and Management Cooperative, Inc. These amounts represent
liabilities incurred by Service and Management Cooperative, Inc., which were
paid for by the Company. Certain officers of the Company's subsidiary Samco were
officers of Service and Management Cooperative, Inc.
In July 1998, the president of Samco issued to the Company a promissory note
in the amount of $125,000. The loan bears interest at the rate of 10% per annum
and is due July 2001.
At December 31, 1997, $114,275 is due from Global Equipment Leasing, LLC.
These amounts represent payments by the Company's subsidiary CPS Leasing, Inc.,
of certain debt obligations of Global Equipment Leasing, LLC., which is 50%
owned by CPS Leasing, Inc. In January 1998, the amount due from Global Equipment
Leasing, LLC, was repaid in full.
The amount due from Stanwich Partners, Inc. ("SPI") at December 31, 1997, is
related to investment banking services performed by the Company in connection
with the Company's January 2, 1997 acquisition of CPS Leasing, Inc. The Chairman
of the Board of Directors of the Company is a principal shareholder of SPI.
The Company is a party to a consulting agreement with SPI that calls for
monthly payments of $6,250 through December 31, 1999. Included in the
accompanying consolidated statements of income for the year ended December 31,
1998, 1997 and 1996, is $75,000, $75,000 and $75,000, respectively, of
consulting expense related to this consulting agreement.
In November 1998, the Company issued $25.0 million of subordinated promissory
notes due November 30, 2003, to an affiliate of Levine Leichtman Capital
Partners, Inc. ("LLCP") (see note 13). As part of the transaction, the Company
entered into a consulting agreement with LLCP, calling for monthly consulting
fees of $22,917 through November 2003. Included in the accompanying consolidated
statements of income for the year ended December 31, 1998, are $22,917 of
consulting fees related to this consulting agreement.
Related Party Debt
In May 1997, the Company entered into two transactions with a related party:
(i) the Company purchased $14.5 million of preferred stock of Stanwich Holdings
with dividends cumulative at the rate of 9% per annum and redeemable at an
aggregate price of $14.6 million, plus accrued dividends, and (ii) the Company
borrowed $14.5 million with an interest rate of 8% per annum under a 60-day
related party loan from SFSC. In August 1997, the Company received $14.9 million
in redemption of its preferred stock of Stanwich Holdings and repaid the 60-day
related party loan in its entirety. In August 1997, the Company entered into a
line of credit agreement with SFSC ("Stanwich Line"), to supplement its working
capital resources. Under the Stanwich Line, SFSC agreed to lend up to $25.0
million to the Company from time to time upon request, through December 19,
1997. Any amount outstanding at December 31, 1997 would be due at that time.
Borrowings under the Stanwich Line bear interest at the rate of 10% per annum,
and the Company paid a $250,000 (one percent) commitment fee to SFSC in
connection with opening the line of credit. The Company drew the full amount of
the line at its inception, none of which remained outstanding at December 31,
1997.
The Company has also received long-term financing from SFSC. In June 1997 the
Company borrowed $15.0 million on an unsecured and subordinated basis from SFSC.
This loan ("RPL") is due 2004, and has a fixed rate of interest of 9% per
F-15
<PAGE> 50
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
annum, payable monthly beginning July 1997. The Company may pre-pay the RPL
without penalty at any time after three years. At maturity or repayment of the
RPL, the holder thereof will have an option to convert 20% of the principal
amount into common stock of the Company, at a conversion rate of $11.86 per
share. The balance of the RPL at December 31, 1998 and 1997, was $15.0 million.
During 1998, the Company borrowed an additional $4.0 million on an unsecured
basis from SFSC. This loan ("RPL2") is due 2004, has a fixed rate of interest of
12.5% per annum payable monthly beginning December 1998. The Company may pre-pay
the RPL2, without penalty, anytime after June 12, 2000. At maturity or repayment
of the RPL2, the holder thereof will have the option to convert the entire
principal balance of the note, or a portion thereof, into common stock of the
Company, at a conversion rate of $3.00 per share. The balance of the RPL2 at
December 31, 1998, was $4.0 million.
During 1998, the Company borrowed $1.0 million on an unsecured basis from
John G. Poole, a director of the Company. The terms of this note ("RPL3") are
the same as RPL2. The balance of the RPL3 at December 31, 1998, was $1.0
million.
Related Party Stock Sale
In July 1998, the Company sold 443,459 shares of common stock in a private
placement to SFSC for $5.0 million. As of December 31, 1998, the above shares of
common stock had not been registered for public sale.
(10) SHAREHOLDERS' EQUITY
Common Stock
Holders of the common stock are entitled to such dividends as the Company's
Board of Directors, in its discretion, may declare out of funds available,
subject to the terms of any outstanding shares of preferred stock and other
restrictions. In the event of liquidation of the Company, holders of common
stock are entitled to receive, pro rata, all of the assets of the Company
available for distribution, after payment of any liquidation preference to the
holders of outstanding shares of preferred stock. Holders of the shares of
common stock have no conversion or preemptive or other subscription rights and
there are no redemption or sinking fund provisions applicable to the common
stock.
The Company is required to comply with various operating and financial
covenants defined in the agreements governing the warehouse lines, residual
financing, subordinated debt, and related party debt. The covenants restrict the
payment of certain distributions, including dividends.
Options and Warrants
In 1991, the Company adopted and gained sole shareholder approval of the 1991
Stock Option Plan (the "1991 Plan") pursuant to which the Company's Board of
Directors may grant stock options to officers and key employees. The Plan, as
amended, authorizes grants of options to purchase up to 2,700,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. Stock options
have terms that range from 7 to 10 years and vest over a range of 0 to 7 years.
In addition to the 1991 Plan, in fiscal 1995, the Company granted 60,000 options
to certain directors of the Company that vest over three years and expire nine
years from the grant date.
In July 1997, the Company adopted and gained shareholder approval of the 1997
Long-Term Incentive Plan (the "1997 Plan") pursuant to which the Company's Board
of Directors may grant stock options, restricted stock and stock appreciation
rights to employees, directors or employees of entities in which the Company has
a controlling or significant equity interest. Options that have been granted
under the 1997 Plan have in all cases been granted at an exercise price equal to
the stock's fair market value at the date of the grant, with terms of 10 years
and vesting over 5 years. The 1997
F-16
<PAGE> 51
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Plan provides that an aggregate maximum of 1,500,000 shares of the Company's
common shares may be subject to awards under the 1997 Plan.
In October 1998, the Company's Board of Directors approved a plan to cancel
and reissue certain stock options previously granted to key employees of the
Company. All options granted prior to October 22, 1998, with an option price
greater than $3.25, were repriced to $3.25. In conjunction with the repricing, a
one year period of non-exercisability was placed on all repriced options, which
expires October 21, 1999.
At December 31, 1998, there were 341,000 additional shares available for
grant under the 1991 Plan and 1997 Plan. Of the options outstanding at December
31, 1998, 1997 and 1996, 194,040, 584,920 and 1,319,420, respectively, were
exercisable with weighted-average exercise prices of $2.68, $6.77 and $4.02,
respectively. The per share weighted-average fair value of stock options granted
during the years ended December 31, 1998, 1997 and 1996, was $1.87, $5.79, and
$4.99, respectively, at the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected life (years) ...... 6.41 6.50 5.86
Risk-free interest rate .... 4.95% 6.48% 6.23%
Volatility ................. 20.00% 52.04% 46.20%
Expected dividend yield .... -- -- --
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation", the Company's net income and net earnings per share would have
been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1998 1997 1996
--------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income
As reported....................... $25,703 $18,532 $14,097
Pro forma......................... $24,639 $18,182 $13,550
Net earnings per share - basic
As reported....................... $ 1.67 $ 1.29 $ 1.05
Pro forma......................... $ 1.60 $ 1.27 $ 1.00
Net earnings per share - diluted
As reported....................... $ 1.50 $ 1.17 $ 0.93
Pro forma......................... $ 1.48 $ 1.17 $ 0.90
</TABLE>
Pro forma net income and net earnings per share reflect only options granted
in the year ended December 31, 1998, 1997, and 1996. Therefore, the full impact
of calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period and compensation
cost for options granted prior to April 1, 1995 is not considered.
F-17
<PAGE> 52
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock options activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
(in thousands, except per share data)
<S> <C> <C>
Balance at December 31, 1995.......................... 2,161 $ 3.56
Granted.......................................... 513 9.60
Exercised........................................ 395 2.82
Canceled......................................... 125 5.23
----- -------
Balance at December 31, 1996.......................... 2,154 5.04
Granted.......................................... 321 9.76
Exercised........................................ 937 2.64
Canceled......................................... 145 11.69
----- -------
Balance at December 31, 1997.......................... 1,393 7.05
Granted.......................................... 3,515 5.42
Exercised........................................ 5 8.50
Canceled......................................... 2,412 8.64
----- -------
Balance at December 31, 1998.......................... 2,491 $ 3.22
===== =======
</TABLE>
At December 31, 1998, the range of exercise prices, the number, weighted-
average exercise price and weighted-average remaining term of options
outstanding and the number and weighted-average price of options currently
exercisable are as follows:
<TABLE>
<CAPTION>
Weighted- Weighted Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Term Price Exercisable Price
- - ------------------------ ----------- --------- -------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
$2.50 - $2.88............... 224 3.99 $2.64 192 $2.62
$3.00 - $3.00............... 47 8.16 $3.00 -- $ --
$3.25 - $3.25............... 2,194 7.87 $3.25 -- $ --
$4.13 - $4.56............... 24 9.86 $4.45 -- $ --
$7.75 - $8.50............... 2 8.05 $8.30 2 $8.30
</TABLE>
In connection with the Company's initial public offering, the Company sold to
the underwriter of the offering, for an aggregate price of $120, warrants to
purchase up to 240,000 shares of the Company's common stock at an exercise price
of $3.00 per share. The warrants were exercisable during the four year period
commencing one year from the date of the offering. The shares represented by the
warrants have been registered for public sale. During the year ended December
31, 1997 and 1996, the underwriter exercised 14,000 and 86,000 warrants,
respectively. At December 31, 1997 all warrants had been exercised.
On November 17, 1998, in conjunction with issuance of the $25.0 million
subordinated promissory note from an affiliate of LLCP, the Company issued
warrants to purchase up to 3,450,000 of common stock at $3.00 per share,
exercisable through November 30, 2005. The value of the warrants, $3.0 million,
is included in other assets as deferred interest expense to be amortized over
the expected life of the related debt, five years. As of December 31, 1998, the
warrants had not been registered for public sale. However, the holder of the
warrants has the right to require the Company register the warrants for public
sale in the future.
Also in November 1998, the Company entered into an agreement with the
Certificate Insurer of its asset-backed securities. The agreement commits the
Certificate Insurer to provide insurance for the securitization of $560.0
million in asset-backed securities, of which $250.0 million remained at December
31, 1998. The agreement provides for a 3% initial Spread Account deposit. As
consideration for the agreement, the Company issued warrants to purchase up to
2,525,114 shares of common stock at $3.00 per share. The warrants are fully
exercisable on the date of grant and expire in November 2003. The value of the
warrants, $2.2 million, is included in other assets as deferred securitization
expense to be amortized over five years. As of December 31, 1998, the warrants
had not been registered for public sale. However, the holder of the warrants has
the right to require the Company register the warrants for public sale in the
future.
F-18
<PAGE> 53
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain computer equipment under
non-cancelable operating and capital leases, which expire through 2008. Future
minimum lease payments at December 31, 1998, under these leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
(in thousands)
<S> <C> <C>
1999 ........................... $ 858 $ 3,113
2000 ........................... 678 3,001
2001 ........................... 579 2,452
2002 ........................... 400 2,376
2003 ........................... 53 2,394
Thereafter ..................... -- 11,935
------- -------
Total minimum lease payments ... 2,568 $25,271
=======
Less: amount representing
interest ..................... 436
-------
Present value of net minimum
lease payments ............... $ 2,132
=======
</TABLE>
Included in furniture and equipment in the accompanying consolidated balance
sheets are the following assets held under capital leases at December 31, 1998:
<TABLE>
<S> <C>
Computer equipment .................. $ 811
Furniture and fixtures .............. 2,044
---------
2,855
Less: accumulated depreciation ...... 669
---------
$ 2,186
=========
</TABLE>
Rent expense for the years then ended December 31, 1998, 1997 and 1996, was
$1,973,304, $1,036,677 and $463,592, respectively. The Company's facility lease
contains certain rental concessions and escalating rental payments, which are
recognized as adjustments to rental expense and are amortized on a straight-line
basis over the term of the lease.
In November 1998, the Company entered into a sublease agreement for the space
which served as the Company's former headquarters in Irvine, California. The
sublease agreement extends beyond the term of the lease and provides for the
tenant to pay a base rent in excess of the lease payment required by the
Company, plus all common area maintenance charges and property taxes. During
1998, the Company received $64,289 of sublease income, which is included in
occupancy expenses. Future minimum sublease payments totaled $1,511,858 at
December 31, 1998.
Litigation
The Company is party to litigation in the ordinary course of business,
generally involving actions against automobile purchasers to collect amounts due
on purchased Contracts or to recover vehicles. In one such case, relating to the
Chapter 13 bankruptcy of obligors Madeline and Darryl Brownlee, of Chicago,
Illinois, the obligors counterclaimed against the Company on June 30, 1997 in
the bankruptcy court for the Northern District of Illinois. The obligors seek
class-action treatment of their allegation that the cost of an extended service
contract on the automobile they purchased was inadequately disclosed by the
automobile dealer, Joe Cotton Ford of Carol Stream, Illinois. The disclosure
allegedly violated the federal Truth in Lending Act and Illinois consumer
protection statutes. The plaintiffs amended their complaint in September 1998,
dropping all Truth in Lending allegations against the Company. The court in
February 1999 dismissed all remaining claims against the Company. The case
remains pending against the dealer, and there is a remote chance that a possible
appeal could result in a reinstatement of claims against the Company.
In another proceeding, arising out of efforts to collect a deficiency balance
from Joseph Barrios of Chicago, Illinois, the debtor has brought suit against
the Company alleging defects in the notice given upon repossession of the
vehicle. This
F-19
<PAGE> 54
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
lawsuit was filed on February 18, 1998 in the circuit court of Cook County,
Illinois. A settlement of this litigation has been reached on a class basis,
which does not involve material expense.
It is management's opinion that all litigation of which it is aware,
including the matters discussed above, will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
(12) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current
Federal ......................... $ 3,318 $ 4,278 $ 3,060
State ........................... 1,195 922 1,151
------- ------- -------
4,513 5,200 4,211
Deferred
Federal ......................... 10,451 4,505 4,565
State ........................... 3,653 1,611 819
------- ------- -------
14,104 6,116 5,384
Income tax benefit from exercise of options
Credited to shareholders'
equity ........................... -- 2,111 --
------- ------- -------
Income taxes ................ $18,617 $13,427 $ 9,595
======= ======= =======
</TABLE>
The Company's effective tax expense for the years ended December 31, 1998,
1997 and 1996, differs from the amount determined by applying the statutory
federal rate of 35% to income before income taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Expense at federal tax rate ............... $ 15,512 $ 11,186 $ 8,292
California franchise tax, net of
federal income tax benefit .............. 3,151 1,672 1,280
State tax benefit from exercise of options,
net of federal income tax benefit,
credited to shareholders' equity ........ -- 586 --
Other ..................................... (46) (17) 23
-------- -------- --------
$ 18,617 $ 13,427 $ 9,595
======== ======== ========
</TABLE>
The tax affected cumulative temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Accrued liabilities ......... $ 1,296 $ 559
Furniture and equipment ..... 212 27
Provision for credit losses.. -- 1,106
State taxes ................. 403 1,851
Other ....................... -- 289
------- -------
1,911 3,832
Deferred Tax Liabilities:
NIRs ........................ 21,054 16,409
Provision for credit losses.. 7,511 --
Equity investments .......... 593 566
------- -------
29,158 16,975
------- -------
Net deferred tax liability... $27,247 $13,143
======= =======
</TABLE>
F-20
<PAGE> 55
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In determining the possible future realization of deferred tax assets, future
taxable income from the following sources is taken into account: (a) the
reversal of taxable temporary differences, and (b) future operations exclusive
of reversing temporary differences.
The Company believes that the deferred tax asset will more likely than not be
realized due to the reversal of the deferred tax liability and expected future
taxable income.
The Company files its tax returns on a fiscal March 31, year end. During
1998, the Company's federal income tax return for the tax year ended March 31,
1995, was audited by the Internal Revenue Service. As a result of the audit, the
Company was required to pay approximately $150,000 in payroll taxes and
interest. The audit was concluded and closed during 1998.
(13) DEBT
In June 1995, the Company entered into two warehouse line of credit
agreements (collectively the "Redwood Line"). The Redwood Line provided the
Company with an interim financing facility to hold Contracts for sale prior to
being sold. The primary agreement provided for loans by Redwood Receivables
Corporation ("Redwood") to the Company, funded by commercial paper issued by
Redwood and secured by Contracts pledged periodically by the Company. The
Redwood Line provided for a maximum of $100.0 million of advances to the
Company, with interest at a variable rate indexed to prevailing commercial paper
rates. The second agreement was a standby line of credit with General Electric
Capital Corporation ("GECC"), also with a $100.0 million maximum, which the
Company would have been entitled to use only if and to the extent that Redwood
did not provide funding as described above. The GECC line was secured by
Contracts and substantially all the other assets of the Company. Both agreements
expired November 30, 1998.
In November 1998, the Company entered into a new warehouse line of credit
agreement with GECC directly ("the GECC Line"). The GECC Line provides for
warehouse facility advances up to a maximum of $100.0 million at a variable
interest rate of LIBOR + 3.75% (8.87% at December 31, 1998). The GECC Line
expires November 30, 1999.
The Company is charged a non-utilization fee of .25% per annum on the unused
portion of the GECC Line. The balance outstanding at December 31, 1998 and 1997
under the GECC and Redwood warehouse lines of credit was $21.7 million and $30.8
million, respectively.
In November 1997, the Company entered into a warehouse line of credit
agreement with First Union Capital Markets ("First Union Line"). The First Union
Line provides for a maximum of $150.0 million of advances to the Company, with
interest at a variable rate (5.05% at December 31, 1998) indexed to prevailing
commercial paper rates. In July 1998, the advance amount was increased to $200.0
million. In conjunction with the increase in maximum advance amount under the
agreement, the expiration date was changed to July 31, 1999, and is renewable
for one year with the mutual consent of the Company and First Union Capital
Markets. The balance outstanding under the First Union Line at December 31, 1998
and 1997 was $130.2 million and $30.9 million, respectively.
When the Company wishes to securitize Contracts, a majority of the proceeds
received from investors is paid to the providers of the warehouse lines,
simultaneously with their release of the pledged Contracts for transfer to a
pass-through securitization trust.
In December 1996, the Company entered into an overdraft financing facility,
with a bank, that provides for maximum borrowings of $2.0 million. Interest is
charged on the outstanding balance at the bank's reference rate (7.75% at
December 31, 1998) plus 1.75%. During 1997, the overdraft facility was increased
to $4.0 million. There were no borrowings outstanding under this facility at
December 31, 1998. The facility expires on June 1, 1999.
In April 1998, the Company established a $33.3 million revolving credit line
(the "Residual Line") with State Street Bank and Trust Company, Prudential
Insurance and an affiliate of Prudential. Borrowings under the Residual Line
bear
F-21
<PAGE> 56
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest at LIBOR + 4.0% (9.54% at December 31, 1998), and are secured by all
the Company's assets, including its residual interest in securitizations. The
Residual Line is a revolving facility for one year, after which it converts into
a loan with a maximum term of four years. At December 31, 1998, the balance
outstanding under the Residual Line was $33.0 million.
In November 1998, the Company issued $25.0 million of subordinated promissory
notes due November 30, 2003, to an affiliate of Levine Leichtman Capital
Partners, Inc. ("LLCP"), and received the proceeds (net of $1.3 million of
capitalized issuance costs), of approximately $23.7 million. The Company also
issued warrants to purchase up to 3,450,000 shares of common stock at $3.00 per
share, exercisable through November 30, 2005 (see note 10). The debt bears
interest at 13.5% per annum, and may not be prepaid without penalty prior to
November 1, 2002. Simultaneously with the consummation of that transaction,
certain affiliates of the Company, who had lent the Company an aggregate of $5.0
million on a short-term basis in August and September 1998, agreed to
subordinate their indebtedness to the indebtedness in favor of LLCP, to extend
the maturity of their debt until June 2004, and to reduce their interest rate
from 15% to 12.5%. Such affiliates received in return the option to convert such
debt into an aggregate of 1,666,667 shares of common stock at the rate of $3.00
per share through maturity at June 30, 2004. Additionally, SFSC also agreed to
subordinate $6.0 million, or 40%, of its RPL in favor of LLCP.
On April 15, 1997, the Company issued $20.0 million in subordinated
participating equity notes ("PENs") due April 15, 2004. The PENs are unsecured
general obligations of the Company. Interest on the PENs is payable on the
fifteenth of each month, commencing May 15, 1997, at an interest rate of 10.5%
per annum. In connection with the issuance of the PENs, the Company incurred and
capitalized issuance costs of $1.2 million. The Company recognizes interest and
amortization expense related to the PENs using the effective interest method
over the expected redemption period. The PENs are subordinated to certain
existing and future indebtedness of the Company as defined in the indenture
agreement. The Company may at its option elect to redeem the PENs from the
registered holders, in whole but not in part, at any time on or after April 15,
2000, at 100% of their principal amount, subject to limited conversion rights,
plus accrued interest to and including the date of redemption. At maturity, upon
the exercise by the Company of an optional redemption, or upon the occurrence of
a "Special Redemption Event," each holder will have the right to convert into
common stock of the Company ("Common Stock"), 25% of the aggregate principal
amount of the PENs held by such holder at the conversion price of $10.15 per
share of Common Stock. "Special Redemption Events" are certain events related to
a change in control of the Company.
On December 20, 1995, the Company issued $20.0 million in rising interest
subordinated redeemable securities due January 1, 2006 (the "Notes"). The Notes
are unsecured general obligations of the Company. Interest on the Notes is
payable on the first day of each month, commencing February 1, 1996, at an
interest rate of 10.0% per annum. The interest rate increases 0.25% on each
January 1 for the first nine years and 0.50% in the last year. In connection
with the issuance of the Notes, the Company incurred and capitalized issuance
costs of $1.1 million. The Company recognizes interest and amortization expense
related to the Notes using the effective interest method over the expected
redemption period. The Notes are subordinated to certain existing and future
indebtedness of the Company as defined in the indenture agreement. The Company
is required to redeem, subject to certain adjustments, $1.0 million of the
aggregate principal amount of the Notes through the operation of a sinking fund
on each of January 1, 2000, 2001, 2002, 2003, 2004 and 2005. The Notes are not
redeemable at the option of the Company prior to January 1, 1998. The Company
may at its option elect to redeem the Notes from the registered holders of the
Notes, in whole or in part, at any time, on or after January 1, 1998, and prior
to January 1, 1999, at 102% of their principal amount, on or after January 1,
1999, and prior to January 1, 2000, at 101% of their principal amount, and on or
after January 1, 2000, at 100% of their principal amount, in each case plus
accrued interest to and including the date of redemption.
During the year ended December 31, 1997 the Company acquired CPS Leasing,
Inc. At December 31, 1998 and 1997, CPS Leasing, Inc. had borrowings to banks
of $2.6 million and $1.5 million, respectively
On November 16, 1993, the Company issued a $3.0 million five year convertible
subordinated note ("Note 1") to an institutional investor in conjunction with an
agreement by that investor to commit to purchase an additional $50.0 million
F-22
<PAGE> 57
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the Company's Contracts. Interest accrued at 9.5% and was payable
semi-annually. On January 17, 1997, the holder converted Note 1 into 480,000
shares of the Company's common stock.
The GECC Line, First Union Line, Residual Line, PENs, Notes, LLCP notes, and
the overdraft financing facility contain various restrictive and financial
covenants. With respect to the Residual Line, certain of the pools' performance
resulted in the right for the lender of that facility to accelerate the
repayment of the outstanding borrowings. On a monthly basis to date and as of
December 31, 1998, the lender has waived their right to accelerate repayment.
With respect to the LLCP notes, as of December 31, 1998, the Company was in
violation of certain covenants. As of April 15, 1999, the holder of such notes
has waived such violations. With respect to all other borrowings listed above,
the Company is in compliance with all related financial covenants as of December
31, 1998.
(14) EMPLOYEE BENEFITS
The Company sponsors a pretax savings and profit sharing plan (the "401(k)
Plan") qualifed under section 401(k) of the Internal Revenue Code. Under the
401(k) Plan, eligible employees are able to contribute up to 15% of their
compensation (subject to stricter limitation in the case of highly compensated
employees). The Company matches 100% of employees' contributions up to $600 per
employee per calendar year. The Company's contributions to the 401(k) Plan were
$250,428, $115,684, and $63,801 for the years ended December 31, 1998, 1997 and
1996, respectively.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active market values do not exist. Therefore, considerable
judgments were required in estimating fair value for certain items. The
subjective factors include, among other things, the estimated timing and amount
of cash flows, risk characteristics, credit quality and interest rates, all of
which are subject to change. Since the fair value is estimated as of December
31, 1998 and 1997, the amounts that will actually be realized or paid at
settlement or maturity of the instruments could be significantly different. The
estimated fair values of financial assets and liabilities at December 31, 1998
and 1997, were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
---------------------- ----------------------
Carrying Carrying
Value or Value or
Notional Fair Notional Fair
Financial Instrument Amount Value Amount Value
- - -------------------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Cash ............................... $ 1,940 $ 1,940 $ 1,745 $ 1,745
Restricted cash .................... 1,619 1,619 -- --
Contracts held for sale ............ 165,582 169,958 68,271 70,900
Residual interest in securitizations 217,848 217,848 124,616 124,616
Related party receivables .......... 3,268 3,268 7,295 7,295
Commitments ........................ 2,313 61 3,774 145
Warehouse lines of credit .......... 151,857 151,857 61,666 61,666
Notes payable ...................... 2,557 2,557 1,506 1,506
Residual financing ................. 33,000 33,000 -- --
Subordinated debt .................. 65,000 65,000 40,000 40,000
Related party debt ................. 20,000 20,000 15,055 15,055
</TABLE>
Cash and Restricted Cash
The carrying value equals fair value.
F-23
<PAGE> 58
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contracts Held for Sale
The fair value of the Company's contracts held for sale is determined by
purchase commitments from investors and prevailing market rates.
Residual Interest in Securitizations
The fair value is estimated by discounting future cash flows using credit and
discount rates that the Company believes reflect the estimated credit, interest
rate and prepayment risks associated with similar types of instruments.
Related Party Receivables
The carrying value approximates fair value because the related interest rates
are estimated to reflect current conditions for similar types of investments.
Commitments
The fair value of commitments to purchase contracts from Dealers is
determined by purchase commitments from investors and prevailing market rates.
Warehouse Line of Credit
The carrying value approximates fair value because the warehouse line of
credit is short-term in nature and the related interest rates are estimated to
reflect current market conditions for similar types of instruments.
Notes Payable, Residual Financing, Subordinated and Related Party Debt
The carrying value approximates fair value because the related interest rates
are estimated to reflect current market conditions for similar types of
instruments.
(16) LIQUIDITY
The Company's business requires substantial cash to support its operating
activities. The Company's primary sources of cash from operating activities are
amounts borrowed under its various warehouse lines, servicing fees on portfolios
of Contracts previously sold, proceeds from the sales of Contracts, customer
payments on Contracts held for sale, interest earned on Contracts held for sale,
and releases of cash from Spread Accounts. The Company's primary uses of cash
are 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 is dependent on its warehouse lines of
credit and its residual financing facility in order to finance its continued
operations. If the Company's principal lenders decided to terminate or not to
renew any of these credit facilities with the Company, the loss of borrowing
capacity would have a material adverse effect on the Company's results of
operations unless the Company found a suitable alternative source.
The Servicing Agreements call for the requisite levels of the various Spread
Accounts to increase if the related receivables experience delinquencies,
repossessions or net losses in excess of certain predetermined levels. At
December 31, 1998, 18 of the Company's 22 securitized pools were at higher than
original requisite levels due to the delinquency, repossession or net loss
performance of 13 of the 22 securitized pools. Such Spread Account balances
therefore included approximately $24.3 million more than would have been
required at the original requisite levels. The higher requisite Spread Account
levels ranged from 30% to 100% of the related outstanding balance of the
securitized pools. In April 1999, the Company entered into an 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 22 securitized pools. The effectiveness of the
amendment is contingent upon approval of certain subordinated
F-24
<PAGE> 59
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certificateholders. This new cap on the Spread Accounts described above is
expected to provide cash flows to the Company during 1999. The amendment is
subject to certain performance measures that may result in an increase in the
cap from 21% to 25%. There can be no assurance that such cash flows will occur.
In addition to requiring higher Spread Account levels, the Servicing Agreements
provide the Certificate Insurer with certain other rights and remedies, which
have been waived on a monthly basis by the Certificate Insurer.
On April 15, 1999, the Company issued $5.0 million of subordinated promissory
notes to LLCP and received proceeds (net of $250,000 of capitalized issuance
costs) of approximately $4.75 million. The debt includes certain covenants one
of which is the infusion of $15.0 million of debt during 1999 by SFSC. 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, the $5.0 million has been personally guaranteed by the chairman of
the Company's board of directors and the president of the Company.
The Company did not sell any Contracts in the first quarter of 1999, and is
currently evaluating alternatives for selling its Contracts during the second
quarter of 1999. Alternatives being considered by the Company include various
securitization structures, unsecuritized sale of Contracts, or perhaps, some
combination of both alternatives. The Company has received a letter of intent
from an investor to purchase up to $300.0 million of the Company's Contracts on
an unsecured basis in the second quarter. There can be no assurance that such a
sale will take place.
In the event the Company incurs a net loss in two consecutive quarters it
would be in default of its agreements for the Residual Line. Unless waived by
the lender, the default could result in acceleration of the Residual Line and a
cross default on the Warehouse Lines. The lender would receive any releases from
Spread Accounts to retire outstanding principal and interest. The Company
believes that the lender would waive the default. In the event the lender does
not waive the default, the Company believes that cash flows from operations
would be sufficient to fund its obligations as they become due and payable.
There can be no assurance, however, that the lender would waive the default or
that other cash flows will be sufficient to fund the Company's operations.
(17) SUBSEQUENT EVENTS
In an effort to conserve capital, the Company intends to dispose of and/or
terminate the operations of three of its subsidiaries; Samco, LINC and CPS
Leasing, Inc. During the first quarter of 1999, all operations of Samco were
terminated and all personnel were laid off. The Company is utilizing the
building and equipment that is owned and/or leased as an asset recovery
facility.
On April 15, 1999, the Company issued $5.0 million of subordinated promissory
notes bearing interest at 14.50% per annum, to LLCP and received proceeds (net
of $250,000 of capitalized issuance costs) of approximately $4.75 million. The
Company also issued warrants to purchase 1,335,000 shares of the Company's
common stock at $0.01 per share to LLCP. The warrants are subject to shareholder
approval and if approved, will be exerciseable through April 2009. As part of
the purchase agreement, the interest rate on the previous LLCP notes will
increase to 14.50% and the 3,450,000 warrants to purchase shares of the
Company's common stock at $3.00 per share were reduced to 3,115,000 at a price
of $0.01 per share.
F-25
<PAGE> 60
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Revenues .............. $24,782 $29,724 $34,577 $37,197
Income before income taxes 9,658 10,240 10,744 13,678
Net income ............ 5,603 5,925 6,238 7,937
Earnings per share:
Basic ............... $ 0.37 $ 0.39 $ 0.40 $ 0.51
Diluted ............. $ 0.34 $ 0.36 $ 0.38 $ 0.44
1997
Revenues .............. $15,230 $17,542 $20,231 $22,248
Income before income taxes 7,143 7,549 8,309 8,958
Net income ............ 4,145 4,386 4,816 5,185
Earnings per share:
Basic ............... $ 0.29 $ 0.31 $ 0.34 $ 0.36
Diluted ............. $ 0.27 $ 0.28 $ 0.30 $ 0.32
1996
Revenues .............. $ 9,699 $11,763 $12,910 $14,066
Income before income taxes 5,101 5,517 6,451 6,623
Net income ............ 3,051 3,271 3,834 3,941
Earnings per share:
Basic ............... $ 0.23 $ 0.24 $ 0.28 $ 0.29
Diluted ............. $ 0.20 $ 0.22 $ 0.25 $ 0.26
</TABLE>
F-26
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<C> <S>
3.1 Restated Articles of Incorporation (incorporated by reference to exhibit
filed with registrant's report on Form 10-KSB dated December 31, 1995)
3.2 Amended and Restated Bylaws. (incorporated by reference to exhibit filed
with registrant's report on Form 10-K dated December 31, 1997)
4.Indenture re Rising Interest Subordinated Redeemable Securities
("RISRs") (incorporated by reference to exhibit filed with registrant's
report on Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRs (incorporated by reference to
exhibit filed with registrant's report on Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")
(incorporated by reference to exhibit filed with registrant's
registration statement on Form S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (incorporated by reference
to exhibit filed with registrant's registration statement on Form S-3,
no. 333-21289)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder
(incorporated by reference to exhibit filed with registrant's report on
Form 10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (incorporated by reference to exhibit
filed with registrant's report on Form 10-K dated December 31, 1997)
10.3 Purchase Agreement relating to PENs. (incorporated by reference to
exhibit filed with registrant's registration statement on Form S-3 no.
333-21289)
10.4 Lease Agreement, First Amendment to Lease, Assignment and Assumption of
Lease (incorporated by reference to exhibit filed with registrant's
registration statement on Form S-1, no. 33-49770)
10.5 Amendment #2 to Lease Agreement, First Amendment to Lease and Assignment
and Assumption of Lease. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB, dated March 31, 1995)
10.6 Lease Agreement re Chesapeake Collection Facility. (incorporated by
reference to exhibit filed with registrant's report on Form 10-K dated
December 31, 1996)
10.7 Consulting Agreement. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB dated December 31, 1995)
10.8 Agreement to Build and Lease Headquarters Building. (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q dated
September 30, 1997)
10.9 Lease of Headquarters Building. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
</TABLE>
<PAGE> 62
<TABLE>
<C> <S>
10.10 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement re Redwood Warehouse Line. (incorporated by reference to
exhibit filed with registrant's report on Form 10-KSB dated December 31,
1995)
10.11 The Receivables Funding and Servicing Agreement re Redwood Warehouse
Line. (incorporated by reference to exhibit filed with registrant's
report on Form 10-KSB dated December 31, 1995)
10.12 Partially Convertible Subordinated Note. (incorporated by reference to
exhibit filed with registrant's report on Form 10-Q dated September 30,
1997)
10.13 Registration Rights Agreement. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
10.14 Receivables Funding and Servicing Agreement relating to First Union
Warehouse Line (incorporated by reference to exhibit filed with
registrant's report on Form 10-K dated December 31, 1997)
10.14a Amendment dated July 17, 1998 to the Receivables Funding and Servicing
Agreement relating to First Union Warehouse Line (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.15 Receivables Transfer Agreement relating to First Union Warehouse Line
(incorporated by reference to exhibit filed with registrant's report on
Form 10-K dated December 31, 1997)
10.16 Residual Interest in Securitizations Revolving Credit and Term Loan
Agreement dated as of April 30, 1998, between registrant and State Street
Bank and Trust Company (incorporated by reference to exhibit filed with
registrant's report on 10-Q filed 5/15/98)
10.16a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement (filed herewith)
10.17 Pledge and Security Agreement dated as of April 30, 1998, between the
Company and State Street Bank and Trust Company (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
May 15, 1998)
10.18 Revolving Credit and Term Note dated April 30, 1998, (the "State Street
Note") (incorporated by reference to exhibit filed with registrant's
report on Form 10-Q filed May 15, 1998)
10.19 Subscription Agreement regarding shares issued in July 1998 (incorporated
by reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.20 Registration Rights Agreement regarding shares issued in July 1998
(incorporated by reference to exhibit filed with registrant's report on
Form 10-Q filed August 14, 1998)
10.21 Line of Credit Note Issued to Stanwich Financial Services Corp. (the "
1998 Stanwich Note") (incorporated by reference to exhibit filed with
registrant's report on Form 10-K filed March 3, 1998)
10.22 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement (filed herewith)
10.23 FSA Warrant Agreement dated November 30, 1998 (filed herewith)
10.24 Securities Purchase Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the statement on Schedule 13D filed with
respect to the registrant on November 25, 1988, by Levine Leichtman
Capital Partners II L.P. and others (the "LLCP report")
</TABLE>
<PAGE> 63
<TABLE>
<C> <S>
10.25 Senior Subordinated Primary Note dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.26 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998 (incorporated by reference to exhibit filed with the
LLCP report)
10.27 Investor Rights Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.28 Registration Rights Agreement dated as of November 17, 1998 (incorporated
by reference to exhibit filed with the LLCP report)
10.29 Subordination Agreement dated as of November 17, 1998 re: Stanwich Note
and Poole Note (filed herewith)
10.30 Consolidated Registration Rights Agreement dated November 17, 1998 re:
1997 Stanwich Notes (filed herewith)
23.1 Consent of independent auditors. (filed herewith)
27 Financial Data Schedule. (filed herewith)
99.1 Cautionary Statement.*
- - ----------
* To be filed by amendment
</TABLE>
<PAGE> 1
EXHIBIT 10.16a
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT TO RESIDUAL INTEREST IN SECURITIZATIONS REVOLVING
CREDIT AND TERM LOAN AGREEMENT (this "Second Amendment") is dated as of November
17, 1998, by and among Consumer Portfolio Services, Inc., a California
corporation (the "Company"), and State Street Bank and Trust Company as agent
and lender ("State Street"), The Structured Finance High Yield Fund, LLC, as
lender and The Prudential Insurance Company of America, as lender. Said lenders
are sometimes herein collectively referred to as the "Lenders" and each
individually a "Lender". State Street in its capacity as agent for the Lenders
hereunder is sometimes herein referred to as the "Agent". This Second Amendment
(i) amends certain provisions of that certain Residual Interest in
Securitizations Revolving Credit and Term Loan Agreement dated as of April 30,
1998 by and among the Company, State Street, for itself and as Agent, and the
Lenders from time to time party thereto (as amended by a letter agreement dated
November 2, 1998 relating to the so-called "Bridge Loan" from Levine, and as
further amended by this Second Amendment, the "Loan Agreement") and (ii)
ratifies and confirms that certain Pledge and Security Agreement dated as of
April 30, 1998 by and among the Company, State Street, for itself and as Agent,
and the Lenders (as amended by and through to the date of the First Amendment,
the "Pledge and Security Agreement"), together with all other Loan Documents
heretofore executed in connection with the Loan Agreement. Certain capitalized
terms relating to the transactions contemplated by this Second Amendment are
defined in section 1(h) below. Other capitalized terms used herein and not
otherwise defined shall have the same meanings herein as in the Loan Agreement.
PREAMBLE
The Company has advised the Agent and the Lenders that it desires to
enter into a Securities Purchase Agreement dated as of the date hereof (the
"Levine Subordinated Agreement") with Levine Leichtman Capital Partners II,
L.P., a California limited partnership ("Levine") and incur Subordinated Debt
thereunder in a principal amount of up to $25,000,000 (the "Levine Subordinated
Debt"), subject to the terms and conditions (including the subordination
provisions) hereof and of the Levine Subordinated Agreement. The Company's
execution of the Levine Subordinated Agreement and incurrence of the Levine
Subordinated Debt requires the consent of the Lenders pursuant to certain
provisions of the Loan Agreement. The Company has requested, and the Agent and
the Lenders have agreed, subject to the terms and conditions set forth herein,
that the Loan Agreement and the other Loan Documents be amended to the extent
necessary to permit the Company to execute the Levine Subordinated Agreement and
incur the Levine Subordinated Debt in accordance with the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company, the Agent, and the
Lenders hereby agree as follows:
<PAGE> 2
1. Amendments to Loan Agreement.
(a) Amendment to Section 4. Section 4 (Conditions Precedent to Closing
Date and all Subsequent Loans; Conditions to Lending) is hereby amended by
adding the following subsection 4.11 thereto:
"4.11 Levine Subordinated Agreement. The Company and Levine
shall have executed the Levine Subordinated Agreement on terms
(including subordination terms) satisfactory in the sole discretion of
the Lenders.
(b) Amendment to Section 5. Section 5 (Affirmative Covenants) of the
Loan Agreement is hereby amended by adding the following subsection 5.13
thereto:
"5.13 Notice of Default Under Levine Subordinated Documents. The
Company shall immediately notify the Agent and the Lenders of its
receipt of any notice of a default or event or default under the Levine
Subordinated Agreement."
(c) Amendment to Subsection 6.1 of the Loan Agreement. Subsection 6.1 of
the Loan Agreement is hereby amended by adding the following subsection (k)
thereto:
"(k) Indebtedness of the Company under the Levine Subordinated Debt in a
maximum principal amount at any one time outstanding not to exceed
$25,000,000."
(d) Amendment to Subsection 6.5. Subsection 6.5 of the Loan Agreement is
hereby amended by deleting such subsection in its entirety, and inserting in
lieu thereof the following:
"6.5 Restricted Payments. The Company will not, and will not permit any
Subsidiary to, directly or indirectly declare, order, pay or make any
Restricted Payment or set aside any sum or property therefor if at the
time of such proposed action or immediately after giving effect thereto,
any Default or Event of Default exists, and unless expressly permitted
by this subsection 6.5.
As used herein, the term "Restricted Payments" means (i) any
dividend or other distribution, direct or indirect, on or on account of
any shares of any class of stock of the Company now or hereafter
outstanding (other than dividends payable exclusively in shares of the
Company's preferred stock); (ii) any redemption, purchase or other
acquisition, direct or indirect, of any shares of any class of stock of
the Company now or hereafter outstanding or of any warrants or rights to
purchase any such stock (including, without limitation, the repurchase
of any such stock or warrant or any refund of the purchase price thereof
in connection with the exercise by the holder thereof of any right of
rescission or similar remedies with respect thereto) provided, that
payment of the Warrant Purchase Price (as defined in the Levine
Subordinated Documents) by Levine in accordance with the provisions of
section 2.2 of the Levine Warrant shall not constitute a Restricted
17
<PAGE> 3
Payment; and (iii) any payment in respect of Subordinated Debt
(including, without limitation, the Levine Subordinated Documents).
Subject to the foregoing, the Company may: (a) make Restricted
Payments in the amount of scheduled (but not accelerated) payments due
the Subordinated Lenders under the Subordinated Agreements, (b) make
scheduled (but not accelerated) monthly payments of interest to Levine
in respect of the Levine Subordinated Debt,(c) make payment in an amount
not to exceed $10,000,000 from proceeds of the key man life insurance
policy obtained by the Company pursuant to section 8.8 of the Levine
Subordinated Agreement, provided that proceeds are applied by Levine in
reduction of the outstanding balance of principal of and accrued but
unpaid interest on the Levine Note, (d) make scheduled (but not
accelerated) "Extension Payments" under and as defined in section
8.21(b) of the Levine Subordinated Agreement, (e) make a payment in an
amount not to exceed $3,000,000 to fund the escrow account provided for
in section 5(a) of the Levine Note or in section 8.21 of the Levine
Subordinated Agreement, provided, that such escrow funds shall not be
paid over to Levine prior to payment in full of all obligations of the
Company to the Lenders under this Agreement, (f) make scheduled (but not
accelerated) payments in an aggregate amount not to exceed $275,000 to
pay the "consulting fee" referred to in section 1.4 of the Investor
Rights Agreement, together with payments to reimburse Levine for
reasonable out-of-pocket expenses incurred in connection with Levine's
representative serving on the Company's Board of Directors or any
committee thereof, (g) make payments of fees and expenses payable
pursuant to section 12.15 of the Levine Subordinated Agreement or
section 14 of the Levine Note and (h) make payments (not to exceed
$700,000) of the "closing fee" under section 6.8 of the Levine
Subordinated Agreement.
Notwithstanding anything to the contrary in the Levine
Subordinated Debt Documents, the Company agrees that, except as
expressly set forth above, it will not at any time make any payment of
any kind or nature (or set aside any sums therefor), in respect of the
Levine Subordinated Debt. For the avoidance of doubt, the Company shall
not make any voluntary or involuntary prepayments of the Indebtedness
under the Levine Subordinated Documents except (i) from proceeds of the
key man life insurance policy in accordance with clause (c) above and
the other provisions of this subsection 6.5, and (ii) simultaneously
with the final repayment in full in cash of all obligations of the
Company to the Lenders under the Loan Agreement and the other Loan
Documents, with proceeds of loans under the New Senior Credit Facility
(as such term is defined in the Levine Subordinated Agreement)."
The provisions of this subsection 6.5 are solely for the purpose of
defining the relative rights of the Agent and the Lenders on the one hand, and
the holders of Subordinated Debt on the other hand, and none of such provisions
shall impair, as between the Company and any holder of the Subordinated Debt,
the obligations of the Company, which are unconditional and absolute, to pay to
such holder all of the Subordinated Debt in accordance with the terms thereof,
subject in each instance to the rights of the Agent
3
<PAGE> 4
and the Lenders under the provisions of this Agreement and under the
subordination provisions of such Subordinated Debt.
(e) Additional Amendments to Section 6. (i) Section 6 (Negative
Covenants) of the Loan Agreement is hereby amended by adding the following
subsection 6.17 thereto:
"6.17 Amendment to Levine Subordinated Documents. The Company
will not amend, modify or change (or consent to any such amendment,
modification or change) in any of the provisions of the Levine
Subordinated Documents if such amendment would: (i) increase the
principal amount of any Levine Subordinated Debt, (ii) increase the rate
of interest accruing on the Levine Subordinated Debt, (iii) change in
any manner the dates upon which any principal or interest payments on
the Levine Subordinated Debt are due, (iv) grant any lien or other
encumbrance on its assets to secure the Levine Subordinated Debt, or (v)
change in any manner, or add, any affirmative or negative covenants,
events of default, redemption provisions or subordination provisions of
any Levine Subordinated Debt that would adversely affect the rights of
the Lenders or otherwise have a material adverse effect on the Company.
Solely with respect to the Levine Subordinated Debt, the provisions of
this subsection 6.17 shall supersede the provisions of subsection 6.11
above."
(ii) Section 6.6 (Capital Expenditures) is hereby amended by
replacing the number "$3,000,000" appearing therein with the number "$3,250,000"
solely for the fiscal year of the Company ending December 31, 1998. The
$3,000,000 limitation on Capital Expenditures shall be reinstated commencing
with the fiscal year of the Company beginning January 1, 1999, and shall be
effective for each fiscal year thereafter during the term of this Agreement.
(f) Amendment to Subsection 3.30. Subsection 3.30 of the Loan Agreement
(Year 2000) is hereby amended by adding the following at the end of such
subsection:
"The Company shall be "Year 2000 Compliant" by December 31, 1999
and at all times thereafter. As used herein, the term "Year 2000
Compliant" means that all software utilized by and material to the
business operations and financial condition of the Company are able to
interpret and manipulate data on and involving all calender dates
correctly and without causing any abnormal ending scenario, including in
relation to dates ending in and after the year 2000."
(g) Amendment to Subsection 8.1. Subsection 8.1 (Events of Default;
Acceleration) of the Loan Agreement is hereby amended by adding the following
clause (m) thereto:
"(m) If there shall occur any default or event of default under and as
from time to time defined in the Levine Subordinated Documents."
4
<PAGE> 5
(h) Amendments to Section 9. Section 9 of the Loan Agreement is hereby
amended by adding the following definitions alphabetically therein:
"Investor Rights Agreement: shall have the meaning set forth in
the definition of Levine Subordinated Documents.
Levine: means Levine Leichtman Capital Partners II, L.P., a
California limited partnership.
Levine Note: shall have the same meaning set forth in the
definition of Levine Subordinated Documents.
Levine Subordinated Debt: shall mean all Indebtedness of the
Company to Levine under the Levine Note (as originally executed) in a
principal amount not to exceed $25,000,000.
Levine Subordinated Agreement: shall mean that certain
Securities Purchase Agreement dated as of the date hereof by and between
the Company and Levine, as originally executed.
Levine Subordinated Documents: shall mean, collectively, the
Levine Subordinated Agreement, the Senior Subordinated Primary Note of
the Company in favor of Levine in the principal amount of $25,000,000
(the "Levine Note"), the Investor Rights Agreement (the "Investor Rights
Agreement"), and all other agreements, documents, certificates and
instruments executed and delivered in connection with the Levine
Subordinated Agreement, in each instance as originally executed."
In addition, the definition of "Subordinated Debt" appearing in section 9 of the
Loan Agreement is amended so as to expressly include all Indebtedness of the
Company under the Levine Subordinated Documents.
2. Confirmation of Representations, Warranties, Exhibits and Schedules
to the Loan Agreement.
The Company, by execution of this Second Amendment, certifies to the
Agent and each of the Lenders that, after giving effect to the substitution of
the Schedules to the Loan Agreement referred to in the last sentence of this
section 2, each of the representations and warranties set forth in the Loan
Agreement, the Security Documents and the other Loan Documents is true and
correct as of the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date, as if fully set forth in this
Second Amendment and that, as of the date hereof, no Default or Event of Default
has occurred and is continuing under the Loan Agreement, any Security Documents,
any other Loan Document or any Eligible Securitization Transaction Document. The
Company acknowledges and agrees that this Second Amendment shall become a part
of the Loan Agreement and shall be a Loan Document. In connection with the
execution of this Second Amendment, the Company has delivered to the Agent
certain revised Schedules to the Loan Agreement. The Company hereby requests and
authorizes the Agent to substitute such revised Schedules for the corresponding
Schedules currently attached to the Loan Agreement.
5
<PAGE> 6
3. Conditions Precedent and (in the case of clause (c) below only)
Subsequent.
Prior to or concurrently with the execution by the Agent and the Lenders
of this Second Amendment, and as a condition to the effectiveness hereof and of
the Lenders to make Loans for the account of the Company on and after the date
hereof:
(a) The Company shall have delivered to the Agent and each of the
Lenders copies of the fully executed Levine Subordinated Documents, together
with such schedules and other information delivered in connection therewith as
may be designated by the Lenders;
(b) This Agreement and all other agreements, instruments and
certificates reasonably required by the Lenders in connection herewith and
therewith shall have been executed and delivered by each of the parties thereto;
(c) The Company shall pay all fees and expenses (including attorney's
fees) incurred by the Agent in connection with the Loan Agreement and the
negotiation, structuring and documentation of the transactions contemplated by
this Agreement and the Levine Subordinated Agreement immediately upon receipt of
a bill therefor; and
(d) The Company shall have paid to the Agent (for the ratable benefit of
the Lenders, a closing fee in the amount of $200,000 (the "Closing Fee"). The
Closing Fee shall be fully earned on the Closing Date, and will not be refunded
to the Borrower, in whole in or part, under any circumstances.
4. Conditions to Lending; Compliance with Loan Documents, etc.
The Company hereby represents and warrants to the Agent and the Lenders
that all of the conditions precedent to lending specified in Section 4 of the
Loan Agreement have been and continue to be satisfied as of the date hereof.
Without limiting the generality of the foregoing, the Company hereby confirms
that (a) the Company is in compliance with all of the terms and provisions set
forth in the Loan Agreement, the Security Documents each of the other Loan
Documents, as amended hereby, and each of the Eligible Securitization
Transaction Documents, on its part to be observed or performed on or prior to
the date hereof; (b) without limiting the foregoing, no Default or Event of
Default has occurred and is continuing; and (c) since December 31, 1997 there
has been no material adverse change in the assets or liabilities or in the
financial or other condition of the Company, except as disclosed in the
Company's periodic filings with the SEC.
5. No Novation; Effect; Ratification and Acknowledgment of Security
Documents; Counterparts; Governing Law.
Except to the extent specifically amended hereby, the Loan Agreement,
the Notes, each of the Security Documents and all other Loan Documents shall be
unaffected hereby and shall remain in full force and effect. The Company hereby
acknowledges, confirms and ratifies its obligations under the Loan Agreement,
the Notes, each of the Security Documents and all other Loan
6
<PAGE> 7
Documents. This Second Amendment may be executed in any number of counterparts,
and by the different parties on separate counterparts, each of which, when so
executed and delivered, shall be an original, but all the counterparts shall
together constitute one instrument. This Second Amendment shall be governed by
the internal laws of The Commonwealth of Massachusetts (without reference to
conflicts of law principals) and shall be binding upon and inure to the benefit
of the parties hereto and the respective successors and assigns. The Company
shall pay all reasonable out-of-pocket expenses of the Agent in connection with
the preparation, execution and delivery of this Second Amendment.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment Agreement as a sealed instrument as of the date first above written.
CONSUMER PORTFOLIO SERVICES, INC.
By:
---------------------------------
(Title)
STATE STREET BANK AND TRUST COMPANY,
INDIVIDUALLY AND AS AGENT
By:
---------------------------------
(Title)
THE STRUCTURED FINANCE HIGH YIELD
FUND, LLC
By:
---------------------------------
(Title)
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By:
---------------------------------
(Title)
8
<PAGE> 1
EXHIBIT 10.22
AMENDED AND RESTATED
MOTOR VEHICLE INSTALLMENT
CONTRACT LOAN AND SECURITY AGREEMENT
Dated as of November 30,1998
by and between
CPS FUNDING CORPORATION
as Borrower
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Lender
1
<PAGE> 2
AMENDED AND RESTATED MOTOR VEHICLE
INSTALLMENT CONTRACT LOAN AND SECURITY AGREEMENT
This Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement ("Agreement") is entered into by and between CPS Funding Corporation,
a California corporation (together with its successors and assigns, "Borrower"),
and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (together with
its successors and assigns hereinafter referred to as "Lender").
RECITALS
WHEREAS, Borrower is a financial organization primarily engaged in the
business of acquiring installment sale contracts for motor vehicles;
WHEREAS, Lender has agreed to provide the loan on the terms and
conditions set forth in this Agreement to Borrower; and
WHEREAS, Borrower and Lender desire to amend and restate the Receivables
Funding And Servicing Agreement ("Prior Agreement") dated as of June 1, 1995
which was entered into by Borrower and Redwood Receivables Corporation and later
assigned by Redwood Receivables Corporation to Lender. Borrower and Lender agree
that (1) this Agreement is not a novation, refinancing or satisfaction of any
existing loan under the Prior Agreement, nor is it a release or substitution of
collateral thereunder, (2) the existing loan and security interest continue
uninterrupted and are not diminished in any manner by the execution of this
Agreement, and (3) this Agreement modifies the terms and conditions contained in
the Prior Agreement to the terms and conditions contained in this Agreement.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, Borrower and Lender agree as follows:
ARTICLE I - DEFINITIONS
Section 1.0 Defined Terms. Whenever used in this Agreement with such
upper case letters as are shown below, the following terms shall have the
respective meanings set forth below. When the terms are used in the plural, the
plural forms of the meanings shall apply.
Accounting Period: means a calendar month, beginning with the month
during which this Agreement is executed and ending with the calendar month
during which the Indebtedness has been paid in full following termination of
this Agreement.
Actual Payment: means, with respect to any Contracts all payments
received by, from or for the account of the related Contract Debtor on such
Contract.
Advance: means each of the Loan advances described in Article III of
this Agreement.
Affiliate: means CPS and any Person, now or in the future (i) directly
or indirectly owned or controlled in whole or in part by Borrower or CPS, or
(ii) under common ownership or control with Borrower. For the purpose of this
definition, "control" shall mean the power to direct, or cause the direction of,
management or policies, whether through the ownership of voting securities, by
contract or otherwise. For the purpose of this definition, "owned" shall mean at
least 10% ownership.
Average Charged-Off Losses: means the Accounting Period average of the
Charged-Off Losses for any three consecutive Accounting Periods for Pledged
Contracts; provided that, until the first three Accounting Periods have expired,
the Average Charged-Off Losses shall be the Accounting Period average of the
Charged-Off Losses for the Accounting Periods which have expired.
1
<PAGE> 3
Bankruptcy Code: means the Bankruptcy Reform Act of 1978, as amended, as
the same may be further amended, and any other applicable state or federal law
with respect to bankruptcy liquidation, insolvency or reorganization.
Borrowing Base: As of the date of its computation, an amount equal to
the lesser of (a) 88% of the aggregate Gross Balance of Eligible Contracts minus
the Unearned Interest Amount with respect to such Contracts, and (b) 91% of
Borrower's aggregate net investment in Eligible Contracts. For the purpose of
this calculation, Borrower's net investment in a Contract shall be equal to the
net amount Borrower paid to purchase the Contract, which shall in no event be
more than the Gross Balance minus the sum of (a) the Unearned Interest Amount,
(b) any discounts, (c) any refundable reserves, (d) any boarding fees, and (e)
any other fees or amounts Borrower is entitled to in connection with the
purchase of the Contract.
Business Day: means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking institutions in the State of New York are required by law
to be closed.
Certificate of Title: means with respect to each Financed Vehicle, the
certificate of title (or other evidence of ownership) issued by the department
of motor vehicles, or other appropriate governmental body, of the state in which
the Financed Vehicle is to be registered showing the Contract Debtor as owner,
with either notation of Borrower's first lien or such other status indicated
thereon which is necessary to perfect Borrower's security interest in the
Financed Vehicle as a first priority interest, and showing no other actual or
possible lien interest in the Financed Vehicle.
Charged-Off Contract: means a Contract for which (i) all or part of more
than five (5) Scheduled Payments are due and unpaid, (ii) the Financed Vehicle
has been surrendered, or repossessed, and any proceeds from the sale thereof
have been received, (iii) a settlement has been made for less than the Gross
Balance minus the Unearned Interest Amount, or (iv) a Skip Loss Investigation
has been pending for more than one hundred and fifty (150) days.
Charged-Off Losses: means as of the end of an Accounting Period, the
Gross Balance minus the Unearned Interest Amount of Charged-Off Contracts which
become Charged-Off Contracts during the Accounting Period minus amounts received
by Borrower during the Accounting Period and applied to Charged-Off Contracts
which became Charged-Off Contracts during a previous Accounting Period, divided
by the Gross Balance minus the Unearned Interest Amount of all Contracts owned
by Borrower which are not Charged-Off Contracts; expressed as a percentage.
Closing Date: means the date on which the first Advance is made.
Collateral: means any and all real and personal, tangible and
intangible, property in which Lender is granted a security interest now or
hereafter, in this Agreement or otherwise, to secure Borrower's obligations to
Lender.
Collection Account: means a bank account in the name of the Lender at a
bank designated by the Lender.
Collections: means, with respect to any Receivable, all cash collections
and other Proceeds of such Receivable (including late charges, fees and interest
arising thereon and all recoveries with respect to Receivables that have been
written off as uncollectible).
Commitment Termination Date: means the earlier of (a) the date so
designated pursuant to Article 15 as a result of an Event of Default, and (b)
the Final Maturity Date.
Contract: means an installment or conditional sale contract, with any
amendments, owned or acquired by Borrower pursuant to which a Contract Debtor
has: (i) purchased a new or used Motor Vehicle, (ii) granted a security interest
in the Motor Vehicle to secure the Contract Debtor's payment obligations, and
(iii) agreed to pay the unpaid purchase price and a finance charge in periodic
installments no less frequently than monthly.
2
<PAGE> 4
Contract Debtor: means the Person that has executed a Contract as a
purchaser, and any guarantor, co-signer or other Person obligated to make
payments under the Contract.
Contract Debtor Documents: means, with respect to each Contract Debtor:
(a) the original Certificate of Title or equivalent title
documents issued by the relevant state motor vehicle authority, if
applicable;
(b) the original executed Contract;
(c) hereafter, on new Financed Vehicles a copy of the Dealer
Invoice and invoices for any additional equipment included in the
Contract;
(d) a copy of the original credit application;
(e) copies of, but with respect to portfolio purchase of
Contracts, only if such are available to Borrower from the seller of the
portfolio purchase Contracts:
(i) the credit bureau reports,
(ii) the completed credit investigation form,
(iii) the completed verification of employment and
income forms, and
(iv) the Contract Debtor's references;
(f) verification of Required Contract Debtor Insurance showing
Borrower as loss payee, additional insured, or lienholder at the time of
Borrower's purchase of the Contract, but with respect to portfolio
purchases of Contracts, only if such are available to Borrower from the
seller of the Contracts;
(g) a certificate for each type of Optional Contract Debtor
Insurance purchased by the Contract Debtor; and
(h) Borrower's loan process or "deal structure" sheet.
Contract Delivery Documents: means the original Certificate of Title, if
available, or a copy of the application for the Certificate of Title, and the
original executed Contract with original Contract Debtor and Dealer signatures.
Contract Rights: means with respect to Pledged Contracts, (i) Borrower's
interest in the Financed Vehicle; (ii) all rights of Borrower regarding the
Contract and Financed Vehicle, including, but not limited to, rights to
electronic funds transfers and rights under all dealer agreements and purchase
agreements pursuant to which the Contract was acquired by Borrower; (iii) all
rights of Borrower with respect to Optional Contract Debtor Insurance, Required
Contract Debtor Insurance, VSI Insurance and any other policies of fire, theft
or comprehensive insurance, collision insurance, public liability insurance or
property damage insurance maintained with respect to the Financed Vehicle, the
Contract, or the Contract Debtor; (iv) all rights of Borrower, if any, to
prepaid dealer rate participation in connection with the Contract; (v)
Remittances; and (vi) all rights of Borrower to the originals of all books,
records (including electronic data), reports, files and documents relating to
the Contracts, including, but not limited to, Contract Debtor Documents,
financial statements of Contract Debtors, and all payment reports or records
relating to the Contracts.
Contract Rights Payors: means Persons, other than Contract Debtors,
against whom Contract Rights can be asserted.
CPS: means Consumer Portfolio Services, Inc., a California corporation.
3
<PAGE> 5
Credit and Collection Policies: means the credit, collection, customer
relations and service policies of CPS and Borrower in effect as of the date
hereof, as set forth in writing and delivered to Lender, and, as such policies
may hereafter be amended, modified or supplemented from time to time with the
written consent of Lender.
Dealer: means the seller of the Financed Vehicle to the Contract Debtor.
Dealer Invoice: means as to new Financed Vehicles, the Invoice prepared
by the manufacturer showing the net cost; and, as to used Financed Vehicles, the
NADA Used Car Guide trade-in value, or for the West Coast, the Kelley Wholesale
Blue Book Wholesale Value, or for the Northeast, the Black Book Average Value.
Delinquency Measurement: means as of the end of an Accounting Period,
the sum of the Gross Balance of all Delinquency Measurement Contracts for which
at least two (2) due Scheduled Payments are less than ninety percent (90%) paid,
divided by the monetary sum of all Scheduled Payments, whether or not due which
have not been paid in full for all Delinquency Measurement Contracts, expressed
as a percentage.
Delinquency Measurement Contracts: means all Pledged Contracts which are
not Charged-Off Contracts, not paid in full or for which the Motor Vehicle has
been secured in a repossession.
Eligible Contract: means each Contract which is listed on a List of
Contracts delivered to Lender at the same time, and which in Lender's sole
determination satisfies each of the following requirements (at the time of
delivery and thereafter except to the extent expressly stated below to apply
only at delivery or only thereafter):
(A) All of the representations and warranties in Section 10.0 are true
with respect to, and all conditions precedent in Section 9.1 have been and
continue to be met with respect to, the Contract, Financed Vehicle, Contract
Debtor, Required Contract Debtor Insurance, and Optional Contract Debtor
Insurance.
(B) The first Scheduled Payment is due within forty five (45) days after
the date of the Contract and the Contract Date is within one (1) day of the
delivery of the Financed Vehicle.
(C) The Contract has a fixed APR and the Finance Charge was computed
using a fixed rate.
(D) The initial term of the Contract does not exceed sixty (60) months
(except for the Super Alpha program Contracts) and the Schedule of Payments has
equal monthly payments except for the final payment which may be less than the
other equal payments, the payment obligation is in Dollars, and at the time the
Contract was delivered to the Lender, there were at least twenty (20) remaining
Scheduled Payments.
(E) The Contract is for the absolute sale of the Financed Vehicle to the
Contract Debtor, and the Financed Vehicle is not on approval or subject to any
agreement between the Contract Debtor and the Dealer for the repurchase or
return of the Financed Vehicle.
(F) The Contract does not present a credit, collateral or documentation
risk which is material and unacceptable to the Lender.
(G) The Dealer has been paid all amounts due for the purchase of the
Contract from the Dealer.
(H) The Contract Debtor is an Eligible Contract Debtor.
(I) The Contract contains the original signature of the Contract Debtor
and the Dealer.
4
<PAGE> 6
(J) The Contract is the only unsatisfied original executed Contract for
the purchase of the Financed Vehicle and accurately reflects all of the actual
terms and conditions of the Contract Debtor's purchase of the Financed Vehicle.
(K) Neither Borrower nor an Affiliate has made any agreement with the
Contract Debtor to reduce the amount owed on the Contract.
(L) Neither Borrower nor an Affiliate is required to perform any
additional service for, or perform or incur any additional obligation to, the
Contract Debtor in order for Borrower to enforce the Contract.
(M) The Contract, at the time Borrower purchased it, materially complied
with the Credit and Collection Policies; or the Lender approved any material
deviation from the Credit and Collection Policies for that Contract in writing.
(N) The Contract Debtor's obligations under the Contract are secured by
a validly perfected first priority security interest in the Financed Vehicle in
favor of Borrower or Lender as secured party.
(O) The Contract has not been, nor is it designated to be, terminated,
satisfied, canceled, subordinated or rescinded in whole or in part; nor has the
Financed Vehicle been released, or designated for release, from the security
interest granted by the Contract; and all of the holder's obligations under the
Contract have been performed except those which arise subsequent to the delivery
to Lender.
(P) No provision of the Contract has been waived, extended, altered or
modified in any respect except in accordance with the Credit and Collection
Policies.
(Q) The day of the month that Scheduled Payments are due has not been
changed from the original Schedule of Payments except for no more than one
change which did not change the due date in a manner such that there was more
than a thirty (30) day period for which no Scheduled Payment was due.
(R) No claims of rescission, setoff, counterclaim, defense or other
material disputes have been asserted with respect to the Contract or Financed
Vehicle.
(S) There are no unsatisfied liens or claims for taxes, labor,
materials, fines, confiscation, or replevin relating to the Contract or Financed
Vehicle. There is no unsatisfied claim against the Contract Debtor based on the
operation or use of the Financed Vehicle. All taxes due for the purchase, use
and ownership of the Financed Vehicle have been paid. All taxes due on the
transfer of the Contract to Borrower and Lender have been paid.
(T) The Contract requires Required Contract Debtor Insurance and
Borrower or CPS is a loss payee or insured under the Required Contract Debtor
Insurance.
(U) The Company has not repossessed the Vehicle or commenced a replevin
action or other lawsuit against the Contract Debtor or Financed Vehicle.
(V) The model year of the Financed Vehicle is not more than seven (7)
years earlier than the model year in effect at the time the Contract is
delivered to Lender.
(W) The obligation of the original Contract Debtor has not been released
or assumed by another Person unless the release or assumption was properly
documented and the Lender consents in writing to it for purposes of the Contract
being an Eligible Contract.
(X) The Contract Debtor Documents exist.
5
<PAGE> 7
(Y) Not more than two (2) Scheduled Payments are due and unpaid in whole
or in part.
(Z) The cash down payment has been paid in full by the Contract Debtor
and not loaned to the Contract Debtor by Borrower or an Affiliate, and any
trade-in has been delivered to the Dealer with an endorsed Certificate of Title.
(AA) The Contract was purchased from a Dealer in the ordinary course of
the Dealer's business within 60 days after the Contract Date.
(BB) The first or second Scheduled Payments are not paid more than
forty-five (45) days past the scheduled due date.
(CC) The Amount Financed does not exceed one hundred fifty percent
(150%) of the net cost or value if applicable, shown on the Dealer Invoice.
(DD) The Amount Financed on the Contract Date does not exceed $30,000
and the Vehicle has no more than 85,000 miles on its odometer on the Contract
Date.
(EE) Not more than 360 days have elapsed since the date the Contract was
pledged to Lender hereunder.
(FF) On or before the date which is 120 days after the Contract Date,
the original Certificate of Title or equivalent title documents issued by the
relevant state motor vehicle authority, if applicable, shall have been delivered
to the Lender.
(GG) The inclusion of the Contract as an Eligible Contract will not
cause (1) the average of the down payment ratios (down payment as % of the sales
price of the Financed Vehicle) for the Pledged Contracts to be less than10%, (2)
the average of the income ratios (Scheduled Payment as % of the Contract
Debtor's monthly income) for the Pledged Contracts to exceed 20%, (3) the
average of the debt ratios (total monthly debt, including the Contract, as a %
of the Contract Debtor's monthly income) for the Pledged Contracts to exceed
45%, or (4) the number of Pledged Contracts approved under Borrower's Delta
program plus the number of Pledged Contracts approved under Borrower's First
Time Buyer program to exceed 15 % of the total number of Pledged Contracts.
Event of Default: has the meaning provided in Section 15.0 of this
Agreement.
Final Maturity Date: means December 31, 1998 unless Borrower activates
Article IV in the CPS Secured Guaranty Agreement before December 31, 1998 in
which case the Final Maturity Date means November 30, 1999.
Financed Vehicle: means the new or used Motor Vehicle purchased by a
Contract Debtor pursuant to a Contract, or any substituted vehicle which is
properly documented and approved by Lender.
Governmental Authority: means the United States of America, any state,
local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions thereof
or pertaining thereto.
Gross Balance: means, with respect to any Contract, an amount equal to
the number of remaining Scheduled Payments multiplied by the amount of each
Scheduled Payment minus any Prepayments or other payments applied to reduce the
unpaid principal balance of such Contract.
Indebtedness: means the Loan and all other amounts, including but not
limited to interest, that Borrower owes Lender in connection with this
Agreement.
6
<PAGE> 8
Interest Coverage: means the sum of Borrower's year-to-date pre-tax
income plus Borrower's year to date interest expense, compared to Borrower's
year-do-date interest expense.
LIBOR Rate: means the average of the "three month" London Interbank
Offered Rates ("LIBOR") published in the Money Rates column of the Wall Street
Journal during the calendar month immediately preceding the calendar month for
which interest is being calculated, or published in such other publication as
Lender may designate.
List of Contracts: means the list delivered to Lender by Borrower with
each Contract or group of Contracts which: (i) identifies each Contract being
delivered by account number, the name of the Contract Debtor, the Gross Balance,
and the year, make, model, and VIN of the Financed Vehicle, and (ii) shows the
total number of Contracts and the total of the Gross Balances.
Loan: means the outstanding principal amount of the Advances, plus all
other amounts advanced, expended or applied by Lender under this Agreement to or
for the benefit of Borrower or to perform or enforce Borrower's covenants in
this Agreement.
Loan Availability: means the amount by which the Borrowing Base exceeds
the Loan.
Loan Documents: means this Agreement, the Note, and the Supplemental
Documentation.
Lockbox: means the arrangement established by the Lender at a bank or
financial institution for the receipt and identification of Remittances.
Motor Vehicle: means a passenger motor vehicle, van, or light duty truck
which is not manufactured for a particular commercial purpose and which can be
registered for use on public highways and is not a "grey market" vehicle.
Non-Utilization Fee: means the fee calculated by multiplying the
Non-Utilization Rate times the amount by which $100,000,000 (one hundred million
and no/100) exceeds the average balance of the Loan for the appropriate
Accounting Period. If the Loan balance for any day is less than zero, such Loan
balance shall be assumed to be positive for purposes of the average balance
calculation.
Non-Utilization Rate: means a monthly percentage rate equal to .02083%
or an annual percentage rate equal to one quarter of one percent (.25%).
Note: means the promissory note issued by Borrower to Lender
substantially in the form of Exhibit A hereto.
Optional Contract Debtor Insurance: any insurance, other than Required
Contract Debtor Insurance which insures a Financed Vehicle or a Contract
Debtor's obligations under a Contract, including but not limited to credit life,
credit health, credit disability, unemployment insurance; and any service
contract, mechanical breakdown coverage, warranty, or extended warranty for a
Financed Vehicle.
Person: means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, entity, party, or government (including, any instrumentality or
division thereof).
Pledged Contract: means any Contract owned on the Closing Date or in the
future by Borrower unless it has been, to the extent allowed by this Agreement,
pledged to a Person other than Lender or sold.
Pre-Default Event: means an event which with the passage of time, the
giving of notice, or both, would constitute an Event of Default if Lender gave
any notice required by this Agreement for the event to be an Event of Default,
or if the event continued past the end of any period specifically allowed by
this Agreement for the event to continue before it becomes an Event of Default.
7
<PAGE> 9
Prepayment: means, with respect to a Contract on any day of
determination, the amount, if any, by which the Actual Payment exceeds the
Scheduled Payment.
Proceeds: means, with respect to any Collateral, whatever is receivable
or received when such Collateral is sold, collected, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary, and includes
all rights to payment, including returned premiums, with respect to any
insurance relating to such Collateral.
Records: means all Contracts and other documents, books, records and
other information (including, without limitation, computer programs, tapes,
disks, data processing software and related property and rights) prepared and
maintained by Borrower with respect to Receivables and the related Contract
Debtors.
Remittances: means all payments made with respect to Pledged Contracts,
including, but not limited to, Scheduled Payments, full and partial prepayments,
liquidation proceeds, insurance proceeds and refunds, late charges, fees
(including but not limited to NSF fees and extension fees), and payments from
Contract Rights Payors.
Required Contract Debtor Insurance: means insurance for physical damage
to, and theft or loss of, the Financed Vehicle, having a deductible no higher
than $500 and providing coverage at least equal to the actual cash value of the
Financed Vehicle.
Rolling Average Delinquency: means the average of the Delinquency
Measurements for any three consecutive Accounting Periods for Pledged Contracts;
provided that, until the first three Accounting Periods have expired, the
Rolling Average Delinquency shall be the average of the Delinquency Measurements
for the Accounting Periods which have expired.
Schedule of Payments: means the schedule of payments disclosed on a
Contract.
Scheduled Payment: means the periodic installment payment amount
disclosed in the Schedule of Payments for the Contract.
Skip Loss Investigation: means an investigation initiated by Borrower of
the whereabouts of a Financed Vehicle or a Contract Debtor.
Statement of Borrowing Base: means a statement issued by lender which
contains the amount of the Borrowing Base, the amount of the Loan or
Indebtedness, and either the amount available for Advances or the amount by
which the Loan or Indebtedness exceeds the Borrowing Base.
Supplemental Documentation: means all agreements, instruments,
documents, certificates of title, financing statements, notices of assignment,
Lists of Contracts, chattel mortgages, powers of attorney, subordination
agreements, and other written matter necessary or reasonably requested by Lender
to perfect and maintain perfected Lender's security interest in the Collateral
or to consummate the transactions contemplated by this Agreement.
UCC: means the Uniform Commercial Code of the applicable state.
Unearned Interest Amount: means, with respect to any Contract, the
aggregate amount of the unearned interest on such Contract calculated in
accordance with the constant yield method, as shown on the books of the
Borrower.
Year 2000 Compliant: means:
(A) The operating systems for Borrower's computers, all software
applications that run on Borrower's computers, all Borrower's facilities,
machinery and equipment and Borrower's products and services (collectively,
"Products and Services) accurately process, provide and or receive date/time
data
8
<PAGE> 10
(including without limitation events and data in the twentieth and twenty-first
centuries and the years 1999 and 2000) including leap year calculations, and
(B) Neither the performance nor the functionality of Borrower, nor
Borrower's supply of Products and Services will be affected adversely by
dates/times prior to, on, after, or spanning January 1, 2000. In particular, but
without limitations, the design and performance of the Products and Services
shall include, without limitations, proper date/time data century recognition,
proper recognition of April 9, 1999, September 9, 1999, December 31, 1999,
January 1, 2000, January 3, 2000, January 10, 2000, January 31, 2000, February
29, 2000, March 31, 2000, October 31, 2000, January 1, 2001 and December 31,
2001, and proper recognition of Leap Years calculation, proper same century and
multi-century formulae and date/time values before, on, after, and spanning
January 1, 2000, and date/time data interface values that properly reflect the
century, 1999 and 2000; and
(C) No value for date/time will cause any error, interpretation, or
decreased performance in or for such Products and Services; and
(D) All manipulations of date and time related data (including but not
limited to, calculating, comparing, sequencing, processing, and outputting) will
produce correct results for all valid dates and times, including when used in
combination with other products, services, and/or items; and
(E) Date /time elements in interfaces and data storage will specify the
century and date/time data so as to eliminate date ambiguity without human
intervention, including Leap Year calculations/date, where any date is
represented without a century, the correct century will be unambiguous for all
manipulations involving that element; and
(F) Authorizations codes, passwords, and purge functions shall operate
normally and in the same manner in which they function with respect to
expiration dates and CPU serial numbers; and
(G) Neither Borrower's supply of Products and Services, Borrower's
business, Borrower's operations nor Borrower's financial condition will be
interrupted, delayed, decreased, or otherwise adversely affected by dates prior
too, on, after, or spanning January 1, 2000."
Section 1.1 Other Terms: All terms not defined in this Agreement shall,
unless the context indicates otherwise, have the meanings provided in the UCC to
the extent the same are defined therein.
Section 1.2 Accounting Terms. Any accounting terms used in this
Agreement which are not specifically defined shall have the meanings customarily
given them in accordance with generally accepted accounting principles.
ARTICLE II - LOAN; GENERAL TERMS
Section 2.0 Revolving Credit; Loan Amount. Subject to all of the terms
and conditions of this Agreement, the Lender agrees to loan funds to Borrower
against Eligible Contracts from time to time in a series of Advances during the
term of this Agreement. Funds may be borrowed, repaid and reborrowed on a
revolving basis subject to the terms and conditions set forth in this Agreement,
provided that the Loan shall not at any time exceed the lesser of the Borrowing
Base or $100,000,000. Borrower's obligation to pay the Loan is evidenced by this
Agreement and the Note. Borrower is obligated to pay Lender as provided in this
Agreement whether or not Borrower has executed a promissory note. Any promissory
note executed by Borrower is adequate, but not required, proof of the
Indebtedness when so used by Lender. The actual amount Borrower is obligated to
pay Lender shall be determined by this Agreement and the records of Lender,
regardless of the terms of any promissory note. Any promissory notes executed in
connection with the Indebtedness need not be amended to reflect changes made to
this Agreement. The records of Lender shall, absent manifest error, be
conclusive evidence at any time as to the amount of the Loan, the interest due
thereon, and all other amounts owed in connection with this Agreement.
9
<PAGE> 11
Section 2.1 Loan Purpose. Borrower shall use the Advances for the legal
and proper corporate working capital needs of Borrower.
Section 2.2 Single Loan. All Advances by Lender to Borrower shall
constitute one loan and all indebtedness and obligations of Borrower to Lender
under the Loan Documents shall constitute an obligation secured by Lender's
security interest in all of the Collateral.
Section 2.3 General Interest Rate. Except as modified by Sections 2.5
and 15.1, the Loan shall bear interest, calculated daily on the basis of a
365-day year, at a per annum rate equal to three and one-half percent (3.50%)
plus the LIBOR Rate.
Section 2.4 Loan Term; Right to Terminate. Unless sooner terminated as
hereinafter provided, this Agreement shall expire on the Commitment Termination
Date. The prepayment in full of all Advances is a termination of this Agreement.
In addition, if an Event of Default has occurred, Lender may without prior
notice to Borrower, immediately terminate this Agreement. Notwithstanding
termination of this Agreement, the Indebtedness shall be payable in accordance
with this Agreement, and all rights and remedies granted to Lender hereunder or
pursuant to applicable law shall continue until all obligations of Borrower to
Lender have been fully paid and performed.
Section 2.5 Maximum Lawful Rate.
(A) Interest Rate. Notwithstanding any provision in this Agreement, or
in any other document, if at any time before the payment in full of the
Indebtedness, any of the rates of interest specified in this Agreement (the
"Stated Rates") exceeds the highest rate of interest permissible under any law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as
the Maximum Lawful Rate would be so exceeded, the rate of interest payable shall
be equal to the Maximum Lawful Rate; provided, however, that if at any time
thereafter the Stated Rates shall be less than the Maximum Lawful Rate, then,
subject to (B) below, Borrower shall continue to pay interest at the Maximum
Lawful Rate until such time as the total interest received by Lender is equal to
the total interest which Lender would have received had the Stated Rates been
(but for the operation of this Section 2.5(A)) the interest rates payable;
thereafter, the interest rates payable shall be the Stated Rates unless and
until any of the Stated Rates shall again exceed the Maximum Lawful Rate, in
which event this Section 2.5(A) shall again apply. In the event interest payable
hereunder is calculated at the Maximum Lawful Rate, such interest shall be
calculated at a daily rate equal to the Maximum Lawful Rate divided by the
number of days in the year in which such calculation is made.
(B) Amount of Interest. In no event shall the total interest contracted
for, charged, received or owed pursuant to the terms of this Agreement exceed
the amount which Lender may lawfully receive. In the event that a court of
competent jurisdiction, notwithstanding the provisions of this Section 2.5,
shall make a final determination that Lender has received, charged, collected,
or contracted for interest hereunder in excess of the amount which Lender could
lawfully have, Lender shall, to the extent permitted by law, promptly apply such
excess first to any interest due (calculated at the Maximum Lawful Rate if
applicable) and not yet paid, then to the prepayment of principal, and any
excess remaining thereafter and after application to any other amounts Borrower
owes Lender shall be refunded to Borrower. In determining whether the interest
exceeds the Maximum Lawful Rate or the maximum amount which Lender could
lawfully have received, the total amount of interest shall, to the extent
allowed by law, be spread over the term of the Loan. Any provisions of this
Agreement regarding the time during which interest accrues on Advances are only
elements of the formula for calculating interest on the total Loan and are not
intended to cause interest to be applied to specific Advances for usury
determination purposes.
ARTICLE III - LOAN DISBURSEMENTS
Section 3.0 Loan - Borrowing Base. Provided that (i) there does not then
exist an Event of Default or a Pre-Default Event, and (ii) Lender has not taken
over all or some of the administration of the Contracts, Lender shall, upon
written request of Borrower and subject to all of the terms and conditions of
this Agreement, make Advances to Borrower pursuant to Section 3.2.
10
<PAGE> 12
Section 3.1 Eligible Contracts. No less frequently than every other
Business Day, Borrower shall deliver to Lender all Eligible Contracts which
Borrower owns and has not previously delivered to Lender. Along with the
Contracts Borrower shall also deliver a List of Contracts. An Eligible Contract
shall be included in the Borrowing Base only when and for so long as, in
Lender's sole determination, each of the requirements in the definition of
Eligible Contracts continues to be satisfied. If a Contract is determined by
Lender to be, or is treated by Lender as, an Eligible Contract, Lender reserves
the right to change its determination or treatment and to remove the Contract
from the Borrowing Base if it later determines that the Contract is not or was
not an Eligible Contract. A determination by Lender that a Contract is an
Eligible Contract is not a waiver by Lender of, or an admission by Lender of the
truth of, any of Borrower's representations and warranties in this Agreement. If
Lender intentionally includes a Contract in the Borrowing Base even though the
Contract does not satisfy all of the requirements for being an Eligible
Contract, Lender does not waive the right to exclude any similar Contract
delivered to Lender before or after the included Contract.
Section 3.2 Procedure for Borrowing.
(A) The first Advance shall not exceed the Borrowing Base. Subsequent
Advances shall not be made more frequently than every other business day. Each
subsequent Advance shall not exceed the Loan Availability determined at Lender's
election either as of the day of the Advance request , the end of the most
recent Accounting Period for which Lender has received the monthly reports
required by Section 5.1 (C), or, as of such other date thereafter designated by
Lender. Lender is not obligated to make an Advance if the amount available or
requested is less than One Hundred Thousand Dollars ($100,000.00). Lender is not
obligated to make an Advance unless Borrower provides Lender with sufficient
information to calculate the Loan Availability. Lenders use of the information
provided by Borrower to determine the amount available for Advances is not an
admission by Lender as to the accuracy of the information, and Lender reserves
the right to verify the information and redetermine the amount available for
Advances.
(B) Lender shall disburse each Advance requested by Borrower within one
(1) Business Day after receipt of Borrower's written request for the Advance.
Lender shall disburse each Advance requested by Borrower by wire transfer to
Borrower.
ARTICLE IV - LOANS: PAYMENTS
Section 4.0 Payments by Borrower.
(A) All payments by Borrower to Lender shall be in a form payable to
Lender and shall be sent to: GE Capital, 540 W. Northwest Highway, Barrington,
Illinois 60010 Attention: Manager - Asset Based Financing, or shall be sent to
such other location that Lender notifies Borrower to send payments. Borrower
shall make all payments to Lender by either an electronic fund transfer method
acceptable to Lender or ACH (Automated Clearing House).
(B) Whenever Lender shall notify Borrower, with a Statement of Borrowing
Base or otherwise, that the Loan exceeds the Borrowing Base, Borrower shall
within one (1) Business Day after receipt of such notice, either pay down the
Loan by the amount of such excess, or, if Lender consents, deliver additional
Eligible Contracts to Lender which are sufficient to increase the Borrowing Base
above the Loan.
(C) On the Commitment Termination Date, Borrower shall pay to Lender the
entire Indebtedness. If there is an Event of Default, Borrower shall pay the
entire Indebtedness on demand if the Indebtedness is accelerated pursuant to
Section 15.2.
(D) Interest shall accrue on the Loan daily and be paid from the
Remittances as provided in Section 4.2. If at the end of an Accounting Period
there is more than one Business Day of accrued unpaid interest, Borrower shall
pay the more-than-one-day accrued interest to Lender within one (1) Business Day
after the end of the Accounting Period. Accrued interest shall not be added to
the Loan balance and bear interest, unless the
11
<PAGE> 13
interest is past due and paid with an Advance requested by Borrower and approved
by Lender; provided that, such an approval by Lender shall not constitute a
waiver of the Event of Default consisting of the failure to pay the interest
except to the extent provided in Section 16.9.
(E) The payment of all elements of the Indebtedness not covered by the
foregoing Subsections (B), (C), or (D) shall be payable by Borrower to Lender as
and when provided in the Loan Documents, and, if not specified, then on demand.
(F) Borrower has the right to prepay the Loan in full or in part at any
time without penalty.
(G) The Non-Utilization Fee shall be payable monthly in arrears within
fifteen (15) days after the end of an Accounting Period for which a
Non-Utilization Fee is due.
(H) Borrower shall immediately pay to Lender the balance of any Advance
for any Pledged Contract upon the sale or other disposition of such Pledged
Contract.
(I) Borrower shall have paid Lender a line fee of $250,000 on or before
November 30, 1998.
Section 4.1 Contract Payments. Borrower shall direct all Contract
Debtors for Pledged Contracts to make, when paying by mail, all payments
directly to the Lockbox. Borrower shall direct all Persons, other than Contract
Debtors, who make payments to Borrower relating to Pledged Contracts, including
but not limited to Contract Rights Payors, to make payment directly to the
Lockbox. In the event Borrower receives any Remittances, Borrower shall, as soon
as possible but no later than the next Business Day following receipt, deposit
the remittances in kind in the Collection Account. Borrower shall hold
Remittances in trust for Lender until delivery to Lender or deposit in the
Collection Account. Borrower shall pay all expenses associated with the Lockbox.
Section 4.2 Application of Payments. All Remittances received by Lender
or the Collection Account shall be applied by Lender to the Indebtedness within
two (2) Business Days after the Remittance has been credited to the Collection
Account. No Remittance other than cash shall be treated as a final payment to
Lender unless and until such item has actually been collected by the Collection
Account and such collection has been finally credited to the Collection Account;
provided, further, that if a Remittance applied to the Indebtedness is charged
back to the Collection Account, Lender can retroactively remove the application
of the Remittance to the Indebtedness and accrue any interest not accrued
because of the application of the Remittance to the Indebtedness. Each
Remittance applied by Lender to the Indebtedness shall be applied by Lender
first to accrued interest and, if sufficient to pay accrued interest, any excess
shall be applied then to the Loan, and, if sufficient to pay the accrued
interest and the Loan, any excess shall then be applied to the remaining
elements of the Indebtedness, if any, or, if not, Lender shall, if there is no
Event of Default or Pre-Default Event, remit the same to Borrower within two
Business Days; provided that, Lender reserves the right to use a different order
of application if there is an Event of Default or Pre-Default Event or Lender
has given prior written notice to Borrower of a different order. All Remittances
received by the Collection Account or Lender may be applied to the Indebtedness
even though no portion of the Indebtedness is otherwise then due and even though
Lender has not sent Borrower a demand, notice or request for payment of the
Indebtedness. Payments shall be deemed to be due by Borrower when received by
Lender unless they are due sooner by the terms of the Loan Documents.
12
<PAGE> 14
ARTICLE V - CONTRACT ADMINISTRATION
Section 5.0 Lender Administration
(A) Lender shall have no liability to Borrower with respect to
Remittances received by Lender, the Lockbox, or the Collection Account, other
than to: (i) apply the Remittances pursuant to Section 4.2 of this Agreement;
(ii) ensure that there is a provision in Lenders Agreement with the Lockbox Bank
which requires the bank to routinely provide Borrower with a report of
Remittances received by the Lockbox which itemizes the Remittances by Contract
to the extent the Remittances contain sufficient identifying information; and
(iii) upon termination of this Agreement and Borrowers satisfaction of all of
its obligations under this Agreement, to assign the Lockbox and its contents to
Borrower. Lender shall have no liability to Borrower with respect to any
interest or other earnings which are earned, or could have been earned, on the
Remittances while they are in the Lockbox, the Collection Account, or otherwise.
(B) Borrower shall transfer to Lender the U.S. Postal Service post
office boxes used by Borrower for the receipt of Remittances processed by
Borrower's service centers. Immediately after the U.S. Postal Service has
recorded the post office boxes in the name of Lender, (i) the post office boxes
shall be the Lockbox, and (ii) Lender shall designate Borrower (or employees of
Borrower specified by Borrower) to the U.S. Postal Service as an authorized
retriever of mail from the post office boxes subject to Lender's right to cancel
such authorization. Lender shall not exercise its rights to cancel Borrower's
authorization to retrieve mail from the Lockbox before Lender has the right (as
described in Section 5.1(E)) to take over all or part of the administration that
Borrower is required by this Agreement to perform. Until Lender exercises its
right to take over all or part of the administration, Lender shall maintain a
Collection Account near each of Borrower's service centers identified in Section
5.1(B).
Section 5.1 Borrower Administration
(A) Borrower shall perform all aspects of servicing, administering,
collecting, liquidating, accounting for and managing (collectively,
administering, administer, or administration) the Pledged Contracts it
customarily performs and all aspects that are customarily performed by financial
institutions in the administration of their motor vehicle installment contracts.
Borrower shall provide such administration in a reasonable and prudent way that
does not, in Lenders determination, adversely affect the value of the Collateral
to Lender. Borrower shall provide such administration with at least the same
standard of care used by large financial institutions in the administration of
motor vehicle installment contracts. Lender shall be the sole determine as to
whether such standard of care has been met. The administration provided by
Borrower shall include but not be limited to all servicing currently provided by
Borrower, and Financed Vehicle titling and lien perfection, customer service,
insurance claim tracking and collection, insurance maintenance, Contract
enforcement, Contract billing, payment processing, portfolio and Contract
accounting, portfolio management, delinquency collection, repossession,
foreclosure, resale, and maintaining current Contract Debtor and Financed
Vehicle location information (name, address and phone number). Borrower shall
maintain current, accurate, and complete records of activity and comments
regarding collection, insurance, payments, and other material events. The
records regarding collection, history, payments, Contract accounting, customer
service notes, Contract Debtor names and addresses and Gross Balance shall be
computerized. Borrower shall require Contract Debtors to maintain Required
Contract Debtor Insurance in accordance with Borrowers existing procedures.
Borrower shall administer and otherwise deal with the Contracts in compliance
with all applicable laws. Borrower shall conduct foreclosure sales in a
commercially reasonable manner and take the steps necessary to preserve the
deficiency liability of the Contract Debtors.
(B) Borrower shall administer the Pledged Contracts at its existing
service centers in Irvine, California, and Chesapeake, Virginia or at such other
locations that Borrower provides prior notice of to Lender and Lender approves
for Contract administration.
13
<PAGE> 15
(C) Borrower shall furnish to Lender such reports in such form that
Lender determines are necessary for it to track and monitor the Pledged
Contracts, Remittances, Financed Vehicles, and insurance. Such reports shall
include but not be limited to:
<TABLE>
<CAPTION>
REPORT FREQUENCY
------- ---------
<S> <C>
Cash Report Daily
Discount Report Summary Monthly
Trial Balance of Contracts Monthly
Gross Delinquency Summary Report Monthly
Loans Paid Off This Month Report Monthly
Loans Charged-Off This Month Report Monthly
Delinquency Detail Report Monthly
</TABLE>
The daily reports shall be provided to Lender no later than the next Business
Day after the day covered by the report. The monthly reports shall be provided
to Lender no later than fifteen (15) Business Days after the end of the month.
Borrower shall deliver with the monthly reports a certificate of the chief
financial officer of Borrower, in the form of Exhibit E and a covenant
compliance certificate, certifying as to the completeness and accuracy of the
reports provided pursuant to this Section 5.1(C). Borrower shall deliver to
Lender, no later than the fifteenth (15th) Business Day following each
Accounting Period, an up-to-date master file back-up tape in a form usable by
Lenders computer of all Pledged Contract information for the Accounting Period
relating to the Contract files which Borrower has placed on electronic media,
including but not limited to, payment histories, contract accounting, Gross
Balance, and Contract Debtor names and addresses.
(D) Notwithstanding anything herein to the contrary, (i) Borrower shall
remain liable under all Contracts, and any other contracts and agreements with
Contact Rights Payors or otherwise included in or related to the Collateral, to
the extent set forth therein to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been executed; (ii)
the exercise by Lender of any rights under any of the Loan Documents shall not
release Borrower from any of its duties or obligations under the Contracts, or
the other contracts and agreements; and (iii) Lender shall not have any
obligation or liability under the Contracts, or the other contracts and
agreements, nor shall Lender be obligated to perform any of the obligations or
duties of Borrower thereunder or take any action to collect or enforce any
rights thereunder.
(E) Borrower shall administer the Contracts at its own expense. In the
event there is an Event of Default or a Pre-Default Event, Lender may in Lenders
or Borrowers name, take over all or part of the administration that Borrower is
required by this Agreement to perform. If Lender takes over all or part of the
administration, Borrower shall pay to Lender on demand all out-of-pocket costs
incurred by Lender in the performance of Borrowers administration obligations,
and Borrower shall pay Lender for the administration performed by Lender an
administration fee (exclusive of out-of-pocket costs) established by Lender
consistent with generally prevailing fees charged by servicers of Contracts of
similar credit quality, and until so paid such costs and fee shall be part of
the Loan.
Section 5.2 Servicing Agreements. Borrower shall not enter into any
agreements for the servicing (including origination or administration) of the
Pledged Contracts other than servicing agreements with CPS which Lender has
approved. Borrower shall not make any changes to servicing agreements approved
by Lender unless Lender approves the changes. Borrower hereby assigns to Lender
all of Borrower's rights regarding Pledged Contracts under servicing agreements
for the Pledged Contracts. Borrower can continue to exercise such rights until
an Event of Default, at which time they may only be exercised by Lender or with
Lender's approval. Lender assumes no liabilities to Borrower or others with
regard to the servicing agreements.
ARTICLE VI - COLLATERAL: GENERAL TERMS
Section 6.0 Security Interest. To secure the prompt performance and
payment in full when due, whether at stated maturity, by acceleration or
otherwise of the Indebtedness and all of Borrower's existing and future
obligations to Lender whether arising under or related to this Agreement or
otherwise, Borrower hereby
14
<PAGE> 16
grants to Lender a continuing security interest in, and lien upon, all of
Borrower's right, title and interest, whether now owned or existing or hereafter
arising or acquired and regardless of where located in, and to, the following:
Contracts; Contract Debtor Documents; Contract Rights; payments from
Contract Debtor bank accounts; chattel paper; leases; installment sale
contracts; installment loan contracts; payments from chattel paper obligors;
security deposits; motor vehicles (including but not limited to cars, trucks and
motorcycles); certificates of title; contract purchase discounts; accounts;
general intangibles; security interests, collateral securing chattel paper;
dealer agreements; dealer reserves and rate participation; rights of Borrower
related to chattel paper, installment contracts, motor vehicles, and collateral
securing chattel paper; documents; instruments; deposit accounts; electronic
funds transfers; equipment; inventory; parts and accessories for motor vehicles;
payments from account debtor bank accounts; reserve accounts; insurance
policies, and benefits and rights under insurance policies, which Borrower is
solely or jointly the owner of, insured under, the lienholder or loss payee
under, or the beneficiary of; and all payments and property of any kind, now or
at any time or times hereafter, in the possession or under the control of
Lender, or a bailee of Lender;
accessions to, substitutions for and all replacements, products and
proceeds of, any of the foregoing property;
books and records (including, without limitation, financial statements,
accounting records, customer lists, credit files, computer programs, print-outs
and other computer materials and records) of Borrower pertaining to any of the
foregoing property; and
Borrower's rights under servicing agreements for the Pledged Contracts.
Section 6.1 Disclosure of Security Interest. Borrower shall make
appropriate entries upon its financial statements and its books and records
disclosing Lenders security interest in the Collateral. Borrower shall inform
Lender of any potentially materially adverse information it receives concerning
the Collateral or Lenders rights in the Collateral.
Section 6.2 Additional Acts. Borrower shall perform all other acts
requested by Lender for the purpose of perfecting, protecting, maintaining and
enforcing Lenders security interest in the Collateral and the priority of such
security interest. Borrower agrees that a carbon, photographic, photostatic, or
other reproduction of this Agreement or of a financing statement is sufficient
as a financing statement. Borrower, upon request of Lender shall either pay and
or reimburse Lender for all costs, filing fees, and taxes associated with the
perfection of Lenders security interest.
Section 6.3 Inspection and Access. Lender and its agents shall have the
rights, at any time, to (i) during Borrowers usual business hours, inspect the
Collateral and the premises upon which any of the Collateral is located; (ii)
during Borrowers usual business hours, inspect, audit and make copies or
extracts from any of Borrowers records, computer systems, files, and books of
account; (iii) during Borrowers usual business hours, monitor Borrowers
performance of its obligations with respect to this Agreement; (iv) obtain
information about Borrowers affairs and finances from any Person; and (v)
verify, in Lenders name or in the name of Borrower, the validity, amount,
quality, quantity, value and condition of, or any other matter relating to, the
Collateral including but not limited to verifying Contract information with
Contract Debtors. Borrower shall, upon Lenders request from time to time,
instruct its vendors, banking and other financial institutions and its
accountants to make available to Lender and discuss with Lender such information
and records as Lender may request. Borrower authorizes Lender, if requested by a
Person other than a credit reporting agency and without request if the Person is
a credit-reporting agency, to provide that Person with information about the
Indebtedness, Collateral and Borrowers performance of this Agreement. As long as
there is a Pre-Default Event, and after an Event of Default has occurred, all
costs, fees and expenses thereafter incurred by Lender, or for which Lender
becomes obligated, in connection with any inspection, audit, monitoring, or
verification shall be payable to Lender by Borrower on demand by Lender and
until paid shall be part of the Loan. If Borrower maintains or stores any data
with respect to Collateral on a computer system, Borrower shall upon request of
Lender, at Lenders option, provide Lender with on-line access or deliver to
Lender duplicate copies of the requested data in machine readable form
acceptable to Lender along with a printout or other hard copy of such data.
Borrower shall, on request of Lender, provide to Lender (at the location
designated by Lender) the Contract Debtor Documents.
15
<PAGE> 17
Section 6.4 Right to Notify and Endorse. Borrower hereby irrevocably
authorizes Lender to, at any time and in the name of Lender or Borrower, notify
any or all Contract Debtors and Contract Rights Payors that Lender has a
security interest in Contracts, Contract Rights, and other items of Collateral.
Any such notice shall, at Lenders election, be signed by Borrower and may be
sent on Borrowers stationery.
Section 6.5 Lender Appointed Attorney-in-Fact. Borrower hereby
irrevocable appoints Lender (and all Persons designated by Lender for that
purpose) as Borrowers true and lawful attorney-in-fact to act in Borrowers place
in Borrowers or Lenders name (i) to endorse Borrowers name on any Remittance;
(ii) to sign Borrowers name on any assignment or termination of a security
interest in a Financed Vehicle, on any application for a Certificate of Title
for a Financed Vehicle, or on any UCC financing statement related to Collateral,
and on any other public records regarding the Collateral; and (iii) to send
requests for verification to Contract Debtors. Borrower ratifies and approves
all acts of Lender as Borrowers attorney-in-fact. Lender shall not, when acting
as attorney-in-fact, be liable for any acts or omissions as or for any error of
judgment or mistake of fact or law, except for actions taken in bad faith. This
power, being coupled with an interest, is irrevocable until all payment and
performance obligations of Borrower to Lender have been fully satisfied.
Borrower shall upon request of Lender execute powers of attorney to separately
evidence the foregoing powers granted to Lender. As long as there is a
Pre-Default Event, and after an Event of Default has occurred, all costs, fees
and expense thereafter incurred by Lender, or for which Lender becomes
obligated, in connection with exercising any of the foreign powers shall be
payable to Lender by Borrower on demand by Lender and until paid shall be part
of the Loan.
Section 6.6 Change of Collateral, Location, Office or Structure.
Borrower shall keep the Collateral, other than Collateral delivered to Lender
and Financed Vehicles, at Borrower address in Section 16.1 or, subject to
Section 5.1(B), one of its service centers, and Borrower shall maintain Borrower
address in Section 16.1 or, subject to Section 5.1(B), one of its service
centers, as its principal place of business and chief executive office, unless
Borrower gives Lender at least sixty (60) days' prior written notice of a change
and before the change takes whatever action Lender requires to maintain the
priority and perfection of its security interest in, and access to, the
Collateral. Borrower shall not change its name, trade name, identity, corporate
structure, or service center locations unless Borrower gives Lender at least
sixty (60) days' prior written notice of a change and before the change takes
whatever action Lender requires to maintain the priority and perfection of its
security interest in, and access to the Collateral.
Section 6.7 Lenders Payment of Claims Asserted against Borrower. Lender
may, at any time, in its sole discretion and without obligation to do so and
without waiving or releasing any obligation, liability or duty of Borrower under
the Loan Documents or any Event of Default, pay, acquire or accept an assignment
of any security interest, lien, claim or encumbrance asserted by any Person
against the Collateral; provided that Lender shall first give Borrower written
notice of its intent to do the same, and Borrower does not, within five (5) days
of such notice, pay such claim and/or obtain to Lenders reasonable satisfaction
the release of the security interest, liens, claims or encumbrances to which
such notice relates. All sums paid by Lender in respect thereof and all costs,
fees and expenses, including reasonable attorneys fees, court costs, expenses
and other charges relating thereto, which are incurred by Lender on account
thereof, shall be payable by Borrower to Lender on demand by Lender and until
paid shall be part of the Loan.
Section 6.8 Termination of Security Interest. Lenders security interest
in the Collateral shall continue until performance and payment in full of all of
Borrowers obligations to Lender in accordance with the terms of agreements
creating such obligations; and if, at any time, all or part of a payment or
transfer made by Borrower or any other Person and applied by Lender to Borrowers
obligations to Lender is rescinded or otherwise must be returned by Lender for
any reason whatsoever (including, without limitation, the insolvency, bankruptcy
or reorganization of Borrower or such other Person), the security interest
granted hereunder or under any other present or future agreement between
Borrower and Lender, and all rights of Lender, shall be reinstated as to the
obligations which were satisfied by the payment or transfer rescinded or
returned, all as though such payment or transfer had not been made, and Borrower
shall take the action requested by Lender to re-perfect all terminated security
interests and to reinstate all satisfied obligations. Lender shall release its
security interest in Contracts which are sold or pledged to other Persons in
accordance with Section 14.8.
16
<PAGE> 18
Section 6.9 Return of Contract Delivery Documents. Lender shall return
to Borrower within three (3) Business Days of Borrowers request any Contract
Delivery Document originals for Contracts paid in full. In addition, provided
that there is no Event of Default or Pre-Default Event and the removal of the
Contract will not result in the Loan exceeding the Borrowing Base, Lender shall
return Contract Delivery Document originals for other Contracts requested by
Borrower for the time and to the extent necessary for Borrower to make
corrections or to enforce the Contracts or the obligations of the Contracts
Rights Payors. Whenever Borrower is in possession or control of Contract
Delivery Documents for Contracts not paid in full, Borrower shall hold them in
trust for Lender.
ARTICLE VII - COLLATERAL: CONTRACTS
Section 7.0 Notice Regarding Contracts.
(A) In the event any amounts due and owing in excess of Five Thousand
Dollars ($5,000) on a Pledged Contract become disputed between the Contract
Debtor and Borrower, or in the event a Contract Debtor for a Pledged Contract
asserts a claim, offset, or defense, or in the event a Person other than
Borrower or a Contract Debtor makes a claim of ownership or other interest in a
Financed Vehicle or Contract, then Borrower shall provide Lender with written
notice thereof within twenty (20) Business Days of learning of the same,
explaining in detail the nature of the matter and the amount in controversy.
Borrower shall promptly, but in no event later than forty (40) Business Days
after learning thereof, inform Lender of all material adverse information
relating to the financial condition of any Contract Debtor, or the value of any
Pledged Contract or Financed Vehicle.
(B) After an Eligible Contract is included in the Borrowing Base, in the
event that Borrower becomes aware that one of the requirements in the definition
of Eligible Contracts or one of the conditions in Section 9.1 are no longer
being satisfied with respect to the Contract, Borrower shall provide Lender with
written notice thereof within twenty (20) Business Days of Borrower becoming
aware, explaining in detail the timing and reasons why the requirement or
condition is not satisfied.
(C) Upon request of Lender, Borrower shall to the extent authorized by
law obtain current credit bureau reports on Contract Debtors.
ARTICLE VIII - COLLATERAL: REMITTANCES AND INSURANCE
Section 8.0 Assignment of Lien in Financed Vehicles. In addition to the
security interest granted in Section 6.0, Borrower hereby assigns absolutely to
Lender Borrowers rights of foreclosure as lienholder of the Financed Vehicles
for Contracts delivered to Lender. This assignment is solely for the purpose of
Lender foreclosing on the liens following an Event of Default. Until an Event of
Default, Borrower has the right to foreclose on a Financed Vehicle. In the event
Lender exercises the right to foreclose, Lender shall be the owner of the
foreclosure sale proceeds and shall apply them to the Indebtedness.
Section 8.1 Absolute Assignment of Remittances. In addition to the
security interest granted in Section 6.0, Borrower hereby absolutely assigns to
Lender Borrowers interest in and right to all Remittances arising on or after
the date of this Agreement, and such Remittances shall be the property solely of
Lender.
Section 8.2 Insurance. In addition to the security interest granted in
Section 6.0, Borrower hereby assigns absolutely to Lender Borrowers right to
refunds and benefits under Required Contract Debtor Insurance, and Optional
Contract Debtor Insurance. In the event Lender uses this assignment to collect
insurance benefits or refunds, Lender shall be the owner of the benefits and
refunds and shall apply them to the Indebtedness.
17
<PAGE> 19
ARTICLE IX - CONDITIONS TO LENDING
Section 9.0 Conditions Precedent to Effectiveness of Agreement. The
effectiveness of this Agreement is subject to the condition precedent that
Lender shall have received on or before November 30, 1998 the following, in form
and substance satisfactory to Lender:
(A) With respect to Borrower:
(i) the certificate or articles of incorporation of Borrower
certified, as of a date no more than ten (10) days prior to November 30,
1998, by the Secretary of State of its state of incorporation;
(ii) a good standing certificate, dated no more than ten (10)
days prior to November 30, 1998, from the respective Secretary of State
of its state of incorporation and each state in which Borrower is
required to qualify, or represents that it is qualified, to do business;
(iii) a certificate of the Secretary or Assistant Secretary of
Borrower certifying as of November 30, 1998: (a) the names and true
signatures of the officers authorized on its behalf to sign this
Agreement, (b) a copy of Borrower's by-laws, and (c) a copy of the
resolutions of the board of directors of Borrower approving this
Agreement, the Related Documents to which it is a party and the
transactions contemplated hereby and thereby;
(B) an Officer's Certificate in the form of Exhibit B hereto; and
(C) the Note shall have been duly executed in the form of Exhibit A and
delivered by Borrower to Lender and shall be in full force and effect.
(D) Any necessary third party (including any Governmental Authority)
consents to the closing of the transactions contemplated by this Agreement on
behalf of Borrower hereby, in form and substance satisfactory to the Lender;
(E) INTENTIONALLY LEFT BLANK
(F) An opinion of Borrowers counsel dated as of the Closing Date in the
form of Exhibit C;
(G) A copy of a letter delivered by Borrower to its independent
accountants instructing them to disclose to Lender any and all financial
statements and other information of any kind relating to Borrowers business,
financial condition and other affairs that Lender may request;
(H) An assignment of Borrower's rights to the payments from Contract
Debtor bank accounts;
(I) An executed certificate in the form of Exhibit D and in the form of
Exhibit E attached hereto executed by the Chief Financial Officer of Borrower;
(J) Landlord lien waivers in the form of Exhibit F attached hereto which
shall be provided to Lender within sixty (60) days following the date of this
Agreement;
(K) Evidence that properly executed financing statements for the
Collateral in the form of Exhibit G have been filed with all appropriate filing
officers;
(L) An assignment of Insurance Interests in the form of Exhibit H duly
executed by Borrower;
(M) An executed power of attorney in the form of Exhibit I attached
hereto; and
18
<PAGE> 20
(N) Such other approvals, consents, opinions, documents and instruments,
as Lender may reasonably request.
(O) CPS shall have unconditionally guarantied the obligations of
Borrower to Lender and not be in default of its guaranty agreement.
Section 9.1 Conditions to Each Advance. Notwithstanding any other
provision of this Agreement and without affecting in any manner the rights of
Lender hereunder, Lender shall not be obligated to make any Advances (including
the initial Advance) unless at the time of the Advance, all of the following
conditions shall, in Lenders sole determination, be satisfied:
(A) For each Eligible Contract, Borrower shall have included the
Eligible Contract on a List of Contracts delivered to Lender and shall have
delivered to Lender the Contract Delivery Documents; except that, if the
Contract date is less than one hundred twenty (120) days before the date the
Contract is delivered to Lender and a Certificate of Title has not been issued
and Borrower has provided Lender with adequate proof that a Certificate of Title
has been applied for, then the Certificate of Title must be delivered to Lender
within one hundred twenty (120) days of the Contract date;
(B) All of the representations and warranties of Borrower in all of the
Loan Documents shall be true and correct on and as of the date of such Advance
as though they were made on and as of such date and Borrower shall have
performed all of its obligations contained in the Loan Documents required to be
performed as of such date;
(C) The making of the advance will not constitute an Event of Default or
Pre-Default Event;
(D) There shall have been no material adverse change in the condition
(financial or otherwise), business, operations, results of operations or
properties of Borrower since the preceding Advance;
(E) INTENTIONALLY LEFT BLANK;
(F) No claim has been asserted or proceeding commenced challenging this
Agreement or Lenders rights under this Agreement, and no claim has been asserted
which if true would be a breach of a representation and warranty in the Loan
Documents;
(G) No vendor or creditor of Borrower has provided adverse credit
information about Borrower to Lender;
(H) No event of Default shall have occurred, and no Pre-Default Event
shall have occurred and still be in existence;
(I) Lender has a first priority perfected security interest in the
Collateral except to the extent otherwise allowed by this Agreement or Lender in
writing;
(J) An event has not occurred which entitles Lender pursuant to Section
5.1(E) to take over administration of the Contracts;
(K) Lenders most recent inspection of the Collateral or Borrowers
records or operations has been satisfactory to Lender;
(L) The Commitment Termination Date shall not have occurred;
(M) Before and after giving effect to such borrowing and to the
application of proceeds therefrom, there exists Loan Availability;
(N) Each Pledged Contract submitted by Borrower for computation of the
Borrowing Base is an Eligible Contract;
19
<PAGE> 21
(O) Borrower shall have provided such additional information and
documentation as Lender may reasonably request; and
(P) None of the actions taken or documents executed to satisfy the
conditions in Section 9.0 have been revoked, rescinded, terminated, or canceled
without Lenders prior consent.
The acceptance by Borrower of each Advance shall be deemed to constitute a
representation and warranty by Borrower that, to the best of Borrower's
knowledge and belief, the conditions in this Section are satisfied.
ARTICLE X - REPRESENTATIONS AND WARRANTIES OF BORROWER
Section 10.0 Representations of Borrower. Borrower hereby makes the
following representations and warranties. The representations and warranties are
made as of the execution and delivery of the Agreement, and each time Borrower
delivers Contracts to Lender or requests an Advance the representations and
warranties are deemed to be made again at that time. Lenders knowledge of any
breach of the representations and warranties contained herein shall not void any
of the representations or warranties or affect Lenders rights with respect to
the breach.
(A) Organization, Good Standing, Name, and Location. Borrower is duly
organized and is validly existing as a corporation in good standing under the
laws of the State of California, with power and authority to own its properties
and to conduct its business, and, at all relevant times, has the power,
authority and legal right to acquire, own, and pledge the Pledged Contracts.
Borrower has, and is in good standing under, and is in compliance with, all
governmental approvals, licenses, permits, certificates, inspections, consents
and franchises necessary to conduct its business, to enter into and perform this
Agreement, and to own and operate its business. Principal place of Borrower's
business and chief executive office is set forth in Section 16.1.
(B) Due Qualifications. Borrower has, and is in good standing under, all
licenses, permits, and approvals in all jurisdictions which are required for
Borrowers initial acquisition of the Pledged Contracts and for Borrowers
performance of this Agreement.
(C) Power and Authority. Borrower has the power and authority to execute
this Agreement and carry out its terms, and the execution and performance of the
Agreement have been duly authorized by all necessary corporate action; and the
execution, delivery and performance of the Agreement has been duly authorized by
Borrower by all necessary corporation action. The execution and performance of
this Agreement by Borrower does not require the consent or approval of any
Person.
(D) Valid and Binding Obligations. The Agreement constitutes a valid
loan obligation of Borrower and a valid granting of a security interest in the
Collateral to Lender, enforceable against creditors of and purchasers from
Borrower; and is a legal, valid and binding obligation of Borrower enforceable
in accordance with its terms. Borrower's use of the Advances is a legal and
proper corporate use. Borrower has not used Advances to give any preference to
any creditor or to make a fraudulent transfer.
(E) No Violation. The execution and performance of this Agreement by
Borrower does not conflict with, result in any breach of, nor constitute (with
or without notice or lapse of time) a default under, the articles of
incorporation or bylaws of Borrower, or any indenture, instrument, agreement,
law, or court order by which it is bound; nor does it result in the creation or
imposition of any lien upon any of Borrower's properties.
(F) No Proceedings. There are no proceedings or investigations pending,
or threatened, before any court, regulatory body, administrative agency, or
other governmental instrumentality having jurisdiction over Borrower or its
properties, which (i) assert the invalidity of the Agreement, (ii) seek to
prevent the consummation of any of the transactions contemplated by the
Agreement, (iii) seek any determination or ruling that, if determined adversely
to Borrower, would materially and adversely affect the performance by Borrower
of its respective obligations under, or the validity or enforceability of, the
Agreement.
20
<PAGE> 22
(G) Collateral. Borrower has good, indefeasible, sole and marketable
ownership of the Collateral, and the Collateral is, except for those liens to be
released by existing lenders in satisfaction of Section 9.1 and those liens
expressly allowed or created by this Agreement, free and clear of all liens,
claims, charges, defenses, counterclaims, offsets, encumbrances and security
interests of any kind or nature whatsoever. The security interests granted to
Lender pursuant hereto are perfected first priority security interests (other
than those expressly allowed or created by this Agreement) in and to the
Collateral, assuming delivery to Lender of any Collateral as to which possession
is the only method of perfecting a security interest and assuming the filing of
a UCC financing statement with the collateral description with the office of
Secretary of State of California; and no claim of ownership or other interest
has been asserted which would be a breach of this Section 10.0(g).
(H) Taxes. All required federal, state and local tax returns of Borrower
have been accurately prepared and duly and timely filed (within the initial or
extended time period allowed therefor) and all federal, state and local taxes
required to be paid with respect to the periods covered by such returns have
been paid. Borrower has not been delinquent in the payment of any tax,
assessment or other governmental charge which could adversely affect in any way
the Collateral.
(I) Brokers. No person has, or as a result of the transactions
contemplated hereby will have by reason of any Borrower conduct or any agreement
to which Borrower is a party, any right, interest or claim against Borrower,
Lender or the Collateral for any commission, fee or other compensation as a
finder or broker or in any similar capacity.
(J) Status and Condition. Borrower is solvent, in stable financial
condition with a positive net worth and is able to and does pay its liabilities
as they mature. This transaction will not leave Borrower with remaining assets
which are unreasonably small compared to its ongoing operations. Borrower is in
compliance with Section 13.6. Borrower has capital sufficient to carry on its
business and transactions as now carried on and as planned for the future,
including but not limited to the transactions contemplated by this Agreement. No
action, investigation, audit, claim or proceeding is now pending or threatened
against Borrower before any court, board, commission, agency or instrumentality
of any Federal, state or local government or of any agency or any subdivision
thereof, or before any arbitrator or panel of arbitrators, nor to the knowledge
of Borrower, does a state of facts exist which might give rise to such
proceedings, with respect to any matter which if adversely determined could
affect the Collateral, impair the ability of Borrower to perform its obligations
in the Loan Documents, Lender's rights under the Loan Documents, or materially
and adversely affect the financial condition or business of Borrower. Borrower
is not a party to any labor dispute or any labor contract. Borrower is not, and
has not received any notice alleging that it is, in violation of any statute,
regulation, rule or ordinance of any governmental entity, including, without
limitation, the United States of America, any state, city, town, municipality,
county or of any other jurisdiction, or of any agency thereof. Borrower is not
in default with respect to any indenture, loan agreement, mortgage, lease, deed
or other similar agreement relating to the borrowing of monies, or any contract
or other instrument relating to the transactions contemplated by this Agreement
or which is material to its business, prospects, operations or financial
condition.
(K) Disclosure. There is no fact known to Borrower which Borrower has
not disclosed to Lender in writing with respect to the Collateral or the assets,
liabilities, financial condition or activities of Borrower or its Affiliates
which would or may be likely to have a material adverse effect upon the
Collateral or Borrower's ability to perform its obligations under the Agreement.
All information and documents prepared by Borrower and provided to Lender at any
time are true and accurate at the time of delivery. Borrower has no knowledge
that any information or documents, not prepared by Borrower but delivered by
Borrower to Lender were not true and accurate at the time of delivery.
(L) Articles of Incorporation and Certificates of Good Standing. The
Articles of Incorporation of Borrower received by Lender pursuant to Section 9.0
have not been modified. Borrower has not taken or allowed any action which would
result in it not being in good standing. Borrower has not received notice of any
actual or threatened action to revoke its articles of incorporation or good
standing.
(M) Financial Statements. All financial statements of Borrower or
Affiliates delivered to Lender fairly present the assets, liabilities and
financial condition and income as of the dates thereof. There are no material
omissions from the financial statements and there has been no adverse change in
the assets, liabilities or
21
<PAGE> 23
financial condition since the date of the most recently delivered financial
statements. There exists no equity or long-term investments in, or outstanding
advances to, or guaranties of, any Person except such equity, investment,
advances or guaranties disclosed in the financial statements. The financial
statements accurately disclose all transactions with Affiliates.
(N) Conditions. Each time Borrower requests an Advance, the Conditions
in Section 9.1 have been met.
(O) Characteristics of Contracts. Each Pledged Contract delivered to
Lender as an Eligible Contract meets all of the requirements listed in the
definition of Eligible Contract, except that Borrower makes no representation or
warranty as to whether (i) the Contract meets such requirements to Lender's
satisfaction, or (ii) the Contract presents a credit, collateral, or
documentation risk unacceptable to Lender. No selection procedures adverse to
Lender have been utilized in selecting the Eligible Contracts delivered to
Lender.
ARTICLE XI - REPRESENTATIONS AND WARRANTIES OF LENDER
Section 11.0 Representations of Lender. Lender hereby makes the
following representations and warranties:
(A) Due Organization. Lender is a corporation, duly organized, validly
existing and in good standing under the laws of the State of New York, and has
the power to own its assets and to transact the business in which it is
presently engaged with regard to this Agreement;
(B) Requisite Power. Lender has the power to execute, deliver and
perform this Agreement, and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement; and
(C) Binding Agreement. This Agreement has been duly executed and
delivered by Lender and constitutes the legal, valid and binding obligation of
Lender, enforceable in accordance with its terms.
ARTICLE XII - INDEMNITIES OF BORROWER
Section 12.0 Indemnity. Borrower shall indemnify and hold Lender
harmless from any and all losses, claims, damages, costs, good faith
settlements, expenses, taxes, reasonable attorneys' fees or other liabilities,
including but not limited to costs of investigation, litigation fees and
expenses, and costs in successfully asserting the right to indemnification
hereunder (collectively, "Lossee") incurred by Lender at any time and pertaining
to (i) facts which are, or allegations which if true would be, a breach of any
representation, warranty, obligation, agreement or covenant of Borrower
contained in the Loan Documents, or (ii) Lender entering into the Loan Documents
or making Advances or handling Remittances or administering Pledged Contracts,
(iii) an Event of Default or a Pre-Default Event, or (iv) activities, operations
or conduct of Borrower or its Affiliates.
ARTICLE XIII - AFFIRMATIVE COVENANTS
The following covenants shall remain in effect until the full payment
and performance of all of the obligations of Borrower to Lender:
Section 13.0 Financing Statements. At the request of Lender, Borrower
shall execute such financing statements as Lender determines may be required by
law to perfect, maintain and protect the interest of Lender in the Collateral
and in the proceeds thereof.
Section 13.1 Books and Records. Borrower shall maintain accurate and
complete books and records with respect to the Collateral and Borrower's
business. All accounting books and records shall be maintained in accordance
with generally accepted accounting principles consistently applied.
22
<PAGE> 24
Section 13.2 Payment of Fees and Expenses. Borrower shall pay to Lender,
on demand, any and all fees, costs or expenses which Lender pays to a bank or
other similar institution arising out of or in connection with (i) the
forwarding to Borrower, or any other Person on behalf of Borrower, by Lender of
Advances pursuant to this Agreement and (ii) the return of payments deposited
for collection by Lender, including but not limited to payments by Borrower and
payments by Contract Debtors.
Section 13.3 Continuity of Business and Compliance With Agreement.
Borrower shall continue in business in a prudent, reasonable and lawful manner
with all necessary licenses, permits, and qualifications necessary to perform
this Agreement. Borrower shall regularly and properly train its employees to
comply with all applicable laws governing the administration and purchase of
Contracts. Borrower shall take the steps necessary for the representations and
warranties in Article X to be true at all times. In the event that Borrower
learns that a representation and warranty in Article X is no longer true, it
shall notify Lender within twenty (20) Business Days after learning thereof.
Section 13.4 Financial Statements and Access to Records. Borrower shall
provide Lender with quarterly consolidated audited or unaudited financial
statements of Borrower and its consolidated Subsidiaries within 45 days of the
end of each of Borrower's fiscal quarters, and with audited consolidated annual
financial statements within one hundred and twenty (120) days of Borrower's
fiscal year-end audited by an independent certified public accounting firm
acceptable to Lender. Upon request of Lender, Borrower shall provide Lender with
unaudited (or audited if Borrower so chooses) monthly financial statements.
Borrower shall deliver to Lender with each financial statement a certificate by
the chief financial officer of Borrower verifying the accuracy and completeness
of such statement.
Section 13.5 Subsequent Actions. At the request of Lender, Borrower
shall execute and deliver to Lender after execution of this Agreement such
documents or take such action as Lender deems necessary to carry out the
Agreement.
Section 13.6 Financial Condition. Borrower shall notify Lender in
writing, promptly upon its learning thereof of any material adverse change in
the financial condition of Borrower. Section 13.7 Litigation Matters. Borrower
shall notify Lender in writing, promptly upon its learning thereof, of any
litigation, arbitration or administrative proceeding which may materially and
adversely affect the operations, financial condition or business of Borrower or
its ability to perform this Agreement or which in any way involve Lender's
security interest in the Collateral or other rights under the Loan Documents.
Section 13.8 Value of Collateral. If in Lender's judgment the Collateral
has materially decreased in value, other than the ordinary depreciation of
Financed Vehicles, Borrower shall either provide enough additional Collateral to
satisfy Lender or Borrower shall reduce the Loan by an amount sufficient to
satisfy Lender.
Section 13.9 Payment of Obligations. Borrower shall pay and perform, as
and when due, all of its obligations, including, without limitation, all of its
obligations to Lender.
Section 13.10 Insurance. Borrower shall maintain customary amounts of
insurance covering, without limitation, fire, theft, burglary, public liability,
property damage, product liability, workers' compensation, and liability arising
from the collection of Contracts and sale of motor vehicles. Borrower shall pay
all insurance premiums payable for such coverage and shall upon request of
Lender deliver a copy of the policies of such insurance to Lender, together with
evidence of payment of all premiums therefor.
Section 13.11 Certificates of Title. Borrower shall promptly apply for
and obtain Certificates of Title for all Financed Vehicles. Borrower shall
promptly deliver to Lender all Certificates of Title it receives for Financed
Vehicles for Pledged Contracts.
Section 13.12 Interest Rate Spread. If at any time the differential
between Borrower's gross yield (including the impact of any discount retained by
Borrower) on Borrower's portfolio of Contracts and the
23
<PAGE> 25
applicable rate of interest hereunder is less than seven and one-half (7.5%),
Lender may in its sole discretion cease making Advances to Borrower hereunder.
Section 13.13 Year 2000 Compliance. On and after March 31, 1999,
Borrower shall be Year 2000 Compliant.
ARTICLE XIV - NEGATIVE COVENANTS
Borrower covenants and agrees that hereafter, without Lender's prior
written consent, which Lender may or may not give, in its sole discretion, until
all of Borrower's obligations to Lender with respect to this Agreement are
performed and paid in full:
Section 14.0 Mergers, Etc. Borrower shall not merge with, consolidate
with, acquire or otherwise combine with any Person, transfer any division or
segment of its operations to any Person or form any subsidiary.
Section 14.1 Investments. Borrower shall not make any investment in any
Person through the direct or indirect holding of securities or otherwise.
Section 14.2 Dividends. Borrower shall not declare or pay dividends
except in accordance with all applicable laws and in no event to any Person
other than CPS.
Section 14.3 Loans and Advances. Except for routine and customary salary
advances, Borrower shall not make any unsecured loans or other advances of money
to officers, directors, employees, stockholders or Affiliates in excess of
Twenty Thousand Dollars ($20,000.00) in the aggregate. Borrower shall not incur
any long term or working capital debt (other than the Indebtedness) secured by
Contracts.
Section 14.4 INTENTIONALLY LEFT BLANK
Section 14.5 Transactions with Affiliate. Borrower shall not enter into,
or be a party to, any transaction with any Affiliate, or stockholder of
Borrower, except, consistent with Borrower's practice before entering into this
Agreement, in the ordinary course of, and pursuant to the reasonable
requirements of, Borrower's business and upon fair and reasonable terms which
are fully disclosed to Lender and are no less favorable to Lender than would
obtain in a comparable arm's length transaction with a Person not an Affiliate
or stockholder of Borrower.
Section 14.6 Adverse Transactions. Borrower shall not enter into any
transaction which adversely affects the Collateral or Borrower's ability to
perform this Agreement or Lender's rights under the Loan Documents; or permit or
agree to any extension, compromise or settlement or make any change or
modification of any kind or nature with respect to any Pledged Contract,
including any of the terms thereof or the amounts due thereunder except for
customary payment extensions of Pledged Contracts done in accordance with
Borrower's policies and routines in existence on the Closing Date, no more
frequently than once every twelve (12) months for a period of no more than three
(3) months.
Section 14.7 Guaranties. Borrower shall not guaranty or otherwise in any
way, become liable with respect to the obligations or liabilities of any other
Person except (i) the Affiliates' obligations to Lender and (ii) by customary
endorsement of instruments or items of payment for deposit to the general
account of Borrower or for delivery to Lender.
Section 14.8 Collateral. Except as otherwise expressly permitted in the
Loan Documents, Borrower shall not convey or allow any ownership, security, or
other, interest in the Collateral other than Borrower's ownership interest and
Lender's security interest. Borrower shall not interfere with or countermand
Lender's instructions to any Person to send Remittances to the Lockbox, the
Collection Account or Lender. Borrower can sell or pledge Contracts which are
not Eligible Contracts provided that the sale or loan proceeds are
24
<PAGE> 26
delivered to Lender for application to the Indebtedness. Borrower can grant
purchase money security interests in its equipment to Persons other than Lender.
Borrower can lease as lessee, equipment it uses.
Section 14.9 INTENTIONALLY LEFT BLANK
ARTICLE XV - EVENTS OF DEFAULT
Section 15.0 Events of Default. An Event of Default means the occurrence
or existence of one or more of the following events or conditions (whatever the
reason for the Event of Default and whether voluntary, involuntary or caused by
operation of law) which is not waived in writing by Lender or cured as provided
in Section 15.7 to the extent Section 15.7 applies:
(A) A breach by Borrower of any representation, warranty or obligation
contained herein or in the other Loan Documents or in any other agreement with
Lender.
(B) A breach by Borrower or an Affiliate of any representation,
warranty, or obligation contained in any other agreement with Lender.
(C) The Collateral or any other of Borrower's or an Affiliate's assets
are attached, seized, levied upon or subjected to a writ or distress warrant, or
come within the possession of any receiver, trustee, custodian or assignee for
the benefit of creditors and the same is not dissolved within thirty (30) days
thereafter; and application is made by any Person other than Borrower for the
appointment of a receiver, trustee, or custodian for the Collateral or any other
of Borrower's or an Affiliate's assets and the same is not dismissed within
thirty (30) days after the application therefor; or Borrower or an Affiliate
shall have concealed, removed or permitted to be concealed or removed, any part
of its property, with intent to hinder, delay or defraud its creditors or made
or suffered a transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or other similar law.
(D) An application is made by Borrower or an Affiliate for the
appointment of a receiver, trustee or custodian for the Collateral or any other
of Borrower's or an Affiliate's assets; a petition under any section or chapter
of the Bankruptcy Code or any similar federal or state law or regulation shall
be filed by Borrower or an Affiliate; Borrower or an Affiliate shall make an
assignment for the benefit of its creditors or any case or proceeding is filed
by Borrower, or an Affiliate for its dissolution, liquidation, or termination;
Borrower ceases to conduct its Contract purchase and servicing business.
(E) Borrower is enjoined, restrained or in any way prevented by court
order from conducting all or any material part of its business affairs, or a
petition under any section or chapter of the Bankruptcy Code or any similar
federal or state law or regulation is filed against Borrower or an Affiliate, or
any case or proceeding is filed against Borrower or an Affiliate for its
dissolution or liquidation, and such injunction, restraint, petition, case or
proceeding is not dismissed within thirty (30) days after the entry or filing
thereof.
(F) A notice of lien, levy or assessment, with respect to an obligation
of $5,000 or more, is filed of record with respect to all or any of Borrower's
or an Affiliate's assets by the United States, or any department, agency or
instrumentality thereof, or by any state, county, municipal or other
governmental agency and it is not released within thirty (30) days after the
filing; or if any taxes or debts become a lien or encumbrance upon the
Collateral or any other of Borrower's assets, and the same is not released
within thirty (30) days after the same becomes a lien or encumbrance.
(G) Borrower or an Affiliate becomes insolvent or admits in writing to
its inability to pay its debts as they mature.
(H) An event has occurred which entitles Lender pursuant to Section
5.1(E) to take over administration of the Contracts.
25
<PAGE> 27
(I) There occurs or exists any situation which leads Lender to believe,
in good faith, that Borrower may not, or may be unable to, pay in the normal
course one or more payment obligations to Lender, and Lender has given Borrower
at least ten (10) days' notice thereof.
(J) A financial statement of Borrower or an Affiliate reveals that its
financial condition has materially adversely deteriorated after the execution of
this Agreement.
(K) An audited financial statement of Borrower is not unqualified.
(L) The Rolling Average Delinquency exceeds 3.0%.
(M) The Average Charged-Off Losses exceeds 0.55%.
(N) Any other event occurs which will, in Lender's reasonable opinion,
have a material adverse effect on the Collateral, Lender's rights under the Loan
Agreements, or on Borrower's financial or business condition, operations or
prospects, including, without limitation, any change in the due diligence
procedures used by Borrower to qualify Contract Debtors for Contracts, and
Lender has given Borrower at least ten (10) days' notice thereof.
(O) INTENTIONALLY LEFT BLANK
(P) Borrower or any Affiliate is in default of its obligations under any
transaction involving the securitization of Contracts.
(A) INTENTIONALLY LEFT BLANK
(B) A default by CPS of any of its obligations under the Secured
Guaranty Agreement pursuant to which CPS, among other obligations, guarantied
the Borrower's payment of the Indebtedness to Lender.
Section 15.1 Default Rate of Interest. Upon and after an Event of
Default and subject to Section 2.5, Borrower's obligations to Lender shall
continue to bear interest, calculated daily on the basis of a 365-day year at
the per annum rate set forth in Section 2.3, plus additional post-default
interest of one percent (1%) per annum until paid in full.
Section 15.2 Lender's Remedies. Whenever a Pre-Default Event exists and
whenever Lender is entitled to take over Contract administration, Lender may
without prior notice immediately suspend making Advances. Upon and after an
Event of Default, Lender shall have the following rights and remedies. The
rights and remedies shall be cumulative, and none exclusive, except to the
extent required by law. Lender's exercise of any right, remedy, or
attorney-in-fact appointment shall not relieve Borrower of any of its
obligations to Lender.
(A) The right, at Lender's discretion and without notice to Borrower,
(i) to immediately cease further Advances and/or terminate this Agreement, and
(ii) to declare Borrower's obligations to Lender immediately due and payable,
whereupon Borrower's obligations shall become and be due and payable, without
presentment, demand, protest or further notice or process of any kind, all of
which are expressly waived by Borrower. Borrower's obligations to Lender shall
be immediately due and payable without declaration by Lender if the Event of
Default consists of a petition filed under the Bankruptcy Code or any similar
federal or state law.
(B) All of the rights and remedies of a secured party under the UCC and
other applicable laws, including the right to appoint a receiver.
(C) The right at any time to (i) enter through self-help and without
judicial process, upon the premises of Borrower without any obligation to pay
rent to Borrower or to enter any other place or places where the Collateral is
located and kept, and remove the Collateral or remain on and use the premises
for the purpose of collecting or disposing of the Collateral, and (ii) require
Borrower to assemble the Collateral and make it available to Lender at a place
to be designated by Lender.
26
<PAGE> 28
(D) The right to sell or otherwise dispose of all or any of the
Collateral at public or private sale, as Lender in its sole discretion may deem
advisable, with such notice as may be required by law; and such sales may be
adjourned from time to time with or without notice. Lender shall have the right
to conduct such sales on the premises of Borrower without charge for such time
and Collateral as Lender may see fit. Lender is hereby granted a license or
other applicable right to use, without charge, Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any property of a similar nature, as it pertains to
the Collateral, in advertising for sale and selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
Lender's benefit for this purpose. Lender shall have the right to sell, lease or
otherwise dispose of the Collateral, or any part thereof, for cash, credit or
any combination thereof, and Lender may purchase all or any part of the
collateral at public, or, if permitted by law, private sale and, in lieu of
actual payment of such purchase price, may set off the amount of such price
against Borrower's obligations to Lender. Without excluding other methods of
disposition which may be commercially reasonable, it shall be a commercially
reasonable disposition of the Pledged Contracts and Contract Rights for Lender
to collect and enforce the Contracts and Contract Rights in a manner similar to
its collection and enforcement of contracts and Contract Rights for its own
account or for the account of other Persons. If any deficiency shall arise from
the disposition of Collateral, Borrower shall remain liable to Lender therefor.
(E) The right at any time and from time to time thereafter, at Lender's
sole discretion and without notice to Borrower, (i) to enforce payment of the
Contract Debtor's and Contract Rights Payor's obligations, and to collect and
foreclose, by legal proceedings or otherwise, the Collateral in the name of
Lender or Borrower and (ii) to take control, in any manner, of any item of
payment for or proceeds of the Collateral. Lender is not obligated to pursue the
Collateral or any other Person in order to enforce Borrower's obligations to
Lender.
(F) The right to take over in Lender's or Borrower's name all or part of
the administration of the Contracts.
(G) The right to carry out the actions within the scope of Borrower's
appointment of Lender as attorney-in-fact.
(H) The right to offset or apply the funds in the Collection Account.
Section 15.3 Injunctive Relief. Borrower recognizes that if there is an
Event of Default then, depending on the nature of the Event of Default, it may
be that no remedy at law will provide complete or adequate relief to Lender, and
Lender shall be entitled to temporary and permanent injunctive relief in any
such case without the necessity of proving actual damages. The injunctive relief
shall not be a waiver of Lender's rights to other relief and remedies.
Section 15.4 Notice. Any notice required to be given by Lender of a
sale, lease, or other disposition of the Collateral which is given pursuant to
Section 16.1 at least five (5) days prior to such proposed action, shall
constitute commercially reasonable and fair notice thereof to Borrower. Notice
of less duration shall not be presumed to be commercially unreasonable or
unfair.
Section 15.5 Appointment of Lender as Borrower's Lawful Attorney.
Borrower irrevocably appoints Lender (and all persons designated by Lender) as
Borrower's true and lawful attorney-in-fact to act in its name, place and stead
and at its expense to: (i) demand payment of the Pledged Contracts, other
Collateral consisting of payment obligations and Contract Rights; (ii) enforce
payment of the Pledged Contracts, other Collateral consisting of payment
obligations and Contract Rights, by legal proceedings or otherwise; (iii)
exercise all of Borrower's rights and remedies with respect to the collection
and enforcement of the Pledged Contracts, other Collateral consisting of payment
obligations, and Contract Rights; (iv) settle, adjust, compromise, discharge,
release, extend or renew the Pledged Contracts, other Collateral consisting of
payment obligations, and Contract Rights; (v) if permitted by applicable law,
sell or assign the Collateral upon such terms, for such amounts and at such time
or times as Lender deems advisable; (vi) take control, in any manner, of any
item of payment or proceeds with respect to the Collateral; (vii) prepare, file
and sign Borrower's name on any proof of claim in Bankruptcy or similar document
against any Contract Debtor or Contract Rights Payor; (ix) prepare, file and
sign Borrower's name on any notice of lien, assignment or satisfaction of lien
or similar document in connection with the
27
<PAGE> 29
Collateral; (x) do all acts and things necessary, in Lender's sole discretion,
to exercise Lender's rights granted in or referred to in Section 15.2 of this
Agreement; (xi) endorse the name of Borrower upon any item of payment or
proceeds consisting of or relating to the Collateral and deposit the same in the
account of Lender for application to the Indebtedness; (xii) use the information
recorded on or contained in any data processing equipment and computer hardware
and software relating to the collateral to which Borrower has access; (xiii)
open Borrower's mail to collect Collateral and direct the Post Office to deliver
Borrower's mail to an address designated by Lender; and (xiv) do all things
necessary to carry out and enforce this Agreement which Borrower has failed to
do. Borrower ratifies and approves all acts of Lender as Borrower's
attorney-in-fact. Lender shall not, when acting as attorney-in-fact, be liable
for any acts or omissions as or for any error of judgment or mistake of fact or
law, except for actions taken in bad faith. This power, being coupled with an
interest, is irrevocable until all payment and performance obligations of
Borrower to Lender have been fully satisfied. Borrower shall upon request of
Lender execute powers of attorney to separately evidence the foregoing powers
granted to Lender. All costs, fees and expenses incurred by Lender, or for which
Lender becomes obligated, in connection with exercising any of the foregoing
powers shall be payable to Lender by Borrower on demand by Lender and until paid
shall be part of the Loan.
Section 15.6 Lender's Default. In the event of any default of the Loan
Documents by Lender or any claim by Borrower related to the Loan Documents,
Borrower's sole and exclusive remedy against Lender shall be a cause of action
sounding in contract with damages limited to actual and direct damages incurred.
Lender shall in no event be liable for ordinary negligence, delay in performance
or any consequential, special, punitive, incidental or indirect damages,
including without limitation, loss of profit or goodwill. Lender shall in no
event be liable for any loss or damage directly or indirectly resulting from the
furnishing of services or reports under this Agreement. With respect to any
goods and services provided by Lender, LENDER MAKES NO WARRANTIES, whether
express or implied, including, without limitation, implied WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Borrower shall have no
cause of action against Lender for a default of the Loan Documents unless
Borrower first notices Lender of the default and allows Lender a reasonable time
of at least thirty (30) Business Days to cure the default and Lender fails to
cure the default.
Section 15.7 Borrower's Right to Cure. In the event of an unintentional
Pre-Default Event by Borrower with respect to payment obligations or the
delivery of Contract Delivery Documents or Remittances, Borrower shall have
three (3) Business Days to cure the Pre-Default Event before Lender exercises
its right to sue Borrower or repossess the Collateral. In the event of any other
type of unintentional default by Borrower (but not including a default by CPS
under its Secured Guaranty Agreement with Lender), Borrower shall have thirty
(30) calendar days to cure the default before Lender exercises its right to sue
Borrower or repossess the Collateral. Regardless of whether Borrower cures a
default, Lender shall be entitled to indemnification pursuant to Article XII
with respect to any Losses arising from claims asserted against Lender.
ARTICLE XVI - GENERAL TERMS AND CONDITIONS
Section 16.0 This Agreement shall be governed and construed in
accordance with the laws of the State of California.
Section 16.1 Notices. Any notice, request, demand, instruction or other
communication to be given any party herein in writing shall be effective upon
delivery during regular business hours at the offices of Borrower and Lender
hereinafter set forth or at such other offices that either party notifies the
other of in writing. The failure to deliver a copy as set forth below shall not
affect the validity of the notice to Borrower or Lender. Such communications
shall be given by telecopy, commercial delivery service, or sent by certified
mail, postage prepaid and return receipt requested, as follows:
If to Borrower:
CPS Funding Corporation
16355 Laguna Canyon Road
Irvine, CA 92718
Electronic FAX (949) 450-3951
28
<PAGE> 30
Attention: Chief Financial Officer
If to Lender:
General Electric Capital Corporation
540 W. Northwest Highway
Barrington, IL 60010
Electronic FAX (847) 277-6997
Attention: Manager, Asset Based Financing
with a copy to:
General Electric Capital Corporation
540 W. Northwest Highway
Barrington, IL 60010
Electronic FAX (847) 277 - 5983
Attention: Counsel - Auto Financial Services
Section 16.2 Headings. Paragraph headings have been inserted in this
Agreement as a matter of convenience for reference only. The paragraph headings
shall not be used in the interpretation of this Agreement.
Section 16.3 Severability. If any one or more of the provisions of this
Agreement are held to be invalid, illegal or unenforceable in any respect for
any reason, the validity, legality or enforceability of any such provision or
provision in every other respect and of the remaining provisions of this
Agreement shall not be in any way impaired.
Section 16.4 Offset. Lender has the right to offset, apply, or recoup
any obligation of Borrower to Lender, arising under the Loan Documents or
otherwise, against any obligations or payments Lender owes to Borrower, arising
under the Loan Documents or otherwise, or against any property of Borrower held
by Lender. Borrower waives any right to offset, apply, or recoup against any
obligation it owes to Lender. Lender is not obligated to collect any of the
Contracts or pursue any of the other Collateral or any of Lender's rights at any
time as a condition to payment and performance by Borrower.
Section 16.5 Independent Contractor. Borrower is an independent
contractor in all matters relating to this Agreement and the Collateral and is
not an agent or representative of Lender. Borrower has no authority to act on
behalf of or bind Lender.
Section 16.6 Expenses. Each party shall bear the expenses of its own
performance of this Agreement.
Section 16.7 Modification of Loan Documents; Sale of Interest. This
Agreement may not be modified, altered or amended, except by an agreement in
writing and signed by Borrower and Lender. The rights of Lender granted in or
referred to in this Agreement shall apply to any modification of or supplement
to the Loan Documents. Borrower may not without Lender's prior written
permission, sell, assign or transfer any of the Loan Documents, or any portion
thereof, including, without limitation, Borrower's rights, title, interests,
remedies, powers and duties thereunder. Any sale, assignment, or transfer by
Borrower without Lender's permission shall be void ab initio. Borrower hereby
consents to Lender's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of any of the Loan Documents, or of
any portion thereof, including, without limitation, Lender's rights, title,
interests, remedies, powers and duties thereunder. The Loan Documents shall be
binding upon and inure to the benefit of the permitted successors and assigns of
Borrower and Lender.
Section 16.8. Attorneys' Fees and Lender's Expenses. If, following an
Event of Default, Lender shall in good faith employ counsel for advice or other
representation or shall incur other costs and expenses in connection with (A)
any litigation, contest, dispute, suit, proceeding or action (whether instituted
by Lender, Borrower or any other Person) in any way relating to the Collateral,
any of the Loan Documents or any other agreements executed or delivered in
connection herewith, (B) any attempt to enforce, or enforcement of, any rights
of Lender against Borrower or any other Person, including, without limitation,
Contract Debtors, that may be
29
<PAGE> 31
obligated to Lender by virtue of any of the Loan Documents, (C) any actual or
attempted inspection, verification, protection, collection, sale, liquidation or
other disposition of the Collateral, then, in any such event, the attorneys'
fees arising from such services and all expenses, costs, charges and other fees
(including expert's fees) incurred by Lender in any way arising from or relating
to any of the events or actions described in this Section shall be payable to
Lender by Borrower on demand by Lender and until paid shall be part of the Loan.
Section 16.9 Waiver by Lender. Lender's failure, at any time or times
hereafter, to require strict performance by Borrower of any provision of this
Agreement or any of the other Loan Documents shall not waive, affect or diminish
any right of Lender thereafter to demand strict performance therewith. Any
suspension or waiver by Lender of an Event of Default by Borrower under the Loan
Documents shall not suspend, waive or affect any other Event of Default by
Borrower under the Loan Documents, whether the same is prior or subsequent
thereto and whether of the same or of a different type. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
contained in the Loan Documents and no Event of Default by Borrower under the
Loan Documents shall be deemed to have been suspended or waived by Lender unless
such suspension or waiver is by an instrument in writing signed by a manager of
Lender and identifies the matter waived or suspended. Any consent or approval by
Lender pursuant to this Agreement is not a waiver by Lender of, or an admission
by Lender of the truth of, any Borrower's representations and warranties in this
Agreement.
Section 16.10 Waivers by Borrower. Except as otherwise provided for in
this Agreement, Borrower waives (i) notice and consummation of presentment,
demand, protest, dishonor, intent to accelerate, acceleration, (ii) all rights
to notice and a hearing prior to taking possession or control of, or Lender's
replevy, attachment or levy upon, the Collateral; (iii) any bond or security in
a judicial proceeding as a condition to Lender exercising any of Lender's
remedies; (iv) the benefit of all valuation, appraisement and exemption laws,
(v) TRIAL BY JURY in any dispute with Lender arising out of or related to any of
the Loan Documents, and (vi) any claim against Lender arising before November
30, 1998. The failure or delay of Lender to strictly enforce the terms of this
Agreement shall not be a waiver of Lender's right to do so.
Section 16.11 Counterparts. This Agreement may be executed in two or
more counterparts, with the same effect as if all parties had signed the same
document. All such counterparts shall be deemed an original, shall be construed
together and shall constitute one and the same instrument.
Section 16.12 Entire Agreement. This Agreement contains the entire
agreement among the parties regarding the loan by Lender to Borrower based on
Contracts and supersedes all prior agreements, whether written or oral, with
respect thereto.
Section 16.13 Statements of Account. Each report, billing statement,
Statement of Borrowing Base, and payment transcript which is prepared by Lender
shall, except for manifest errors, be deemed final, binding and conclusive upon
Borrower in all respects as to all matters reflected therein, and shall
constitute an account stated between Borrower and Lender, unless thereafter
waived in writing by Lender or unless, within thirty (30) days after Borrower's
receipt of such document, Borrower delivers to Lender notice of a written
objection thereto specifying the claimed error. In the event of such an error,
only those items expressly objected to in such notice shall be deemed to be
disputed by Borrower and Lender's only liability to Borrower shall be to issue a
corrected document.
Section 16.14 Publicity. Borrower authorizes Lender to publicize
"tombstone" or similar announcements with respect to the financing contemplated
under this Agreement, and to use Borrower' name and logo in connection therewith
30
<PAGE> 32
Section 16.15 Contract Documents. After Lender reviews a Contract form
or any other form used in connection with a Contract (collectively, the "Form"),
Lender may inform Borrower hereto that the Form may not comply with certain laws
or that the Form is not acceptable to Lender as an Eligible Contract form unless
certain changes are made. Borrower is responsible for its use of the Forms and
for any changes Borrower makes to the Forms in response to Lender's comments.
Lender shall have no liability to Borrower arising from Borrower's use of, or
changes to, any Form regardless of whether Lender approved the Form or the
changes or whether Lender conditioned the use of the Form as an Eligible
Contract Form or Lender's comments regarding a Form, Borrower remain obligated
to Lender to conduct its business in a lawful manner, including the use of Forms
which comply with applicable laws.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
CPS FUNDING CORPORATION,
as Borrower
By: ________________________________
Name: _____________________________
Title: _____________________________
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: ________________________________
Name: _____________________________
Title: _____________________________
31
<PAGE> 33
EXHIBIT A
AMENDED AND RESTATED PROMISSORY NOTE
$100,000,000.00 November 30, 1998
FOR VALUE RECEIVED, the undersigned, CPS FUNDING CORPORATION, a
California corporation ("Borrower"), hereby promises to pay to GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation ("Lender"), or order, the principal
amount (the "Principal") of up to One Hundred Million Dollars ($100,000,000.00),
or such other amount constituting the Loan made by Lender to Borrower pursuant
to the Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement, dated as of November 30, 1998 between Borrower and Lender (the
"Agreement"). All terms used in this Note shall have the meanings given to them
in the Agreement if they are defined in the Agreement and not defined in this
Note. Borrower further promises to pay interest ("Interest") on the amount of
the Principal outstanding from time to time from the date hereof until such
Principal shall be paid in full, at a rate per annum (calculated on the basis of
a year of 365 days for the actual days elapsed) equal to the applicable rate of
interest provided for in the Agreement.
Interest and Principal shall be due and payable at the times provided
for in the Agreement. All payments of Principal and Interest shall be made in
lawful money of the United States of America and in immediately available funds
to Lender at GE Capital, 540 W. Northwest Highway, Barrington, IL 60010,
Attention: Manager - Asset Based Financing, or such other address as may be
specified by Lender or any other holder of this Note.
This Note is the Note described in, and is subject to the terms and
provisions of, the Agreement, as the same may at any time be amended or modified
and in effect.
Upon and after an Event of Default, the outstanding Principal of this
Note and any Interest and fees accrued thereon shall, at the option of the
holder of this Note and without demand, notice or legal process of any kind,
become immediately due and payable.
The records of the holder of this Note shall, in the absence of manifest
error, be conclusive evidence at any time as to the amount of the outstanding
Principal of this Note and the amount of Interest accrued thereon.
This Note is secured by a security interest in the Collateral, as
described in and evidenced by the Agreement. This Note is enforceable by the
holder without first enforcing the security interest and whether or not the
security interest exists or is enforceable.
If any suit or other proceeding shall be instituted to enforce this
Note, the holder of the Note shall, in addition to such other relief as the
court may award, be entitled to recover attorneys' fees, expenses and costs of
investigation, including, without limitation, attorneys' fees, costs and
expenses of investigation incurred in appellate proceedings or in connection
with any case or proceeding under the Bankruptcy Code or similar law.
No delay or failure on the part of the holder of this Note to exercise
any power or right given under this Note shall operate as a waiver of any right
or remedy of the holder; nor shall any right or remedy of the holder hereunder
or under any other applicable law be abridged or modified by any course of
conduct.
The undersigned and all endorsers, guarantors, and all persons liable or
to become liable on this Note hereby waive presentment, protest, demand, notice
of dishonor, notice of protest, and any and all delays or lack of diligence or
collection and any other notice or further requirement necessary to hold each of
them liable for payment. The right to a trial by jury and to plead any statute
of limitations as a defense to any demand on this Note, or any guaranty hereof,
or any agreement to pay the same, or any and all obligations or liabilities
arising out
1
<PAGE> 34
of or in connection with this Note is expressly waived by the undersigned,
endorsers and guarantors, to the fullest extent permitted by the law.
No payment of interest hereunder shall exceed the maximum amount payable
under applicable law.
This Note may not be modified, amended or terminated, except in a
written instrument executed by both Borrower and the holder of this Note.
Borrower agrees that the rights granted to Lender pursuant to this Note shall
accrue to any Person who is lawfully in possession of this Note with an
assignment from Lender.
This Note shall be governed by and construed in accordance with the laws
of the State of California. This Note amends, restates and supersedes the prior
Notes of Borrower payable to the order of Redwood Receivables Corpration
pursuant to the Receivables Funding and Servicing Agreement, dated as of June 1,
1995, as amended, and is given in substitution therefor and not in satisfaction
of Borrower's obligations thereunder.
IN WITNESS WHEREOF, Borrower has executed and delivered the foregoing
Note as of the day and year first above written.
CPS FUNDING CORPORATION
By: ________________________________
Name: _____________________________
Title: _____________________________
2
<PAGE> 1
EXHIBIT 10.23
WARRANT AGREEMENT
by and between
CONSUMER PORTFOLIO SERVICES, INC.,
the Company,
and
FSA PORTFOLIO MANAGEMENT INC.,
AND ITS SUCCESSORS AND ASSIGNS,
the Purchaser,
Dated as of November 30, 1998
<PAGE> 2
EXECUTION COPY
WARRANT AGREEMENT (this "Agreement"), dated as of November 30, 1998, by
and between CONSUMER PORTFOLIO SERVICES, INC., a California corporation (the
"Company"), and FSA PORTFOLIO MANAGEMENT INC., a Delaware corporation (together
with its successors and assigns, the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Purchaser warrants
("Warrants") to purchase shares of Common Stock (as defined in Section 1) in
connection with the agreement of Financial Security Assurance Inc. ("FSA"), an
affiliate of FSA Portfolio Management Inc., (i) to facilitate the obtaining of
reinsurance related to securities issued in CPS Auto Securitizations (as defined
herein) and guaranteed by FSA and (ii) to undertake certain actions necessary to
permit FSA to issue financial guaranty insurance policies for the benefit of
holders of securities issued in such CPS Auto Securitizations.
NOW, THEREFORE, in consideration of the premises, the agreements herein
set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Conditional Grant. (a) The Purchaser is hereby granted the
right to purchase, subject to the terms and conditions of this Agreement,
including, without limitation, the conditions precedent set forth in Section
1(b) below, at any time and from time to time, during the period from the Issue
Date (as defined in Section 1(b) below) until 5:30 p.m., New York time, on the
first Business Day (as defined in this Section 1(a)) on or after the fifth
anniversary of the Issue Date (the "Exercise Period"), 2,525,114 shares (the
"Warrant Shares") designated pursuant to the Company's Articles of
Incorporation, as they may be amended as of the Issue Date, as voting "Common
Stock" without par value, at the initial exercise price per Warrant Share of
Three Dollars ($3.00). The adjusted exercise price shall be the price that shall
result from time to time from any and all adjustments of the initial exercise
price in accordance with the provisions of Section 6. "Exercise Price" means the
initial exercise price or the adjusted exercise price, depending upon the
context. The number of Warrant Shares issuable upon the exercise of any Warrant
remaining unexercised at any time shall be the number of Warrant Shares that
shall result from time to time from any and all adjustments to the number of
Warrant Shares represented by such Warrant in accordance with the provisions of
Section 7. "Business Day" means a day that is not a Saturday or a Sunday or a
day on which banking institutions in New York, New York or Irvine, California
are authorized or obligated by law, regulation, executive order or decree to be
closed.
(b) The rights of the Purchaser under this Agreement, including, without
limitation, the right to receive Warrant Certificates (as defined in Section 2
below), the right to exercise any Warrants, the right to receive certificates
for the Warrant Shares, the right to have the Company register certain
securities, and the right to receive notice of and to participate in certain
meetings, are all contingent upon satisfaction of the following conditions: that
FSA shall have issued a financial guaranty insurance policy for the benefit of
holders of at least $300 million of securities issued by one or more entities
affiliated with the company in securitizations of automobile installment
receivables, that said policy guarantees the full and timely payment of the
scheduled payments of principal and interest relating to such securities, and
that said policy be issued after the date hereof and not later than December 31,
1998. The date on which such conditions are first satisfied shall be the "Issue
Date".
(c) The Company represents that it has disclosed to FSA on Schedule 1
hereto all Common Stock, Serial Preferred Stock, and any other capital stock of
the Company outstanding on the date of this Agreement, and has disclosed to FSA,
on at least an accurate pro forma basis if not in full, any options, interests,
participations, or other equivalents (however designated) of or in the Company,
whether voting or nonvoting, including, without limitation, phantom stock,
performance stock, Options (as defined in Section 6.7(b)) Convertible Securities
(as defined in Section 6.7(b), and all agreements, instruments, documents, and
securities convertible, exercisable, or exchangeable, in whole or in part, into
any one or more of the foregoing that are outstanding on the date of this
Agreement. The Company further represents that the number of Warrant Shares in
1
<PAGE> 3
Section 1(a) is not less than 10% of the Common Stock after full dilution,
giving effect to the exercise of all such outstanding interests and rights. The
Company agrees that, in connection with a breach of either of the foregoing
representations, the Purchaser shall have the right, without limitation of any
other available rights and remedies, to compel the Company to grant additional
Warrants for additional Warrant Shares in accordance with the essential intent
and principles of this Agreement, including, without limitation, the intent that
the Purchaser receive Warrants for 10% of the Common Stock on a fully diluted
basis measured as of the date of this Agreement.
Section 2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered pursuant to this Agreement shall be in the form set
forth in Exhibit A, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
Section 3. Exercise of Warrants.
3.1 Method of Exercise. The Warrants are exercisable at the Exercise
Price per Warrant Share payable by check or by surrender of Warrants in lieu of
cash as provided in Section 3.2. Upon surrender of a Warrant Certificate,
together with the annexed Form of Election to Purchase duly executed by the
registered holder of such Warrant Certificate (the "Holder") or the Holder's
agent or attorney and payment of the Exercise Price for the Warrant Shares
purchased, at the Company's principal executive offices at 16355 Laguna Canyon
Road, Irvine, California 92618 or its office or agency maintained for such
purpose as referred to below, the Holder shall be entitled to receive a
certificate or certificates for the Warrant Shares so purchased. The purchase
rights represented by each Warrant Certificate are exercisable at the option of
the Holder thereof, in whole or in part (but subject to Section 8 as to
fractional shares). In the case of the purchase of less than all the Warrant
Shares purchasable under any Warrant Certificate, the Company shall cancel said
Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Warrant Shares
purchasable thereunder. As long as any of the Warrants remain outstanding, the
Company shall maintain an office or agency (which shall initially be the the
principal executive offices of the Company) where the Warrant Certificates may
be presented for exercise, registration of transfer, division, or combination as
provided in this Agreement. The Company agrees to maintain, at its aforesaid
office or agency, books for the registration and the registration of transfer of
the Warrants.
3.2 Exercise by Surrender of Warrants. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in whole or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 in exchange for
the number of Warrant Shares equal to (x) the number of Warrant Shares as to
which the Warrants are being exercised multiplied by (y) a fraction, the
numerator of which is the 30-Day Average Market Price (as defined in Section
6.6) of the Common Stock less the Exercise Price and the denominator of which is
such 30-Day Average Market Price.
Section 4. Issuance of Certificates. Upon the exercise of the Warrants,
the issuance of certificates for the Warrant Shares and/or other securities,
properties, or rights underlying such Warrants shall be made forthwith (and in
any event within five (5) Business Days thereafter) without charge to the Holder
thereof including, without limitation, any tax that may be payable in respect of
the issuance thereof, and such certificates shall (subject to the provisions of
Section 5) be issued in the name of, or in such names as may be directed by, the
Holder thereof.
The Warrant Certificates and the certificates representing the Warrant
Shares (and/or other securities, cash, rights, or other property issuable upon
the exercise of the Warrants) shall be executed on behalf of the Company by the
manual or facsimile signature of the then Chairman or Vice Chairman of the Board
of Directors or President or Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature of the
then Secretary or Assistant Secretary of the Company. Warrant Certificates shall
be dated the date of execution by the Company upon initial issuance, division,
exchange, substitution, or transfer.
2
<PAGE> 4
Section 5. Securities Act of 1933 Legend. None of the Warrants, the
Warrant Shares, nor any of the other securities that may become issuable upon
exercise of the Warrants or upon conversion of the Warrant Shares have been
registered under the Securities Act of 1933, as amended (the "Securities Act").
Upon exercise of the Warrants, in part or in whole, unless the Warrant Shares
previously have been registered pursuant to the Securities Act, pursuant to
Section 11 or 12 hereof or otherwise, the certificates representing the Warrant
Shares and any other securities issued upon exercise of the Warrants or upon
conversion of the Warrant Shares shall bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE LAWS."
Section 6. Adjustments to Exercise Price and Number of Warrant Shares.
6.1 Subdivision and Combination. If the Company shall at any time (i)
subdivide the outstanding shares of Common Stock into a larger number of shares,
(ii) combine the outstanding shares of Common Stock into a smaller number of
shares, (iii) declare a dividend on the outstanding shares of Common Stock
payable in shares of Common Stock or (iv) issue by reclassification of its
Common Stock any shares of its Capital Stock (as defined in this Section 7.1),
then the Exercise Price in effect immediately after the record date for such
dividend or distribution or the effective date of such subdivision, combination,
or reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior thereto
by a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding immediately before such dividend, distribution, subdivision,
combination, or reclassification, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately after such dividend,
distribution, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event specified above shall occur.
"Capital Stock" means the Common Stock, the Serial Preferred Stock, and any
other capital stock of the Company authorized from time to time, and any other
shares, options, interests, participations, or other equivalents (however
designated) of or in the Company, whether voting or nonvoting, including,
without limitation, common stock, preferred stock, phantom stock, performance
stock, Options (as defined in Section 6.7(b)) Convertible Securities (as defined
in Section 6.7(b)), and all agreements, instruments, documents, and securities
convertible, exercisable, or exchangeable, in whole or in part, into any one or
more of the foregoing.
6.2 Adjustment in Number of Warrant Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of Section 6.1, the number of Warrant
Shares issuable upon the exercise of each remaining unexercised Warrant shall be
adjusted to the nearest full Warrant Share by multiplying the number of Warrant
Shares issuable upon exercise of such Warrant immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of shares
of Common Stock outstanding immediately after such dividend, distribution,
subdivision, combination, or reclassification, and of which the denominator
shall be the number of shares of Common Stock outstanding immediately before
such dividend, distribution, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event specified above shall
occur.
6.3 Definition of Common Stock. "Common Stock" means (i) any class of
stock designated as "Common Stock" in the Articles of Incorporation of the
Company, as they may be amended as of the Issue Date, or (ii) any other class of
stock resulting from one or more changes or reclassifications of such designated
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that the Company
shall after the date of this Agreement issue Common Stock ("New Common Stock")
with any rights that are different from the rights evidenced by the shares of
Common Stock outstanding as of the date of this Agreement ("Existing Common
Stock"), the Holder, at its option, may receive upon exercise of any Warrant,
Warrant Shares consisting of either shares of Existing Common Stock or shares of
New Common Stock or any combination of shares of Existing Common Stock and New
Common Stock. This Section 6.3 shall apply to successive issuances of any such
New Common Stock.
3
<PAGE> 5
6.4 Merger or Consolidation. If the Company after the Issue Date (i)
shall consolidate with or merge into any other person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Company and the
Company shall be the continuing or surviving person but, in connection with such
consolidation or merger, the Common Stock shall be changed into or exchanged for
stock or other securities of any other person or cash or rights or any other
property, (iii) shall transfer all or substantially all of its properties or
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common Stock for
which adjustments to the Exercise Price are provided in this Section 6), or (v)
shall effect a spin-off of assets, securities (other than Common Stock), or
other property to holders of its Common Stock, then, and in the case of each
such transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Agreement and the Warrants, the Holders
of the Warrants, upon the exercise thereof at any time after the consummation of
such transaction, shall be entitled to receive (at the Exercise Price in effect
at the time of such consummation for all Warrant Shares immediately prior to
such consummation), in lieu of or, in the case of an event described clause (v)
above, in addition to the Warrant Shares or other securities issuable upon such
exercise prior to such consummation, the highest amount of securities, cash,
rights, or other property to which such Holders would actually have been
entitled as stockholders upon such consummation if such Holders had exercised
the rights represented by the Warrants immediately prior thereto, subject to
adjustments (subsequent to such consummation) as nearly equivalent as possible
to the adjustments provided for in this Section 6.
6.5 Assumption of Obligations. Notwithstanding anything contained in the
Warrants to the contrary, the Company will not effect any of the transactions
described in clauses (i) through (v) of Section 6.4 unless, prior to the
consummation thereof, each person (other than the Company) that may be required
to deliver any stock, securities, cash, rights, or other property upon the
exercise of the Warrants as provided herein shall assume, by written instrument
delivered to and reasonably satisfactory to the Holders of the Warrants, (a) the
obligations of the Company under this Agreement and the Warrants (and if the
Company shall survive the consummation of such transaction, such assumption
shall be in addition to, and shall not release the Company from, any continuing
obligations of the Company under this Agreement and the Warrants) and (b) the
obligation to deliver to such Holders such stock, securities, cash, rights, or
property as, in accordance with the foregoing provisions of this Section 6, such
Holders may be entitled to receive, and such person shall have similarly
delivered to such Holders an opinion of counsel for such person, which counsel
shall be reasonably satisfactory to such Holders, stating that this Agreement
and the Warrants shall thereafter continue in full force and effect and the
terms hereof (including, without limitation, all of the provisions of this
Section 6) shall be applicable to the stock, securities, cash, rights, or
property that such person may be required to deliver upon any exercise of the
Warrants or the exercise of any rights pursuant hereto.
6.6 Dividends and Other Distributions. If, at any time or from time to
time after the date of this Agreement, the Company shall issue or distribute to
the holders of shares of Common Stock evidences of its indebtedness, any other
securities of the Company, or any cash, rights, property, or other assets
(excluding pursuant to a subdivision, combination, or reclassification, or
dividend or distribution payable in shares of Common Stock, provision for which
is made in Section 6.1, and excluding Regular Cash Dividends (as defined in this
Section 6.6)) (any such non-excluded event being herein called a "Special
Dividend"), the Exercise Price shall be adjusted by multiplying the then current
Exercise Price by a fraction (i) the numerator of which shall be (a) the 30-Day
Average Market Price (as defined in this Section 6.6) of the Common Stock, less
(b) the Fair Market Value (as defined in this Section 6.6) of the evidences of
indebtedness, other securities, cash, rights, property, or other assets issued
or distributed in such Special Dividend applicable to one share of Common Stock
and (ii) the denominator of which shall be such 30-Day Average Market Price. An
adjustment made pursuant to this Section 6.6 shall become effective immediately
after the record date of any such Special Dividend. "30-Day Average Market
Price" means, with respect to any security, the average for the thirty
consecutive trading days on the New York Stock Exchange immediately preceding
the record date (or, if such calculation is being made pursuant to Section
6.7(a) or 6.7(b), at the time specified in such Section) of the daily closing
price of such security as reported by the national securities exchange upon
which such security is then listed or if not listed on any such exchange, the
average of the closing prices as reported by the Nasdaq National Market, or if
not then listed on the Nasdaq
4
<PAGE> 6
National Market, the average of the highest reported bid and lowest reported
asked prices in the over-the-counter market as reported by the National
Association of Securities Dealers Inc. Automated Quotation System or its
successor or such other generally accepted source of publicly reported bid
quotations; provided, that if such thirty-trading-day period would include any
days of trading in such security on an ex-dividend basis, the 30-Day Average
Market Price shall be determined on the basis of only the portion of such
thirty-trading-day period preceding the period of ex-dividend trading or, if no
portion of such thirty-trading-day period precedes ex-dividend trading, then the
30-Day Average Market Price shall be determined on the basis of the ten
consecutive trading days on the New York Stock Exchange immediately preceding
such ex-dividend trading; provided, further, that if such security is not then
publicly traded on the basis of any of the foregoing listings or quotations, the
30-Day Average Market Price shall be the Fair Market Price. "Fair Market Price"
means, with respect to any security, the fair market price of such security as
determined in good faith by the Company's Board of Directors, subject to Section
6.8. "Fair Market Value" means, with respect to any evidences of indebtedness,
other securities, cash, rights, property, or other assets, the fair market value
of such property or assets as determined in good faith by the Company's Board of
Directors, subject to Section 6.8. "Regular Cash Dividend" means, for the
purposes of this Section 6.6, any cash dividend declared or paid after the date
of this Agreement of which the Purchaser has received at least 30 days' advance
notice so long as the sum of (a) such cash dividend plus (b) the aggregate
amount of all Restricted Payments (as defined in this Section 6.6) made during
the period after December 31, 1996 would not exceed the sum of (x) $7,500,000
plus (y) 50% of the Consolidated Net Income for the period commencing December
31, 1996 and ending on the date of payment of such cash dividend, treated as one
accounting period. "Restricted Payments" means any payment of or in respect of
(i) any dividend, either in cash or property, on any shares of the Company's
Capital Stock (excluding pursuant to a subdivision, combination, or
reclassification, or dividend or distribution payable in shares of Common Stock
provision for which is made in Section 6.1) or (ii) any purchase, redemption, or
retirement of any shares of the Company's Capital Stock or any warrants, rights,
or options to purchase or acquire any shares of the Company's Capital Stock or
(iii) any other payment or distribution, either directly or indirectly through
any subsidiary, in respect of the Company's Capital Stock.
6.7 Certain Issuances. (a) If at any time on or after the date of this
Agreement the Company issues or sells any shares of Capital Stock (x) including
any Capital Stock issuable pursuant to Options (as defined in, and subject to
the further provisions of, Section 6.7(b)) or Convertible Securities (as defined
in, and subject to the further provisions of, Section 6.7(b)) outstanding on or
before the Issue Date but (y) excluding all Warrant Shares, at a per unit or
share price less than the Exercise Price or less than the 30-Day Average Market
Price of Common Stock immediately before the time such Capital Stock (the
"Additional Capital Stock") is issued or sold, then the Exercise Price will be,
in the case of Capital Stock issued at a price less than the Exercise Price,
reduced to the lower of the prices calculated by the following clauses (i) and
(ii) and, in the case of Capital Stock issued at a price less than such 30-Day
Average Market Price but above the Exercise Price, reduced to the price
calculated by the following clause (ii):
(i) dividing (A) the sum of (I) the total number of shares of
Capital Stock outstanding immediately before such issuance or sale of
Additional Capital Stock multiplied by the then current Exercise Price
plus (II) the aggregate cash consideration, if any, received by the
Company upon such issuance or sale, by (B) the total number of shares of
Capital Stock outstanding immediately after such issuance or sale (as
calculated on a fully-diluted basis); and
(ii) multiplying the then current Exercise Price by a fraction,
(A) the numerator of which is calculated by dividing (I) the sum of (x)
the total number of shares of Capital Stock outstanding immediately
before such issuance or sale of Additional Capital Stock multiplied by
the then current 30-Day Average Market Price of the Common Stock plus
(y) the aggregate consideration, if any, received by the Company upon
such issuance or sale, by (II) the total number of shares of Capital
Stock outstanding immediately after such issuance or sale (as calculated
on a fully-diluted basis), and (B) the denominator of which is the
30-Day Average Market Price before such issuance or sale;
for purposes of this Section 6.7(a), in each case where the 30-Day Average
Market Price is to be computed with respect to the time before any Additional
Capital Stock is issued or sold, the date as of which the 30-Day Average Market
Price will be computed will be the earlier of the date upon which the Company
enters into a firm contract
5
<PAGE> 7
for the issuance of such Additional Capital Stock and the date upon which the
Company issues such Additional Capital Stock.
(b) If at any time on or after the date of this Agreement the Company
issues, sells, grants, or assumes, or shall fix a record date for the
determination of holders of any class of securities (other than the Warrant
Certificates) to receive, any Options or Convertible Securities, then, and in
each case, the maximum number of shares of Additional Capital Stock (and set
forth in the instrument relating thereto, without regard to any provisions
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities or Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be the shares of Additional Capital Stock issued as of the time of
such issue, sale, grant, or assumption or, in case such a record date shall have
been fixed, as of the close of business on such record date (or, if the related
Capital Stock trades on an ex-dividend basis, on the date immediately before the
commencement of ex-dividend trading); provided, that such shares of Additional
Capital Stock shall never be deemed to have been issued for the purposes of this
Section 6.7 unless the per unit or share price of such shares (including the
consideration for such Options or Convertible Securities) is less than the
Exercise Price or less than the 30-Day Average Market Price of Common Stock
immediately before the time such Options or Convertible Securities are issued,
sold, granted, or assumed, or such a record date is fixed; and provided,
further, that in any such case in which shares of Additional Capital Stock are
deemed to be issued:
(i) no further adjustment of the Exercise Price shall be made
upon the subsequent issue or sale of shares of Capital Stock or
Convertible Securities upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of
shares of Additional Capital Stock issuable, upon the exercise,
conversion, or exchange thereof (by change of rate or otherwise), the
Exercise Price computed upon the original issue, sale, grant, or
assumption thereof, and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such Options, or
the rights of conversion or exchange under such Convertible Securities,
that are outstanding at such time;
(iii) upon the expiration of any such Options that have not been
exercised (or the purchase by the Company and cancellation or retirement
of any such Options that have not been exercised) or the expiration of
any rights of conversion or exchange under any such Convertible
Securities that have not been exercised (or purchase by the Company and
cancellation or retirement of any such Convertible Securities the rights
of conversion or exchange under which have not been exercised), the
Exercise Price computed upon the original issue, sale, grant, or
assumption thereof, and any subsequent adjustments based thereon, shall,
upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(A) in the case of Options for Capital Stock, the only
shares of Additional Capital Stock issued or sold were the
shares of Additional Capital Stock, if any, actually issued or
sold upon the exercise of such Options and the consideration
received therefor was the consideration actually received by the
Company for the issue, sale, grant, or assumption of all such
Options, whether or not actually exercised, plus the
consideration actually received by the Company upon the issue or
sale of such shares of Additional Capital Stock with respect to
which such Options were actually exercised;
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued or sold
upon the exercise of such Options were issued at the time of the
issue, sale, grant, or assumption of such Options, and the
consideration received by the Company for the shares of
Additional Capital Stock deemed to have then been issued was the
consideration actually received by the Company for the issue,
sale, grant, or assumption of all such Options, whether or not
actually exercised, plus the consideration received by the
Company upon the issue
6
<PAGE> 8
or sale of such Convertible Securities with respect to which
such Options were actually exercised; and
(C) in the case of Convertible Securities, the only
shares of Additional Capital Stock issued or sold were the
shares of Additional Capital Stock, if any, actually issued or
sold upon the conversion or exchange of such Convertible
Securities and the only consideration received therefor was the
consideration actually received by the Company for the issue or
sale of such Convertible Securities that were actually converted
or exchanged, plus the additional consideration actually
received by the Company upon such conversion or exchange.
No readjustment pursuant to paragraphs (A) through (C) above shall have
effect of increasing the Exercise Price by an amount in excess of the
amount of the adjustment thereof originally made in respect of the
issue, sale, grant, or assumption of such Options or Convertible
Securities. In the case of any Options that expire by their terms not
more than 30 days after the date of issue, sale, grant, or assumption
thereof, all adjustments pursuant to this Section 6.7(b)(iii) shall be
postponed until the expiration or exercise of all such Options,
whereupon such adjustment shall be made in the manner provided for such
Options above.
"Convertible Securities" means any evidences of indebtedness or other securities
directly or indirectly convertible into or exchangeable for shares of Additional
Capital Stock. "Options" means options, warrants, stock purchase rights, or
stock appreciation rights for or related to shares of Additional Capital Stock
or Convertible Securities.
(c) Subject to Section 1(c) only, no adjustment to the Exercise Price or
to the number of Warrant Shares shall take place as a result solely of either
(i) exercise of Options or Convertible Securities that are referred to on
Schedule 1 hereto or (ii) issuance of Options or Convertible Securities (or the
issuance of Capital Stock upon the exercise or conversion of such Options or
Convertible Securities) under an employee benefit plan, so long as such plan is
approved or ratified by action of the Company's shareholders and such Options or
Convertible Securities are granted with an exercise or conversion price at or
above market value (as reasonably determined under the terms of such plan) at
the time of such grant.
6.8 Other Dilutive Events; Holders' Objection to Valuation. If any event
shall occur as to which the other provisions of this Section 6 are not strictly
applicable, but as to which the failure to make any adjustment would not fairly
protect the purchase rights represented by this Agreement and the Warrants in
accordance with the essential intent and principles hereof or if any adjustment
is made based in any respect upon a determination of Fair Market Price or Fair
Market Value and any Holders object to the Board of Directors' determination of
Fair Market Price or Fair Market Value then, in each such case, the Holders of
Warrants representing a majority may appoint a firm of independent public
accountants of recognized national standing reasonably acceptable to the
Company, which shall give their opinion as to the adjustment, if any, on a basis
consistent with the essential intent and principles established herein, or the
further adjustment, if any, on the basis of a corrected determination of Fair
Market Price or Fair Market Value, necessary properly to preserve the purchase
rights represented by this Agreement and the Warrants. The opinion of such
accounting firm shall be conclusive and binding on the Company and the Holders.
The Company and the Holders shall equally bear the expenses of the accounting
firm appointed pursuant to this Section.
6.9 Notice of Adjustment Events. Whenever the Company contemplates the
occurrence of an event that would give rise to adjustments under this Section 6,
the Company shall mail to each Holder, at least thirty (30) days prior to the
record date with respect to such event or, if no record date shall be
established, at least thirty (30) days prior to such event, a notice specifying
(i) the nature of the contemplated event, (ii) the date as of which any such
record is to be taken for the purpose of such event, (iii) the date on which
such event is expected to become effective, and (iv) the time, if any is to be
fixed, when the holders of record of Common Stock shall be entitled to exchange
their shares of Common Stock for securities, cash, rights, or other property
deliverable in connection with such event.
6.10 Notice of Adjustments. Whenever the Exercise Price or the kind of
securities, cash, rights, or other property issuable upon exercise of the
Warrants, or both, shall be adjusted pursuant to this Section 6, the
7
<PAGE> 9
Company shall prepare a certificate signed by its President or a Vice President
and by its Chief Financial Officer, Secretary, or Assistant Secretary, setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Company made any determination hereunder),
and the Exercise Price and the kind of securities, cash, rights, or other
property issuable upon exercise of the Warrants after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail postage prepaid) to each Holder promptly after each adjustment. The
Company shall keep copies of all such certificates at the principal executive
offices of the Company referred to in Section 3.1, or the office or agency
designated by the Company pursuant to Section 3.1, and cause the same to be
available for inspection at such location during normal business hours by any
Holder or any prospective purchaser of a Warrant designated by the Holder
thereof.
6.11 Preservation of Rights. The Company will not, by amendment of its
Certificate of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issuance or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Agreement or the Warrants or the rights
represented thereby, but will at all times in good faith assist in the carrying
out of all such terms and in the taking of all such action as may be necessary
or appropriate in order to protect the rights of the Holders of the Warrants
against dilution or other impairment in accordance with the essential intent and
principles of this Agreement.
6.12 When No Adjustment Required. No adjustment in the Exercise Price
shall be required unless such adjustment would require an increase or decrease
of at least $0.001 per share of Common Stock; provided, however that any and all
adjustments that, by reason of this Section 6.12, are not required to be made
shall be carried forward and taken into account in any subsequent adjustment;
provided, further, however, that adjustments shall be required and made in
accordance with the provisions of this Section 6 (other than this Section 6.12)
not later than such time as may be required in order to preserve the tax-free
nature of a distribution to the Holders of the Warrants. Anything in this
Section 6 to the contrary notwithstanding, the Company shall be entitled to make
such reductions in the Exercise Price, in addition to those required by this
Section 6, as it in its discretion shall deem to be advisable in order that any
stock dividend, subdivision of shares, or distribution of rights to purchase
stock or securities convertible or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.
Section 7. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive offices of the Company
referred to in Section 3.1 or the office or agency designated by the Company
pursuant to Section 3.1, for a new Warrant Certificate or Warrant Certificates
of like tenor and date representing in the aggregate the right to purchase the
same number of Warrant Shares in such denominations as shall be designated by
the Holder thereof at the time of such surrender. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Warrant Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of the Warrants, if mutilated, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
Section 8. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of any Warrant. As to any fraction of a Warrant Share or
fraction of other securities, properties, or rights that the Holder would
otherwise be entitled to purchase upon exercise of any Warrant, the Company
shall pay a cash adjustment in an amount equal to the fractional interest
multiplied by the difference of (x) the 30-Day Average Market Price, on the date
of exercise, of the Common Stock or other securities that the Holder would be
entitled to purchase or, if such 30-Day Average Market Price cannot be
determined, the Fair Market Price, on the date of exercise, of the Common Stock
or such other securities and the Fair Market Value of any other property or
rights to which the Holder would be entitled upon such exercise and (y) the
Exercise Price.
Section 9. Transfer. Subject to compliance with all applicable
securities laws, transfer of any Warrant and all rights hereunder relating to
such Warrant, in whole or in part, shall be registered on the books of
8
<PAGE> 10
the Company to be maintained for such purpose, upon (i) surrender of a Warrant
Certificate at the principal executive offices of the Company referred to in
Section 3.1 or the office or agency designated by the Company pursuant to
Section 3.1, together with a written Assignment of such Warrant, substantially
in the form of Exhibit B hereto, duly executed by the Holder or its agent or
attorney, and (ii) if required, payment of funds sufficient to pay any transfer
taxes payable upon the making of such transfer. Upon such surrender and, if
required, such payment, the Company shall cancel such surrendered Warrant
Certificate and shall execute and deliver one or more new Warrant Certificates
of like tenor in the name of the assignee or assignees and in the denominations
specified in such Assignment, and shall issue to the assignor a new Warrant
Certificate evidencing the portion of such Warrant, if any, not so assigned.
Section 10. [intentionally omitted.]
Section 11. Registration Rights.
11.1 Demand Registration. (a) Request for Registration. At any time and
from time to time on or after the first anniversary of the date of this
Agreement, the Demanding Holders (as defined in this Section 11.1(a)) may make a
written request for registration under the Securities Act of all or part of
their Registrable Securities (as defined in this Section 11.1(a)) (a "Demand
Registration"). Such request for a Demand Registration must specify the number
of shares of Registrable Securities proposed to be sold and must also specify
the intended method of disposition thereof. Upon any such request, the Demanding
Holders shall be entitled to have their Registrable Securities included in the
Demand Registration, subject to Section 11.1(d). The Company shall not be
obligated to effect more than two Demand Registrations with respect to the
Registrable Securities under this Section 11.1(a). "Demanding Holders" means a
majority of the holders of Registrable Securities. "Registrable Securities"
means the Warrant Shares (issuable but unissued Warrant Shares shall be
considered held by the Holder of Warrants representing the right to receive such
Warrant Shares) and any securities issued or issuable upon any subdivision,
combination, or reclassification thereof, any dividend or distribution thereon,
or any merger or consolidation with respect to the Company.
(b) Effective Registration. Except in the case of a withdrawal governed
by the last sentence of Section 11.1(e), a registration will not count as a
Demand Registration until it has become effective and the Company has complied
with its obligations under this Agreement with respect thereto; provided,
however, that, after it has been declared effective, if the offering of
Registrable Securities pursuant to a Demand Registration is interfered with by
any stop order, injunction, or other order or requirement of the Securities and
Exchange Commission (the "Commission") or any other governmental agency or
court, such Demand Registration will be deemed not to have become effective
during the period of such interference.
(c) Underwritten Offering. If the Demanding Holders so elect, the
offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of an underwritten offering. The Demanding Holders shall
select one or more firms of investment bankers to act as the managing
Underwriter or Underwriters in connection with such offering and shall select
any additional managers to be used in connection with the offering.
(d) Reduction of Offering. If the managing Underwriter or Underwriters
for a Demand Registration that is to be an underwritten offering advises the
Company and the Demanding Holders, in writing, that the dollar amount or number
of shares of Registrable Securities that the Demanding Holders desire to sell,
taken together with all other shares of Common Stock or securities that the
Company or any other shareholders of the Company desire to sell, exceeds the
maximum dollar amount or number that can be sold in such offering without
adversely affecting the proposed offering price, the timing, the distribution
method, or the probability of success of such offering (the "Maximum Number of
Shares"), then the Company shall include in such registration: (i) first, the
Registrable Securities as to which Demand Registration has been requested by the
Demanding Holders (pro rata in accordance with the number of shares of
Registrable Securities that such Demanding Holder has requested be included in
such registration) that can be sold without exceeding the Maximum Number of
Shares and (ii) second, to the extent the Maximum Number of Shares has not been
reached under the foregoing clause (i), the
9
<PAGE> 11
shares of Common Stock or other securities, if any, that the Company is
obligated (pursuant to agreements other than this Agreement) or desires to
register, that can be sold without exceeding the Maximum Number of Shares.
(e) Withdrawal. If the Demanding Holders or any of them disapprove of
the terms of any underwriting or are not entitled to include all of their
Registrable Securities in any offering, such Demanding Holders may elect to
withdraw from such offering by giving written notice to the Company and the
Underwriter of their request to withdraw prior to the effectiveness of the
registration statement. If the Demanding Holders or any of them withdraw from a
proposed offering relating to a Demand Registration and, solely as a result of
such withdrawal the registration statement is withdrawn prior to being declared
effective, such registration shall count as a Demand Registration provided for
in Section 11.1(a), unless the withdrawing Demanding Holders pay their pro rata
share (based upon the number of shares to be included in such registration
statement) of the expenses incurred in connection with such registration
statement.
11.2 Piggyback Registration. (a) Piggy-Back Rights. If at any time the
Company proposes to file a registration statement under the 1933 Act with
respect to an offering of equity securities, or securities convertible or
exchangeable into equity securities, by the Company for its own account or by
shareholders of the Company for their account (or by the Company and by
shareholders of the Company) other than a registration statement (i) on Form S-4
or S-8 (or any substitute or successor form that may be adopted by the
Commission), (ii) filed in connection with any employee stock option or other
benefit plan, (iii) for an exchange offer or offering of securities solely to
the Company's existing shareholders, or (iv) for a dividend reinvestment plan,
then the Company shall (x) give written notice of such proposed filing to the
holders of Registrable Securities as soon as practicable but in no event less
than 30 days before the anticipated filing date, which notice shall describe the
amount and type of securities to be included in such offering, the intended
method(s) of distribution, and the name of the proposed managing Underwriter or
Underwriters, if any, of the offering; and (y) offer to holders of Registrable
Securities in such notice the opportunity to register such number of shares of
Registrable Securities as such holders may request in writing within 15 days
following receipt of such notice (a "Piggy-Back Registration"). The Company
shall cause such Registrable Securities to be included in such registration and
shall use its best efforts to cause the managing Underwriter or Underwriters of
a proposed underwritten offering to permit the Registrable Securities requested
to be included in a Piggy-Back Registration to be included on the same terms and
conditions as any similar securities of the Company and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof.
(b) Reduction of Offering.
(i) If the managing Underwriter or Underwriters for a Piggy-Back
Registration that is to be an underwritten offering of shares for the
Company's account advises the Company and the holders of Registrable
Securities in writing that the dollar amount or number of shares of
Common Stock that the Company desires to sell, taken together with the
Registrable Securities as to which registration has been requested
pursuant to the piggy-back registration rights under the Stanwich
Registration Rights Agreement (as defined in this Section 11.2(b)) or
the LLCP Registration Agreement (as defined in this Section 11.2(b))
that other shareholders or warrantholders of the Company desire to sell,
exceeds the Maximum Number of Shares, then the Company shall include in
such registration: (1) first, the shares of Common Stock or other
securities that the Company desires to sell that can be sold without
exceeding the Maximum Number of Shares, (2) second, to the extent the
Maximum Number of Shares has not been reached under the foregoing clause
(1), the Registrable Securities as to which registration has been
requested hereunder, the shares of Common Stock or other securities, if
10
<PAGE> 12
any, as to which registration has been requested pursuant to the
piggy-back registration rights granted under the Stanwich Registration
Rights Agreement, and the shares of Common Stock or other securities, if
any, as to which registration has been requested pursuant to the
piggy-back registration rights granted under the LLCP Registration
Rights Agreement (pro rata among the holders of such Registrable
Securities and Common Stock or other securities in accordance with the
number of shares held by each such holder, regardless of the number of
shares that such holder has requested be included in such registration)
that can be sold without exceeding the Maximum Number of Shares, and (3)
third, to the extent the Maximum Number of Shares has not been reached
under the foregoing clauses (1) and (2), the shares of Common Stock or
other securities, if any, that other shareholders desire to sell that
can be sold without exceeding the Maximum Number of Shares. "Stanwich
Registration Rights Agreement" means the Consolidated Registration
Rights Agreement entered into before the date of this Agreement by and
between the Company and Stanwich Financial Corp., together with any
persons identified as "Stanwich Parties" therein. "LLCP Registration
Rights Agreement" means the Registration Rights Agreement entered into
before the date of this Agreement by and between the Company and Levine
Leichtman Capital artners II, L.P.
(ii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares
for the account of persons having exercised their demand registration
rights under the Stanwich Registration Rights Agreement or the LLCP
Registration Rights Agreement advises the Company and the holders of
Registrable Securities in writing that the dollar amount or number of
shares of Common Stock that such persons desire to sell, taken together
with the Registrable Securities as to which registration has been
requested hereunder and the shares of Common Stock or other securities,
if any, that the Company desires to sell or that other shareholders of
the Company desire to sell, exceeds the Maximum Number of Shares, then
the Company shall include in such registration: (1) first, the shares of
Common Stock or other securities for the account of persons having
demand registration rights under the Stanwich Registration Rights
Agreement or the LLCP Registration Rights Agreement, as applicable, that
can be sold without exceeding the Maximum Number of Shares, (2) second,
to the extent the Maximum Number of Shares has not been reached under
the foregoing clause (1), the Registrable Securities as to which
registration has been requested pursuant to the piggy-back registration
rights granted hereunder and the shares of Common Stock or other
securities, if any, as to which registration has been requested pursuant
to the piggy-back registration rights granted under the LLCP
Registration Rights Agreement or the Stanwich Registration Rights
Agreement, as applicable (pro rata among such holders in accordance with
the number of shares of Registrable Securities held by each such holder,
regardless of the number of shares of Registrable Securities that such
holder has requested be included in such registration), that can be sold
without exceeding the Maximum Number of Shares, (3) third, to the extent
the Maximum Number of Shares has not been reached under the foregoing
clauses (1) and (2), the shares of Common Stock or other securities, if
any, that the Company is obligated (pursuant to agreements other than
this Agreement, the Stanwich Registration Rights Agreement, and the LLCP
Registration Rights Agreement) or desires to register, that can be sold
without exceeding the Maximum Number of Shares.
(c) Withdrawal. Any holder of Registrable Securities may elect to
withdraw such holder's request for inclusion of Registrable Securities in any
Piggy-Back Registration by giving written notice to the Company of such request
to withdraw prior to the effectiveness of the registration statement. The
Company may also elect to withdraw a registration statement at any time prior to
the effectiveness of the registration statement. Notwithstanding any such
withdrawal, the Company shall pay all expenses incurred by the holders of
Registrable Securities in connection with such Piggy-Back Registration as
provided in Section 11.4(b).
11.3 Registration on Form S-3. The holders of Registrable Securities may
at any time request in writing that the Company register the resale of any or
all of such Registrable Securities on Form S-3 (or any similar short-form
registration that may be available at such time). Upon receipt of such written
request, the Company shall promptly give written notice of the proposed
registration to all other holders of Registrable Securities, and, as soon as
practicable thereafter, effect the registration of all or such portion of such
holder's or holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
holder or holders joining in such request as are specified in a written request
given within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration pursuant to this Section 11.3 if (i) Form S-3 is not available for
such offering, (ii) the holders propose to effect an underwritten offering,
(iii) the holders propose to sell Registrable Securities at an anticipated
aggregate price to the public (net of any underwriters' discounts or
commissions) of less than $500,000, (iv) the Company shall furnish to the
holders a certificate signed by the Chief Executive Officer of the Company
stating that in
11
<PAGE> 13
the good faith judgment of the Board, it would be materially detrimental to the
Company and its shareholders for such Form S-3 registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than 60 days
after receipt of the request of the holder or holders under this Section 11.3,
provided, however, that in the event the Company elects to exercise such right
with respect to any registration, it shall not exercise such right again prior
to the date that is nine months after the date on which the registration
statement relating to such deferred registration is filed, (v) the Company has
effected eight registrations pursuant to this Section 11.3, or (vi) the Company
has effected two registrations pursuant to this Section 11.3 during the 12-month
period prior to the date on which the registration statement relating to such
registration is anticipated to be declared effective. The Company shall use its
best efforts to maintain each registration statement under this Section 11.3
effective for 60 days or until the Registrable Securities covered thereby have
been sold, whichever shall first occur. Registrations effected pursuant to this
Section 11.3 shall not be counted as Demand Registrations effected pursuant to
Section 11.1.
11.4 Covenants of the Company with Respect to Registration. In
connection with any registration under Section 11.1, 11.2, or 11.3, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to have any registration
statements declared effective at the earliest possible time, and shall furnish
each holder desiring to sell securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all of the costs, fees and expenses in
connection with all registration statements filed pursuant to Sections 11.1,
11.2, and 11.3 including, without limitation, the Company's legal and accounting
fees, printing expenses, blue sky fees, and expenses (including legal fees and
disbursements of one counsel for holders of Warrants and/or Warrant Shares in
connection with such registration statements but excluding each such holder's
pro rata share of underwriting commissions and discounts). If the Company shall
fail to comply with the provisions of Section 11.4(a), the Company shall, in
addition to any other equitable or other relief available to the holder(s) of
Warrants and/or Warrant Shares, extend the Exercise Period of the Warrants by
such number of days as shall equal any delay in excess of 120 days caused by the
Company's failure.
(c) The Company shall take all necessary action that may be required in
qualifying or registering the securities included in a registration statement
for offering and sale under the securities or blue sky laws of such states as
the holder(s) of Warrants and/or Warrant Shares shall reasonably designate;
provided, that the Company shall not be obligated to qualify to do business in
any such jurisdiction or to file any general consent to service of process in
any jurisdiction in any action other than one arising out of the offering or the
sale of the Warrants and/or Warrant Shares.
(d) Nothing contained in this Agreement shall be construed as requiring
a Holder to exercise any Warrant representing Warrant Shares to be registered
under Section 11.1, 11.2, or 11.3 prior to the closing of the sales pursuant to
an offering made by means of a registration statement referred to in Sections
11.1, 11.2, or 11.3.
(e) In connection with any registration statement filed pursuant to
Section 11.1, 11.2, or 11.3, the Company shall furnish to each holder of
Warrants and/or Warrant Shares participating in any underwritten offering and to
each underwriter, a signed counterpart, addressed to such holder or underwriter,
of (i) an opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have issued a
report on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and, in the
case of such accountants' letter, with respect to events subsequent to the date
of such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(f) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within fifteen (15) months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Securities Act) an earnings statement (which need
not be audited) complying
12
<PAGE> 14
with Section 11(a) of the Securities Act and covering a period of at least
twelve (12) consecutive months beginning after the effective date of the
registration statement.
(g) The Company shall deliver promptly to each holder of Warrants and/or
Warrant Shares participating in the offering requesting the correspondence and
memoranda described below, and to the managing underwriters, copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the registration statement and permit each such holder (at its sole
cost and expense other than that set forth in Section 11.3(b)) and underwriter
to do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
NASD. Such investigation shall include access to books, records and properties
and opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such holder or underwriter shall reasonably request.
(h) (A) The Company shall indemnify, to the full extent permitted by
law, each selling holder of Warrants and/or Warrant Shares, its officers and
directors, and each person who "controls" such seller (within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) against all losses, claims, damages,
liabilities, and expenses (collectively, "Losses") suffered by or threatened
against such seller as a result of any untrue or alleged untrue statement of a
material fact contained in any registration statement or any amendment thereof
or any omission or alleged omission to state therein a material fact required to
be stated therein or necessary in order to make the statements made therein not
misleading or any untrue or alleged untrue statement of a material fact
contained in any prospectus or preliminary prospectus or any supplement thereto
or any omission or alleged omission to state therein a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading, except insofar as the Losses are
caused by or contained in any information which such seller furnished in writing
to the Company expressly for use therein. In connection with an underwritten
offering, the Company shall indemnify the underwriters thereof, their officers
and directors, and each person who "controls" any of such underwriters (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the selling holders of Warrants and/or Warrant Shares.
(B) Each selling holder of Warrants and/or Warrant Shares shall
indemnify, to the full extent permitted by law, the Company, its directors and
officers and each person who controls the Company (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) against Losses
resulting from any untrue or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements made therein not misleading
or any untrue or alleged untrue statement of a material fact contained in any
prospectus or preliminary prospectus or any supplement thereto or any omission
or alleged omission to state therein a material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading, if and only to the extent that, such untrue statement
or alleged untrue statement or omission or alleged omission is contained in any
information that such seller furnished in writing to the Company expressly for
use in any registration statement or any amendment thereof or in any prospectus
or preliminary prospectus or any supplement thereto.
(C) Any person entitled to indemnification hereunder (the "Indemnitee")
shall promptly notify the indemnifying party (the "Indemnitor") in writing after
the Indemnitee receives any written notice of the commencement of any action,
suit, proceeding, or investigation or threat thereof made in writing for which
the Indemnitee may claim indemnification or contribution pursuant to this
Agreement. Unless, in the reasonable judgment of the Indemnitee, a conflict of
interest exists between the Indemnitee and the Indemnitor with respect to such
claim, the Indemnitee will permit the Indemnitor to assume the defense of such
claim with counsel reasonably satisfactory to the Indemnitee and the Indemnitor
will pay all costs and expenses incurred in connection therewith, including the
fees and expenses of counsel. If the Indemnitor is not entitled, or elects not,
to assume the defense of a claim, it need not pay the fees and expenses of more
than one counsel with respect to such claim, unless, in an Indemnitee's
reasonable judgment, a conflict of interest may exist between such Indemnitee
and any other Indemnitee(s) with respect to such claim. In such event the
Indemnitor shall pay the fees and expenses of such
13
<PAGE> 15
additional counsel as may be necessary, but in no event shall the Company be
required to pay the fees or expenses of more than one counsel in addition to
counsel representing the Company. The Indemnitor shall not be subject to any
liabilities for any settlement made without its consent, which consent shall not
unreasonably be withheld or delayed. No Indemnitor shall consent to entry of any
judgment or enter into any settlement that does not unconditionally require the
claimant or plaintiff to release the Indemnitee from all liability in respect of
such claim or litigation.
(D) If the indemnification provided for in this paragraph (h) is
unavailable to an Indemnitee hereunder in respect of any Losses referred to
herein, then the Indemnitor, in lieu of indemnifying such Indemnitee, shall
contribute to the amount paid or payable by such Indemnitee as a result of such
Losses, in such proportion as appropriately reflects the relative fault of the
Indemnitor(s) and Indemnitee(s) in connection with such Losses, as well as any
other relevant equitable considerations. The relative fault of the Indemnitor(s)
and Indemnitee(s) and relevant equitable considerations shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such Indemnitor(s) or Indemnitee(s) and their relative intent,
knowledge, access to information, and opportunity to correct or prevent such
action, and their benefit therefrom. The amount paid or payable by a party as a
result of the Losses referred to above shall include, subject to the limitations
set forth in subparagraph (E), any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this subparagraph (D) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(E) Anything to the contrary contained in this paragraph (h)
notwithstanding, no selling holder of Warrants and/or Warrant Shares shall be
liable for any indemnification or contribution in excess of the maximum amount
received by such holder from any sale of Warrants and/or Warrant Shares that
were actually registered pursuant to Section 11.1 or 11.2, net of any amounts
paid by such holder in connection with such sale in respect of the Exercise
Price, underwriting commissions and discounts, or any other costs related to
such sale.
(i) The Company shall promptly notify each holder of Warrants and/or
Warrant Shares covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, upon the Company's discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and at the request
of any such holder promptly prepare and furnish to such holder and each
underwriter, if any, a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
contain such misstatement or omission.
(j) The Company shall enter into an underwriting agreement with the
managing underwriters of an underwritten offering covered by Section 11.1 or
Section 11.2. Such agreement shall be reasonably satisfactory in form and
substance to the Company, each holder of Warrants and/or Warrant Shares to be
sold thereunder and such managing underwriters, and shall contain such
representations, warranties, and covenants by the Company and such other terms
as are customarily contained in agreements of that type. The holders of Warrants
and/or Warrant Shares shall be parties to any underwriting agreement relating to
an underwritten sale of their Warrants and/or Warrant Shares and may, at their
option, require that any or all the representations, warranties, and covenants
of the Company to or for the benefit of such underwriters shall also be made to
and for the benefit of such holders. Such holders shall not be required to make
any representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such holders and their intended
methods of distribution.
14
<PAGE> 16
(k) In the event the Company grants to any other holder of the Company's
securities at any time registration rights more favorable than those afforded to
the Holders hereunder, then the provisions hereunder shall be deemed amended to
include such more favorable provisions.
Section 12. Other Covenants of the Company. For so long as any Warrants
remain outstanding:
12.1 Information. The Company shall furnish to the Purchaser:
(a) within 15 days after the Company is required to file the
same with the Commission, copies of the annual, quarterly and other
reports which the Company may be required to file with the Commission
pursuant to Sections 13(a), 13(c), or 15(d) of the Exchange Act; and
(b) with reasonable promptness, such other information
respecting the business, operations, properties, or condition (financial
or otherwise) or prospects of the Company as the Purchaser may
reasonably request from time to time.
12.2 Rule 144; Rule 144A. (a) The Company will file the reports required
to be filed by it under the Securities Act and the Exchange Act and the rules
and regulations adopted by the Commission thereunder and will take such further
action as may reasonably be required from time to time to enable Holders to sell
Warrant Shares without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any Holder,
the Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
(b) For so long as any Warrants or Shares are restricted securities
within the meaning of Rule 144(a)(3) under the Securities Act, the Company
covenants and agrees that it shall, during any period in which it is not subject
to Section 13 or 15(d) of the Exchange Act, make available to any Holder in
connection with the sale by such Holder to any prospective purchaser of Common
Stock from such Holder, in each case upon request, the information specified in,
and meeting the requirements of, Rule 144A(d)(4) under the Securities Act.
Section 13. Voting. So long as any holder of Warrants and/or Warrant
Shares shall own Warrants exercisable for and/or Warrant Shares consisting of or
convertible into at least five percent (5%) of the outstanding Common Stock of
the Company, such holder of Warrants and/or Warrant Shares shall have the right
to send a representative selected by it to each meeting of the Company's Board
of Directors, which representative shall be permitted to attend (but not
participate in) such meeting and any adjournments thereof. The Company shall
give to such holder of Warrants and/or Warrant Shares notice of all meetings
thereof at least ten (10) Business Days prior to convening such meeting, which
notice shall describe the matters upon which action is to be taken, or shall
provide such notice as is given to members of the Company's Board of Directors.
The Company shall provide such holder with a copy of all resolutions adopted by
the Board of Directors by written consent promptly upon execution by the Board
members.
Section 14. Further Assurance. The Company represents and warrants that
all corporate action on the part of the Company necessary for the authorization,
execution, delivery, and performance by the Company of this Agreement in
accordance with the provisions hereof has been taken.
Section 15. Reservation and Listing of Securities. The Company shall at
all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise or conversion of the
Warrants, such number of shares of Common Stock or other securities, properties,
or rights as shall be issuable upon the exercise or conversion thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all shares of Common Stock and other securities
issuable upon such exercise and conversion thereof shall be duly and validly
issued, fully paid, nonassessable, and not subject to the preemptive rights of
any stockholder. As long as the Warrants shall be outstanding, the Company shall
use its best efforts to cause all Warrant Shares to be listed on all securities
exchanges and/or included in the
15
<PAGE> 17
automated quotation system of the Nasdaq National Market (subject to official
notice of issuance) with respect to which the Common Stock issued to the public
may then be so listed and/or quoted.
Section 16. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution payable; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of Capital Stock of the Company or
securities convertible into or exchangeable for shares of Capital Stock
of the Company, or any option, right, or warrant to subscribe therefor;
or
(c) a voluntary or involuntary dissolution, liquidation, or
winding-up of the Company (other than in connection with a consolidation
or merger) or any capital reorganization, recapitalization, or
reclassification or a sale of all or substantially all of its property,
assets, and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall mail to each Holder
of a Warrant a notice specifying (i) the date or expected date on which any such
record is to be taken for the purpose of such dividend, distribution, or right,
and the amount and character of such dividend, distribution, or right, or (ii)
the date or expected date on which any such reorganization, reclassification,
recapitalization, consolidation, merger, sale, dissolution, liquidation, or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for the securities, cash, rights, or other property
deliverable upon such reorganization, reclassification, recapitalization,
consolidation, merger, sale, dissolution, liquidation, or winding-up. Such
notice shall be mailed at least thirty (30) days prior to the date therein
specified.
Section 17. Notices. All notices, requests, consents, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or made at the time delivered by hand, if personally delivered; five
calendar days after mailing, if sent by registered or certified mail; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and the
next Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery (except that a notice of change of
address shall not be deemed to have been given until actually received by the
addressee):
(a) If to a registered Holder of any Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the Company's principal executive
offices referred to in Section 3.1 or to such other address as the
Company may designate by notice to the Holders.
Section 18. Supplements and Amendments. The Company and the Purchaser
may from time to time supplement or amend this Agreement without the approval of
any Holders (other than the Purchaser) in order to cure any ambiguity, to
correct or supplement any provision contained herein that may be defective or
inconsistent with any other provision herein, or to make any other provision in
regard to matters or questions arising hereunder that the Company and the
Purchaser may deem necessary or desirable and that the Company and the Purchaser
determine in good faith does not materially and adversely affect the interests
of any other Holder.
16
<PAGE> 18
Section 19. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders, and their respective permitted successors and assigns hereunder.
Section 20. Governing Law, Submission to Jurisdiction. This Agreement
and each Warrant issued hereunder shall be governed and construed in accordance
with the laws of the State of New York applicable to contracts made and
performed in the State of New York without giving effect to the principles of
conflicts of law thereof.. If any action or proceeding shall be brought by the
Purchaser or any of the Holders in order to enforce any right or remedy under
the Warrants or this Agreement, the Company hereby consents to, and submits to,
the jurisdiction of the courts of the State of New York and of any federal court
sitting in the Borough of Manhattan, City of New York. The Company agrees that
process in any such action or proceeding may be served in the manner provided by
New York law for service on foreign persons, as appropriate.
Section 21. Entire Agreement, Modification. This Agreement contains the
entire understanding between the parties hereto with respect to the subject
matter hereof and may not be modified or amended except by a writing duly signed
by the party against whom enforcement of the modification or amendment is
sought.
Section 22. Expiration of this Agreement. This Agreement shall expire 10
years from the Issue Date; provided, however, that the indemnity and
contribution agreements contained in Section 11.3(h) shall continue in full
force and effect.
Section 23. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement. Any such provision held to be
invalid or unenforceable shall, to the extent possible, be deemed modified so as
to be valid and enforceable and in harmony with the essential intent and
principles of this Agreement.
Section 24. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended to be, nor
should they be construed as, part of this Agreement and shall be given no
substantive effect.
Section 25. Benefits of This Agreement. Nothing in this Agreement
(except for the indemnity and contribution agreements contained in Section
11.3(h)) shall be construed to give any person or corporation other than the
Company and the Purchaser and any other holder(s) of the Warrants and/or Warrant
Shares any legal or equitable right, remedy, or claim under this Agreement; and
(except for the indemnity and contribution agreements contained in Section
11.3(h)) this Agreement shall be for the sole and exclusive benefit of the
Company, the Purchaser, and any other Holder from time to time of any Warrant or
Warrant Shares.
Section 26. Specific Performance. The parties hereby declare that it is
impossible to measure in money the damages that will accrue to a party hereto by
reason of a failure to perform any of the obligations under this Agreement.
Therefore, all parties hereto shall have the right to specific performance of
the obligations of the other parties under this Agreement, and if any party
hereto shall institute an action or proceeding to enforce the provisions hereof,
any person (including the Company) against whom such action or proceeding is
brought hereby waives the claim or defense therein that such party has an
adequate remedy at law, and such person shall not urge in any such action or
proceeding the claim or defense that such remedy at law exists.
Section 27. Counterparts. This Agreement may be executed in any number
of counterparts, including by telecopied facsimile, and each of such
counterparts shall for all purposes be deemed to be an original, and such
counterparts shall together constitute but one and the same instrument.
17
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
CONSUMER PORTFOLIO SERVICES, INC.
By:_________________________________
Name:
Title:
FSA PORTFOLIO MANAGEMENT INC.
By:_________________________________
Name:
Title:
18
<PAGE> 20
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE LAWS.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ON NOVEMBER __, 2003
WARRANT CERTIFICATE NO. ___
This Warrant Certificate certifies that
_____________________________________, or registered assigns, is the registered
holder of a Warrant to purchase initially, at any time from the date hereof
until 5:30 p.m., New York time, on November __, 2003 (the "Expiration Date"), up
to __________ fully paid and nonassessable shares of Common Stock, no par value
(the "Common Stock") of CONSUMER PORTFOLIO SERVICES, INC., a California
corporation (the "Company"), at the Exercise Price (as defined in the Warrant
Agreement, dated as of November __, 1998, between the Company and FSA Portfolio
Management Inc. (the "Warrant Agreement")) upon surrender of this Warrant
Certificate and payment of the Exercise Price at the Company's principal
executive offices or another office maintained by the Company for such purpose
in accordance with the Warrant Agreement, but subject to the conditions set
forth herein and in the Warrant Agreement. Payment of the Exercise Price shall
be made by certified or official bank check in New York Clearing House funds
payable to the order of the Company or as otherwise set forth in the Warrant
Agreement.
Capitalized terms used but not defined in this Warrant Certificate have
the meanings given to such terms in the Warrant Agreement.
NO WARRANT MAY BE EXERCISED AFTER 5:30 P.M., NEW YORK TIME, ON THE
EXPIRATION DATE, AT WHICH TIME ALL WARRANTS EVIDENCED HEREBY, UNLESS EXERCISED
PRIOR THERETO, SHALL THEREAFTER BE VOID.
The warrant evidenced by this Warrant Certificate is part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement which,
among other things, provides certain rights and procedures related to the
Warrants and Warrant Shares. The Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties, and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrant; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair the rights of the holder
as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrant Shares shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge.
A-1
<PAGE> 21
Upon the exercise of the Warrant evidenced hereby for the purchase of
less than all the Warrant Shares purchasable hereunder, the Company shall cancel
this Warrant Certificate upon the surrender hereof and forthwith issue to the
holder hereof a new Warrant Certificate of like tenor representing the balance
of the Warrant Shares purchasable hereunder.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
A-2
<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ________________________
CONSUMER PORTFOLIO SERVICES, INC.
[SEAL]
By:_________________________________
Name:
Title:
Attest:
__________________________________
Name:
Title: Secretary
A-3
<PAGE> 23
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House funds to the order of
CONSUMER PORTFOLIO SERVICES, INC. in the amount of $_____________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of
_______________________________________________________________ whose address is
_______________________________________________________________ and that such
Certificate be delivered to
__________________________________________________________ whose address is
______________________________________________________________.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
- - --------------------------------------------------------------------------------
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase ________ shares of Common Stock all in
accordance with the terms of Section 3.2 of the Warrant Agreement, dated as of
November __, 1998 between Consumer Portfolio Services, Inc. and FSA Portfolio
Management Inc. The undersigned requests that a certificate for such securities
be registered in the name of _________________________________________________
whose address is _______________________________________________________________
and that such Certificate be delivered to
_________________________________________________________ whose address is
______________________________________________________________.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
A-4
<PAGE> 24
EXHIBIT B
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED _____________________________________________ hereby sells,
assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
B-1
<PAGE> 25
Schedule 1 to Warrant Agreement
<TABLE>
<S> <C>
Capital Stock
Outstanding common shares 15,658,501
Outstanding preferred shares 0
Convertible Debt
PENs (1997 public subordinated debt) 492,611
Stanwich 1997 quasi-PENs (1997 private 252,951
subordinated debt)
1998 Stanwich/Poole Convertible 1,666,667
Subordinated Notes
Options, Warrants & Rights
Options outstanding under Plans 2,341,400
Non-Plan options (directors) 60,000
Levine Leichtman warrant 3,450,000
----------
TOTAL 23,922,130
==========
</TABLE>
S-1
<PAGE> 26
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE LAWS.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ON DECEMBER 4, 2003
WARRANT CERTIFICATE NO. 1
This Warrant Certificate certifies that FSA PORTFOLIO MANAGEMENT INC.,
or registered assigns, is the registered holder of a Warrant to purchase
initially, at any time from the date hereof until 5:30 p.m., New York time, on
December 4, 2003 (the "Expiration Date"), up to 2,525,114 (two million, five
hundred twenty-five thousand, one hundred fourteen) fully paid and nonassessable
shares of Common Stock, no par value (the "Common Stock") of CONSUMER PORTFOLIO
SERVICES, INC., a California corporation (the "Company"), at the Exercise Price
(as defined in the Warrant Agreement, dated as of November 30, 1998, between the
Company and FSA Portfolio Management Inc. (the "Warrant Agreement")) upon
surrender of this Warrant Certificate and payment of the Exercise Price at the
Company's principal executive offices or another office maintained by the
Company for such purpose in accordance with the Warrant Agreement, but subject
to the conditions set forth herein and in the Warrant Agreement. Payment of the
Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company or as otherwise set
forth in the Warrant Agreement.
Capitalized terms used but not defined in this Warrant Certificate have
the meanings given to such terms in the Warrant Agreement.
NO WARRANT MAY BE EXERCISED AFTER 5:30 P.M., NEW YORK TIME, ON THE
EXPIRATION DATE, AT WHICH TIME ALL WARRANTS EVIDENCED HEREBY, UNLESS EXERCISED
PRIOR THERETO, SHALL THEREAFTER BE VOID.
The warrant evidenced by this Warrant Certificate is part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement which,
among other things, provides certain rights and procedures related to the
Warrants and Warrant Shares. The Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties, and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrant; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair the rights of the holder
as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
1
<PAGE> 27
number of Warrant Shares shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge.
Upon the exercise of the Warrant evidenced hereby for the purchase of
less than all the Warrant Shares purchasable hereunder, the Company shall cancel
this Warrant Certificate upon the surrender hereof and forthwith issue to the
holder hereof a new Warrant Certificate of like tenor representing the balance
of the Warrant Shares purchasable hereunder.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
2
<PAGE> 28
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of December 4, 1998
CONSUMER PORTFOLIO SERVICES, INC.
[SEAL]
By:_________________________________
Name:
Title:
Attest:
__________________________________
Name:
Title: Secretary
3
<PAGE> 29
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House funds to the order of
CONSUMER PORTFOLIO SERVICES, INC. in the amount of $_____________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of
_______________________________________________________________ whose address is
_______________________________________________________________ and that such
Certificate be delivered to
__________________________________________________________ whose address is
______________________________________________________________.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
- - --------------------------------------------------------------------------------
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase ________ shares of Common Stock all in
accordance with the terms of Section 3.2 of the Warrant Agreement, dated as of
November 30, 1998 between Consumer Portfolio Services, Inc. and FSA Portfolio
Management Inc. The undersigned requests that a certificate for such securities
be registered in the name of _________________________________________________
whose address is _______________________________________________________________
and that such Certificate be delivered to
_________________________________________________________ whose address is
______________________________________________________________.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
4
<PAGE> 30
EXHIBIT B
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED _____________________________________________ hereby sells,
assigns and transfers unto
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
5
<PAGE> 1
EXHIBIT 10.29
SUBORDINATION AGREEMENT
This Subordination Agreement (this "Agreement") is made as of
this 17th day of November, 1998, by and between Stanwich Financial Services
Corp., a Rhode Island corporation ("Stanwich"), John G. Poole, an individual
("Poole"), Levine Leichtman Capital Partners II, L.P., a California limited
partnership ("LLCP"), and Consumer Portfolio Services, Inc., a California
corporation ("CPS").
RECITALS
A. Pursuant to the terms of that certain Debt Restructure
Agreement of even date herewith by and among CPS, Stanwich and Poole (the "Debt
Restructure Agreement"), CPS is issuing (i) a Convertible Subordinated 12.5%
Note in the principal amount of $4,000,000 to Stanwich (the "$4 Million Stanwich
Note") and (ii) a Convertible Subordinated 12.5% Note in the principal amount of
$1,000,000 to Poole (the "Poole Note").
B. Stanwich is the holder of (i) two Partially Convertible
Subordinated 9% Notes dated June 12, 1997, each in the principal amount of
$5,000,000 (the "$5 Million Stanwich Notes"), and (ii) five Partially
Convertible Subordinated 9% Notes dated June 12, 1997, each in the principal
amount of $1,000,000 (the "$1 Million Stanwich Notes" and, together with the $4
Million Stanwich Note and the $5 Million Stanwich Notes, the "Stanwich Notes").
C. Stanwich has pledged both of the $5 Million Stanwich Notes
and one of the $1 Million Stanwich Notes (collectively, the "Pledged Notes") to
certain financial institutions pursuant to the terms of various agreements (as
such agreements as in effect on the date hereof, the "Note Pledge Agreements").
D. LLCP and CPS are parties to that certain Securities Purchase
Agreement of even date herewith (the "LLCP Purchase Agreement") pursuant to
which CPS has agreed to issue to LLCP, and LLCP has agreed to purchase from CPS
as of the date hereof a Senior Subordinated Primary Note in the principal amount
of $25,000,000.
E. The execution of this Agreement by Stanwich, Poole and CPS is
a condition precedent to the obligation of LLCP to consummate the transactions
contemplated by the LLCP Purchase Agreement.
F. In consideration of the substantial direct and indirect
benefits which Stanwich, Poole and CPS will realize from the consummation of the
transactions contemplated by the LCCP Purchase Agreement, Stanwich, Poole and
CPS desire to enter into this Agreement and to be bound by the terms and
conditions hereof.
AGREEMENT
In consideration of the mutual covenants and agreements set
forth herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment of the Stanwich Notes and the Poole Note.
1.1 Amendment of Section 2. Subject to Section 1.4, from and after the
date hereof and until the termination of this Agreement as provided below,
Section 2 (SUBORDINATION) of the Stanwich Notes and the Poole Note shall be
amended and restated to read in its entirety as follows:
2. SUBORDINATION.
<PAGE> 2
(a) IN GENERAL. THIS NOTE IS ISSUED SUBJECT TO, AND EACH PERSON
HOLDING THIS NOTE OR ANY INTEREST THEREIN, WHETHER UPON ORIGINAL ISSUE OR
UPON TRANSFER OR ASSIGNMENT HEREOF, SHALL BY ACCEPTANCE HEREOF BE DEEMED
TO HAVE ACCEPTED AND AGREED TO BE BOUND BY THE PROVISIONS THAT THE
INDEBTEDNESS EVIDENCED BY THIS NOTE IS AND SHALL BE SUBORDINATED AND
SUBJECT IN RIGHT OF PAYMENT, TO THE EXTENT AND IN THE MANNER PROVIDED IN
THIS SECTION 2, TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS
AND OF ALL SENIOR SUBORDINATED INDEBTEDNESS.
(b) PERMITTED PAYMENTS. THE MAKER MAY NOT MAKE ANY PAYMENT OF
PRINCIPAL OR PREMIUM ON THIS NOTE, AND THE HOLDER OF THIS NOTE SHALL NOT
BE PERMITTED TO RETAIN ANY PAYMENT OF PRINCIPAL OR PREMIUM, PRIOR TO THE
PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
INDEBTEDNESS. UNTIL ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
INDEBTEDNESS HAVE BEEN PAID IN FULL, THE MAKER SHALL BE PERMITTED TO MAKE
AND THE HOLDER SHALL BE PERMITTED TO RETAIN, SUBJECT TO THE PROVISIONS OF
SECTION 2(c), ONLY PAYMENTS OF INTEREST ON THIS NOTE ("PERMITTED
PAYMENTS"), AND ANY PAYMENTS MADE BY THE MAKER THAT ARE NOT PERMITTED
PAYMENTS WILL BE TURNED OVER BY THE HOLDER OF THIS NOTE (i) FIRST, TO THE
HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY AGENT THEREFOR (A "SENIOR
AGENT") FOR THE BENEFIT OF THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS
AND (ii) TO THE EXTENT THE SENIOR INDEBTEDNESS HAS BEEN PAID IN FULL, TO
THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS OR ANY AGENT
THEREFOR (A "SENIOR SUBORDINATED AGENT") FOR THE BENEFIT OF THE HOLDER OR
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS. UPON PAYMENT IN FULL OF THE
SENIOR INDEBTEDNESS AND THE SENIOR SUBORDINATED INDEBTEDNESS, PAYMENT OF
PRINCIPAL AND INTEREST MAY BE MADE TO THE HOLDER OF THIS NOTE WITHOUT
RESTRICTION HEREUNDER.
-2-
<PAGE> 3
(c) SUSPENSION OF PAYMENTS; LIMITATION ON REMEDIES.
(i) FROM AND AFTER RECEIPT BY THE MAKER OF A WRITTEN
NOTICE FROM THE HOLDER OR HOLDERS OF NOT LESS THAN FIFTY-ONE
PERCENT (51.0%) IN PRINCIPAL AMOUNT OF THE OUTSTANDING SENIOR
INDEBTEDNESS OR ANY SENIOR AGENT (A "DEFAULT NOTICE") STATING
THAT A DEFAULT HAS OCCURRED IN THE PAYMENT OF ANY OBLIGATION ON
ANY SENIOR INDEBTEDNESS WHEN DUE, WHETHER AT THE STATED MATURITY
OF ANY SUCH PAYMENT OR BY DECLARATION OF ACCELERATION, CALL FOR
REDEMPTION, MANDATORY REPURCHASE, PAYMENT OR PREPAYMENT OR
OTHERWISE (A "PAYMENT DEFAULT"), AND UNTIL THE DATE ON WHICH SUCH
PAYMENT DEFAULT IS CURED OR WAIVED IN WRITING BY THE HOLDERS OF
THE SENIOR INDEBTEDNESS WHO DELIVERED THE DEFAULT NOTICE, THE
MAKER SHALL NOT MAKE, AND THE HOLDER SHALL NOT BE PERMITTED TO
RECEIVE OR RETAIN, ANY PAYMENT OF INTEREST ON THIS NOTE.
(ii) FROM AND AFTER RECEIPT BY THE MAKER OF WRITTEN NOTICE
FROM LLCP STATING THAT A DEFAULT OR EVENT OF DEFAULT HAS OCCURRED
UNDER THE LLCP PURCHASE AGREEMENT AND STATING THAT LLCP IS
ELECTING TO INVOKE THE PROVISIONS OF THIS SECTION 2(c)(ii), AND
UNTIL THE DATE ON WHICH SUCH DEFAULT OR EVENT OF DEFAULT IS CURED
OR WAIVED IN WRITING BY LLCP, THE MAKER MAY NOT MAKE, AND THE
HOLDER SHALL NOT BE PERMITTED TO RECEIVE OR RETAIN, ANY PAYMENT
OF INTEREST ON THIS NOTE.
(iii) THE HOLDER OF THIS NOTE MAY NOT ACCELERATE THE
MATURITY OF THIS NOTE, OR PURSUE ANY OTHER REMEDY PROVIDED IN
SECTION 11 PRIOR TO THE PAYMENT IN FULL OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS; PROVIDED,
HOWEVER, THAT THIS CLAUSE (iii) SHALL NOT LIMIT THE AUTOMATIC
ACCELERATION OF THIS NOTE UPON THE OCCURRENCE OF ANY EVENT OF
DEFAULT SPECIFIED IN SECTIONS 10(f) OR 10(g) OF THIS NOTE .
(iv) IN THE EVENT THE MAKER IS PROHIBITED FROM MAKING ANY
PAYMENT OF INTEREST UNDER THIS SECTION 2(c), THE AMOUNT OF SUCH
PAYMENT SHALL BE ADDED TO THE PRINCIPAL AMOUNT OF THIS NOTE AS OF
THE DATE ON WHICH SUCH PAYMENT WOULD OTHERWISE HAVE BEEN DUE AND
SUCH ADDITIONAL PRINCIPAL AMOUNT SHALL BE DUE AND PAYABLE AT
MATURITY, EXCEPT TO THE EXTENT LLCP MAY OTHERWISE AGREE IN
WRITING.
(d) DISTRIBUTIONS IN BANKRUPTCY. UPON A PAYMENT OR DISTRIBUTION
TO CREDITORS OF THE MAKER IN A LIQUIDATION, DISSOLUTION, OR WINDING UP OF
THE MAKER OR IN A BANKRUPTCY, REORGANIZATION, INSOLVENCY, RECEIVERSHIP OR
SIMILAR PROCEEDING RELATING TO THE MAKER OR ITS PROPERTIES OR AN
ASSIGNMENT FOR THE BENEFIT OF CREDITORS OR ANY MARSHALING OF THE MAKER'S
ASSETS AND LIABILITIES:
(i) THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS SHALL BE
ENTITLED TO RECEIVE PAYMENT OF THE FULL AMOUNT OF THE SENIOR
INDEBTEDNESS AND, AFTER SUCH PAYMENT IN FULL OF THE SENIOR
INDEBTEDNESS, THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS SHALL BE ENTITLED TO RECEIVE PAYMENT OF THE FULL
AMOUNT OF THE SENIOR SUBORDINATED INDEBTEDNESS BEFORE THE HOLDER
IS ENTITLED TO RECEIVE ANY PAYMENT ON ACCOUNT OF THE PRINCIPAL
OF, PREMIUM, IF ANY, OR INTEREST ON THIS NOTE; AND
(ii) ANY PAYMENT BY, OR DISTRIBUTION OF ASSETS OF, THE
MAKER OF ANY KIND OR CHARACTER, WHETHER IN CASH, PROPERTY OR
SECURITIES (OTHER THAN SECURITIES OF THE MAKER AS REORGANIZED OR
READJUSTED OR SECURITIES OF THE MAKER OR ANY OTHER CORPORATION
PROVIDED FOR BY A PLAN OF REORGANIZATION OR READJUSTMENT THE
PAYMENT OF WHICH IS SUBORDINATE, AT LEAST TO THE EXTENT PROVIDED
IN THIS SECTION 2 WITH RESPECT TO THIS NOTE, TO THE PAYMENT OF
ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
-3-
<PAGE> 4
INDEBTEDNESS, PROVIDED THAT THE RIGHTS OF THE HOLDERS OF SENIOR
INDEBTEDNESS AND THE HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS
ARE NOT IMPAIRED BY SUCH REORGANIZATION OR READJUSTMENT) TO WHICH
THE HOLDER WOULD BE ENTITLED EXCEPT FOR THE PROVISIONS OF THIS
SECTION 2 SHALL BE PAID OR DELIVERED BY THE PERSON MAKING SUCH
PAYMENT OR DISTRIBUTION, WHETHER A TRUSTEE IN BANKRUPTCY, A
RECEIVER OR LIQUIDATING TRUSTEE OR OTHERWISE, (i) FIRST, DIRECTLY
TO THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY SENIOR
AGENT, RATABLY ACCORDING TO THE AGGREGATE AMOUNTS REMAINING
UNPAID ON ACCOUNT OF THE SENIOR INDEBTEDNESS HELD OR REPRESENTED
BY EACH, TO THE EXTENT NECESSARY TO MAKE PAYMENT IN FULL OF ALL
SENIOR INDEBTEDNESS REMAINING UNPAID AFTER GIVING EFFECT TO ANY
CONCURRENT PAYMENT OR DISTRIBUTION TO THE HOLDER OR HOLDERS OF
SENIOR INDEBTEDNESS, BEFORE ANY PAYMENT OR DISTRIBUTION IS MADE
TO THE HOLDER OR HOLDERS OF ANY SENIOR SUBORDINATED INDEBTEDNESS
OR ANY SENIOR SUBORDINATED AGENT OR TO THE HOLDER, AND (II)
THEREAFTER DIRECTLY TO THE HOLDER OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS OR ANY SENIOR SUBORDINATED AGENT,
RATABLY ACCORDING TO THE AGGREGATE AMOUNTS REMAINING UNPAID ON
ACCOUNT OF THE SENIOR SUBORDINATED INDEBTEDNESS HELD OR
REPRESENTED BY EACH, TO THE EXTENT NECESSARY TO MAKE PAYMENT IN
FULL OF ALL SENIOR SUBORDINATED INDEBTEDNESS REMAINING UNPAID
AFTER GIVING EFFECT TO ANY CONCURRENT PAYMENT OR DISTRIBUTION TO
THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS, BEFORE
ANY PAYMENT OR DISTRIBUTION IS MADE TO THE HOLDER; AND
(iii) IN THE EVENT, NOTWITHSTANDING THE FOREGOING, ANY
PAYMENT BY, OR DISTRIBUTION OF ASSETS OF, THE MAKER OF ANY KIND
OR CHARACTER, WHETHER IN CASH, PROPERTY OR SECURITIES (OTHER THAN
SECURITIES OF THE MAKER AS REORGANIZED OR READJUSTED OR
SECURITIES OF THE MAKER OR ANY OTHER CORPORATION PROVIDED FOR BY
A PLAN OF REORGANIZATION OR READJUSTMENT THE PAYMENT OF WHICH IS
SUBORDINATE, AT LEAST TO THE EXTENT PROVIDED IN THIS SECTION 2
WITH RESPECT TO THIS NOTE, TO THE PAYMENT OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS, PROVIDED
THAT THE RIGHTS OF THE HOLDERS OF SENIOR INDEBTEDNESS AND THE
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS ARE NOT IMPAIRED BY
SUCH REORGANIZATION OR READJUSTMENT) SHALL BE RECEIVED BY THE
HOLDER OF THIS NOTE BEFORE ALL SENIOR INDEBTEDNESS AND ALL SENIOR
SUBORDINATED INDEBTEDNESS IS PAID IN FULL, SUCH PAYMENT OR
DISTRIBUTION SHALL BE PAID OVER (i) FIRST, TO THE HOLDER OR
HOLDERS OF SUCH SENIOR INDEBTEDNESS OR ANY SENIOR AGENT, AND (ii)
THEREAFTER TO THE HOLDERS OF SUCH SENIOR SUBORDINATED
INDEBTEDNESS OR ANY SENIOR SUBORDINATED AGENT RATABLY AS
AFORESAID, FOR APPLICATION TO THE PAYMENT OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS REMAINING
UNPAID, AS THE CASE MAY BE, UNTIL ALL SUCH SENIOR INDEBTEDNESS
AND ALL SUCH SENIOR SUBORDINATED INDEBTEDNESS SHALL HAVE BEEN
PAID IN FULL, AFTER GIVING EFFECT TO ANY CONCURRENT PAYMENT OR
DISTRIBUTION TO THE HOLDERS OF SUCH SENIOR INDEBTEDNESS AND THE
HOLDERS OF SUCH SENIOR SUBORDINATED INDEBTEDNESS.
(e) EXCLUSIVE POWERS. THE HOLDERS OF SENIOR INDEBTEDNESS AND THE
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS, ON THE ONE HAND, AND THE
HOLDER, ON THE OTHER HAND, ARE ENTITLED TO EXERCISE CERTAIN RIGHTS AND
POWERS WITH RESPECT TO THE MAKER FROM TIME TO TIME, WHETHER BEFORE OR
AFTER AN OCCURRENCE OF AN EVENT OF DEFAULT, AND THE EXERCISE OF ANY SUCH
RIGHT OR POWER BY ONE CREDITOR MAY PRECLUDE THE EXERCISE OF A SIMILAR
RIGHT OR POWER BY ONE OR MORE OTHER CREDITORS (ANY SUCH RIGHT OR POWER
BEING HEREIN CALLED AN "EXCLUSIVE POWER"). TO THE EXTENT THAT ANY HOLDER
OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY SENIOR AGENT OR ANY HOLDER OR
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS OR ANY SENIOR SUBORDINATED
AGENT ACTUALLY EXERCISES ANY EXCLUSIVE POWER, THEN THE HOLDER OF THIS
NOTE AGREES TO REFRAIN FROM EXERCISING ANY SUBSTANTIALLY SIMILAR
EXCLUSIVE POWER TO THE EXTENT NECESSARY TO PERMIT THE HOLDER OR HOLDERS
OF SENIOR INDEBTEDNESS OR THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS, OR ANY OF THEM, TO BENEFIT FROM THEIR ACTIONS.
-4-
<PAGE> 5
(f) MODIFICATION OF SENIOR DEBT OR SENIOR SUBORDINATED DEBT. NO
AMENDMENT, MODIFICATION, EXTENSION, REPLACEMENT, RESTATEMENT OR
SUBSTITUTION OF ANY SENIOR INDEBTEDNESS OR OF ANY SENIOR SUBORDINATED
INDEBTEDNESS, OR OF ANY AGREEMENT OR NOTE NOW OR HEREAFTER IN EFFECT
PERTAINING TO SUCH SENIOR INDEBTEDNESS OR SENIOR SUBORDINATED
INDEBTEDNESS, SHALL NULLIFY, IMPAIR, LIMIT, ALTER OR MODIFY THE
PROVISIONS OF THIS SECTION 2.
(g) EXPENSES INCLUDED IN SENIOR INDEBTEDNESS AND SENIOR
SUBORDINATED INDEBTEDNESS. FOR PURPOSES OF THIS SECTION 2, SENIOR
INDEBTEDNESS SHALL INCLUDE ALL FEES, EXPENSES AND COSTS INCURRED BY OR ON
BEHALF OF THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR THE SENIOR
AGENT IN CONNECTION WITH SUCH SENIOR INDEBTEDNESS, AND SENIOR
SUBORDINATED INDEBTEDNESS SHALL INCLUDE ALL FEES, EXPENSES AND COSTS
INCURRED BY OR ON BEHALF OF THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS OR THE SENIOR SUBORDINATED AGENT IN CONNECTION WITH SUCH
SENIOR SUBORDINATED INDEBTEDNESS.
(h) NOTICE TO SENIOR DEBT AND TO SENIOR SUBORDINATED DEBT.
NOTICES TO HOLDERS OF SENIOR INDEBTEDNESS SHALL BE MADE TO EACH HOLDER OF
SENIOR INDEBTEDNESS OR, IF THE HOLDERS OF SENIOR INDEBTEDNESS HAVE
APPOINTED A SENIOR AGENT, THEN TO SUCH SENIOR AGENT, AND SHALL BE MADE IN
THE MANNER SPECIFIED IN THE DOCUMENT EVIDENCING SUCH HOLDER'S SENIOR
INDEBTEDNESS IF SUCH A MANNER IS SO SPECIFIED THEREIN. NOTICES TO HOLDERS
OF SENIOR SUBORDINATED INDEBTEDNESS SHALL BE MADE TO EACH HOLDER OF
SENIOR SUBORDINATED INDEBTEDNESS OR, IF THE HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS HAVE APPOINTED A SENIOR SUBORDINATED AGENT,
THEN TO SUCH SENIOR SUBORDINATED AGENT, AND SHALL BE MADE IN THE MANNER
SPECIFIED IN THE DOCUMENT EVIDENCING SUCH HOLDER'S SENIOR SUBORDINATED
INDEBTEDNESS IF SUCH A MANNER IS SO SPECIFIED THEREIN.
(i) SUBROGATION. SUBJECT TO THE PAYMENT IN FULL OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS, THE HOLDER SHALL
BE SUBROGATED TO THE RIGHTS OF THE HOLDER OR HOLDERS OF SENIOR
INDEBTEDNESS AND THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS TO RECEIVE PAYMENTS OR DISTRIBUTIONS OF CASH, PROPERTY OR
SECURITIES OF THE MAKER APPLICABLE TO SUCH SENIOR INDEBTEDNESS OR SENIOR
SUBORDINATED INDEBTEDNESS, AS THE CASE MAY BE, UNTIL ALL AMOUNTS OWING ON
THIS NOTE SHALL BE PAID IN FULL, AND, AS BETWEEN THE MAKER, ITS CREDITORS
OTHER THAN HOLDERS OF SENIOR INDEBTEDNESS OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS AND THE HOLDER, NO SUCH PAYMENT OR DISTRIBUTION
MADE TO THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR THE HOLDERS OF
SENIOR SUBORDINATED INDEBTEDNESS BY VIRTUE OF THIS SECTION 2 WHICH
OTHERWISE WOULD HAVE BEEN MADE TO THE HOLDER SHALL BE DEEMED TO BE A
PAYMENT BY THE MAKER ON ACCOUNT OF ANY SENIOR INDEBTEDNESS OR ANY SENIOR
SUBORDINATED INDEBTEDNESS, IT BEING UNDERSTOOD THAT THE PROVISIONS OF
THIS SECTION 2 ARE AND ARE INTENDED SOLELY FOR THE PURPOSE OF DEFINING
THE RELATIVE RIGHTS OF THE HOLDER, ON THE ONE HAND, AND THE HOLDER OR
HOLDERS OF SENIOR INDEBTEDNESS AND THE HOLDER OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS, ON THE OTHER HAND.
(j) OBLIGATIONS OF THE MAKER UNCONDITIONAL. NOTHING CONTAINED IN
THIS SECTION 2 OR ELSEWHERE IN THIS NOTE IS INTENDED TO OR SHALL IMPAIR,
AS BETWEEN THE MAKER, ITS CREDITORS OTHER THAN THE HOLDERS OF SENIOR
INDEBTEDNESS OR OF SENIOR SUBORDINATED INDEBTEDNESS AND THE HOLDER, THE
OBLIGATIONS OF THE MAKER, WHICH ARE ABSOLUTE AND UNCONDITIONAL, TO PAY TO
THE HOLDER THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THIS NOTE
AS AND WHEN THE SAME SHALL BECOME DUE AND PAYABLE IN ACCORDANCE WITH ITS
TERMS HEREOF, OR IS INTENDED TO OR SHALL AFFECT THE RELATIVE RIGHTS OF
THE HOLDER, ON THE ONE HAND, AND CREDITORS OF THE MAKER OTHER THAN THE
HOLDERS OF SENIOR INDEBTEDNESS AND SENIOR SUBORDINATED INDEBTEDNESS, ON
THE OTHER HAND.
UPON ANY PAYMENT OR DISTRIBUTION OF ASSETS OF THE MAKER REFERRED
TO IN THIS SECTION 2, THE HOLDER OF THIS NOTE SHALL BE ENTITLED TO RELY
UPON ANY ORDER OR DECREE MADE BY ANY COURT OF COMPETENT JURISDICTION IN
WHICH ANY SUCH DISSOLUTION, WINDING UP, LIQUIDATION OR REORGANIZATION
PROCEEDING AFFECTING THE AFFAIRS OF THE MAKER IS PENDING OR UPON A
CERTIFICATE OF THE TRUSTEE IN
-5-
<PAGE> 6
BANKRUPTCY, RECEIVER, ASSIGNEE FOR THE BENEFIT OF CREDITORS,
LIQUIDATING TRUSTEE OR AGENT OR OTHER PERSON MAKING ANY PAYMENT OR
DISTRIBUTION, DELIVERED TO THE HOLDER OF THIS NOTE, FOR THE PURPOSE OF
ASCERTAINING THE PERSONS ENTITLED TO PARTICIPATE IN SUCH PAYMENT OR
DISTRIBUTION, THE HOLDERS OF THE SENIOR INDEBTEDNESS, SENIOR
SUBORDINATED INDEBTEDNESS AND OTHER INDEBTEDNESS OF THE MAKER, THE
AMOUNT THEREOF OR PAYABLE THEREON, THE AMOUNT PAID OR DISTRIBUTED
THEREON AND ALL OTHER FACTS PERTINENT THERETO OR TO THIS SECTION 2.
1.2 Amendment of Section 12. From and after the date hereof and until the
termination of this Agreement as provided below, the following definitions shall
be added to Section 12 of the Stanwich Notes and the Poole Note:
"LLCP" MEANS LEVINE LEICHTMAN CAPITAL PARTNERS II, L.P., A CALIFORNIA
LIMITED PARTNERSHIP.
"LLCP PURCHASE AGREEMENT" MEANS THAT CERTAIN SECURITIES PURCHASE
AGREEMENT DATED NOVEMBER 16, 1998 BY AND AMONG THE MAKER AND LLCP.
"SENIOR SUBORDINATED INDEBTEDNESS" HAS THE MEANING GIVEN TO SUCH TERM IN
THE LLCP PURCHASE AGREEMENT.
1.3 Legends. Subject to Section 1.4, the following legend shall be placed
on the Stanwich Notes and the Poole Note:
THE PROVISIONS OF THIS NOTE HAVE BEEN AMENDED AS PROVIDED IN A
SUBORDINATION AGREEMENT DATED NOVEMBER 16, 1998 AMONG THE MAKER, THE
ORIGINAL HOLDER OF THIS NOTE AND CERTAIN OTHER PARTIES. A COPY OF SUCH
SUBORDINATION AGREEMENT MAY BE OBTAINED FROM THE PRINCIPAL EXECUTIVE
OFFICE OF THE MAKER.
CPS shall not effect any transfer of the Stanwich Note or the Poole Note or any
portion of either of them prior to the termination of this Agreement unless the
foregoing legend is imprinted thereon. Upon the termination of this Agreement,
CPS shall, upon request and against delivery of the legended note for
cancellation, issue a new note without the foregoing legend for any Stanwich
Note or for the Poole Note.
1.4 The Pledged Notes. The foregoing provisions of this Section 1
notwithstanding, the Pledged Notes shall not be amended as provided herein so
long as they remain subject to the Note Pledge Agreements as in effect on the
date hereof. Neither Stanwich nor Poole may amend any Note Pledge Agreement
without the prior written consent of LLCP. Upon the release of any Pledged Note
from the pledge created pursuant to any Pledge Agreement, such Pledged Note
shall thereupon immediately be deemed amended as provided in this Agreement
without any further action of any kind by any party. Without limiting the
foregoing, upon the release of any Pledged Note from pledge, such Pledged Note
shall be legended as required by Section 1.4 within two business days of such
release.
2. Termination. This Agreement shall terminate and be of no further force
or effect upon the first to occur of (i) the payment in full of all "Obligations
to Purchaser" as such term is defined in the LLCP Purchase Agreement or (ii) the
issuance to LLCP of the New Senior Credit Facility Note (as such term is defined
in the LLCP Purchase Agreement). Upon termination of this Agreement, the terms
and provisions of the Stanwich Notes and the Poole Note shall no longer be
amended as provided herein and shall continue in effect without any modification
resulting from this Agreement.
3. Miscellaneous.
3.1 Successors and Assigns. This Agreement shall be binding on and inure
to the benefit of the respective successors, legal representatives and assigns
of the parties to this Agreement. No party to this Agreement may assign its
right or obligations hereunder without the prior written consent of the other
parties.
-6-
<PAGE> 7
3.2 Notices. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given if transmitted by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of 72 hours
after mailing, if mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to LLCP: c/o Levine Leichtman Capital Partners, Inc.
335 North Maple Drive, Suite 240
Beverly Hills, California 90210
Attention: Arthur E. Levine, President
Telephone: (310) 275-5335
Facsimile: (310) 275-1441
If to Stanwich: c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Attention: President
Telephone: (203) 325-0551
Facsimile: (203) 967-3923
If to Poole: c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Telephone: (203) 325-0551
Facsimile: (203) 967-3923
If to CPS: Consumer Portfolio Services, Inc.
16355 Laguna Canyon Road
Irvine, CA 92618
Attention: Charles E. Bradley, Jr., President
and Chief Executive Officer
Telephone: (949) 753-6800
Facsimile: (949) 753-6805
or at such other address or addresses as LLCP, Stanwich, Poole, or CPS, as the
case may be, may specify by written notice given in accordance with this
Section.
3.3 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
3.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
3.5 Descriptive Headings, Construction and Interpretation. The
descriptive headings of the several paragraphs of this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
are not to be considered in construing or interpreting this Agreement. All
section, preamble, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of this
Agreement for purposes of construing the provisions of this Agreement, and all
provisions of this Agreement shall be construed in accordance with their fair
meaning, and not strictly for or against any party.
-7-
<PAGE> 8
3.6 Waivers and Amendments. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally or by course of
dealing, except by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought.
3.7 Remedies. In the event that Stanwich, Poole, or CPS fails to observe
or perform any covenant or agreement to be observed or performed under this
Agreement, LLCP may proceed to protect and enforce its rights by suit in equity
or action at law, whether for specific performance of any term contained in this
Agreement or for an injunction against the breach of any such term or in aid of
the exercise of any power granted in this Agreement or to enforce any other
legal or equitable right, or to take any one or more of such actions. Stanwich,
Poole and CPS severally agree to pay all fees, costs, and expenses, including
without limitation, fees and expenses of attorneys, accountants and other
experts, and all fees, costs and expenses of appeals, incurred by LLCP in
connection with the enforcement of this Agreement against it or him, as the case
may be or the collection or any sums due hereunder, whether or not suit is
commenced. None of the rights, powers or remedies conferred under this Agreement
shall be mutually exclusive, and each such right, power or remedy shall be
cumulative and in addition to any other right, power or remedy whether conferred
by this Agreement or now or hereafter available at law, in equity, by statute or
otherwise.
3.8 Governing Law. In all respects, including all matters of
construction, validity and performance, this Agreement and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to principles thereof regarding
conflicts of laws.
4. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
COMMERCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR
OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS
AGREEMENT AND/OR ANY RELATED AGREEMENT OR THE TRANSACTIONS COMPLETED HEREBY OR
THEREBY.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Subordination Agreement
to be executed and delivered by their duly authorized representatives as of the
date first above written.
CONSUMER PORTFOLIO SERVICES, LEVINE LEICHTMAN CAPITAL
INC., a California corporation PARTNERS, INC., a California
corporation
By:_______________________________ on behalf of LEVINE LEICHTMAN
Charles E. Bradley, Jr., CAPITAL PARTNERS II, L.P.,
President and Chief Executive Officer a California limited partnership
By:_______________________________ By:_________________________________
Jeffrey P. Fritz, Lauren B. Leichtman,
Senior Vice President and Chief Chief Executive Officer
Financial Officer
STANWICH FINANCIAL SERVICES
CORP., a Rhode Island Corporation ____________________________________
JOHN G. POOLE
By:______________________________
Charles E. Bradley, Sr., President
-9-
<PAGE> 1
EXHIBIT 10.30
CONSOLIDATED REGISTRATION RIGHTS AGREEMENT
THIS CONSOLIDATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") is
entered into as of November 17, 1998 by and between Consumer Portfolio Services,
Inc., a California corporation (the "Company"), and the following parties
(collectively, the "Stanwich Parties"): Stanwich Financial Corp, a Rhode Island
corporation ("Stanwich"), and John G. Poole ("Poole").
RECITALS
A. Stanwich is the holder of seven Partially Convertible Subordinated 9%
Notes, each dated June 12, 1997 and issued by the Company to Stanwich, in the
following principal amounts (collectively, the "1997 Stanwich Notes"): two such
notes for $5,000,000 each, and five such notes for $1,000,000 each. Each of the
1997 Stanwich Notes contains provisions granting to the holder thereof the right
to convert 20% of the principal thereof into shares of Common Stock at the rate
of $11.86 per shares, subject to adjustment as provided therein.
B. Stanwich is the holder of 443,450 shares of Common Stock, which it
subscribed for and purchased from the Company on or about July 21, 1998 (the
"1998 Issued Shares").
C. The Company and the Stanwich Parties are parties to a certain Debt
Restructure Agreement of even date herewith (the "Restructure Agreement")
pursuant to which, simultaneously herewith, the Company has (i) issued to
Stanwich a certain Convertible Subordinated 12.5% Note dated the date hereof in
the principal amount of $4,000,000 (the "1998 Stanwich Note") and (ii) issued to
Poole a certain Convertible Subordinated 12.5% Note dated the date hereof in the
principal amount of $1,000,000 (the "Poole Note"). The principal of each of the
1998 Stanwich and the Poole Note is convertible into shares of Common Stock at
the rate of $3.00 per share, subject to adjustment as provided therein.
D. The Company is obligated to enter into this Agreement under the terms
of the Restructure Agreement.
E. In consideration of the substantial direct and indirect benefits
which the Company will realize from the consummation of the transactions
contemplated by the Restructure Agreement, the Company desires to enter into
this Agreement and to be bound by the terms and conditions hereof.
AGREEMENT
In consideration of the mutual covenants and agreements set forth
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings specified below:
"Business Day" shall mean any day that is not a Saturday, Sunday or
other day on which banks in the State of California are authorized or required
to close.
"Commission" shall mean the Securities and Exchange Commission or any
other Federal agency at the time administering the 1933 Act.
"Common Stock" shall mean the common stock, no par value, of the
Company.
"Company" shall have the meaning set forth in the preamble of this
Agreement.
"Conversion Right" means, with respect to each of the Notes, the right
to convert the principal thereof into shares of Common Stock, as provided
therein.
<PAGE> 2
"Demanding Holders" shall mean Stanwich or, if Stanwich does not hold a
majority of the Registrable Securities at any time, the holders of a majority of
Registrable Securities.
"Demand Registration" shall have the meaning specified in Section
2.1(a).
"FSA Registration Rights Agreement" shall have the meaning given to such
term in the LLCP Registration Rights Agreement.
"Indemnified Party" shall have the meaning specified in Section 4.3.
"Indemnifying Party" shall have the meaning specified in Section 4.3.
"Inspectors" shall have the meaning specified in Section 3.1(h).
"LLCP" shall mean Levine Leichtman Capital Partners II, L.P., a
California limited partnership.
"LLCP Registration Rights Agreement" shall mean that certain
Registration Rights Agreement of even date herewith between the Company and
LLCP.
"Maximum Numbers of Shares" shall have the meaning specified in Section
2.1(d).
"1998 Issued Shares" shall have the meaning set forth in the recitals to
this Agreement.
"1998 Stanwich Note" shall have the meaning set forth in the recitals to
this Agreement.
"1997 Stanwich Notes" shall have the meaning set forth in the recitals
to this Agreement.
"1933 Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect at the time.
"Notes" shall mean, collectively, the 1997 Stanwich Notes, the 1998
Notes and the Poole Note.
"Piggy-Back Registration" shall have the meaning specified in Section
2.2(a).
"Poole" shall have the meaning set forth in the recitals to this
Agreement.
"Poole Note" shall have the meaning set forth in the recitals to this
Agreement.
"Register", "registered" and "registration" shall mean a registration
effected by preparing and filing a registration statement or similar document in
compliance with the 1933 Act, and the applicable rules and regulations
thereunder, and such registration statement becoming effective.
"Registrable Securities" shall mean, collectively, the Shares and any
securities issued or issuable upon any stock dividend, stock split,
recapitalization, merger, consolidation or similar event with respect to the
Shares. As to any particular Registrable Securities, such securities shall cease
to be Registrable Securities when (i) a registration statement covering such
securities shall have become effective under the 1933 Act and such securities
shall have been sold pursuant to such registration statement, (ii) such
securities shall have been distributed to the public pursuant to Rule 144 or
Rule 144A (or any successor provisions) under the 1933 Act, or (iii) such
securities shall have ceased to be outstanding.
"Restructure Agreement" shall have the meaning set forth in the recitals
to this Agreement.
2
<PAGE> 3
"SFSC Warrant" shall have the meaning given to such term in that certain
Securities Option Agreement of even date herewith among LLCP, Stanwich and the
Company.
"Shares" shall mean, collectively, (i) the 1998 Issued Shares, (ii) the
shares of Common Stock issued or issuable upon exercise of any and all of the
Conversion Rights and (iii) the shares of Common Stock issued or issuable
pursuant to the SFSC Warrant. As used in this Agreement, the holder of any
Conversion Right or of the SFSC Warrant or any portion thereof shall be deemed
to be the holder of the shares of Common Stock issuable upon exercise thereof
and, to the extent such shares constitute Registrable Securities, such holder
shall be deemed to be the holder of such Registrable Securities.
"Stanwich" shall have the meaning set forth in the recitals to this
Agreement.
"Stanwich Parties" shall have the meaning set forth in the recitals to
this Agreement.
"Underwriter" shall mean a securities dealer who purchases any
Registrable Securities as principal in an underwritten offering and not as part
of such dealer's market-making activities.
As used herein, the plural or singular include each other, and pronouns
in any gender are to be construed as masculine, feminine or neuter, as the
context requires.
2. REGISTRATION RIGHTS.
2.1 Demand Registration.
(a) Request for Registration. At any time and from time to time
on or after the first anniversary of the date of this Agreement, the Demanding
Holders may make a written request for registration under the 1933 Act of all or
part of their Registrable Securities (a "Demand Registration"). Such request for
a Demand Registration must specify the number of shares of Registrable
Securities proposed to be sold and must also specify the intended method of
disposition thereof. Upon any such request, the Demanding Holders shall be
entitled to have their Registrable Securities included in the Demand
Registration, subject to Section 2.1(d) and the proviso set forth in Section
3.1(a). The Company shall not be obligated to effect more than two Demand
Registrations with respect to the Shares under this Section 2.1(a).
(b) Effective Registration. Except in the case of a withdrawal
governed by the last sentence of Section 2.1(e), a registration will not count
as a Demand Registration until it has become effective and the Company has
complied with its obligations under this Agreement with respect thereto;
provided, however, that, after it has been declared effective, if the offering
of Registrable Securities pursuant to a Demand Registration is interfered with
by any stop order, injunction or other order or requirement of the Commission or
any other governmental agency or court, such Demand Registration will be deemed
not to have become effective during the period of such interference.
(c) Underwritten Offering. If the Demanding Holders so elect,
the offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of an underwritten offering. The Demanding Holders shall
select one or more firms of investment bankers to act as the managing
Underwriter or Underwriters in connection with such offering and shall select
any additional managers to be used in connection with the offering.
(d) Reduction of Offering. If the managing Underwriter or
Underwriters for a Demand Registration that is to be an underwritten offering
advises the Company and the Demanding Holders, in writing, that the dollar
amount or number of shares of Registrable Securities which the Demanding Holders
desire to sell, taken together with all other shares of Common Stock or
securities which the Company desires to sell and the shares of Common Stock, if
any, as to which registration has been requested pursuant to the piggy-back
registration rights under the LLCP Registration Rights Agreement and the FSA
Registration Rights Agreement or which other shareholders of the Company desire
to sell, exceeds the maximum dollar amount or number that can be sold in such
offering without adversely affecting the proposed offering
3
<PAGE> 4
price, the timing, the distribution method or the probability of success of such
offering (the "Maximum Number of Shares"), then the Company shall include in
such registration: (i) first, the Registrable Securities as to which Demand
Registration has been requested by the Demanding Holders (pro rata in accordance
with the number of shares of Registrable Securities held by each Demanding
Holder, regardless of the number of shares of Registrable Securities which such
Demanding Holder has requested be included in such registration) that can be
sold without exceeding the Maximum Number of Shares, (ii) second, to the extent
the Maximum Number of Shares has not been reached under the foregoing clause
(i), the shares of Common Stock for the account of other persons that the
Company is obligated to register pursuant to the LLCP Registration Rights
Agreement and the FSA Registration Rights Agreement (to be allocated among the
persons requesting inclusion in such registration pursuant to such agreements
pro rata in accordance with the number of shares of Common Stock with respect to
which such person has the right to request such inclusion under such agreements,
regardless of the number of shares which such person has actually requested be
included in such registration) that can be sold without exceeding the Maximum
Number of Shares, (iii) third, to the extent the Maximum Number of Shares has
not been reached under the foregoing clauses (i) and (ii), the shares of Common
Stock that the Company desires to sell that can be sold without exceeding the
Maximum Number of Shares and (iii) fourth, to the extent the Maximum Number of
Shares has not been reached under the foregoing clauses (i), (ii) and (iii), the
shares of Common Stock that other shareholders desire to sell that can be sold
without exceeding the Maximum Number of Shares.
(e) Withdrawal. If the Demanding Holders or any of them
disapprove of the terms of any underwriting or are not entitled to include all
of their Registrable Securities in any offering, such Demanding Holders may
elect to withdraw from such offering by giving written notice to the Company and
the Underwriter of their request to withdraw prior to the effectiveness of the
registration statement. If the Demanding Holders or any of them withdraw from a
proposed offering relating to a Demand Registration and, solely as a result of
such withdrawal the registration statement is withdrawn prior to being declared
effective, such registration shall count as a Demand Registration provided for
in Section 2.1(a) unless the withdrawing Demanding Holders pay their pro rata
share (based upon the number of shares to be included in such registration
statement) of the expenses incurred in connection with such registration
statement.
2.2 Piggy-Back Registration.
(a) Piggy-Back Rights. If at any time the Company proposes to
file a registration statement under the 1933 Act with respect to an offering of
equity securities, or securities convertible or exchangeable into equity
securities, by the Company for its own account or by shareholders of the Company
for their account (or by the Company and by shareholders of the Company) other
than a registration statement (i) on Form S-4 or S-8 (or any substitute or
successor form that may be adopted by the Commission), (ii) filed in connection
with any employee stock option or other benefit plan, (iii) for an exchange
offer or offering of securities solely to the Company's existing shareholders,
or (iv) for a dividend reinvestment plan, then the Company shall (x) give
written notice of such proposed filing to the holders of Registrable Securities
as soon as practicable but in no event less than 30 days before the anticipated
filing date, which notice shall describe the amount and type of securities to be
included in such offering, the intended method(s) of distribution, and the name
of the proposed managing Underwriter or Underwriters, if any, of the offering;
and (y) offer to the holders of Registrable Securities in such notice the
opportunity to register such number of shares of Registrable Securities as such
holders may request in writing within 15 days following receipt of such notice
(a "Piggy-Back Registration"). The Company shall cause such Registrable
Securities to be included in such registration and shall use its best efforts to
cause the managing Underwriter or Underwriters of a proposed underwritten
offering to permit the Registrable Securities requested to be included in a
Piggy-Back Registration to be included on the same terms and conditions as any
similar securities of the Company and to permit the sale or other disposition of
such Registrable Securities in accordance with the intended method of
distribution thereof.
(b) Reduction of Offering.
(i) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the
Company's account advises the Company and the holders of Registrable Securities
in writing that the dollar amount or number of shares of Common Stock which the
Company desires to sell, taken together with the Registrable Securities as to
which registration has been requested hereunder and the shares of Common Stock,
if any, as to which registration has been requested pursuant to the piggy-back
registration rights under the FSA Registration Rights Agreement or the LLCP
Registration Rights Agreement or which other shareholders of the Company desire
to sell, exceeds the Maximum Number of Shares, then the Company shall include in
such registration: (i) first, the shares of Common Stock or other securities
that the Company desires to sell that can be sold without exceeding the Maximum
Number of Shares, (ii) second, to the extent the Maximum Number of Shares has
not been reached under the foregoing clause (i), the Registrable Securities as
to which registration has been requested hereunder and the shares of Common
Stock, if
4
<PAGE> 5
any, as to which registration has been requested pursuant to the piggy-back
registration rights granted under the FSA Registration Rights Agreement and the
LLCP Registration Rights Agreement (to be allocated among the persons requesting
inclusion in such registration pursuant to such agreements pro rata in
accordance with the number of shares of Common Stock with respect to which such
person has the right to request such inclusion under such agreements, regardless
of the number of shares which such person has actually requested be included in
such registration) that can be sold without exceeding the Maximum Number of
Shares and (iii) third, to the extent the Maximum Number of Shares has not been
reached under the foregoing clauses (i) and (ii), the shares of Common Stock
that other shareholders desire to sell that can be sold without exceeding the
Maximum Number of Shares.
(ii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the
account of persons having demand registration rights under the LLCP Registration
Rights Agreement account advises the Company and the holders of Registrable
Securities in writing that the dollar amount or number of shares of Common Stock
which such persons desire to sell, taken together with the Registrable
Securities as to which registration has been requested hereunder, the shares of
Common Stock, if any, as to which registration has been requested pursuant to
the piggy-back registration rights under the FSA Registration Rights Agreement
and the shares of Common Stock, if any, which the Company desires to sell or
which other shareholders of the Company desire to sell, exceeds the Maximum
Number of Shares, then the Company shall include in such registration: (i)
first, the shares of Common Stock for the account of persons having demand
registration rights under the LLCP Registration Rights Agreement that can be
sold without exceeding the Maximum Number of Shares, (ii) second, to the extent
the Maximum Number of Shares has not been reached under the foregoing clause
(i), the Registrable Securities as to which registration has been requested by
the holders of Registrable Securities hereunder and the shares of Common Stock,
if any, as to which registration has been requested pursuant to the piggy-back
registration rights granted under the FSA Registration Rights Agreement (to be
allocated among the persons requesting inclusion in such registration pursuant
to such agreements pro rata in accordance with the number of shares of Common
Stock with respect to which such person has the right to request such inclusion
under such agreements, regardless of the number of shares which such person has
actually requested be included in such registration) that can be sold without
exceeding the Maximum Number of Shares, (iii) third, to the extent the Maximum
Number of Shares has not been reached under the foregoing clauses (i) and (ii),
the shares of Common Stock, if any, that the Company desires to sell that can be
sold without exceeding the Maximum Number of Shares and (iv) fourth, to the
extent the Maximum Number of Shares has not been reached under the foregoing
clauses (i), (ii) and (iii), the shares of Common Stock, if any, which other
shareholders desire to sell that can be sold without exceeding the Maximum
Number of Shares.
(iii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the
account of persons having demand registration rights under the FSA Registration
Rights Agreement account advises the Company and the holders of Registrable
Securities in writing that the dollar amount or number of shares of Common Stock
which such persons desire to sell, taken together with the Registrable
Securities as to which registration has been requested hereunder, the shares of
Common Stock, if any, as to which registration has been requested pursuant to
the piggy-back registration rights under the LLCP Registration Rights Agreement
and the shares of Common Stock, if any, which the Company or other shareholders
of the Company desire to sell, exceeds the Maximum Number of Shares, then the
Company shall include in such registration: (i) first, the shares of Common
Stock for the account of persons having demand registration rights under the FSA
Registration Rights Agreement that can be sold without exceeding the Maximum
Number of Shares, (ii) second, to the extent the Maximum Number of Shares has
not been reached under the foregoing clause (i), the Registrable Securities as
to which registration has been requested by the holders of Registrable
Securities hereunder and the shares of Common Stock, if any, as to which
registration has been requested pursuant to the piggy-back registration rights
granted under the LLCP Registration Rights Agreement (to be allocated among the
persons requesting inclusion in such registration pursuant to such agreements
pro rata in accordance with the number of shares of Common Stock with respect to
which such person has the right to request such inclusion under such agreements,
5
<PAGE> 6
regardless of the number of shares which such person has actually requested be
included in such registration) that can be sold without exceeding the Maximum
Number of Shares, (iii) third, to the extent the Maximum Number of Shares has
not been reached under the foregoing clauses (i) and (ii), the shares of Common
Stock, if any, that the Company desires to sell that can be sold without
exceeding the Maximum Number of Shares and (iv) fourth, to the extent the
Maximum Number of Shares has not been reached under the foregoing clauses (i),
(ii) and (iii), the shares of Common Stock, if any, which other shareholders
desire to sell that can be sold without exceeding the Maximum Number of Shares.
(c) Withdrawal. Any holder of Registrable Securities may elect
to withdraw such holder's request for inclusion of Registrable Securities in any
Piggy-Back Registration by giving written notice to the Company of such request
to withdraw prior to the effectiveness of the registration statement. The
Company may also elect to withdraw a registration statement at any time prior to
the effectiveness of the registration statement. Notwithstanding any such
withdrawal, the Company shall pay all expenses incurred by the holders of
Registrable Securities in connection with such Piggy-Back Registration as
provided in Section 3.3.
2.3 Registrations on Form S-3. The holders of Registrable Securities may
at any time request in writing that the Company register the resale of any or
all of such Registrable Securities on Form S-3 (or any similar short-form
registration which may be available at such time). Upon receipt of such written
request, the Company will promptly give written notice of the proposed
registration to all other holders of Registrable Securities, and, as soon as
practicable thereafter, effect the registration of all or such portion of such
holder's or holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
holder or holders joining in such request as are specified in a written request
given within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration pursuant to this Section 2.3 if (i) Form S-3 is not available for
such offering; (ii) the holders propose to effect an underwritten offering,
(iii) the holders propose to sell Registrable Securities at an anticipated
aggregate price to the public (net of any underwriters' discounts or
commissions) of less than $500,000, (iv) the Company shall furnish to the
holders a certificate signed by the Chief Executive Officer of the Company
stating that in the good faith judgment of the Board, it would be materially
detrimental to the Company and its shareholders for such Form S-3 registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than 60 days after receipt of the request of the holder or holders under this
Section 2.3, provided, however, that in the event the Company elects to exercise
such right with respect to any registration, it shall not have the right to
exercise such right again prior to the date which is ten months after the date
on which the registration statement relating to such deferred registration is
declared effective, (v) the Company has effected eight registrations pursuant to
this Section 2.3 or (vi) the Company has effected two registrations pursuant to
this Section 2.3 during the 12 month period prior to the date on which the
registration statement relating to such registration is anticipated to be
declared effective. The Company shall use its best efforts to maintain each
registration statement under this Section 2.3 effective for 60 days or until the
Registrable Securities covered thereby have been sold, whichever shall first
occur. Registrations effected pursuant to this Section 2.3 shall not be counted
as Demand Registrations effected pursuant to Section 2.1.
2.4 Purchase (and Exercise) of the SFSC Warrant by the Underwriters.
Notwithstanding any other provision of this Agreement to the contrary, in
connection with any Demand Registration or Piggy-Back Registration which is to
be an underwritten offering, to the extent all or any portion of the Registrable
Securities to be included in such registration consist of shares of Common Stock
issuable upon exercise of the SFSC Warrant or any portion thereof, the holders
of such Registrable Securities may require that the Underwriter or Underwriters
purchase (and exercise) the SFSC Warrant or any portion thereof rather than
require the holders of the Registrable Securities to exercise the SFSC Warrant
or portion thereof in connection with such registration unless the Underwriters
inform such holders that such a purchase and exercise of the SFSC Warrant will
materially and adversely affect the proposed offering. The Company shall take
all such action and provide all such assistance as may be reasonably requested
by the holders of Registrable Securities to facilitate any such purchase (and
exercise) of the SFSC Warrant agreed to by the Underwriter or Underwriters,
including, without limitation, issuing the Common Stock issuable upon the
exercise of the SFSC Warrant or any portion thereof to be issued within such
time period as will permit the Underwriters to make and complete the
distribution contemplated by the underwriting.
3. REGISTRATION PROCEDURES.
6
<PAGE> 7
3.1 Filings; Information. If and whenever the Company is required to
effect the registration of any Registrable Securities under the 1933 Act
pursuant to Section 2, the Company shall use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof as expeditiously as practicable, and in
connection with any such request:
(a) Filing Registration Statement. The Company shall, as
expeditiously as possible, prepare and file, within 60 days after receipt of a
request for a Demand Registration pursuant to Section 2.1, with the Commission a
registration statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate and which form shall be available
for the sale of the Registrable Securities to be registered thereunder in
accordance with the intended method of distribution thereof, and shall use its
best efforts to cause such registration statement to become and remain effective
for the period required by Section 3.1(c); provided, however, that the Company
shall have the right to defer such registration for up to 60 days if the Company
shall furnish to the holders a certificate signed by the Chief Executive Officer
of the Company stating that, in the good faith judgment of the Board, it would
be materially detrimental to the Company and its shareholders for such
registration statement to be effected at such time; provided further, that in
the event the Company elects to exercise such right with respect to any
registration, it shall not have the right to exercise such right again prior to
the date which is 12 months after the date on which the registration statement
relating to such deferred registration is declared effective.
(b) Copies. The Company shall, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish without
charge to the holders of Registrable Securities included in such registration,
and such holders' legal counsel, copies of such registration statement as
proposed to be filed, each amendment and supplement to such registration
statement (in each case including all exhibits thereto and documents
incorporated by reference therein), the prospectus included in such registration
statement (including each preliminary prospectus), and such other documents as
the holders of Registrable Securities included in such registration or legal
counsel for any such holder may request in order to facilitate the disposition
of the Registrable Securities owned by such holders.
(c) Amendments and Supplements. The Company shall prepare and
file with the Commission such amendments, including post-effective amendments,
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and in compliance with the provisions of the 1933 Act until all
Registrable Securities and other securities covered by such registration
statement have been disposed of in accordance with the intended methods of
disposition set forth in such registration statement (which period shall not
exceed the sum of 120 days plus any period during which any such disposition is
interfered with by any stop order, injunction or other order or requirement of
the Commission or any governmental agency or court) or such securities have been
withdrawn.
(d) Notification. After the filing of the registration
statement, the Company shall promptly, and in no event more than two Business
Days, notify the holders of Registrable Securities included in such registration
statement, and confirm such advice in writing, (i) when such registration
statement becomes effective, (ii) when any post-effective amendment to such
registration statement becomes effective, (iii) of any stop order issued or
threatened by the Commission (and the Company shall take all actions required to
prevent the entry of such stop order or to remove it if entered) and (iv) of any
request by the Commission for any amendment or supplement to such registration
statement or any prospectus relating thereto or for additional information or of
the occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of the securities covered by such registration statement, such prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and promptly make available to the holders of Registrable
Securities included in such registration statement any such supplement or
amendment; except that before filing with the Commission a registration
statement or prospectus or any amendment or supplement thereto, including
documents incorporated by reference, the Company shall furnish to the holders of
Registrable Securities included in such registration statement and to the legal
counsel for any such holders, copies of all such documents proposed to be filed
sufficiently in advance of filing to provide such holders and legal counsel with
a reasonable opportunity to review such documents and comment thereon, and the
Company shall not file any registration statement or prospectus or amendment or
supplement
7
<PAGE> 8
thereto, including documents incorporated by reference to which such holders or
legal counsel, shall object on a timely basis in light of the requirements of
the 1933 Act or any other applicable laws and regulations.
(e) State Securities Laws Compliance. The Company shall use its
best efforts to (i) register or qualify the Registrable Securities covered by
the registration statement under such securities or blue sky laws of such
jurisdictions in the United States as the holders of Registrable Securities
included in such registration statement (in light of their intended plan of
distribution) may request and (ii) cause such Registrable Securities covered by
the registration statement to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary by
virtue of the business and operations of the Company and do any and all other
acts and things that may be necessary or advisable to enable the holders of
Registrable Securities included in such registration statement to consummate the
disposition of such Registrable Securities in such jurisdictions; provided,
however, that the Company shall not be required to qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this paragraph (e), or subject itself to taxation in any such
jurisdiction.
(f) Agreements for Disposition. The Company shall enter into
customary agreements (including, if applicable, an underwriting agreement in
customary form) and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of such Registrable Securities. The
representations, warranties and covenants of the Company in any underwriting
agreement which are made to or for the benefit of any Underwriters shall also be
made to and for the benefit of the holders of Registrable Securities included in
such registration statement. No holder of Registrable Securities included in
such registration statement shall be required to make any representations or
warranties in the underwriting agreement except, if applicable, with respect to
such holder's organization, good standing, authority, title to Registrable
Securities, lack of conflict of such sale with such holder's material agreements
and organizational documents, and with respect to written information relating
to such holder that such holder has furnished in writing expressly for inclusion
in such registration statement.
(g) Cooperation. The Chief Executive Officer, the President of
the Company, the Chief Financial Officer of the Company, any Senior Vice
President of the Company and any other members of the management of the Company
shall cooperate fully in any offering of Registrable Securities hereunder, which
cooperation shall include, without limitation, the preparation of the
registration statement with respect to such offering and all other offering
materials and related documents, and participation in meetings with
Underwriters, attorneys, accountants and potential investors.
(h) Records. The Company shall make available for inspection by
the holders of Registrable Securities included in such registration statement,
any Underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other professional retained by any
holder of Registrable Securities included in such registration statement or any
Underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, as shall be necessary to enable them to exercise
their due diligence responsibility, and cause the Company's officers, directors
and employees to supply all information requested by any of them in connection
with such registration statement.
(i) Opinions and Comfort Letters. The Company shall furnish to
each holder of Registrable Securities included in any registration statement a
signed counterpart, addressed to such holder, of (i) any opinion of counsel to
the Company delivered to any Underwriter and (ii) any comfort letter from the
Company's independent public accountants delivered to any Underwriter. In the
event no legal opinion is delivered to any Underwriter, the Company shall
furnish to each holder of Registrable Securities included in such registration
statement, at any time that such holder elects to use a prospectus, an opinion
of counsel to the Company to the effect that the registration statement
containing such prospectus has been declared effective and that no stop order is
in effect.
(j) Earnings Statement. The Company shall comply with all
applicable rules and regulations of the Commission and the 1933 Act, and make
available to its shareholders, as soon as practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder.
8
<PAGE> 9
(k) Listing. The Company shall use its best efforts to cause all
Registrable Securities included in any registration to be listed on such
exchanges or otherwise designated for trading in the same manner as similar
securities issued by the Company are then listed or designated or, if no such
similar securities are then listed or designated, in a manner satisfactory to
the holders of a majority of the Registrable Securities included in such
registration.
3.2 Obligation to Suspend Distribution. Upon receipt of any notice from
the Company of the happening of any event of the kind described in Section
3.1(d)(iv), each holder of Registrable Securities included in any registration
shall immediately discontinue disposition of such Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until such holder receives the supplemented or amended prospectus contemplated
by Section 3.1(d)(iv), and, if so directed by the Company, each such holder will
deliver to the Company all copies, other than permanent file copies then in such
holder's possession, of the most recent prospectus covering such Registrable
Securities at the time of receipt of such notice.
3.3 Registration Expenses. The Company shall pay all expenses incurred
in connection with any Demand Registration pursuant to Section 2.1 and any
Piggy-Back Registration pursuant to Section 2.2, and all expenses incurred in
performing or complying with the Company's obligations under this Section 3,
whether or not the registration statement becomes effective, in each case
including, but not limited to: (i) all registration and filing fees; (ii) fees
and expenses of compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities); (iii) printing expenses; (iv) the Company's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees); (v) the fees and expenses incurred in connection with
the listing of the Registrable Securities as required by Section 3.1(k); (vi)
National Association of Securities Dealers, Inc. fees; (vii) fees and
disbursements of counsel for the Company and fees and expenses for independent
certified public accountants retained by the Company (including the expenses or
costs associated with the delivery of any opinions or comfort letters requested
pursuant to Section 3.1(i); (viii) the fees and expenses of any special experts
retained by the Company in connection with such registration; (ix) one-half of
the cost for selling stockholder errors and omissions insurance for the benefit
of the holders of Registrable Securities included in such registration which the
holders of a majority of such Registrable Securities may elect to purchase (with
the other one-half of such cost to be paid by the holders of Registrable
Securities included in such registration, pro rata in accordance with the number
of shares included in such registration), and (x) all fees and expenses incurred
by the holders of Registrable Securities included in such registration statement
in connection with its participation in such registration, including, without
limitation, the fees and expenses of such holders' legal counsel, accountants
and other experts. The Company shall have no obligation to pay any underwriting
fees, discounts or selling commissions attributable to the Registrable
Securities being sold by holders of Registrable Securities, which expenses shall
be borne by such holders.
3.4 Information. The holders of Registrable Securities shall provide
such information as reasonably requested by the Company in connection with the
preparation of any registration statement, including amendments and supplements
thereto, in order to effect the registration of any Registrable Securities under
the 1933 Act pursuant to Sections 2.
4. INDEMNIFICATION AND CONTRIBUTION.
4.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless (i) each of the Stanwich Parties and each holder of Registrable
Securities and (ii) the respective officers, employees, affiliates, directors,
partners, members and agents of, and each person, if any, who controls, Stanwich
or any holder of Registrable Securities within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act (each, a "Stanwich Indemnified Party"),
from and against any loss, claim, damage or liability and any action in respect
thereof to which any Stanwich Indemnified Party may become subject under the
1933 Act or the 1934 Act or any other statute or common law, insofar as such
loss, claim, damage, liability or action arises out of, or is based upon, (a)
any untrue statement or alleged untrue statement of a material fact made in
connection with the sale of Registrable Securities or shares of Common Stock,
whether or not such statement is contained or incorporated by reference in any
registration statement or prospectus relating to the Registrable Securities (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, (b) any omission or alleged
omission to state a material fact required to be stated in any registration
statement or prospectus or necessary to make the statements therein not
misleading, or (c) any violation by the
9
<PAGE> 10
Company of any Federal, state or common law, rule or regulation applicable to
the Company and relating to action required of or inaction by the Company in
connection with such registration. The Company also shall promptly, but in no
event more than ten Business Days after request for payment, pay directly or
reimburse each Stanwich Indemnified Party for any legal and other expenses
incurred by such Stanwich Indemnified Party in investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action.
The Company also shall indemnify any Underwriter of the Registrable Securities,
their officers, affiliates, directors, partners, members and agents and each
person who controls such Underwriters on substantially the same basis as that of
the indemnification provided above in this Section 4.1.
The indemnity agreement contained in this Section 4.1 shall not apply to
amounts paid in settlement of any such loss, claim, damage or liability or any
action in respect thereof if such settlement is effected without the consent of
the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable to any holder of Registrable Securities included in any
registration for any loss, claim, damage, liability or any action in respect
thereof to the extent that it arises solely from or is based solely upon and is
in conformity with information related to such holder furnished in writing by
such holder expressly for use in connection with such registration, nor shall
the Company be liable to any holder of Registrable Securities included in any
registration for any loss, claim, damage or liability or any action in respect
thereof to the extent it arises solely from or is based solely upon (i) any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities
delivered in writing by such holder after the Company had provided written
notice to such holder that such registration statement or prospectus contained
such untrue statement or alleged untrue statement of a material fact, or (ii)
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading after
the Company had provided written notice to such holder that such registration
statement or prospectus contained such omission or alleged omission.
4.2 Indemnification by Holders of Registrable Securities. Each holder of
Registrable Securities shall indemnify and hold harmless the Company, its
officers, directors, partners, members and agents and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act to the same extent as the foregoing indemnity from the
Company to such holder, but solely with reference to information related to such
holder furnished in writing by such holder expressly for use in any registration
statement or prospectus relating to Registrable Securities of such holder
included in any registration, or any amendment or supplement thereto, or any
preliminary prospectus. Each holder of Registrable Securities included in any
registration hereunder shall also indemnify and hold harmless any Underwriter of
such holder's Registrable Securities, their officers, directors, partners,
members and agents and each person who controls such Underwriters on
substantially the same basis as that of the indemnification of the Company
provided in this Section 4.2; provided, however, that in no event shall any
indemnity obligation under this Section 4.2 exceed the dollar amount of the net
proceeds (after payment of any underwriting fees, discounts or commissions)
actually received by such holder from the sale of Registrable Securities which
gave rise to such indemnification obligation under such registration statement
or prospectus.
4.3 Conduct of Indemnification Proceedings. Promptly after receipt by
any person of any notice of any loss, claim, damage or liability or any action
in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2, such
person (the "Indemnified Party") shall, if a claim in respect thereof is to be
made against any other person for indemnification hereunder, notify such other
person (the "Indemnifying Party") in writing of the loss, claim damage,
liability or action; provided, however, that the failure by the Indemnified
Party to notify the Indemnifying Party shall not relieve the Indemnifying Party
from any liability which the Indemnifying Party may have to such Indemnified
Party hereunder, except to the extent the Indemnifying Party is actually
prejudiced by such failure. If the Indemnified Party is seeking indemnification
with respect to any claim or action brought against the Indemnified Party, then
the Indemnifying Party shall be entitled to participate in such claim or action,
and, to the extent that it wishes, jointly with all other Indemnifying Parties,
to assume the defense thereof with counsel satisfactory to the Indemnified
Party. After notice from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or action, the Indemnifying Party
shall not be liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that in
any action in which both the Indemnified Party and the Indemnifying Party are
named as defendants, the Indemnified Party shall have the right to employ
separate counsel (but no more than one such separate counsel) to represent the
Indemnified Party and its controlling persons
10
<PAGE> 11
who may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the Indemnified Party against the Indemnifying Party,
with the fees and expenses of such counsel to be paid by such Indemnifying Party
if, based upon the written opinion of counsel of such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, consent to
entry of judgment or effect any settlement of any claim or pending or threatened
proceeding in respect of which the Indemnified Party is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Party,
unless such judgment or settlement includes an unconditional release of such
Indemnified Party from all liability arising out of such claim or proceeding.
4.4 Contribution. If the indemnification provided for in the foregoing
Sections 4.1, 4.2 and 4.3 is unavailable to any Indemnified Party in respect of
any loss, claim, damage, liability or action referred to herein, then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage, liability or action in such proportion as is
appropriate to reflect the relative fault of the Indemnified Parties and the
Indemnifying Parties in connection with the actions or omissions which resulted
in such loss, claim, damage, liability or action, as well as any other relevant
equitable considerations. The relative fault of any Indemnified Party and any
Indemnifying Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such Indemnified Party or such Indemnifying Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 4.4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of any loss, claim,
damage, liability or action referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.4, no holder of Registrable Securities shall be
required to contribute any amount in excess of the dollar amount of the net
proceeds (after payment of any underwriting fees, discounts or commissions)
actually received by such holder from the sale of Registrable Securities which
gave rise to such contribution obligation. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
50 UNDERWRITING AND DISTRIBUTION.
5.1 Rule 144. The Company covenants that it shall file any reports
required to be filed by it under the 1933 Act and the 1934 Act and shall take
such further action as the holders of Registrable Securities may reasonably
request, all to the extent required from time to time to enable such holders to
sell Registrable Securities without registration under the 1933 Act within the
limitation of the exemptions provided by Rule 144 or Rule 144A under the 1933
Act, as such Rules may be amended from time to time, or any similar Rule or
regulation hereafter adopted by the Commission.
5.2 Restrictions on Sale by the Company and Others. The Company agrees
(i) not to effect any sale or distribution of any securities similar to those
being registered in accordance with Section 2.1, or any securities convertible
into or exchangeable or exercisable for such securities, during the 90 days
prior to, and during the 120-day period beginning on, the effective date of any
Demand Registration (except as part of such Demand Registration to the extent
permitted by Section 2.1(d)); and (ii) that any agreement entered into after the
date hereof pursuant to which the Company issues or agrees to issue any
privately placed securities shall contain a provision under which holders of
such securities agree not to effect any sale or distribution of any such
securities during the periods described in (i) above, in each case including a
sale pursuant to Rule 144 or 144A under the 1933 Act (except as part of any such
registration, if permitted); provided, however, that the provisions of this
Section 5.2 shall not prevent the conversion or exchange of any securities
pursuant to their terms into or for other securities and shall not prevent the
issuance of securities by the Company under any employee benefit, stock option
or stock subscription plans.
11
<PAGE> 12
60 MISCELLANEOUS.
6.1 Other Registration Rights. The Company represents and warrants that,
except as provided in the LLCP Registration Rights Agreement, no person has any
right to require the Company to register any shares of the Company's capital
stock for sale or to include shares of the Company's capital stock in any
registration filed by the Company for the sale of shares of capital stock for
its own account or for the account of any other person. From and after the date
of this Agreement, the Company shall not, without the prior written consent of
the holders of a majority of the Registrable Securities, (i) enter into any
agreement granting any demand registration right (i.e., the right to require the
Company to register the sale of any shares of the Company's capital stock) other
than demand registration rights under the FSA Registration Rights Agreement,
(ii) enter into any agreement granting any piggy-back registration right (i.e.,
the right to require the Company to register the sale of any shares of the
Company's capital stock in any registration filed by the Company for the sale of
shares of capital stock for its own account or for the account of any other
person) which is inconsistent with, equal to (except pursuant to the FSA
Registration Rights Agreement) or superior to any registration rights granted to
hereunder, or (iii) amend the LLCP Registration Rights Agreement (or enter into
or amend the FSA Registration Rights Agreement at any time) so as to cause the
registration rights granted therein to be inconsistent with, equal to or
superior to the rights granted to the holders of Registrable Securities
hereunder or to otherwise adversely affect the registration rights granted to
the holders of Registrable Securities hereunder.
6.2 Successors and Assigns. The rights and obligations of the Stanwich
Parties under this Agreement shall be freely assignable in whole or in part.
Each such assignee, by accepting such assignment of the rights of the assignor
hereunder shall be deemed to have agreed to and be bound by the obligations of
the assignor hereunder. The rights and obligations of the Company hereunder may
not be assigned.
6.3 Notices. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given if transmitted by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of 72 hours
after mailing, if mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to Stanwich:
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Attention: President
Telephone: (203) 325-0551
Facsimile: (203) 967-3923
If to Poole:
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Telephone: (203) 325-0551
Facsimile: (203) 967-3923
If to any assignee of either of the Stanwich Parties:
At such assignee's address as shown on the books of the
Company.
12
<PAGE> 13
If to the Company:
Consumer Portfolio Services, Inc.
16355 Laguna Canyon Road
Irvine, CA 92618
Attention: Charles E. Bradley, Jr., President
and Chief Executive Officer
Telephone: (949) 753-6800
Facsimile: (949) 753-6805
or at such other address or addresses as Stanwich, Poole, such assignee or the
Company, as the case may be, may specify by written notice given in accordance
with this Section.
6.4 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
6.5 Counterpart. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.6 Descriptive Headings, Construction and Interpretation. The
descriptive headings of the several paragraphs of this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
are not to be considered in construing or interpreting this Agreement. All
section, preamble, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of this
Agreement for purposes of construing the provisions of this Agreement, and all
provisions of this Agreement shall be construed in accordance with their fair
meaning, and not strictly for or against any party.
6.7 Waivers and Amendments. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally or by course of
dealing, except by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought.
6.8 Remedies. In the event that the Company fails to observe or perform
any covenant or agreement to be observed or performed under this Agreement,
either of the Stanwich Parties or any other holder of Registrable Securities may
proceed to protect and enforce its rights by suit in equity or action at law,
whether for specific performance of any term contained in this Agreement or for
an injunction against the breach of any such term or in aid of the exercise of
any power granted in this Agreement or to enforce any other legal or equitable
right, or to take any one or more of such actions. The Company agrees to pay all
fees, costs, and expenses, including without limitation, fees and expenses of
attorneys, accountants and other experts, and all fees, costs and expenses of
appeals, incurred by either of the Stanwich Parties or any other holder of
Registrable Securities in connection with the enforcement of this Agreement or
the collection or any sums due hereunder, whether or not suit is commenced. None
of the rights, powers or remedies conferred under this Agreement shall be
mutually exclusive, and each such right, power or remedy shall be cumulative and
in addition to any other right, power or remedy whether conferred by this
Agreement or now or hereafter available at law, in equity, by statute or
otherwise.
6.9 Governing Law. In all respects, including all matters of
construction, validity and performance, this Agreement and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to principles thereof regarding
conflicts of laws.
6.10 Termination of Prior Registration Rights Agreements. This Agreement
supersedes and replaces the Old Registration Rights (as such term is defined in
the Restructure Agreement) relating to or covering the Shares.
70 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
COMMERCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
13
<PAGE> 14
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR
OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS
AGREEMENT, THE PURCHASE AGREEMENT AND/OR ANY RELATED AGREEMENT OR THE
TRANSACTIONS COMPLETED HEREBY OR THEREBY.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
14
<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Consolidated
Registration Rights Agreement to be executed and delivered by their duly
authorized representatives as of the date first above written.
THE COMPANY: STANWICH:
CONSUMER PORTFOLIO SERVICES, STANWICH FINANCIAL SERVICES CORP.,
INC., a California corporation a Rhode Island Corporation
By:_______________________________ By:_________________________________
Charles E. Bradley, Jr., Charles E. Bradley, Sr.
President President and Chief
Executive Officer
POOLE:
By:_______________________________ ____________________________________
Jeffrey P. Fritz, John G. Poole
Senior Vice President and Chief
Financial Officer
15
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Consumer Portfolio Services, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-77314, 333-00880) on Form S-3 and the registration statements (Nos. 33-78680
and 33-80327) on Form S-8 of Consumer Portfolio Services, Inc. of our report
dated March 3, 1999, except as to notes 13, 16 and 17 to the consolidated
financial statements, which are as of April 15, 1999 relating to the
consolidated balance sheets of Consumer Portfolio Services, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of Consumer Portfolio
Services, Inc.
KPMG LLP
Orange County, California
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,940 1,745
<SECURITIES> 0 0
<RECEIVABLES> 176,730 73,696
<ALLOWANCES> 2,751 2,204
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,272 3,128
<DEPRECIATION> 2,626 1,734
<TOTAL-ASSETS> 431,962 225,095
<CURRENT-LIABILITIES> 162,945 72,092
<BONDS> 40,000 40,000
0 0
0 0
<COMMON> 52,533 41,762
<OTHER-SE> 66,548 40,845
<TOTAL-LIABILITY-AND-EQUITY> 431,962 225,895
<SALES> 0 0
<TOTAL-REVENUES> 126,280 75,251
<CGS> 0 0
<TOTAL-COSTS> 81,960 43,292
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22,019 9,185
<INCOME-PRETAX> 44,320 31,959
<INCOME-TAX> 18,617 13,427
<INCOME-CONTINUING> 25,703 18,532
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 25,703 18,532
<EPS-PRIMARY> 1.67 1.29
<EPS-DILUTED> 1.50 1.17
</TABLE>
