We May Have Rescission Liability in Connection with Sales of Our Renewable Unsecured Subordinated Notes to Certain Purchasers
We filed a registration statement on Form S-2 with respect to our renewable unsecured subordinated notes on January 7, 2005 and subsequently filed amendments to such registration statement on April 13, May 2, and May 20, 2005 and April 11, 2006 (such registration statement, as so amended, the “Former Registration Statement”). We discovered in July 2010 that, under a rule of the SEC, we were no longer permitted to offer and sell our renewable unsecured subordinated notes in reliance on the Former Registration Statement. Consequently, purchasers who acquired such notes within the past twelve months may have a statutory right to rescind their pur- chases. As a result, we could be required to repurchase some or all of such notes at the original sale price plus statutory interest, less the amount of any income received by the purchasers. Within the twelve months imme- diately preceding December 8, 2010 (the latest practicable date prior to the effective date of the registration state- ment to which this prospectus relates), we sold a total of approximately $11.67 million of such notes, including renewals of previously sold notes, but excluding notes that we have repaid. Within the twelve months immediately preceding June 30, 2011, we sold a total of approximately $3.1 million of such notes, including renewals of pre- viously sold notes, but excluding notes that we have repaid, and excluding notes sold or renewed pursuant to the registration statement to which this prospectus relates.
Sales of such notes could also subject us to regulatory sanctions by the SEC, which might include the im- position of civil penalties. Although we do not expect any rescissions or regulatory actions to have a material ad- verse effect on us, we are unable to predict the full consequences of these events and regulatory actions at this time.
Our results of operations, financial condition and cash flows could be materially and adversely affected if a substantial number of purchasers of such notes were to successfully assert rescission rights or if we were to be assessed substantial penalties by regulatory authorities. The exercise of rescission rights would not have any direct material effect on our results of operations, as any rescission of sales of such notes would involve simultaneous and approximately equal reductions in our assets and our liabilities. However, if holders of sufficient amounts of such notes were to demand rescission and to prevail in that demand, the adverse effect on our liquidity could be material, which could in turn impair our ability to conduct our business as otherwise planned. In such event, our ability to perform our obligations under the renewable unsecured subordinated notes, including those offered by this Prospectus, could also be materially and adversely affected.
If We Are Unable to Obtain Credit Enhancement for Our Securitizations Upon Favorable Terms, Our Re- sults of Operations Would Be Impaired.
In our securitizations, we historically have utilized credit enhancement in the form of one or more financial gua- ranty insurance policies issued by financial guaranty insurance companies. Each of these policies unconditionally and irrevocably guarantees certain interest and principal payments on the senior classes of the securities issued in our securitizations. These guarantees enabled these securities to achieve the highest credit rating available. This form of credit enhancement reduced the costs of our securitizations relative to alternative forms of credit en- hancement available to us at the time. Such financial guaranty insurance policies are not at present available to us. Due to significantly reduced investor demand for securities carrying such a financial guaranty, it is likely that this form of credit enhancement, even if it were again to become available to us, may not be economic for us in the future. As we pursue future securitizations, we may not be able to obtain:
credit enhancement in any form on terms acceptable to us, or at all; or
similar ratings for senior classes of securities to be issued in future securitizations.
Based on indications from market participants as to reduced investor comfort with credit ratings and financial guarantees, we believe that even if we were unable to obtain such enhancements or such ratings, we would expect to incur increased interest expense. Such increased interest expense would adversely affect our results of opera- tions.
If We Are Unable to Successfully Compete With Our Competitors, Our Results of Operations May Be Im- paired.
The automobile financing business is highly competitive. We compete with a number of national, regional and local finance companies. 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