pre14a.htm
PRELIMINARY
PROXY MATERIALS
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS
OF
CONSUMER
PORTFOLIO SERVICES, INC.
19500
Jamboree Road, Irvine, California 92612
Phone:
949-753-6800
The
annual meeting of the shareholders of Consumer Portfolio Services, Inc. (the
"Company") will be held at 10:00 a.m., local time, on Wednesday, July 15,
2009 at the Company's principal executive offices, 19500 Jamboree Road, Irvine,
California for the following purposes:
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To
elect the Company's entire Board of Directors for a one-year
term.
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To
ratify the appointment of Crowe Horwath, LLP as the Company's independent
auditors for the fiscal year ending December 31,
2009.
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To
approve an amendment of the Company's 2006 Long-Term Equity Incentive
Plan, which will permit an exchange and repricing of outstanding
options.
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To
transact such other business as may properly come before the
meeting.
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Only
shareholders of record at the close of business on Monday, May 18, 2009 are
entitled to notice of and to vote at the meeting.
Whether
or not you expect to attend the meeting in person, please complete, date, and
sign the enclosed proxy exactly as your name appears thereon and promptly return
it in the envelope provided, which requires no postage if mailed in the United
States. Proxies may be revoked at any time and, if you attend the meeting in
person, your executed proxy will be returned to you upon request.
By Order
of the Board of Directors
Mark
Creatura, Secretary
Dated: June
19, 2009
PRELIMINARY
PROXY MATERIALS
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intentionally left blank]
PRELIMINARY
PROXY MATERIALS
CONSUMER
PORTFOLIO SERVICES, INC.
19500
Jamboree Road
Irvine,
California 92612
949-753-6800
PROXY
STATEMENT FOR
ANNUAL
MEETING OF SHAREHOLDERS
TO
BE HELD JULY 15, 2009
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INTRODUCTION
This
proxy statement is furnished in connection with the solicitation of proxies by
the Board of Directors of Consumer Portfolio Services, Inc. (the "Company" or
"CPS") for use at the annual meeting of the shareholders to be held at 10:00
A.M. local time on Wednesday, July 15, 2009 at the Company's principal executive
offices, 19500 Jamboree Road, Irvine, California 92612, and at any adjournment
thereof (the "Annual Meeting").
All
shares represented by properly executed proxies received in time will be voted
at the Annual Meeting and, where the manner of voting is specified on the proxy,
will be voted in accordance with such specifications. Any shareholder who
executes and returns a proxy may revoke it at any time prior to the voting of
the proxy by giving written notice to the Secretary of the Company, by executing
a later-dated proxy, or by attending the meeting and giving oral notice of
revocation to the Secretary of the Company.
The Board
of Directors of the Company has fixed the close of business on May 18, 2009, as
the record date for determining the holders of outstanding shares of the
Company's Common Stock, without par value ("CPS Common Stock") entitled to
notice of, and to vote at the Annual Meeting. On that date, there were
18,737,141 shares of CPS Common Stock issued and outstanding. Each
such share of CPS Common Stock is entitled to one vote on all matters to be
voted upon at the meeting, except that holders of CPS Common Stock have the
right to cumulative voting in the election of directors, as described herein
under the heading "Voting of Shares."
The
notice of the Annual Meeting, this proxy statement and the form of proxy are
first being mailed to shareholders of the Company on or about June 18,
2009. The Company will pay the expenses incurred in connection with
the solicitation of proxies. The proxies are being solicited
principally by mail. In addition, directors, officers and regular employees of
the Company may solicit proxies personally or by telephone, for which they will
receive no payment other than their regular compensation. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting material to the beneficial owners of Common Stock of the
Company and will reimburse such persons for their expenses so
incurred.
PRELIMINARY
PROXY MATERIALS
PROPOSAL
NO. 1 - ELECTION OF DIRECTORS
Nominations
The
individuals named below have been nominated for election as directors of the
Company at the Annual Meeting, and each has agreed to serve as a director if
elected. The entire board of directors of the Company is elected
annually. Directors serve until the next annual meeting of
shareholders and until their successors are duly elected and
qualified.
The names
of the nominees, their principal occupations, and certain other information
regarding them set forth below are based upon information furnished to the
Company by them. Except as noted below, none of the nominees currently serve on
the board of directors of any other publicly-traded companies.
Charles E. Bradley, Jr., 49,
has been the President and a director of the Company since its formation in
March 1991, and was elected Chairman of the Board of Directors in July
2001. Mr. Bradley has been the Company's Chief Executive Officer
since January 1992. 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.
Chris A. Adams, 61, has been a
director of the Company since August 2007. Since 1982 he has been the
owner and chief executive of Latrobe Pattern Company and K Castings Inc., which
are firms engaged in the business of fabricating metal parts.
Brian J. Rayhill, 46, has been
a director of the Company since August 2006. Mr. Rayhill has been a
practicing attorney in New York State since 1988.
William B. Roberts, 71, has
been a director of the Company since its formation in March
1991. Since 1981, he has been the President of Monmouth Capital
Corp., an investment firm that specializes in management buyouts.
Gregory S. Washer, 47, has
been a director of the Company since June 2007. He has been the owner
and president of Clean Fun Promotional Marketing LLC, a promotional marketing
company, since its founding in 1986.
Daniel S. Wood, 50, has been a
director of the Company since July 2001. Mr. Wood was president of
Carclo Technical Plastics, a manufacturer of custom injection moldings, until
his retirement in April 2007. He now serves as a consultant to that
company. Previously, from 1988 to September 2000, he was the chief
operating officer and co-owner of Carrera Corporation, the predecessor to the
business of Carclo Technical Plastics.
The Board
of Directors has established an Audit Committee, a Compensation and Stock Option
Committee, and a Nominating Committee. Each of these three committees
operates under a written charter, adopted by the Board of Directors of the
Company. The charters are available on the Company’s website, www.consumerportfolio.com. The
Board of Directors has concluded that each member of these three committees
(every director other than Mr. Bradley, the Company's chief executive officer),
is independent in accordance with the director independence standards prescribed
by Nasdaq, and has determined that none of them have a material relationship
with the Company that would impair their independence from management or
otherwise compromise the ability to act as an independent director.
The
members of the Audit Committee are Daniel S. Wood (chairman), Chris A. Adams and
Brian J. Rayhill. The Audit Committee is empowered by the Board of Directors to
review the financial books and records of the Company in consultation with the
Company's accounting and auditing staff and its independent auditors and to
review with the accounting staff and independent auditors any questions that may
arise with respect to accounting and auditing policy and procedure.
The Board
of Directors has further determined that Mr. Wood has the qualifications and
experience necessary to serve as an "audit committee financial expert" as such
term is defined in Item 401(h) of Regulation S-K promulgated by the
SEC. Such qualifications and experience are described above in this
section.
The
members of the Compensation and Stock Option Committee are Gregory S. Washer
(chairman), William B. Roberts and Mr. Wood. This Committee makes
determinations as to general levels of compensation for all employees of the
Company and the annual salary of each of the executive officers of the Company,
and administers the Company's compensation plans. Those plans include
the Company's 1997 Long-Term Stock Incentive Plan, the Executive Management
Bonus Plan, and the CPS 2006 Long-Term Equity Incentive Plan.
PRELIMINARY
PROXY MATERIALS
The
members of the Nominating Committee are Brian J. Rayhill (chairman), Chris A.
Adams and Mr. Washer. Nominations for board positions are made on behalf of the
Board of Directors by the nominating committee. Because neither the
Board of Directors nor its Nominating Committee has received recommendations
from shareholders as to nominees, the Board of Directors and the Nominating
Committee believe that it is and remains appropriate to operate without a formal
policy with regard to any director candidates who may in the future be
recommended by shareholders. The nominating committee would consider
such recommendations.
When
considering a potential nominee, the nominating committee considers the benefits
to the Company of such nomination, based on the nominee's skills and experience
related to managing a significant business, the willingness and ability of the
nominee to serve, and the nominee's character and reputation.
Shareholders
who wish to suggest individuals for possible future consideration for board
positions, or to otherwise communicate with the Board of Directors, should
direct written correspondence to the corporate secretary at the Company's
principal executive offices, indicating whether the shareholder wishes to
communicate with the nominating committee or with the Board of Directors as a
whole. The present policy of the Company is to forward all such
correspondence to the designated members of the Board of
Directors. There have been no changes in the procedures regarding
shareholder recommendations in the past year.
Section
16(a) Beneficial Ownership Reporting Compliance
Directors,
executive officers and holders of in excess of 10% of the Company's common stock
are required to file reports concerning their transactions in and holdings of
equity securities of the Company. Based on a review of reports filed
by each such person, and inquiry of each regarding holdings and transactions,
the Company believes that all reports required with respect to the year 2008
were timely filed.
Code
of Ethics
The
Company has adopted a Code of Ethics for Senior Financial Officers, which
applies to the Company's chief executive officer, chief financial officer,
controller and others. A copy of the Code of Ethics may be obtained
at no charge by written request to the Corporate Secretary at the Company's
principal executive offices.
Meetings
of the Board
The Board of Directors held seven
meetings (including regular and special meetings) and acted twice by written
consent during 2008. The Audit Committee met six times during 2008,
including at least one meeting per quarter to review the Company's
financial statements, and acted one time by written consent, while the
Compensation and Stock Option Committee met four times during 2008 and did not
act by written consent. The Nominating Committee met once during 2008
and did not act by written consent. Each nominee attended at least
75% of the meetings of the Board of Directors and its committees that such
individual was eligible to attend in 2008. The Company does not have
a policy of encouraging directors to attend or discouraging directors from
attending its annual meetings of shareholders. Other than Mr.
Bradley, no directors attended last year’s annual meeting of
shareholders.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
ABOVE.
PRELIMINARY
PROXY MATERIALS
PROPOSAL
NO. 2 – RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Audit
Committee of the Board of Directors has appointed the accounting firm of Crowe
Horwath, LLP ("Crowe") to be the Company's independent auditors for the year
ending December 31, 2009. Crowe also performed the audit of the
Company's financial statements for the year ended December 31, 2008. The Company
retained Crowe for that purpose on February 6, 2009. The former principal
accountant, McGladrey & Pullen LLP (“McGladrey”), had served as the
Company's principal accountant since October 21, 2004, and performed certain
attestation services for the Company during the year ended December 31, 2008,
notably the review of the financial statements included in the Company's three
quarterly reports on Form 10-Q filed in 2008.
A
proposal to ratify that appointment will be presented to shareholders at the
Annual Meeting. If the shareholders do not ratify the selection of
Crowe at the Annual Meeting, the Audit Committee will consider selecting another
firm of independent public accountants. Representatives of Crowe are
expected to be present at the Annual Meeting. Such representatives will have an
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions from shareholders in
attendance.
Information
relating to the fees billed by those firms to the Company appears
below.
Audit
Fees
The
aggregate fees billed by Crowe for professional services rendered for the audit
of the Company's annual financial statements for the fiscal year ended December
31, 2008 were $625,000.
The
aggregate fees billed by McGladrey for professional services rendered as part of
or for the audit of the Company's annual financial statements for the fiscal
year ended December 31, 2007, for the review of the financial statements
included in the Company's quarterly reports on Form 10-Q filed in 2008 and 2007,
and for services that are normally provided by the auditor in connection with
statutory or regulatory filings or engagements in those two years were $325,000
and $971,000, respectively. It should be noted that McGladrey, though
not retained to perform the audit of the Company's annual financial statements
for the year ended December 31, 2008, did perform quarterly review of the
financial statements included in the Company's three quarterly reports on Form
10-Q filed in 2008.
Audit-Related
Fees
Crowe
performed for the Company no audit-related services in the fiscal years ended
December 31, 2008 and 2007.
The
aggregate fees billed by McGladrey for audit-related services for the fiscal
years ended December 31, 2008 and 2007 were $52,550 and $316,000,
respectively. These professional services were rendered in
conjunction with the Company's securitization and financing transactions, and
consultations concerning financial accounting and reporting
standards.
Tax
Fees
Crowe
performed for the Company no tax services in the fiscal years ended December 31,
2008 and 2007.
The
aggregate fees billed by McGladrey for tax services in the fiscal years ended
December 31, 2008 and 2007 were $600,790 and $570,000,
respectively. Tax services provided by McGladrey consisted of
preparation of various state and federal income tax returns for the Company and
its subsidiaries.
All
Other Fees
No other
fees were billed by Crowe or McGladrey in the fiscal years ended December 31,
2008 and December 31, 2007.
Audit
Committee Supervision of Principal Accountant
The Audit
Committee acts pursuant to a written charter adopted by the Board of
Directors. Pursuant to the charter, the Audit Committee pre-approves
the audit and permitted non-audit fees to be paid to the independent auditor,
and authorizes on behalf of the Company the payment of such fees, or refuses
such authorization. The Audit Committee has delegated to its chairman
and its vice-chairman the authority to approve performance of services on an
interim basis. In the fiscal years ended December 31, 2008 and December 31,
2007, all services for which audit fees or audit related fees were paid were
preapproved by the Audit Committee as a whole, or pursuant to such delegated
authority.
PRELIMINARY
PROXY MATERIALS
In
the course of its meetings, the Audit Committee has considered whether the
provision of the non-audit fees outlined above is compatible with maintaining
the independence of the respective audit firms, and has concluded that such
independence is not impaired.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF
CROWE HORWATH, LLP.
PROPOSAL
NO. 3 – APPROVAL OF AN AMENDMENT OF THE COMPANY'S 2006 LONG-TERM INCENTIVE
PLAN, WHICH WILL PERMIT AN EXCHANGE AND REPRICING OF OUTSTANDING
OPTIONS
Introduction
We are
seeking shareholder approval of an amendment of the Company's 2006 Long-Term
Equity Incentive Plan (“2006 Stock Plan”), which will permit a one-time exchange of
eligible stock options that have exercise prices significantly above the current
price of our common stock. The exchange would involve surrender of
outstanding options and issuance of amended options to purchase, at a reduced
exercise price, the same number of shares. The amended options will become
exercisable on a vesting schedule that will be based on the vesting schedule of
the surrendered options, but will include a bar on exercise within six months
following the deemed date of issuance. That date of issuance will be on or about
the conclusion of the exchange offer process. The amendment will also add to the
2006 Plan an explicit definition of the term "forfeited," as used in the 2006
Stock Plan, to make clear that options surrendered in the exchange are deemed
forfeited, with the result that the shares underlying such surrendered options
are made available for re-grant under the 2006 Stock Plan.
Our
executive officers, but not our non-employee directors, will be eligible to
participate in the exchange. Prior to launching the exchange offer after the
annual meeting, our Compensation Committee may determine to exclude any employee
or class of employees or adjust the terms of the new options in a manner less
favorable to any employee or class of employees.
A
critical factor in successfully achieving our business objectives and creating
long-term value for our shareholders is the ability to provide long-term equity
compensation to our key employees. Participation in our equity plan rewards
these employees for the Company’s success by giving them an opportunity to
participate in our growth, thereby aligning their interests with those of our
shareholders. Although all of our employees are eligible for equity compensation
under our 2006 Equity Incentive Plan, we have generally limited participation in
the 2006 Stock Plan to management employees, whose performance is likely to have
an effect on our financial results. Our direct competitors and our peer
companies rely on equity compensation to attract and retain top talent in our
industry and remain competitive. We believe that if we should fail to offer
competitive levels of equity compensation in attracting and retaining important
management employees we would put ourselves at a competitive disadvantage, and
have an adverse effect on our business.
As of the
date of this proxy statement, there are outstanding options to purchase
approximately 7,501,999 shares of CPS common stock, held by approximately 79
individuals. However, like other companies in the financial services sector, and
business services generally, our stock price has fallen significantly over the
past 9 to 18 months. This has caused 100% of the outstanding stock option awards
issued prior to this year to be out-of-the-money, or underwater, meaning the
exercise or purchase price of the option is greater than the current market
price of our common stock. As a result, these options fail to provide adequate
performance and retention incentives to our employees and do not achieve our
goal of aligning employees’ interests with those of our
shareholders.
We
believe the steep decline in our stock price was mostly driven by factors
external to how we operate our business. Since the fourth quarter of 2007, U.S.
and global economic activity has progressively weakened. The recession has
affected virtually all segments of the economy in 2008 and 2009 as both consumer
and business spending dropped sharply. The economic and capital market stresses
led to a severe global financial disruption in 2008. This disruption caused a
freezing up of credit markets, pervasive loss of investor confidence and
significant devaluation of assets of all types, from the riskiest to the most
secure. It also resulted in increasingly negative job growth throughout 2008,
and a deepening economic contraction in the second half of 2008.
PRELIMINARY
PRIXY MATERIALS
As they
affect our business of subprime automotive finance, the severe credit and
liquidity disruptions in the market globally and rapid deterioration in general
economic circumstances described above have caused it to be increasingly
difficult to obtain financing to acquire and hold subprime consumer
obligations.
Our
management has taken actions to address the unprecedented economic environment.
We undertook significant cost-reduction actions in late 2008 and early 2009,
across all of our business lines. As of our year-end earnings release, we have
taken actions to eliminate a total of approximately $35 million of annual
operating expenses for 2009. Among these actions are (i) reduction in headcount
from 873 at May 31, 2008 to 542 at May 31, 2009, (ii) a general freeze on
salaries, ceasing our former practice of annual adjustments, and (iii) as to
officer-level employees, a 20% reduction in bonuses earned for achieving their
personal performance goals in 2008. However, despite the actions we have taken
to reinvigorate our business and improve our performance, our efforts have not
had a significant impact on our stock price, which remains at a level
significantly below that of the years 2006 and 2007. Further, there can be no
assurance that our stock price will increase in the near-term.
We
believe the best course of action is to replace the deeply under-water stock
option awards with amended stock-option awards, with the amended options to
carry an exercise price that is well above the currently prevailing price of CPS
common stock, but not out of reach. By exchanging such options, we will more
cost-effectively provide retention and performance incentives to our key
contributors than we would by simply issuing incremental equity or paying
additional cash compensation.
Overview
and Summary of Material Terms of Option Exchange Program
Beginning
in January, our Compensation Committee began to consider the possibility of a
one-time stock option exchange program (the “Option Exchange Program”), subject
to shareholder approval. The topic was considered again at a meeting on May 6,
2009. On June 5, 2009, the Compensation Committee approved the
detailed terms of the Option Exchange Program as described herein. Under the
proposed Option Exchange Program, eligible employees would be able to elect to
exchange, through an Exchange Offer (as described below), outstanding eligible
options to purchase shares of our common stock issued for new options with
reduced exercise prices and modified vesting schedules (the “New Option”). The
following describes important features of the Option Exchange
Program:
Who Is Eligible to Participate in
the Option Exchange Program? All employees of the Company who are
employed by us on the date we commence the Exchange Offer and who hold Eligible
Options (as defined below) will be eligible to participate in the program (such
employees, “Eligible Optionholders”). Each New Option will have an exercise
price of $1.50 per share (or, if greater, the closing
price of our common stock on the date of the exchange.) Only those Eligible
Optionholders who continue to be employed by us through the date on which the
Exchange Offer concludes will be granted New Options.
Who Is Not Eligible to Participate
in the Option Exchange Program? Non-employee members of our Board of
Directors, as well as persons whose employment terminates prior to the date on
which the Exchange Offer is concluded, will not be eligible to receive New
Options. As of May 31, 2009, non-employee directors held options to purchase
670,000 shares of common stock, while terminated employees held options to
purchase 223,000 shares of common stock. These options are ineligible for
exchange. In addition certain outstanding options with exercise
prices below $2.50 per share are not eligible for exchange. As of May 31, 2009
there were 2,408,433 shares of our common stock subject to outstanding options
that are not eligible for exchange because they have exercise prices ranging
from $0.625 to $2.39.
What Options Are Eligible to be
Cancelled in the Option Exchange Program? Options held by Eligible
Optionholders that have exercise prices of $2.50 per share or more are eligible
to be surrendered in the Option Exchange Program (such options, “Eligible
Options”). As of April 30, 2009 there were 70 Eligible Optionholders, who held
4,200,566 Eligible Options with exercise prices ranging from $2.50 to $7.18 per
share, a weighted average exercise price of $4.99 per share and a weighted
average remaining term of 6.18 years per share. The Eligible Options constitute
approximately 56% of the 7,501,999 shares of our common stock subject to
outstanding stock options as of May 31, 2009. The Eligible Options constitute
approximately 22% of our total outstanding shares of common stock as of May 31,
2009. As of May 31, 2009, approximately 1.1 million shares remain available for
issuance under the 2006 Stock Plan. Because the Exchange Offer will involve a
one-for-one correspondence of shares underlying the Eligible Options and New
Options, the number of
PRELIMINARY
PROXY MATERIALS
shares
remaining available for future grants will not be affected.
An
Eligible Optionholder who desires to participate in the Option Exchange Program
must surrender an entire Eligible Option that corresponds to a particular
exercise price and will not be given the opportunity to surrender only a portion
of such outstanding Eligible Option. An Eligible Optionholder who holds more
than one Eligible Option corresponding to different exercise prices will not be
required to surrender every Eligible Option he or she holds but may make a
participation decision on an Eligible Option-by-Eligible Option
basis.
How many shares may be purchased
upon the exercise of the New Options by an Eligible Optionholder? The
number of shares that may be purchased upon exercise of the New Options will be
the same as the number of shares that might be purchased upon exercise of the
surrendered Eligible Options. This will result in the New Options
having a greater value to the optionholder than the surrendered
options.
What Vesting Will Apply? Each
New Option will be subject to vesting in a manner that bars any exercise for six
months after the new grant, and thereafter becomes exercisable on the same
schedule as was applicable to the surrendered option. For example, if
an Eligible Option were previously to become exercisable in five annual
increments on the first of June of the years 2008 through 2012, so that such
option was 40% exercisable at present, then the corresponding New Option would
not be exercisable at all at issuance, would become exercisable as to 40% of the
underlying shares six months after issuance, and would become exercisable as to
three further increments of 20% each on the originally applicable dates: June 1
of 2010, 2011 and 2012.
Why Are We Seeking Shareholder
Approval of the Option Exchange Program? Under the listing rules of the
Nasdaq Stock Market and the terms of the 2006 Stock Plan, shareholder approval
is required in order for us to implement the Option Exchange Program. If our
shareholders approve this proposal, we currently intend to launch the Exchange
Offer promptly following the Annual Meeting to which this Proxy Statement
relates and at which we are seeking shareholder approval, although we may
determine to delay the Exchange Offer. If we do not obtain shareholder approval
of this proposal, we will not be able to implement the Option Exchange Program.
See “Vote Required” on page __ for a description of the votes required to
approve the Option Exchange Program.
Reasons
for the Option Exchange Program
We
believe that an effective and competitive employee incentive program is
imperative for the future growth and success of our business. We rely on highly
skilled and educated managerial employees to implement our strategic
initiatives, expand and develop our business and satisfy our customers.
Competition for these types of employees is intense, and many companies use
equity awards, including stock options and restricted stock, as a means of
attracting, motivating and retaining their employees. Our Board believes that
equity compensation encourages employees to act like owners of the business,
motivating them to work toward our success and rewarding their contributions by
allowing them to benefit from increases in the value of our shares. In the past,
stock options have constituted an important part of our incentive and retention
programs.
As a
result of the recent global credit and liquidity crisis and the subsequent sharp
economic slowdown described above, the stock prices of financial companies,
including ours, have declined. Because of this decline in price over the past 18
months, many of our employees now hold stock options with exercise prices
significantly higher than the current market price of our common stock. For
example, on May 31, 2009, the closing price of our common stock on the Nasdaq
Stock Market was $0.98 per share and the weighted average exercise price of
Eligible Options was $4.99 per share. Consequently, as of that date, all of the
outstanding stock options issued prior to 2009 under the 2006 Stock Plan and
held by Eligible Optionholders were out-of-the-money.
This
circumstance has caused our Board and its Compensation Committee to conclude
that we may be at risk of losing key contributors across our workforce because,
in the absence of an effective equity component, we do not currently have
sufficient compensation programs in place to incentivize, retain and ensure the
continued commitment of many of our employees. Additionally, the Board
considered the following in determining to adopt the Option Exchange
Program:
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Reasonable, Balanced and
Meaningful Incentives. Under the Option Exchange Program, Eligible
Optionholders would be able to surrender certain underwater options for
New Options, with exercise
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PROXY MATERIALS
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prices
above the current market price. Employees who no longer have an equity
stake due to underwater stock options might seek employment with another
company. The cost of replacing a significant fraction of our management
employees, or even certain key contributors, could be substantial. Our
Board believes that if we do not take steps in the near future to properly
incentivize our key employees, it could adversely affect our business,
results of operations and future stock price.
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Enhanced Long-Term Shareholder
Value. We believe that ultimately the Option Exchange Program will
enhance long-term shareholder value by restoring competitive incentives to
the participants so they are further motivated to achieve our strategic,
operational and financial goals, as grant prices significantly in excess
of the market price of our stock undermine the effectiveness of stock
options as employee performance and retention
incentives.
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Reduced Pressure for
Additional Grants. If we are unable to implement the Option
Exchange Program, we may be forced to issue additional equity awards to
our employees at current market prices, increasing our equity award
overhang. These grants also would more quickly exhaust the current pool of
shares available for future grant of options or other equity awards under
the 2006 Stock Plan.
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Equity Award Overhang
Unchanged. Not only do the underwater options have little or
no retention value, they cannot be removed from our equity award overhang
until they are exercised, expire or the employee who holds them leaves our
employment. An exchange, such as the Option Exchange Program, will offer
meaningful incentives to option plan participants while eliminating the
ineffective options that are currently outstanding. All Eligible Options
that are not exchanged will remain outstanding and in effect in accordance
with their existing terms.
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Participation by Our Executive
Officers. Our executive officers are expected to be among the
primary drivers of the strategic and operational initiatives we have
implemented to advance the creation of long-term shareholder value. As a
result, the retention and motivation of our executive officers are
critical to our long-term success. Accordingly, we have elected to include
executive officers as Eligible Optionholders in the Option Exchange
Program.
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Restore value from
compensation costs that we have already incurred and will continue to
incur with respect to outstanding underwater stock options.
Options eligible for the Option Exchange Program were granted at the
then fair market value of our common stock in accordance with our policies
for such grants. Under applicable accounting rules, we have already
recognized $2.7 million in compensation expense for these
options. Moreover, we are obligated to recognize approximately
$3.8 million in additional future compensation expense, even if these
options are never exercised. We believe it is an inefficient
use of the shares made available under our 2006 Stock Plan to recognize
compensation expense on options that are not perceived as having value by
our employees.
The
Option Exchange Program will result in some additional compensation
expense. Assuming a market price for our stock of $1.00 per
share on the date of the exchange, if all the options eligible for the
Option Exchange Program are exchanged, we will incur additional
compensation expense, in accordance with applicable accounting rules, of
approximately $457,000 at the time of the exchange and approximately
$232,000 over the remaining vesting periods of the exchanged
options. The actual amounts of additional compensation expense
will vary to the extent the market price for our stock is more or less
than $1.00 per share at the time of the exchange. There will
also be additional expense incurred in connection with modification of
terms of an outstanding warrant, as discussed below, which expense we
estimate to be approximately $140,789. We believe the amount of
additional compensation expense is small relative to the amount of
compensation expense already incurred and committed to for the underwater
options that are eligible for the Option Exchange Program and that the
additional expense is justified by the value restored to the exchanged
options.
If
the Option Exchange Program is not approved by our shareholders, the
original options that would have qualified for exchange will remain
outstanding and we will continue to incur the compensation expense
associated with those options even though they will no more than minimal
retention and incentive value due to their being
underwater.
|
PRELIMINARY
PROXY MATERIALS
In
determining to recommend that shareholders approve the Option Exchange Program,
the Compensation Committee of the Board considered other alternatives as set
forth below. However, the Compensation Committee believes that the Option
Exchange Program provides a better opportunity to motivate our employees to
create shareholder value at a more reasonable cost to the Company as the Option
Exchange Program will allow us to conserve cash resources, as compared to
alternative compensation schemes.
Consideration
of Alternatives
When
considering how best to continue to retain and incentivize our employees who
have underwater stock options, we considered the following
alternatives:
Increase cash compensation.
To replace equity incentives, we considered that we could increase base
and target bonus compensation. However, significant increases in cash
compensation would substantially increase our compensation expenses and reduce
our cash flow from operations, which would adversely affect our business and
operating results. We believe that equity awards are an important component of
our employees’ total target compensation, and that replacing this component with
additional cash compensation to remain competitive during a period of financial
strain on the Company could have a material adverse effect on the Company. In
fact, we instituted a salary freeze in February 2009, and our senior management
team received reduced bonuses they would have earned for having achieved their
personal strategic objectives in 2008.
Grant additional equity
compensation. In addition to this year’s stock option grants, we
considered granting employees special supplemental stock option grants at
current market prices or restricted stock units in order to restore the value of
previously granted stock options that are now out-of-the-money. However, such
supplemental equity grants would substantially increase our equity award
overhang and the potential dilution to our shareholders and deplete our already
limited remaining equity award pool. In addition, these supplemental grants,
like the Option Exchange Program, would increase our stock-based compensation
expense.
Exchange options for
cash. We also considered implementing a program to exchange
underwater options for cash payments. However, an exchange program for cash
would reduce our cash flow from operations, which could adversely affect our
business and operating results. In addition, we do not believe that such a
program would provide strong alignment of management’s and employees’ interests
with those of our shareholders.
Implement Option Exchange
Program. We also considered implementing the Option Exchange Program
under which employees could exchange underwater stock options for new options.
We determined that this approach was the most attractive for the reasons
described above.
Description
of the Option Exchange Program
Implementing the Option Exchange
Program. If the Option Exchange Program is approved by our
shareholders, it is the Board’s intent that Eligible Optionholders who are
offered the opportunity to participate in the program under a tender offer (an
“Exchange Offer”) that will be filed with the Securities and Exchange Commission
(the “SEC”) will be able to complete their exchange following the Annual Meeting
at which such shareholder approval is sought. The Company has not commenced the
Option Exchange Program and will not do so unless the shareholders approve this
proposal. If the Company receives shareholder approval of the Option Exchange
Program, the Option Exchange Program may commence at a time determined by the
Company, with terms expected to be materially similar to those described in this
proposal. Upon the commencement of the Option Exchange Program, Eligible
Optionholders will receive written materials explaining the precise terms and
timing of the Option Exchange Program. From the time the Exchange Offer
commences, the Eligible Optionholders will be given at least 20 business days
(or such longer period as we may elect to keep the Option Exchange Program open)
to make an election to surrender for cancellation all or a portion of their
Eligible Options, on a grant-by-grant basis, in exchange for New Restricted
Stock. They will make this election by completing an election form which will be
distributed to them as part of the Option Exchange Program and submitting the
form to us within the 20 business day period (or such longer period if we choose
to keep the offer to exchange open). Once the Exchange Offer is closed, Eligible
Options that were surrendered for exchange will be cancelled, and the
Compensation Committee will approve grants of New Options New Options to
participating employees. All such New Options will be granted under the 2006
Stock Plan and will be subject to the terms of such 2006 Stock Plan and an
option award agreement to be entered
PRELIMINARY
PROXY MATERIALS
into
between the Company and each participating employee. At or before commencement
of the Option Exchange Program, the Company will file the Exchange Offer and
other related documents with the SEC as part of a tender offer statement on
Schedule TO.
Even if
the Option Exchange Program is approved by our shareholders, our Compensation
Committee will retain the authority, in its sole discretion, to amend (including
adjusting the terms in a manner less favorable to any employee or class of
employees), postpone, or under certain circumstances cancel the Option Exchange
Program once it has commenced or to exclude certain Eligible Options or Eligible
Optionholders from participating in the Option Exchange Program, due to tax,
regulatory or accounting reasons or because participation would be inadvisable
or impractical.
Shareholder
approval of the proposed amendment to the 2006 Stock Plan would authorize this
Option Exchange Program only, and would not disturb the general prohibition on
repricing of outstanding options. If we were to propose a stock option exchange
program in the future, we would need to seek separate shareholder approval of
that subsequent program.
Outstanding Options Eligible for the
Option Exchange Program. Options held by Eligible Optionholders that
have an exercise price of at least $2.50 per share and are out-of-the-money on
the date the Exchange Offer concludes are eligible to be surrendered in the
Option Exchange Program. As of April 30, 2009, options to purchase approximately
5,875,999 shares of our common stock were outstanding, of which options to
purchase approximately 4,200,566 shares would be eligible for exchange under the
Option Exchange Program.
As of May
31, 2009, there were 70 Eligible Optionholders. The following table shows the
number of shares underlying outstanding Eligible Options at each applicable
exercise price as of May 31, 2009.
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Maximum
Number of Shares
Underlying
Eligible Options
|
|
Remaining Life
(in
years)
|
|
$2.50
|
|
|
|
|
161,283
|
|
1.75
|
|
$2.64
|
|
|
|
|
236,000
|
|
3.96
|
|
$2.77
|
|
|
|
|
27,700
|
|
3.04
|
|
$2.88
|
|
|
|
|
11,000
|
|
4.34
|
|
$3.05
|
|
|
|
|
5,000
|
|
4.43
|
|
$3.18
|
|
|
|
|
420,000
|
|
8.55
|
|
$3.31
|
|
|
|
|
10,000
|
|
4.68
|
|
$3.50
|
|
|
|
|
17,500
|
|
4.75
|
|
$3.64
|
|
|
|
|
20,000
|
|
4.59
|
|
$4.00
|
|
|
|
|
500,000
|
|
4.68
|
|
$4.01
|
|
|
|
|
40,000
|
|
6.07
|
|
$4.25
|
|
|
|
|
227,583
|
|
2.90
|
|
$4.60
|
|
|
|
|
15,000
|
|
5.59
|
|
$4.61
|
|
|
|
|
57,500
|
|
8.40
|
|
$5.00
|
|
|
|
|
37,500
|
|
7.97
|
|
$5.04
|
|
|
|
|
441,000
|
|
5.56
|
|
$5.07
|
|
|
|
|
15,000
|
|
5.84
|
|
$5.26
|
|
|
|
|
400,000
|
|
8.05
|
|
$6.00
|
|
|
|
|
388,500
|
|
5.98
|
|
$6.04
|
|
|
|
|
107,500
|
|
7.98
|
|
$6.07
|
|
|
|
|
62,500
|
|
5.76
|
|
$6.10
|
|
|
|
|
15,000
|
|
6.45
|
|
$6.50
|
|
|
|
|
35,000
|
|
5.77
|
|
$6.85
|
|
|
|
|
640,000
|
|
7.10
|
|
$6.91
|
|
|
|
|
270,000
|
|
7.55
|
|
$7.18
|
|
|
|
|
50,000
|
|
7.69
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
4,200,566
|
|
6.18
|
The fair
value of the Eligible Options was calculated using the Black-Scholes option
valuation model. The Black-Scholes model is a common method used for estimating
the fair value of a stock option. For purposes of determining the fair value of
an Eligible Option under the Black-Scholes model, the following factors were
used: (a) the option’s exercise price; (b) an assumed value of $1.00 per share
(selected as a round number somewhat in excess of to the 10-day trailing average
closing price for the period ending May 31, 2009, which was $.917 per share) for
our common stock at the commencement of the Option Exchange Program; (c)
expected annual volatility of our common stock price ranging from 71% to 93%;
(d) an expected term ranging from 3 years to 7 years; (e) a risk-free interest
rate ranging from 1.32% to 2.47%; and (f) no expected dividends. Based on these
assumptions, the Eligible Options to purchase approximately 4,200,566 shares
have an aggregate fair value of approximately $1.43 million.
We also
valued the New Options using the Black-Scholes option valuation model using the
following assumptions: (a) the new option exercise price of $1.50; (b) an
assumed share price of $1.00 per share; (c) expected annual volatility ranging
from 75% to 111%; (d) an expected term ranging from 2 years to 5 years; (e) a
risk-free interest rate ranging from 0.93% to 1.86%; and (f) no expected
dividends. Based on the above, and assuming that all of the Eligible Options
will be surrendered for exchange by Eligible Optionholders, the aggregate fair
value of the New Options would be approximately $2.12 million.
Election to
Participate. Participation in the Option Exchange Program will be
voluntary. Eligible Optionholders will be permitted to exchange all or none of
their Eligible Options for New Options on a grant-by-grant basis, meaning that
an Eligible Optionholder who holds more than one Eligible Option need not
surrender every Eligible Option he or she holds, but if any part of a single
Eligible Option is surrendered, the entire Eligible Option must be
surrendered.
Vesting of New
Options. As described in more detail above under “Overview and
Summary of Material Terms of Option Exchange Program—What Vesting Will Apply,”
each New Option will be subject to vesting that prohibits exercise within six
months of its date of grant. A participant in the Option Exchange Program will
forfeit any portion of the New Options award that remains unvested at the time
his or her employment with us terminates for any reason, except to the extent
that the holder exercises the New Options within a period of three months after
termination of employment (twelve months if termination is due to death or
disability).
Other Terms and Conditions of the
New Options. The other terms and conditions of the New Options will
be set forth in an option agreement to be entered into as of the New Option
grant date, and otherwise governed by the terms and conditions of the 2006 Stock
Plan. These additional terms and conditions will be comparable to the other
terms and conditions of the Eligible Options.
Return of Eligible Options
Surrendered. Consistent with the terms of the 2006 Stock Plan,
shares subject to Eligible Options surrendered in the Option Exchange Program
will return to the pool of shares available for grant under the 2006 Stock Plan.
This will result no net change in the number of shares available for issuance
under the 2006 Stock Plan.
Accounting Treatment. We
have adopted the provisions of SFAS 123R regarding accounting for
share-based payments. Under SFAS 123R, the expense related to issuance of
the Eligible Options as of their respective dates of grant, and is accrued over
the vesting period of such options. All of such expenses will continue to be
incurred, notwithstanding the surrender of any or all of the Eligible Options
for New Options. In addition, assuming a market price for our stock of $1.00 per
share on the date of the exchange, if all the options eligible for the Option
Exchange Program are exchanged, we will incur additional compensation
expense of approximately $543,000 at the time of the exchange and
approximately $232,000 over the remaining vesting periods of the exchanged
options. Further, in connection with obtaining the consent of a senior lender to
the amendment to the 2006 Stock Plan, we have agreed to modify the terms of a
warrant held by such lender. We estimate the fair value of the change in such
terms at $140,789.
U.S. Federal Income Tax
Consequences. The following is a summary of the anticipated material
U.S. federal income tax consequences of participating in the Option Exchange
Program. A more detailed summary of the applicable tax considerations to
participants will be provided in the Exchange Offer. The tax consequences of the
Option Exchange Program are not entirely certain, however, as the Internal
Revenue Service is not precluded from adopting a contrary position, and the law
and regulations themselves are subject to change. We believe the exchange of
Eligible Options for New Options pursuant to the Option Exchange Program should
be treated as a non-taxable
PRELIMINARY
PROXY MATERIALS
exchange,
and no income should be recognized for U.S. federal income tax purposes by us or
our employees upon the grant of the New Options. Upon disposition of any stock
acquired upon exercise of options, the Eligible Optionholder will recognize a
capital gain or loss (which will be long- or short-term depending upon whether
the stock was held for more than one year) equal to the difference between the
selling price and any amount previously recognized as income. All holders of
Eligible Options are urged to consult their own tax advisors regarding the tax
implications of participating in the Option Exchange Program under all
applicable laws prior to participating in the Option Exchange
Program.
Potential Modifications to Terms to
Comply with Governmental Requirements. The terms of the Option
Exchange Program will be described in an Exchange Offer that we will file with
the SEC. Although we do not anticipate that the SEC will require us to modify
the terms significantly, it is possible that we will need to alter the terms of
the Option Exchange Program, including an extension of the period we will keep
the Option Exchange Program open, to comply with comments from the
SEC.
Effect
on Shareholders
We are
not able to predict with certainty the effect the Option Exchange Program will
have on your interests as a shareholder, as we are unable to predict exactly how
many Eligible Optionholders will exchange their Eligible Options or what the
future market price of our common stock will be on the date that the New Options
are granted. However, we believe that substantially all holders of Eligible
Options will chose to participate. On the assumption of 100% participation and a
stock price of $1.00, we would expect to incur incremental compensation expense
from the Option Exchange Program of approximately $457,000 at the time of the
exchange and approximately $232,000 over the remaining vesting periods of the
exchanged options. In addition, we estimate the fair value of a related warrant
modification at $140,789.
Interests
of Our Directors and Executive Officers in the Option Exchange
Program
The
following table shows the number of shares subject to Eligible Options held by
our executive officers (as such term is defined in Section 16 of the
Securities Exchange Act of 1934, as amended, and Rule 16a-1 thereunder) as of
May 31, 2009:
|
|
|
|
|
|
Weighted
Avg.
|
|
|
Weighted
Avg.
|
|
|
|
Eligible
|
|
|
Exercise
|
|
|
Remaining
|
|
Name
|
|
Options
|
|
|
Price
|
|
|
Term (years)
|
|
Charles
E. Bradley
|
|
|
886,666 |
|
|
$ |
4.7230 |
|
|
|
5.42 |
|
|
Jeffrey
P. Fritz
|
|
|
270,000 |
|
|
$ |
5.0930 |
|
|
|
6.52 |
|
|
Robert
E. Riedl
|
|
|
250,000 |
|
|
$ |
4.8252 |
|
|
|
6.24 |
|
|
Chris
Terry
|
|
|
206,000 |
|
|
$ |
5.1226 |
|
|
|
6.48 |
|
|
Curtis
K. Powell
|
|
|
190,000 |
|
|
$ |
4.9105 |
|
|
|
6.21 |
|
|
Mark
Creatura
|
|
|
190,000 |
|
|
$ |
4.9105 |
|
|
|
6.21 |
|
|
Teri
L. Clements
|
|
|
145,000 |
|
|
$ |
5.0490 |
|
|
|
6.89 |
|
|
Jayne
E. Holland
|
|
|
145,000 |
|
|
$ |
5.0490 |
|
|
|
6.89 |
|
|
Michael
T. Lavin
|
|
|
85,000 |
|
|
$ |
5.0912 |
|
|
|
6.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,367,666 |
|
|
|
|
|
|
|
|
|
New
Plan Benefits
The
following table shows the maximum number of New Options that may be issued to
each of our executive officers, our executive officers as a group, and our
employees as a group pursuant to the Option Exchange Program and the dollar
values for the New Options assuming that all Eligible Options are exchanged and
the market price of our common stock is $1.00 per share at the date of grant of
the New Option:
PRELIMINARY
PROXY MATERIALS
|
|
|
|
|
|
Estimated Fair Value
|
|
|
|
|
|
|
Eligible
|
|
|
Eligible
|
|
|
New
|
|
|
Net
|
|
|
Name
|
|
Options
|
|
|
Options
|
|
|
Options
|
|
|
Benefit
|
|
|
Charles
E. Bradley
|
|
|
886,666 |
|
|
$ |
294,300 |
|
|
$ |
440,000 |
|
|
$ |
145,700 |
|
|
Jeffrey
P. Fritz
|
|
|
270,000 |
|
|
|
87,500 |
|
|
|
134,300 |
|
|
|
46,800 |
|
|
Robert
E. Riedl
|
|
|
250,000 |
|
|
|
83,300 |
|
|
|
124,700 |
|
|
|
41,400 |
|
|
Chris
Terry
|
|
|
206,000 |
|
|
|
69,810 |
|
|
|
103,580 |
|
|
|
33,770 |
|
|
Curtis
K. Powell
|
|
|
190,000 |
|
|
|
65,200 |
|
|
|
95,900 |
|
|
|
30,700 |
|
|
Mark
Creatura
|
|
|
190,000 |
|
|
|
65,200 |
|
|
|
95,900 |
|
|
|
30,700 |
|
|
Teri
L. Clements
|
|
|
145,000 |
|
|
|
51,700 |
|
|
|
74,550 |
|
|
|
22,850 |
|
|
Jayne
E. Holland
|
|
|
145,000 |
|
|
|
51,700 |
|
|
|
74,550 |
|
|
|
22,850 |
|
|
Michael
T. Lavin
|
|
|
85,000 |
|
|
|
29,150 |
|
|
|
43,150 |
|
|
|
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
for executive officers
|
|
|
2,367,666 |
|
|
$ |
797,860 |
|
|
$ |
1,186,630 |
|
|
$ |
388,770 |
|
|
All
other employees
|
|
|
1,832,900 |
|
|
|
634,155 |
|
|
|
934,717 |
|
|
|
300,562 |
|
|
All
participants
|
|
|
4,200,566 |
|
|
$ |
1,432,015 |
|
|
$ |
2,121,347 |
|
|
$ |
689,262 |
|
Although
participation in the Option Exchange Program is voluntary, one may reasonably
expect that all holders of Eligible Options will exchange them for New
Options. On that assumption, the benefits to be received by any
Eligible Optionholder or groups of Eligible Optionholders, if the proposal is
approved, would be the difference between the fair value of the Eligible Options
and the fair value of the New Options, as shown above under the caption "Net
Benefit.".
Vote
Required
You may
vote in favor or against the proposal and you may also abstain as to the
proposal. In order to approve the proposal, the affirmative vote of a majority
of all of the votes cast at the Annual Meeting is necessary for the approval of
the Option Exchange Program assuming a quorum is present. Completion of the
Exchange Offer is therefore contingent upon shareholder approval of the
proposal. For purposes of the approval of the Option Exchange Program,
abstentions and broker non-votes will not be counted as “votes cast” and will
have no effect on the result of the vote, although they will count toward the
presence of a quorum.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE STOCK OPTION EXCHANGE
PROGRAM.
PRELIMINARY
PROXY MATERIALS
INFORMATION
REGARDING THE COMPANY
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation earned during the two fiscal years
ended December 31, 2008 and 2007 by the Company's chief executive officer, by
its chief financial officer, and by the two other most highly compensated
individuals (such three individuals, the "named executive officers") who were
serving in such positions or as executive officers at any time in
2008.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards (1)
|
|
|
All
Other
Compensation (2)
|
|
|
Total
|
|
|
Charles
E. Bradley, Jr.
|
2008
|
|
$ |
880,000 |
|
|
$ |
1,056,000 |
|
|
$ |
67,244 |
|
|
|
2,100 |
|
|
$ |
2,005,344 |
|
|
President
& Chief
|
2007
|
|
|
840,000 |
|
|
|
1,500,000 |
|
|
|
561,864 |
|
|
|
2,100 |
|
|
|
2,903,964 |
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
P. Fritz
|
2008
|
|
|
317,000 |
|
|
|
170,000 |
|
|
|
33,622 |
|
|
|
2,100 |
|
|
|
522,722 |
|
|
Sr.
Vice President – Accounting
|
2007
|
|
|
305,000 |
|
|
|
212,000 |
|
|
|
93,122 |
|
|
|
2,100 |
|
|
|
612,222 |
|
|
&
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Terry
|
2008
|
|
|
319,000 |
|
|
|
182,000 |
|
|
|
33,622 |
|
|
|
2,100 |
|
|
|
536,722 |
|
|
Sr.
Vice President –
|
2007
|
|
|
307,000 |
|
|
|
229,000 |
|
|
|
93,122 |
|
|
|
2,100 |
|
|
|
631,222 |
|
|
Servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
the dollar value of accrued for financial accounting purposes in
connection with the grant of such
options
|
|
(2)
|
Amounts
in this column represent (a) any Company contributions to the Employee
Savings Plan (401(k) Plan), and (b) premiums paid by the Company for group
life insurance, as applicable to the named executive officers. Company
contributions to the 401(k) Plan were $1500 per individual in 2007 and
2008.
|
Grants of Plan-Based Awards in Last
Fiscal Year
The
Company in the year ended December 31, 2008, did not grant any stock awards or
stock appreciation rights to any of the named executive officers. The
Company granted options to substantially all of its management level employees
on January 30, 2008. The option grants noted in the tables above and
below were awarded to the named executive officers as part of that general
grant. The chief executive officer received an option to purchase up
to 40,000 shares of the Company's common stock at the market closing price
($3.18 per share) on the date of grant, with such right to purchase to become
exercisable in increments of 20% on each of the first through fifth
anniversaries of the grant date, and to expire on the tenth
anniversary. Each of the other seven executive officers of the
Company (including the named executive officers) received a grant at that time
on the same terms, with respect to up to 20,000 shares.
Grants
of Plan-Based Awards
|
Name
|
Grant
date
|
|
Number
of shares underlying options
|
|
|
|
Exercise
or base price of option awards
|
|
|
Grant
date fair value
of
stock and option awards
|
|
|
Charles
E. Bradley, Jr.
|
January
30, 2008
|
|
|
40,000 |
|
|
|
$ |
3.18 |
|
|
$ |
67,244 |
|
|
Jeffrey
P. Fritz
|
January
30, 2008
|
|
|
20,000 |
|
|
|
|
3.18 |
|
|
$ |
33,622 |
|
|
Chris
Terry
|
January
30, 2008
|
|
|
20,000 |
|
|
|
|
3.18 |
|
|
$ |
33,622 |
|
Subsequent
to year-end, on May 13, 2009, each director and management-level employee of the
Company received an option grant under the 2006 Stock Plan. All such
options are exercisable at $.77 per share, which was the closing price of the
common stock on that date. Each director received an option to
purchase 30,000 shares, the chief executive
PRELIMINARY
PROXY MATERIALS
officer
received an option to purchase 120,000 shares, and each senior vice president of
the Company (including Mr. Fritz and Mr. Terry) received an option to purchase
60,000 shares. The director's options become exercisable in full six
months after the date of grant, and the other options become exercisable in five
equal installments on the first through fifth anniversaries of the date of
grant. All of such options expire on May 13, 2019, ten years after
the date of grant.
Outstanding Equity Awards at Fiscal
Year-end
The
following table sets forth as of December 31, 2008 the number of unexercised
options held by each of the named executive officers, the number of shares
subject to then exercisable and unexercisable options held by such persons and
the exercise price and expiration date of each such option. Each
option referred to in the table was granted under the Company's 1991 Stock
Option Plan, 1997 Long-Term Incentive Plan or 2006 Long-Term Equity Incentive
Plan, at an option price per share no less than the fair market value per share
on the date of grant. Of such options, those that are "Eligible Options" as
described above in this proxy statement may be exchanged pursuant to the Option
Exchange Program, if the related proposal is approved at the Annual Meeting.
None of such individuals holds a stock award.
|
|
|
Number
of shares underlying unexercised options (#) exercisable
|
|
|
Number
of shares underlying unexercised options (#) unexercisable
|
|
|
Option
exercise price ($/share)
|
|
Option
expiration date
|
|
Charles
E. Bradley, Jr.
|
|
|
11,100 |
|
|
|
0 |
|
|
$ |
0.625 |
|
October
29, 2009
|
|
|
|
|
250,000 |
|
|
|
0 |
|
|
|
1.75 |
|
September
21, 2010
|
|
|
|
|
83,333 |
|
|
|
0 |
|
|
|
1.75 |
|
September
21, 2010
|
|
|
|
|
83,333 |
|
|
|
0 |
|
|
|
2.50 |
|
January
17, 2011
|
|
|
|
|
83,333 |
|
|
|
0 |
|
|
|
4.25 |
|
January
17, 2011
|
|
|
|
|
185,000 |
|
|
|
0 |
|
|
|
1.50 |
|
July
23, 2012
|
|
|
|
|
40,000 |
|
|
|
0 |
|
|
|
2.64 |
|
July
17, 2013
|
|
|
|
|
240,000 |
|
|
|
0 |
|
|
|
4.00 |
|
April
26, 2014
|
|
|
|
|
120,000 |
|
|
|
0 |
|
|
|
5.04 |
|
May
16, 2015
|
|
|
|
|
40,000 |
|
|
|
0 |
|
|
|
6.00 |
|
December
30, 2015
|
|
|
|
|
32,000 |
|
|
|
48,000 |
|
|
|
6.85 |
|
October
25, 2016
|
|
|
|
|
48,000 |
|
|
|
32,000 |
|
|
|
6.91 |
|
February
27, 2017
|
|
|
|
|
8,000 |
|
|
|
32,000 |
|
|
|
5.26 |
|
July
30, 2017
|
|
|
|
|
0 |
|
|
|
40,000 |
|
|
|
3.18 |
|
January
30, 2018
|
|
Jeffrey
P. Fritz
|
|
|
80,000 |
|
|
|
0 |
|
|
|
4.25 |
|
November
12, 2014
|
|
|
|
|
80,000 |
|
|
|
0 |
|
|
|
5.04 |
|
May
16, 2015
|
|
|
|
|
20,000 |
|
|
|
0 |
|
|
|
6.00 |
|
December
30, 2015
|
|
|
|
|
16,000 |
|
|
|
24,000 |
|
|
|
6.85 |
|
October
25, 2016
|
|
|
|
|
4,000 |
|
|
|
6,000 |
|
|
|
6.91 |
|
February
27, 2017
|
|
|
|
|
4,000 |
|
|
|
16,000 |
|
|
|
5.26 |
|
July
30, 2007
|
|
|
|
|
0 |
|
|
|
20,000 |
|
|
|
3.18 |
|
January
30, 2018
|
|
Chris
Terry
|
|
|
5000 |
|
|
|
0 |
|
|
|
1.75 |
|
September
21, 2010
|
|
|
|
|
5000 |
|
|
|
0 |
|
|
|
2.50 |
|
January
17, 2011
|
|
|
|
|
5000 |
|
|
|
0 |
|
|
|
4.25 |
|
January
17, 2011
|
|
|
|
|
27,500 |
|
|
|
0 |
|
|
|
1.50 |
|
July
23, 2012
|
|
|
|
|
30,000 |
|
|
|
0 |
|
|
|
1.92 |
|
February
3, 2013
|
|
|
|
|
20,000 |
|
|
|
0 |
|
|
|
2.64 |
|
July
17, 2013
|
|
|
|
|
20,000 |
|
|
|
0 |
|
|
|
4.00 |
|
April
26, 2014
|
|
|
|
|
20,000 |
|
|
|
0 |
|
|
|
5.04 |
|
May
16, 2015
|
|
|
|
|
46,000 |
|
|
|
0 |
|
|
|
6.00 |
|
December
30, 2015
|
|
|
|
|
16,000 |
|
|
|
24,000 |
|
|
|
6.85 |
|
October
25, 2016
|
|
|
|
|
4,000 |
|
|
|
6,000 |
|
|
|
6.91 |
|
February
27, 2017
|
|
|
|
|
4,000 |
|
|
|
16,000 |
|
|
|
5.26 |
|
July
30, 2017
|
|
|
|
|
0 |
|
|
|
20,000 |
|
|
|
3.18 |
|
January
30, 2018
|
PRELIMINARY
PROXY MATERIALS
Option
Exercises in Last Fiscal Year
None of
the named executive officers exercised any stock options during 2008;
accordingly, no value was realized by any of such individuals in connection with
stock option exercises.
Bonus
Plan
The
salary and bonus of the named executive officers are determined by the
Compensation Committee. The compensation appearing in the table above under the
caption "bonus" is paid pursuant to an executive management bonus plan (the “EMB
Plan”). The EMB Plan is administered by the Compensation Committee.
Among other things, the Compensation Committee selects participants in the EMB
Plan from among the Company’s executive officers and determines the performance
goals, target amounts and other terms and conditions of awards under the EMB
Plan. With respect to officers other than the chief executive officer,
determinations of base salary and of criteria relating to the EMB Plan are based
in part on evaluations of such officers prepared by the chief executive officer,
which are furnished to and discussed with the Compensation
Committee.
Pension
Plans
The
Company's officers do not participate in any pension or retirement plan, other
than a tax-qualified defined contribution plan (commonly known as a 401(k)
plan). Each of the named executive officers is employed "at will" by the
Company, and none has an employment contract. The Compensation
Committee has considered entering into agreements with one or more of the
Company's officers that might pay additional compensation following a change in
control, and may authorize such agreement(s) in the future, but no such
agreements are in place as of the date of this report.
Director
Compensation
The
Company pays all non-employee directors a retainer of $3,000 per month, with an
additional fee of $500 per month for service on a board committee ($1,000 for a
committee chairman). Non-employee directors also receive per diem fees of $1,000 for
attendance in person at meetings of the board of directors, or $500 for
attendance by telephone. No per diem fees are paid for
attendance at committee meetings. Pursuant to the Company's policy
that is applicable to all of its non-employee members, the Board on January 30,
2008, issued options with respect to 10,000 shares to each non-employee
director. All such options are exercisable at $3.18 per share, the
exercise price being the closing price on the date of grant. The following
table summarizes compensation received by the Company’s directors for the year
2008:
|
Name
of Director
|
|
|
Fees
Earned or Paid in Cash (1)
|
|
|
Option
Awards (2)
|
|
|
Total
|
|
|
Charles
E. Bradley, Jr. (3)
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Chris
A. Adams
|
|
|
$ |
47,500 |
|
|
$ |
8,161 |
|
|
$ |
55,661 |
|
|
Brian
J. Rayhill
|
|
|
$ |
65,500 |
|
|
$ |
8,161 |
|
|
$ |
73,661 |
|
|
William
B. Roberts
|
|
|
$ |
52,500 |
|
|
$ |
8,161 |
|
|
$ |
60,661 |
|
|
Gregory
S. Washer
|
|
|
$ |
59,000 |
|
|
$ |
8,161 |
|
|
$ |
67,161 |
|
|
Daniel
S. Wood
|
|
|
$ |
71,500 |
|
|
$ |
8,161 |
|
|
$ |
79,661 |
|
(1) This
column reports the amount of cash compensation earned in 2008 for Board and
committee service.
(2) This
column represents the dollar amount recognized for financial statement reporting
purposes with respect to the 2008 fiscal year for the fair value of stock
options granted to the directors in 2008. The fair value was
estimated using the Black-Scholes option-pricing model in accordance with SFAS
123R. The weighted average fair value per option was $0.82, based on
assumptions of 2.0 years expected life, expected volatility of 43%, expected
dividend yield of 0.0%, and a risk-free rate of 2.48%. In addition to
the stock option awards granted in 2008, the several directors held at December
31, 2008 option awards granted in previous years, for totals as follows: Mr.
Bradley, 14 awards; Mr. Adams, two; Mr. Rayhill, four; Mr. Roberts, three; Mr.
Washer, three; and Mr. Wood, seven. Each director also received a
stock option award on May 13, 2009, as described above.
PRELIMINARY
PROXY MATERIALS
(3) Mr.
Bradley's compensation as chief executive officer of the Company is described
elsewhere in this report. He received no additional compensation for
service on the Company's Board of Directors.
The
Committee has from time to time considered providing additional elements of
executive compensation. It has considered elements such as restricted
stock awards, compensation contingent on a change in control, defined benefit
pension plans, deferred cash compensation, and supplemental retirement plans
(supplemental in the sense that they exceed the limits for tax advantaged
treatment). To date, the Committee has elected not to pay
compensation in such forms, having determined that the Company's objectives are
better met by one or more of the elements of compensation that it does
pay. Regarding restricted stock units, the Committee has noted that
any form of equity equivalent to or closely tied to common stock does serve to
meet the objective of aligning officers' personal interest with that of the
shareholders generally. The Committee believes, however, that the
objective is better met by grants of stock options than by grants of share
equivalents, because recipients of the grants will face the same degree of
variance in results at a lesser cost to the Company, when option grants are
compared to grants of restricted stock units. Regarding compensation
that would be payable contingent on a change in control of the Company, the
Committee believes that there are certain legitimate objectives to be met by
such contingent compensation. As of the date of this report, however,
no such contingent compensation plans are in place. Regarding defined
benefit pension plans, deferred cash compensation and supplemental retirement
plans, the Committee believes that the Company's retention objective is better
met by straight cash payments, whether in the form of base salary or in the form
of bonus compensation. The Committee may in the future revisit its
conclusions as to any of the components discussed above, or may consider other
forms of compensation.
PRELIMINARY
PROXY MATERIALS
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table
below sets forth the number and percentage of shares of the Company’s Common
Stock (its only class of voting securities) owned beneficially as of the May 18,
2009, by (i) each person known to the Company to own beneficially more than 5%
of the outstanding Common Stock, (ii) each director or named executive officer
of the Company, and (iii) all directors and executive officers of the Company as
a group. Except as otherwise indicated, and subject to applicable community
property and similar laws, each of the persons named has sole voting and
investment power with respect to the shares shown as beneficially owned by such
persons. Except as otherwise noted, each person named in the table
has a mailing address at 19500 Jamboree Road, Irvine, CA 92612.
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership (1)
|
Percent
of
Class
|
|
Charles
E. Bradley, Jr.
|
2,650,408
|
|
14.1%
|
|
Chris
A. Adams
|
54,000
|
|
*
|
|
Brian
J. Rayhill
|
115,000
|
|
*
|
|
William
B. Roberts
|
939,107
|
|
5.0%
|
|
Gregory
S. Washer
|
127,550
|
|
*
|
|
Daniel
S. Wood
|
137,000
|
|
*
|
|
Jeffrey
P. Fritz
|
208,000
|
|
1.1%
|
|
Chris
Terry
|
249,041
|
|
1.3%
|
|
All
nominees and executive officers combined (13 persons)
|
5,627,094
|
(2)
|
|
|
Citigroup
Financial Products Inc., 388 Greenwich Street, New York, NY
10013
|
2,508,113
|
(3)
|
13.3%
|
|
Levine
Leichtman Capital Partners IV, L.P., 335 N. Maple Drive, Suite 240,
Beverly Hills, CA 90210
|
3,073,309
|
(4)
|
16.3%
|
|
Millenco
LLC, 666 Fifth Ave., New York, NY 10103
|
1,469,618
|
(5)
|
7.8%
|
|
Dimensional
Fund Advisors LP, 1299 Ocean Ave., Santa Monica, CA 90401
|
1,102,850
|
(6)
|
5.9%
|
|
Whitebox
Advisors LLC, 3033 Excelsior Boulevard, Suite 300, Minneapolis, MN
55416
|
1,137,957
|
(7)
|
6.0%
|
* Less
than 1.0%
|
(1)
|
Includes
certain shares that may be acquired within 60 days after May 18, 2009 from
the Company upon exercise of options, as follows: Mr. Bradley,
1,232,099 shares; Mr. Adams, 40,000 shares; Mr. Rayhill, 95,000 shares;
Mr. Roberts, 45,000 shares; Mr. Washer, 55,000 shares; Mr. Wood,
85,000 shares; Mr. Fritz, 208,000 shares; and Mr. Terry, 206,500
shares. The calculation of beneficial ownership also includes,
in the case of the executive officers, an approximate number of shares
each executive officer could be deemed to hold through contributions made
to the Company's Employee 401(k) Plan (the "401(k) Plan"). The
401(k) Plan provides an option for all participating employees to purchase
stock in the Company indirectly by buying units in a mutual
fund. Each "unit" in the mutual fund represents an interest in
Company stock, cash and cash
equivalents.
|
|
(2)
|
Includes
2,940,099 shares that may be acquired within 60 days after May 18, 2009,
upon exercise of options and conversion of convertible
securities.
|
|
(3)
|
Based
on a report on Schedule 13G filed by Citigroup Financial Products Inc. on
February 9, 2009.
|
|
(4)
|
Based
on a report on Schedule 13D filed by Levine Leichtman Capital Partners IV,
L.P. on September 26, 2008.
|
|
(5)
|
Based
on a report on Schedule 13G filed by Millenco LLC on February 12,
2009.
|
|
(6)
|
Based
on a report on Schedule 13G filed by Dimensional Fund Advisors LP on
February 9, 2009.
|
|
(7)
|
Based
on a report on Schedule 13G filed by Whitebox Advisors LLC on February 17,
2009.
|
The table
below presents information regarding securities authorized for issuance under
equity compensation plans, including the CPS 2006 Long-Term Equity Incentive
Plan, as of December 31, 2008.
|
|
|
|
Number
of Securities
|
|
|
|
|
Remaining
Available for
|
|
|
Number
of Securities
|
|
Future
Issuance Under
|
|
|
to
be Issued Upon
|
Weighted-Average
|
Equity
Compensation
|
|
|
Exercise
of
|
Exercise
Price of
|
Plans
(excluding securities
|
|
Plan
Category
|
Outstanding
Options
|
Outstanding
Options
|
reflected
in first column)
|
|
Plans
approved by stockholders
|
|
6,319,999
|
|
|
$4.35
|
|
|
2,435,000
|
|
|
Plans
not approved by stockholders
|
|
None
|
|
|
N/A
|
|
|
N/A
|
|
|
Total
|
|
6,319,999
|
|
|
$4.35
|
|
|
2,435,000
|
|
|
Audit
Committee Report
The
Audit Committee reviews the Company's financial reporting process on
behalf of the Board and meets at least once per quarter to review the
Company’s financial statements. The Audit Committee acts
pursuant to a written charter adopted by the Board of
Directors. Management has the primary responsibility for the
financial statements and the reporting process. The Company's
independent auditors are responsible for expressing an opinion on the
conformity of the Company's audited financial statements to accounting
principles generally accepted in the United States of
America.
In
this context, the Audit Committee reviewed and discussed with management
and the independent auditors the audited financial statements for the year
ended December 31, 2008 (the "Audited Financial
Statements"). The Audit Committee has discussed with the
independent auditors the matters required to be discussed by Statement on
Auditing Standards No. 61 (Communication with Audit
Committees). In addition, the Audit Committee has received from
the independent auditors the written disclosures required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit
Committees) and discussed with them their independence from the
Company. Based on the reviews and discussions referred to
above, the Audit Committee recommended to the Board that the audited
financial statements be included in the Company's Annual Report on Form
10-K for the year ended December 31, 2008, for filing with the Securities
and Exchange Commission.
The
Audit Committee members do not serve as professional accountants or
auditors and their functions are not intended to duplicate or to certify
the activities of management and the independent auditors. The
Committee serves a board-level oversight role where it receives
information from, consults with, and provides its views and directions to,
management and the independent auditors on the basis of the information it
receives and the experience of its members in business, financial and
accounting matters. Pursuant to the terms of its charter, the
Audit Committee approves the engagement of auditing services and permitted
non-audit services including the related fees and general
terms. Mr. Fredrikson, chairman of the Audit Committee, is
considered by the Board of Directors to have the qualifications and
experience necessary to serve as an "audit committee financial
expert."
THE
AUDIT COMMITTEE
E.
Bruce Fredrikson (chairman)
John
C. Warner
Daniel
S. Wood
|
PRELIMINARY
PROXY MATERIALS
CERTAIN
TRANSACTIONS
Citigroup. On July
10, 2008, the Company and its wholly owned subsidiary Folio Funding II, LLC, as
borrower, agreed with Citigroup Financial Products, Inc. (“CGFP”) to amend and
restate the agreements governing a pre-existing revolving residual credit
facility. CGFP is the note purchaser under and administrative agent of that
credit facility.
Under
the original residual facility, the Company sold eligible residual interests in
securitizations to the borrower, which in turn pledged the residuals as
collateral for floating rate borrowings from the note purchaser. The amount
available for borrowing was computed by the administrative agent using a
valuation methodology of the residuals, and was subject to an overall maximum
principal amount of $120 million. The indebtedness of the borrower was
represented by (i) a $60 million Class A-1 Variable Funding Note, and (ii) a $60
million Class A-2 Term Note. The facility's revolving feature was to expire by
its terms on July 10, 2008, and the Class A-1 Note was to be due at that time.
The Class A-2 Note was to be due on July 10, 2009.
With the
amendments to this facility, the Company prepaid a portion of the outstanding
notes, reducing the outstanding principal balance to $70 million, and the notes
were re-designated as (i) a $10 million Class A-1 Term Note, and (ii) a $60
million Class A-2 Term Note. Approximately $4 million of the principal
prepayment represented the agreed value of a warrant to purchase (for
nominal consideration) 2,500,000 shares of Company common stock, which warrant
was issued to an affiliate of CGFP, and was subsequently transferred to CGFP.
The Class A-1 Term Note and Class A-2 Term Note provide for minimum required
levels of amortization, and are due in June 2009. However, the Company also
received an option, if certain conditions are met, to extend the maturity for an
additional year to June 2010.
The
maximum principal amount of such indebtedness to CGFP during 2008 was $90
million. During 2008, the Company paid $22.7 million of principal and
$8,595,970 of interest on the debt, and has since paid additional principal to
reduce the amount outstanding to $65.25 million as of March 31,
2009. Interest on such indebtedness accrues at a floating rate,
computed as 30-day LIBOR plus 10.875%.
On
September 26, 2008, the Company sold approximately $198.7 million in adjusted
principal amount of automobile purchase receivables to its wholly owned
subsidiary CALT SPE, LLC, which then transferred those receivables to Auto Loan
Trust, a Delaware statutory trust. The purchase price was funded by
Auto Loan Trust's issuance and sale of structured notes. An affiliate of CGFP
purchased 95% of the notes, and the Company purchased the remaining
5%.
Levine Leichtman Capital
Partners. On June 30, 2008, the Company entered into a
Securities Purchase Agreement and related agreements pursuant to which Levine
Leichtman Capital Partners IV, L.P (“LLCP”) purchased a $10 million five-year
note issued by the Company. The indebtedness to LLCP is secured by substantially
all of the Company’s assets, though not by the assets of its special-purpose
financing subsidiaries. Certain other subsidiaries (CPS Marketing, Inc., CPS
Leasing, Inc., Mercury Finance Company LLC and TFC Enterprises LLC) have
guarantied the Company’s obligations to LLCP.
In
connection with the Securities Purchase Agreement, the Company paid to LLCP a
closing fee of $1.1 million and issued to LLCP (i) 1,225,000 shares of the
Company’s common stock, (ii) a warrant that represented the right to purchase,
at the time of issuance, 275,000 shares of the Company’s common stock, at a
nominal exercise price (the "N Warrant"), and (iii) a warrant that represented
the right to purchase, at the time of issuance, 1,500,000 shares of the
Company’s common stock, at an exercise price of $2.573 per share (the "FMV
Warrant"). The number of shares subject to each warrant and the
exercise price of each warrant are subject to certain adjustments contained in
the warrants. Exercise of the warrants was contingent upon the
Company’s obtaining the approval of its shareholders, which was obtained on
September 16, 2008.
Pursuant
to the anti-dilution provisions of the LLCP warrants, the Company’s July 10
transactions with CGFP, described above, resulted in a change in the number of
shares issuable upon exercise of the N Warrant from 275,000 to 283,985, and upon
exercise of the FMV Warrant from 1,500,000 to 1,564,324. The exercise
price of the FMV Warrant was also adjusted, from $2.573 per share to $2.4672 per
share.
Under the
Securities Purchase Agreement, subject to the satisfaction of certain terms and
conditions, LLCP also agreed to purchase an additional $15 million note to be
issued by the Company. That obligation was subject to a number of conditions
being satisfied, including, without limitation, a successful amendment and
restatement of the Company’s indebtedness to CGFP, described above. Those
conditions were satisfied and the additional note was issued on July 10, 2008.
The additional note has substantially the same terms as the $10 million
note.
In
connection with the Securities Purchase Agreement, the Company entered into an
Investor Rights Agreement with LLCP that granted LLCP certain monitoring and
other rights, including the right to cause an individual designated by LLCP to
be nominated and elected to the Company’s board of directors. In
addition, the Investor Rights Agreement granted to LLCP rights of first refusal
with respect to future issuances of equity securities by the Company and
contains restrictions on the Company’s ability (and the ability of the Company’s
subsidiaries) to issue equity securities. Such restrictions made it
necessary to seek the consent of LLCP with respect to the Option Exchange
Program. LLCP has indicated its willingness to consent to the
transactions composing the Option Exchange Program, provided that the
antidilution terms of its FMV Warrant are modified upon completion of the Option
Exchange Program to provide for a decrease in the exercise price, but not an
increase in the number of underlying shares, of the FMV
Warrant. Assuming 100% participation in the Option Exchange Program,
the exercise price of the FMV Warrant would be reduced from $2.4672 per share to
$1.44 per share. Upon such adjustment, the Company will record
expense in an amount dependent on the fair value of the modified FMV
Warrant. We believe the additional expense will be approximately
$140,789.
The
maximum principal amount of indebtedness to LLCP during 2008 was $25
million. During 2008, the Company paid no principal and $2,533,000 of
interest on the debt. As of March 31, 2009, the principal amount owed
remains $25 million. Interest on such indebtedness accrues at a fixed
rate of 16% per year.
Affiliates
of LLCP have purchased other senior secured debt securities from the Company,
and have held as much as 4.5 million shares of the Company's common stock, at
various times prior to the transactions described above. No such debt securities
had been outstanding since July 2007, and no such shares had been held since
December 2007. LLCP or its affiliates may in the future provide the Company
with financial advisory or other services, for which it or they may receive
compensation in such amounts and forms as may be determined by
negotiation.
CPS Leasing. The Company
holds 80% of the outstanding shares of the capital stock of CPS Leasing, Inc.
("CPSL"). The remaining 20% of CPSL is held by Charles E. Bradley,
Jr., who is the chief executive officer and chairman of the board of directors
of the Company. CPSL engaged in the equipment leasing business, and
is currently in the process of liquidation as its leases come to
term. The Company financed the operations of CPSL by making
operating advances and by advancing to CPSL the fraction of the purchase prices
of its leased equipment that CPSL did not borrow under its lines of
credit. The aggregate amount of advances made by the Company to CPSL
as of December 31, 2008, is approximately $474,000.
Employee Indebtedness. To assist certain
officers in exercising stock options, the Company or a subsidiary lent to such
officers the exercise price of options such officers exercised in May and July
2002. The loans accrued interest at 5.50% per annum, which compounded
annually. The entire principal and accrued interest was due in July
2007. The chief executive officer (Mr. Bradley), one executive
officer (Mr. Terry), and four officers other than executive officers
borrowed money on those terms. One of the other officers (Teri L.
Clements) was promoted to an executive officer position in April
2007. At December 31, 2007 there was $383,000 outstanding related to
three such loans. Two of the loans were repaid during 2008 with
cash. The third was repaid on August 5, 2008 by surrender to the
Company of 210,000 shares of Company common stock. At December 31,
2008, all such loans have been repaid. Pursuant to the Sarbanes-Oxley
Act of 2002, the Company has ceased providing any loans to its executive
officers.
Public Offering of Subordinated
Notes. The
Company is engaged in an ongoing offering to the public of subordinated notes.
Director William Roberts on December 3, 2007 purchased $4,000,000 of three-year
notes directly from the Company in that offering. The Company in 2008
paid interest of $601,513 on such notes, in accordance with their terms. The
interest rate on such notes of 14.91% per annum, and the yield paid to the
noteholder is computed by compounding that rate on a daily basis. The rate was
determined by negotiation, and is consistent with rates then available to other
purchasers in the offering.
Policy on Related Party
Transactions. The agreements and transactions described above, other than
those described under the captions “Citigroup” and “Levine Leichtman
Capital Partners,” were entered into by the Company with parties who personally
benefited from such transactions and who had a control or fiduciary relationship
with the Company. It is the Company's policy that any such
transactions with persons having a control or fiduciary relationship with the
Company may take place only if approved by the Audit Committee or by the members
of the Company's Board of Directors who are disinterested with respect to the
transaction, and independent in accordance with the standards for director
independence prescribed by Nasdaq. Such policy is maintained in
writing in the charter of the Audit Committee. The agreements and
transactions above were reviewed and approved by the members of the Company's
Board of Directors who are disinterested with respect to the transaction, except
that the subordinated notes transaction was reviewed and approved by the Audit
Committee. The Company has determined that each of its nonemployee
directors (Messrs. Adams, Fredrikson, Rayhill, Roberts, Warner, Washer and Wood,
of whom Messrs. Wood, Adams and Rayhill compose the Audit Committee) is
independent in accordance with Nasdaq standards.
FURTHER
INFORMATION RELATING TO THE ANNUAL MEETING
Voting
Of Shares
The Board
of Directors recommends that an affirmative vote be cast in favor of each of the
nominees and proposals listed on the proxy card.
The Board
of Directors knows of no other matters that may be brought before the meeting
which require submission to a vote of the shareholders. If any other
matters are properly brought before the meeting, however, the persons named in
the enclosed proxy or their substitutes will vote in accordance with their best
judgment on such matters.
Holders
of CPS Common Stock are entitled to one vote per share on each matter other than
election of directors. As to election of directors, each holder of
CPS Common Stock may cumulate such holder's votes and give any nominee an
aggregate number of votes equal to the number of directors to be elected
multiplied by the number of shares of CPS Common Stock held of record by such
holder as of the record date, or distribute such aggregate number of votes among
as many nominees as the holder thinks fit. However, no such holder
shall be entitled to cumulate votes for any nominee unless such nominee's name
has been placed in nomination prior to the voting and the holder has given
notice at the annual meeting prior to the voting of the holder's intention to
cumulate votes. If any one holder has given such notice, all holders
may cumulate their votes for nominees. Discretionary authority is
sought hereby to cumulate votes of shares represented by proxies.
Votes
cast in person or by proxy at the Annual Meeting will be tabulated by the
Inspector of Elections with the assistance of the Company's transfer
agent. The Inspector of Elections will also determine whether or not
a quorum is present. In general, California law provides that a
quorum consists of a majority of the shares entitled to vote, represented either
in person or by proxy. Approval of each proposal other than election
of directors requires the affirmative vote of a majority of shares represented
and voting on the proposal at a duly held meeting at which a quorum is present
(which shares voting affirmatively must also constitute at least a majority of
the required quorum). The Inspector of Elections will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as not voting for purposes of
determining the approval of any matter submitted to the shareholders for a
vote. Any proxy that is returned using the form of proxy enclosed and
which is not marked as to a particular item will be voted FOR election of the
nominees for director named herein; FOR the ratification of the appointment of
Crowe Horwath LLP as the Company's independent auditors for the year ending
December 31, 2009; "FOR” approval of the amendment to the 2006 Stock Plan; and
such proxy will also be deemed to grant discretionary authority to vote upon any
other matters properly coming before the meeting. If a broker
indicates on the enclosed proxy or its substitute that it does not have
discretionary authority as to certain shares to vote on a particular matter
("broker non-votes"), those shares will be considered as abstentions with
respect to that matter. While there is no definitive specific
statutory or case law authority in California concerning the proper treatment of
abstentions and broker non-votes, the Company believes that the tabulation
procedures to be followed by the Inspector of Elections are consistent with the
general statutory requirements in California concerning voting of shares and
determination of a quorum.
Shareholder
Proposals
The
Company plans to hold its year 2010 Annual Meeting of Shareholders on June 3,
2010. In order to be considered for inclusion in the Company's proxy
statement and form of proxy for the 2010 Annual Meeting, any proposals by
shareholders intended to be presented at such meeting must be received by the
Secretary of the Company at 19500 Jamboree Road, Irvine, California 92612 by
December 30, 2009.
Availability
of Annual Report on Form 10-K
The
Company has provided a copy of its 2008 Annual Report with this proxy
statement. Shareholders may obtain, without
charge, a copy of the Company’s annual report on Form 10-K, upon written
request. Any such request should be directed to "Corporate
Secretary, Consumer Portfolio Services, Inc., 19500 Jamboree Road, Irvine, CA
92612." The Form 10-K is also available on the Company's website,
www.consumerportfolio.com.