UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
________________
FORM
10-K
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2008
Commission
file number: 001-14116
CONSUMER
PORTFOLIO SERVICES, INC.
(Exact
name of registrant as specified in its charter)
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California
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33-0459135
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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19500
Jamboree Road, Irvine, California
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92618
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (949) 753-6800
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class Name of Each Exchange on
Which Registered
Common
Stock, no par
value The
Nasdaq Stock Market LLC (Global
Market)
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[ ]No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes [ ]No [ X
]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated
filer”,”accelerated filer" and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated filer
[ ] Non-accelerated
filer [ ] Smaller reporting company [ X
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).
Yes
[ ]No [ X ]
The
aggregate market value of the 16,412,115 shares of the registrant’s common stock
held by non-affiliates as of the date of filing of this report, based upon the
closing price of the registrant’s common stock of $1.47 per share reported by
Nasdaq as of June 30, 2008, was approximately $24,125,809. For purposes of this
computation, a registrant sponsored pension plan and all directors and executive
officers are deemed to be affiliates. Such determination is not an admission
that such plan, directors and executive officers are, in fact, affiliates of the
registrant. The number of shares of the registrant's Common Stock outstanding on
March 20, 2009 was 18,899,999.
DOCUMENTS
INCORPORATED BY REFERENCE
The proxy
statement for registrant’s 2009 annual shareholders meeting is incorporated by
reference into Part III hereof.
TABLE OF CONTENTS
PART
I
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Item
1.
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Business
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1
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Item 1A.
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Risk Factors |
11
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Item
1B.
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Unresolved Staff Comments |
19
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Item
2.
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Property
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19
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Item
3.
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Legal
Proceedings
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19
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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Item 4A.
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Executive Officers of the Registrant |
20
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
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22
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Item
6.
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Selected
Financial Data
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23
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Item
7.
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Management’s
Discussion And Analysis Of Financial Condition And Results Of
Operations
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26
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Item 9A.
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Controls and Procedures |
43
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Item
9B.
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Other Information |
44
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PART
III
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Item 10.
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Directors and Executive Officers of the Registrant |
44
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Item 11.
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Executive Compensation |
44
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
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44 |
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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44 |
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Item 14.
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Principal Accountant Fees and Services |
44
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PART
IV
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Item 15.
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Exhibits, Financial Statement Schedules |
45
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PART
I
Item
1. Business
Overview
We are a
specialty finance company engaged in purchasing and servicing retail automobile
contracts originated primarily by franchised automobile dealers and, to a lesser
extent, by select independent dealers in the United States in the sale of new
and used automobiles, light trucks and passenger vans. Through our automobile
contract purchases, we provide indirect financing to the customers of dealers
who have limited credit histories, low incomes or past credit problems, who we
refer to as sub-prime customers. We serve as an alternative source of
financing for dealers, facilitating sales to customers who otherwise might not
be able to obtain financing from traditional sources, such as commercial banks,
credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly
from dealers, we have also (i) acquired installment purchase contracts in three
merger and acquisition transactions, (ii) purchased immaterial amounts of
vehicle purchase money loans from non-affiliated lenders, and (iii) originated
ourselves an immaterial amount of vehicle purchase money loans by lending money
directly to consumers. In this report, we refer to all of such
contracts and loans as "automobile contracts."
We were
incorporated and began our operations in March 1991. From inception through
December 31, 2008, we have purchased a total of approximately $8.7 billion of
automobile contracts from dealers. In addition, we obtained a total
of approximately $605.0 million of automobile contracts in mergers and
acquisitions we made in 2002, 2003 and 2004. During 2008, unlike
recent prior years, our managed portfolio decreased from the previous year due
to our strategy of decreasing contract purchases to conserve our liquidity in
response to adverse economic conditions, as discussed further
below. Our total managed portfolio, net of unearned interest on
pre-computed automobile contracts, was approximately $1,664.1 million at
December 31, 2008 compared to $2,162.2 million at December 31, 2007,
$1,565.9 million as of December 31, 2006 and $1,122.0 million as of
December 31, 2005.
We are
headquartered in Irvine, California, where most operational and administrative
functions are centralized. All credit and underwriting functions are
performed in our California headquarters, and we service our automobile
contracts from our California headquarters and from three servicing branches in
Virginia, Florida and Illinois.
We direct
our marketing efforts primarily to dealers, rather than to
consumers. We establish relationships with dealers through our
employee marketing representatives who contact a prospective dealer to explain
our automobile contract purchase programs, and thereafter provide dealer
training and support services. The marketing representatives are obligated to
represent our financing program exclusively. Our marketing representatives
present the dealer with a marketing package, which includes our promotional
material containing the terms offered by us for the purchase of automobile
contracts, a copy of our standard-form dealer agreement, and required
documentation relating to automobile contracts. As of December 31,
2008, we had 36 marketing representatives and we were actively receiving
applications from 364 dealers in 43 states. Current levels of
marketing representatives and dealers are a significant reduction from December
31, 2007 when we had 134 marketing representatives and were actively receiving
applications from 10,255 dealers. During 2008 and thereafter, we
significantly reduced our presence in the marketplace in response to economic
conditions as discussed further below. As of December 31, 2008,
approximately 82% of our dealers are franchised new car dealers that sell both
new and used cars and the remainder are independent used car dealers. For the
year ended December 31, 2008, approximately 88% of the automobile contracts
purchased under our programs consisted of financing for used cars and 12%
consisted of financing for new cars, as compared to 84% financing for used cars
and 16% for new cars in the year ended December 31, 2007. We
purchase contracts in our own name (“CPS”) and, until July 2008, also purchased
contracts in the name of our wholly-owned subsidiary, The Finance Company
("TFC"). Programs marketed under the CPS name serve a wide range of
sub-prime customers, primarily through franchised new car dealers. Our TFC
program served vehicle purchasers enlisted in the U.S. Armed Forces, primarily
through independent used car dealers. In July 2008, we suspended
contract purchases under our TFC program.
We
purchase automobile contracts with the intention of financing them on a
long-term basis through securitizations. Securitizations are transactions in
which we sell a specified pool of contracts to a special purpose entity of ours,
which in turn issues asset-backed securities to fund the purchase of the pool of
contracts from us. Depending on the structure of the securitization, the
transaction may be treated, for financial accounting purposes, as a sale of the
contracts or as a secured financing.
Historically,
we have depended upon the availability of short-term warehouse credit facilities
and access to long-term financing through the issuance of asset-backed
securities collateralized by our automobile contracts. Since 1994, we have
completed 49 term securitizations of approximately $6.6 billion in contracts. We
conducted four term
Since the
fourth quarter of 2007, we have observed unprecedented adverse changes in the
market for securitized pools of automobile contracts. These changes include
reduced liquidity, and reduced demand for asset-backed securities, particularly
for securities carrying a financial guaranty and for securities backed by
sub-prime receivables. Moreover, many of the firms that previously provided
financial guarantees, which were an integral part of our securitizations, are no
longer offering such guarantees. As of December 31, 2008, we have no
available warehouse credit facilities and no immediate plans to complete a term
securitization. The adverse changes that have taken place in the
market over the last 18 months have caused us to seek to conserve liquidity by
reducing our purchases of automobile contracts to nominal levels. If the current
adverse circumstances that have affected the capital markets should continue or
worsen, we may curtail further or cease our purchases of new automobile
contracts, which could lead to a material adverse effect on our
operations.
Sub-Prime
Auto Finance Industry
Automobile
financing is the second largest consumer finance market in the United
States. The automobile finance industry can be divided into two
principal segments: a prime credit market and a sub-prime credit market.
Traditional automobile finance companies, such as commercial banks, savings
institutions, credit unions and captive finance companies of automobile
manufacturers, generally lend to the most creditworthy, or so-called prime,
borrowers. The sub-prime automobile credit market, in which we operate, provides
financing to less creditworthy borrowers, at higher interest rates.
Historically,
traditional lenders have not served the sub-prime market or have done so through
programs that were not consistently available. Independent companies
specializing in sub-prime automobile financing and subsidiaries of larger
financial services companies currently compete in this segment of the automobile
finance market, which we believe remains highly fragmented, with no single
company having a dominant position in the market.
Current
economic conditions have negatively affected many aspects of our
industry. First, as stated above, there is little demand for
asset-backed securities secured by consumer finance receivables, including
sub-prime automobile receivables. Second, lenders who previously
provided short-term warehouse financing for sub-prime automobile finance
companies such as ours are reluctant to provide such short-term financing due to
the uncertainty regarding the prospects of obtaining long-term financing through
the issuance of asset-backed securities. In addition, many capital
market participants such as investment banks, financial guaranty providers and
institutional investors who previously played a role in the sub-prime auto
finance industry have withdrawn from the industry, or in some cases, have ceased
to do business. Finally, the broad economic weakness and increasing
unemployment has made many of the obligors under our receivables less willing or
able to pay, resulting in higher delinquency, charge-offs and
losses. Each of these factors has adversely affected our results of
operations. Should existing economic conditions worsen, both our
ability to purchase new contracts and the performance of our existing managed
portfolio may be impaired, which, in turn, could have a further material adverse
effect on our results of operations.
Our
Operations
Our
automobile financing programs are designed to serve sub-prime customers, who
generally have limited credit histories, low incomes or past credit
problems. Because we serve customers who are unable to meet certain
credit standards, we incur greater risks, and generally receive interest rates
higher than those charged in the prime credit market. We also sustain
a higher level of credit losses because we provide financing in a relatively
high risk market.
Originations
When a
retail automobile buyer elects to obtain financing from a dealer, the dealer
takes a credit application to submit to its financing sources. Typically, a
dealer will submit the buyer's application to more than one financing source for
review. We believe the dealer’s decision to choose a financing source
is based primarily on: (i) the monthly payment made available to the dealer's
customer; (ii) the purchase price offered to the dealer for the contract; (iii)
the timeliness, consistency and predictability of response; (iv) funding
turnaround time; and (v) any conditions to purchase. Dealers can send
credit applications to us by entering the necessary data on our website, by fax,
or through one of several third-party application aggregators. For the year
ended December 31, 2008, we received approximately 78% of all applications
through DealerTrack (the industry leading dealership
application
2
Upon
receipt of information from a dealer, we immediately order a credit report to
document the buyer's credit history. If, upon review by our proprietary
automated decisioning system, or in some cases, one of our credit analysts, we
determine that the automobile contract meets our underwriting criteria, or would
meet such criteria with modification, we request and review further information
and supporting documentation and, ultimately, decide whether to approve the
automobile contract for purchase. When presented with an application, we attempt
to notify the dealer within one hour as to whether we would purchase the related
automobile contract.
Dealers
with which we do business are under no obligation to submit any automobile
contracts to us, nor are we obligated to purchase any automobile contracts from
them. During the year ended December 31, 2008, no dealer accounted for more than
1% of the total number of automobile contracts we purchased. The
following table sets forth the geographical sources of the automobile contracts
purchased by us (based on the addresses of the customers as stated on our
records) during the years ended December 31, 2008 and 2007. The 18,707 contracts
purchased in the year 2008 is not indicative of our rate of contract purchases
in the year 2009 through the date of this report. See "Management's
Discussion and Analysis."
|
Contracts
Purchased During the Year Ended (1)
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||||||||||||||||
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December
31, 2008
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December
31, 2007
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|||||||||||||||
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Number
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Percent
(2)
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Number
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Percent
(2)
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|||||||||||||
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California
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2,166 | 11.6 | % | 8,358 | 10.4 | % | ||||||||||
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Florida
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1,744 | 9.3 | % | 6,774 | 8.4 | % | ||||||||||
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Texas
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1,320 | 7.1 | % | 7,408 | 9.2 | % | ||||||||||
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Pennsylvania
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1,301 | 7.0 | % | 4,967 | 6.2 | % | ||||||||||
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Ohio
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1,286 | 6.9 | % | 4,990 | 6.2 | % | ||||||||||
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New
York
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1,271 | 6.8 | % | 4,087 | 5.1 | % | ||||||||||
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Michigan
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745 | 4.0 | % | 3,229 | 4.0 | % | ||||||||||
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Louisiana
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723 | 3.9 | % | 3,006 | 3.7 | % | ||||||||||
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Illinois
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697 | 3.7 | % | 3,164 | 3.9 | % | ||||||||||
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Maryland
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684 | 3.7 | % | 2,779 | 3.4 | % | ||||||||||
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Kentucky
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594 | 3.2 | % | 2,797 | 3.5 | % | ||||||||||
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North
Carolina
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543 | 2.9 | % | 3,748 | 4.7 | % | ||||||||||
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New
Jersey
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505 | 2.7 | % | 2,030 | 2.5 | % | ||||||||||
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Indiana
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471 | 2.5 | % | 2,165 | 2.7 | % | ||||||||||
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Virginia
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428 | 2.3 | % | 2,091 | 2.6 | % | ||||||||||
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Georgia
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379 | 2.0 | % | 2,263 | 2.8 | % | ||||||||||
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Other
States
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3,850 | 20.6 | % | 16,725 | 20.8 | % | ||||||||||
|
Total
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18,707 | 100.0 | % | 80,581 | 100.0 | % | ||||||||||
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(1)
|
Automobile
contracts purchased by TFC are not included because such purchases
accounted for less than 10% of the total purchases during the year and are
not representative of automobile contracts purchased under our CPS
programs.
|
|
(2)
|
Percentages
may not total to 100.0% due to
rounding.
|
We
purchase automobile contracts under our programs from dealers at a price
generally computed as the total amount financed under the automobile contracts,
adjusted for an acquisition fee, which may either increase or decrease the
automobile contract purchase price paid by us. The amount of the acquisition
fee, and whether it results in an increase or decrease to the automobile
contract purchase price, is based on the perceived credit risk of and, in some
cases, the interest rate on the automobile contract. For the years
ended December 31, 2008, 2007 and 2006, the average acquisition fee charged per
automobile contract purchased under our CPS programs was $592, $209 and $241,
respectively, or 3.9%, 1.4% and 1.6%, respectively, of the amount
financed. In 2008 and subsequently, we increased our acquisition fees
as a part of our strategy to conserve liquidity by decreasing new contract
purchases.
We offer
seven different financing programs to our dealership customers, and price each
program according to the relative credit risk. Our programs cover a wide band of
the credit spectrum and are labeled as follows:
3
First Time Buyer –
This program accommodates an applicant who has limited significant past credit
history, such as a previous auto loan. Since the applicant has little
or no credit history, the contract interest rate and dealer acquisition fees
tend to be higher, and the loan amount, loan-to-value ratio, down payment and
payment-to-income ratio requirements tend to be more restrictive compared to our
other programs.
Mercury / Delta –
This program accommodates an applicant who may have had significant past
non-performing credit including recent derogatory credit. As a
result, the contract interest rate and dealer acquisition fees tend to be
higher, and the loan amount, loan-to-value ratio, down payment,
payment-to-income ratio and income requirements tend to be more restrictive
compared to our other programs.
Standard – This
program accommodates an applicant who may have significant past non-performing
credit, but who has also exhibited some performing credit in their
history. The contract interest rate and dealer acquisition fees are
comparable to the First Time Buyer and Mercury/Delta programs, but the loan
amount, loan-to-value ratio, down payment, payment-to-income ratio and income
requirements are somewhat less restrictive.
Alpha – This program
accommodates applicants who may have a discharged bankruptcy, but who have also
exhibited performing credit. In addition, the program allows for
homeowners who may have had other significant non-performing credit in the
past. The contract interest rate and dealer acquisition fees are
lower than the Standard program, and the loan-to-value ratio, down payment,
payment-to-income ratio and income requirements are somewhat less
restrictive.
Alpha Plus – This
program accommodates applicants with past non-performing credit, but with a
stronger history of recent performing credit, including auto related credit, and
higher incomes than the Alpha program. Contract interest rates
and dealer acquisition fees are lower than the Alpha program.
Super Alpha – This
program accommodates applicants with past non-performing credit, but with a
somewhat stronger history of recent performing credit, including auto related
credit, and higher incomes than the Alpha Plus program. Contract
interest rates and dealer acquisition fees are lower, and the maximum loan
amount is somewhat higher, than the Alpha Plus program.
Preferred - This
program accommodates applicants with past non-performing credit, but who meet a
certain minimum FICO score threshold. Other requirements include a
somewhat stronger history of recent performing credit than the Super
Alpha program. Contract interest rates and dealer acquisition
fees are lower than the Super Alpha program.
Our upper
credit tier products, which are our Preferred, Super Alpha, Alpha Plus and Alpha
programs, accounted for approximately 76% of our new contract originations in
2008 and 2007, measured by aggregate amount financed.
The
following table identifies the credit program, sorted from highest to lowest
credit quality, under which we purchased automobile contracts during the years
ended December 31, 2008, 2007 and 2006.
|
Contracts
Purchased During the Year Ended (1)
|
||||||||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
December
31, 2006
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||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Amount
Financed
|
Percent
(2)
|
Amount
Financed
|
Percent
(2)
|
Amount
Financed
|
Percent
(2)
|
|||||||||||||||||||
|
Preferred
|
$ | 13,211 | 4.7 | % | $ | 55,717 | 4.5 | % | $ | 30,700 | 3.1 | % | ||||||||||||
|
Super
Alpha
|
33,726 | 11.9 | % | 153,410 | 12.3 | % | 120,118 | 12.2 | % | |||||||||||||||
|
Alpha
Plus
|
50,823 | 18.0 | % | 215,248 | 17.3 | % | 178,371 | 18.1 | % | |||||||||||||||
|
Alpha
|
123,933 | 43.9 | % | 523,259 | 42.0 | % | 444,775 | 45.0 | % | |||||||||||||||
|
Standard
|
15,332 | 5.4 | % | 116,424 | 9.3 | % | 85,190 | 8.6 | % | |||||||||||||||
|
Mercury
/ Delta
|
25,635 | 9.1 | % | 104,990 | 8.4 | % | 77,481 | 7.8 | % | |||||||||||||||
|
First
Time Buyer
|
19,695 | 7.0 | % | 77,283 | 6.2 | % | 50,893 | 5.2 | % | |||||||||||||||
| $ | 282,355 | 100.0 | % | $ | 1,246,330 | 100.0 | % | $ | 987,528 | 100.0 | % | |||||||||||||
|
(1)
|
Automobile
contracts purchased by TFC after the TFC merger are not included because
such purchases accounted for less than 10% of the total purchases during
the year.
|
|
(2)
|
Percentages
may not total to 100.0% due to
rounding.
|
We
attempt to control misrepresentation regarding the customer's credit worthiness
by carefully screening the automobile contracts we purchase, by establishing and
maintaining professional business relationships with dealers, and by including
certain representations and warranties by the dealer in the dealer agreement.
Pursuant to the dealer
4
In
addition to our purchases of installment contracts from dealers, we have
purchased since 2006 an immaterial number of vehicle purchase money loans,
evidenced by promissory notes and security agreements. A
non-affiliated lender originated all such loans directly to vehicle purchasers,
and sold the loans to us. We began financing vehicle purchases by
lending money directly to consumers in January 2008, on terms similar to those
that we offer through dealers, though without a down payment requirement and
with more restrictive loan-to-value and credit score requirements. In
October 2008 we suspended purchases of loans from other lenders and direct
lending to consumers. There can be no assurance as to whether or not
we will recommence these programs, the extent to which we may make such loans,
or as to their future performance.
Underwriting
To be
eligible for purchase by us, an automobile contract must have been originated by
a dealer that has entered into a dealer agreement to sell automobile contracts
to us. The automobile contract must be secured by a first priority lien on a new
or used automobile, light truck or passenger van and must meet our underwriting
criteria. In addition, each automobile contract requires the customer to
maintain physical damage insurance covering the financed vehicle and naming us
as a loss payee. We may, nonetheless, suffer a loss upon theft or physical
damage of any financed vehicle if the customer fails to maintain insurance as
required by the automobile contract and is unable to pay for repairs to or
replacement of the vehicle or is otherwise unable to fulfill his or her
obligations under the automobile contract.
We
believe that our underwriting criteria enable us to evaluate effectively the
creditworthiness of sub-prime customers and the adequacy of the financed vehicle
as security for an automobile contract. The underwriting criteria include
standards for price, term, amount of down payment, installment payment and
interest rate; mileage, age and type of vehicle; principal amount of the
automobile contract in relation to the value of the vehicle; customer income
level, employment and residence stability, credit history and debt service
ability, as well as other factors. Specifically, the underwriting guidelines for
our CPS programs generally limit the maximum principal amount of a purchased
automobile contract to 115% of wholesale book value in the case of used vehicles
or to 115% of the manufacturer's invoice in the case of new vehicles, plus, in
each case, sales tax, licensing and, when the customer purchases such additional
items, a service contract or a credit life or disability policy. We generally do
not finance vehicles that are more than eight model years old or have in excess
of 99,999 miles. Under most of our programs, the maximum term of a purchased
contract is 72 months; a shorter maximum term may be applicable based on the
mileage and age of the vehicle. Automobile contracts with the maximum
term of 72 months may be purchased if the customer is among the more
creditworthy of our obligors and the vehicle is generally not more than four
model years old and has less than 45,000 miles. Automobile contract purchase
criteria are subject to change from time to time as circumstances may warrant.
In 2008 we made our contract purchase criteria more restrictive as part of our
strategy to decrease new contract purchases in order to conserve
liquidity. Upon receiving the vehicle and customer information with
the customer's application, our underwriters verify the customer's employment,
income, residency, and credit information by contacting various parties noted on
the customer's application, credit information bureaus and other sources. In
addition, prior to purchasing an automobile contract, we contact each customer
by telephone to confirm that the customer understands and agrees to the terms of
the related automobile contract. During this "welcome call," we also ask the
customer a series of open ended questions about his application and the
contract, which may uncover potential misrepresentations.
Credit Scoring. We
use proprietary scoring models to assign each automobile contract several
"credit scores" at the time the application is received from the dealer and the
customer's credit information is retrieved from the credit reporting agencies.
The credit scores are based on a variety of parameters including the customer's
credit history, employment and residence stability, income, and monthly payment
amount. Once a vehicle is selected by the customer and a proposed
deal structure is provided to us by the dealer, our scores will then consider
the loan-to-value ratio, payment-to-income ratio and the sales price and make of
the vehicle. We have developed the credit scores utilizing statistical risk
management techniques and historical performance data from our managed
portfolio. We believe this improves our allocation of credit evaluation
resources, enhances our competitiveness in the marketplace and manages the risk
inherent in the sub-prime market.
Characteristics of
Contracts. All of the automobile contracts purchased by us are
fully amortizing and provide for level payments over the term of the automobile
contract. All automobile contracts may be prepaid at any time without penalty.
The average original principal amount financed, under the CPS programs and in
the year ended December 31, 2008, was $15,094, with an average original term of
62 months and an average down payment
5
Dealer
Compliance. The dealer agreement and related assignment
contain representations and warranties by the dealer that an application for
state registration of each financed vehicle, naming us as secured party with
respect to the vehicle, was effected by the time of sale of the related
automobile contract to us, and that all necessary steps have been taken to
obtain a perfected first priority security interest in each financed vehicle in
favor of us under the laws of the state in which the financed vehicle is
registered.
Servicing
and Collection
We
currently service all automobile contracts that we own as well as those
automobile contracts that are included in portfolios that we have sold in
securitizations or service for third parties. We organize our
servicing activities based on the tasks performed by our personnel. Our
servicing activities consist of mailing monthly billing statements; collecting,
accounting for and posting of all payments received; responding to customer
inquiries; taking all necessary action to maintain the security interest granted
in the financed vehicle or other collateral; investigating delinquencies;
communicating with the customer to obtain timely payments; repossessing and
liquidating the collateral when necessary; collecting deficiency balances; and
generally monitoring each automobile contract and the related
collateral. We are typically entitled to receive a base monthly
servicing fee equal to 2.5% per annum computed as a percentage of the declining
outstanding principal balance of the non-charged-off automobile contracts in the
securitization pools.
The servicing fee is included in interest income for those securitization
transactions that are treated as financings.
Collection
Procedures. We believe that our ability to monitor performance
and collect payments owed from sub-prime customers is primarily a function of
our collection approach and support systems. We believe that if payment problems
are identified early and our collection staff works closely with customers to
address these problems, it is possible to correct many problems before they
deteriorate further. To this end, we utilize pro-active collection procedures,
which include making early and frequent contact with delinquent customers;
educating customers as to the importance of maintaining good credit; and
employing a consultative and customer service approach to assist the customer in
meeting his or her obligations, which includes attempting to identify the
underlying causes of delinquency and cure them whenever possible. In support of
our collection activities, we maintain a computerized collection system
specifically designed to service automobile contracts with sub-prime customers
and similar consumer obligations.
We
attempt to make telephonic contact with delinquent customers from one to 29 days
after their monthly payment due date, depending on our proprietary behavioral
assessment of the customer’s likelihood of payment during early stages of
delinquency. Our contact priorities may be based on the customers' physical
location, stage of delinquency, size of balance or other parameters. Our
collectors inquire of the customer the reason for the delinquency and when we
can expect to receive the payment. The collector will attempt to get the
customer to make an electronic payment over the phone or a promise for the
payment for a time generally not to exceed one week from the date of the call.
If the customer makes such a promise, the account is routed to a promise queue
and is not contacted until the outcome of the promise is known. If the payment
is made by the promise date and the account is no longer delinquent, the account
is routed out of the collection system. If the payment is not made, or if the
payment is made, but the account remains delinquent, the account is returned to
the queue for subsequent contacts.
If a
customer fails to make or keep promises for payments, or if the customer is
uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the customer's payment due date, but could
occur sooner or later, depending on the specific circumstances. At the time the
vehicle is repossessed we will stop accruing interest on this automobile
contract, and reclassify the remaining automobile contract balance to other
assets. In addition we will apply a specific reserve to this automobile contract
so that the net balance represents the estimated fair value less costs to
sell.
If we
elect to repossess the vehicle, we assign the task to an independent local
repossession service. Such services are licensed and/or bonded as required by
law. When the vehicle is recovered, the repossessor delivers it to a wholesale
automobile auction, where it is kept until sold. Financed vehicles that have
been repossessed are generally resold by us through unaffiliated automobile
auctions, which are attended principally by car dealers. Net
liquidation
6
Once an
automobile contract becomes greater than 90 days delinquent, we do not recognize
additional interest income until the borrower under the automobile contract
makes sufficient payments to be less than 90 days delinquent. Any payments
received by a borrower that are greater than 90 days delinquent are first
applied to accrued interest and then to principal reduction.
We
generally charge off the balance of any contract by the earlier of the end of
the month in which the automobile contract becomes five scheduled installments
past due or, in the case of repossessions, the month that the proceeds from the
liquidation of the financed vehicle are received by us or if the vehicle has
been in repossession inventory for more than three months. In the case of
repossession, the amount of the charge-off is the difference between the
outstanding principal balance of the defaulted automobile contract and the net
repossession sale proceeds.
Credit
Experience
Our
financial results are dependent on the performance of the automobile contracts
in which we retain an ownership interest. The tables below document the
delinquency, repossession and net credit loss experience of all automobile
contracts that we are servicing (excluding certain contracts we have serviced
for third-parties on which we earn servicing fees only, and have no credit
risk). While the broad economic weakness and increasing unemployment
over the last year has resulted in higher delinquencies and net charge-offs, the
increase in the percentage levels for 2008 is also partially attributable to the
decrease in the size and the increase in the average age of our managed
portfolio.
7
|
Delinquency Experience (1)
|
||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
December
31, 2006
|
||||||||||||||||
|
Number
of
|
Number
of
|
Number
of
|
||||||||||||||||
|
Contracts
|
Amount
|
Contracts
|
Amount
|
Contracts
|
Amount
|
|||||||||||||
|
Delinquency
Experience
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Gross
servicing portfolio (1)
|
145,564
|
$ |
1,665,036
|
168,260
|
$ |
2,128,656
|
126,574
|
$
|
1,568,329
|
|||||||||
|
Period
of delinquency (2)
|
||||||||||||||||||
|
31-60
days
|
3,733
|
39,798
|
4,227
|
48,134
|
3,275
|
37,328
|
||||||||||||
|
61-90
days
|
2,376
|
26,549
|
2,370
|
27,877
|
1,367
|
14,903
|
||||||||||||
|
91+
days
|
2,424
|
27,243
|
2,039
|
24,888
|
1,035
|
10,301
|
||||||||||||
|
Total
delinquencies (2)
|
8,533
|
93,590
|
8,636
|
100,899
|
5,677
|
62,532
|
||||||||||||
|
Amount
in repossession (3)
|
4,262
|
49,357
|
3,049
|
33,400
|
2,148
|
24,135
|
||||||||||||
|
Total
delinquencies and
|
||||||||||||||||||
|
amount
in repossession (2)
|
12,795
|
$ |
142,947
|
11,685
|
$ |
134,299
|
7,825
|
$
|
86,667
|
|||||||||
|
Delinquencies
as a percentage
|
||||||||||||||||||
|
of
gross servicing portfolio
|
5.9
|
% |
5.6
|
%
|
5.1
|
% |
4.7
|
% |
4.5
|
% |
4.0
|
%
|
||||||
|
Total
delinquencies and
|
||||||||||||||||||
|
amount
in repossession as a
|
||||||||||||||||||
|
percentage
of gross servicing
|
||||||||||||||||||
|
portfolio
|
8.8
|
% |
8.6
|
%
|
6.9
|
% |
6.3
|
% |
6.2
|
% |
5.5
|
%
|
||||||
|
Extension
Experience
|
||||||||||||||||||
|
Contracts
with one extension (4)
|
30,160
|
$ |
354,330
|
21,555
|
$ |
251,067
|
12,318
|
$
|
128,386
|
|||||||||
|
Contracts
with two or more
|
||||||||||||||||||
|
extensions
(4)
|
8,639
|
88,988
|
4,377
|
38,264
|
3,183
|
24,978
|
||||||||||||
|
Total
contracts with extensions
|
38,799
|
$ |
443,318
|
25,932
|
$ |
289,331
|
15,501
|
$
|
153,364
|
|||||||||
|
(1)
|
All
amounts and percentages are based on the amount remaining to be repaid on
each automobile contract, including, for pre-computed automobile
contracts, any unearned interest. The information in the table represents
the gross principal amount of all automobile contracts we purchased,
including automobile contracts we subsequently sold in securitization
transactions that we continue to service. The table does not include
certain contracts we have serviced for third-parties on which we earn
servicing fees only, and have no credit
risk.
|
|
(2)
|
We
consider an automobile contract delinquent when an obligor fails to make
at least 90% of a contractually due payment by the following due date,
which date may have been extended within limits specified in the servicing
agreements. The period of delinquency is based on the number of days
payments are contractually past due. Automobile contracts less than 31
days delinquent are not included.
|
|
(3)
|
Amount
in repossession represents the contract balance on financed vehicles that
have been repossessed but not yet liquidated. This amount is not netted
with the specific reserve to arrive at the estimated asset value less
costs to sell.
|
|
(4)
|
The
aging categories shown in the tables reflect the effect of
extensions.
|
Extensions
We may
offer a customer an extension, under which the customer agrees with us to move
past due payments to the end of the automobile contract term. In such cases the
customer must sign an agreement for the extension, and may pay a fee
representing partial payment of accrued interest. Our policies, and contractual
arrangements for our warehouse and securitization transactions, limit the number
of extensions that may be granted. In general, a customer may arrange for an
extension no more than once every 12 months, not to exceed four extensions over
the life of the contract.
If a
customer is granted such an extension, the date next due is advanced. Subsequent
delinquency aging classifications would be based on the future payment
performance of the automobile contract.
8
|
Net
Charge-Off Experience (1)
|
|||||||||||
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
(Dollars
in thousands
|
|||||||||||
|
CPS,
MFN, TFC and SeaWest Combined
|
|||||||||||
|
Average
servicing portfolio outstanding
|
$ |
1,934,003
|
$
|
1,905,162
|
$
|
1,367,935
|
|||||
|
Net
charge-offs as a percentage of average
|
|||||||||||
|
servicing
portfolio (2)
|
7.7
|
%
|
5.3
|
%
|
4.5
|
%
|
|||||
|
(1)
|
All
amounts and percentages are based on the principal amount scheduled to be
paid on each automobile contract, net of unearned income on pre-computed
automobile contracts. The information in the table represents all
automobile contracts serviced by us, excluding certain contracts we have
serviced for third-parties on which we earn servicing fees only, and have
no credit risk.
|
|
(2)
|
Net
charge-offs include the remaining principal balance, after the application
of the net proceeds from the liquidation of the vehicle (excluding accrued
and unpaid interest) and amounts collected subsequent to the date of
charge-off, including some recoveries which have been classified as other
income in the accompanying financial
statements.
|
Securitization
of Automobile Contracts
We
purchase automobile contracts with the intention of financing them on a
long-term basis through securitizations. All such securitizations have involved
identification of specific automobile contracts, sale of those automobile
contracts (and associated rights) to a special purpose subsidiary, and issuance
of asset−backed securities to fund the transactions. Upon the securitization of
a portfolio of automobile contracts, we retain the obligation to service the
contracts, and receive a monthly fee for doing so. We have been a regular issuer
of asset-backed securities since 1994, completing 49 securitizations totaling
over $6.6 billion through December 31, 2008. Depending on the
structure of the securitization, the transaction may be treated as a sale of the
automobile contracts or as a secured financing for financial accounting
purposes. From July 2003 through April 2008, we have structured our
securitizations as secured financings rather than as sales of
contracts. In September 2008, we sold automobile contracts using a
securitization structure.
When
structured to be treated as a secured financing, the subsidiary is consolidated
and, accordingly, the automobile contracts and the related securitization trust
debt appear as assets and liabilities, respectively, on our consolidated balance
sheet. We then recognize interest income on the contracts and interest expense
on the securities issued in the securitization and record as expense a provision
for probable credit losses on the contracts.
When
structured to be treated as a sale, the subsidiary is not consolidated.
Accordingly, the securitization removes the sold automobile contracts from our
consolidated balance sheet, the related debt does not appear as our debt, and
our consolidated balance sheet shows, as an asset, a retained residual interest
in the sold automobile contracts. The residual interest represents the
discounted value of what we expect will be the excess of future collections on
the automobile contracts over principal and interest due on the asset-backed
securities. That residual interest appears on our consolidated balance sheet as
"residual
interest in securitizations," and the
determination of its value is dependent on our estimates of the future
performance of the sold automobile contracts.
Historically,
prior to a securitization transaction, we funded our automobile contract
purchases primarily with proceeds from warehouse credit facilities. As of
December 31, 2007, we had $425 million in warehouse credit capacity, in the form
of two $200 million senior facilities and one $25 million subordinated
facility. Both warehouse credit facilities provided funding for
automobile contracts purchased under the CPS programs, while one facility also
provided funding for automobile contracts purchased under the TFC programs.
Up to 93% of the principal balance of the automobile contracts was advanced to
us under these facilities, subject to collateral tests and certain other
conditions and covenants. In April 2008, the subordinated facility
expired and the subordinated lenders were fully repaid. In November
2008, one of the two senior facilities expired and the lender was fully
repaid. The remaining warehouse facility was amended in December 2008
to eliminate further advances and to provide for repayment from proceeds
collected under the related pledged receivables, and certain other scheduled
principal reductions until its maturity in September 2009. Long-term
financing for the automobile contract purchases has historically been achieved
through securitization transactions. The proceeds from such
securitization transactions were used primarily to repay the warehouse credit
facilities.
In a
securitization and in our warehouse credit facilities, we are required to make
certain representations and warranties, which are generally similar to the
representations and warranties made by dealers in connection with our purchase
of the automobile contracts. If we breach any of our representations or
warranties, we will be obligated to repurchase the automobile contract at a
price equal to the principal balance plus accrued and unpaid interest.
We
9
Whether a
securitization is treated as a secured financing or as a sale for financial
accounting purposes, the related special purpose subsidiary may be unable to
release excess cash to us if the credit performance of the securitized
automobile contracts falls short of pre-determined standards. Such releases
represent a material portion of the cash that we use to fund our operations. An
unexpected deterioration in the performance of securitized automobile contracts
could therefore have a material adverse effect on both our liquidity and results
of operations, regardless of whether such automobile contracts are treated as
having been sold or as having been financed. For estimation of the magnitude of
such risk, it may be appropriate to look to the size of our "managed portfolio,"
which represents both financed and sold automobile contracts as to which such
credit risk is retained. Our managed portfolio as of December 31, 2008 was
approximately $1.7 billion.
Competition
The
automobile financing business is highly competitive. We compete with a number of
national, regional and local finance companies with operations similar to
ours. In addition, competitors or potential competitors include other
types of financial services companies, such as commercial banks, savings and
loan associations, leasing companies, credit unions providing retail loan
financing and lease financing for new and used vehicles, and captive finance
companies affiliated with major automobile manufacturers such as General Motors
Acceptance Corporation, Ford Motor Credit Corporation, Chrysler Finance and
Nissan Motors Acceptance Corporation. Many of our competitors and potential
competitors possess substantially greater financial, marketing, technical,
personnel and other resources than we do. Moreover, our future profitability
will be directly related to the availability and cost of our capital in relation
to the availability and cost of capital to our competitors. Our competitors and
potential competitors include far larger, more established companies that have
access to capital markets for unsecured commercial paper and investment
grade-rated debt instruments and to other funding sources that may be
unavailable to us. Many of these companies also have long-standing relationships
with dealers and may provide other financing to dealers, including floor plan
financing for the dealers' purchase of automobiles from manufacturers, which we
do not offer.
We
believe that the principal competitive factors affecting a dealer's decision to
offer automobile contracts for sale to a particular financing source are the
purchase price offered for the automobile contracts, the timeliness of the
response to the dealer upon submission of the initial application, the
reasonableness of the financing source's underwriting guidelines and
documentation requests, the predictability and timeliness of purchases and the
financial stability of the funding source. While we believe that we can obtain
from dealers sufficient automobile contracts for purchase at attractive prices
by consistently applying reasonable underwriting criteria and making timely
purchases of qualifying automobile contracts, there can be no assurance that we
will do so.
Regulation
Several
federal and state consumer protection laws, including the federal
Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal
Fair Debt Collection Practices Act and the Federal Trade Commission Act,
regulate the extension of credit in consumer credit transactions. These laws
mandate certain disclosures with respect to finance charges on automobile
contracts and impose certain other restrictions on dealers. In many states, a
license is required to engage in the business of purchasing automobile contracts
from dealers. In addition, laws in a number of states impose limitations on the
amount of finance charges that may be charged by dealers on credit sales. The
so-called Lemon Laws enacted by various states provide certain rights to
purchasers with respect to automobiles that fail to satisfy express warranties.
The application of Lemon Laws or violation of such other federal and state laws
may give rise to a claim or defense of a customer against a dealer and its
assignees, including us and purchasers of automobile contracts from us. The
dealer agreement contains representations by the dealer that, as of the date of
assignment of automobile contracts, no such claims or defenses have been
asserted or threatened with respect to the automobile contracts and that all
requirements of such federal and state laws have been complied with in all
material respects. Although a dealer would be obligated to repurchase automobile
contracts that involve a breach of such warranty, there can be no assurance that
the dealer will have the financial resources to satisfy its repurchase
obligations. Certain of these laws also regulate our servicing activities,
including our methods of collection.
Although
we believe that we are currently in material compliance with applicable statutes
and regulations, there can be no assurance that we will be able to maintain such
compliance. The past or future failure to comply with such statutes and
regulations could have a material adverse effect upon us. Furthermore, the
adoption of additional statutes and regulations, changes in the interpretation
and enforcement of current statutes and regulations or the
10
Employees
As of
December 31, 2008, we had 681 employees. The breakdown of the employees is as
follows: 8 are senior management personnel, 529 are collections personnel, 20
are automobile contract origination personnel, 56 are marketing personnel (36 of
whom are marketing representatives), 49 are operations and systems personnel,
and 19 are administrative personnel. We believe that our relations with our
employees are good. We are not a party to any collective bargaining
agreement.
| Item 1A. |
RISK
FACTORS
|
Our
business, operating results and financial condition could be adversely affected
by any of the following specific risks. The trading price of our common stock
could decline due to any of these risks and other industry risks. In addition to
the risks described below, we may encounter risks that are not currently known
to us or that we currently deem immaterial, which may also impair our business
operations and the value of our common stock.
Risks
Related to Our Business
We
Require a Substantial Amount of Cash to Service Our Substantial
Debt.
To
service our existing substantial indebtedness, we require a significant amount
of cash. Our ability to generate cash depends on many factors, including our
successful financial and operating performance. Our financial and operational
performance depends upon a number of factors, many of which are beyond our
control. These factors include, without limitation:
|
·
|
the
economic and competitive conditions in the asset-backed securities
market;
|
|
·
|
the
performance of our current and future automobile
contracts;
|
|
·
|
the
performance of our residual interests from our securitizations and
warehouse credit facilities;
|
|
·
|
any
operating difficulties or pricing pressures we may
experience;
|
|
·
|
our
ability to obtain credit enhancement for our
securitizations;
|
|
·
|
our
ability to establish and maintain dealer
relationships;
|
|
·
|
the
passage of laws or regulations that affect us
adversely;
|
|
·
|
our
ability to compete with our competitors;
and
|
|
·
|
our
ability to acquire and finance automobile
contracts.
|
Depending
upon the outcome of one or more of these factors, we may not be able to generate
sufficient cash flow from operations or obtain sufficient funding to satisfy all
of our obligations. We presently find that funding in the asset-backed
securities market is difficult to secure, that the credit performance of our
automobile contracts has been adversely affected by general economic conditions,
and that adverse effects on performance of our automobile contracts held in
securitization pools result in an adverse effect on performance of residual
interests. Such factors may result in our being unable to pay our
debts timely or as agreed. If we were unable to pay our debts, we
would be required to pursue one or more alternative strategies, such as selling
assets, refinancing or restructuring our indebtedness or selling additional
equity capital. These alternative strategies might not be feasible at the time,
might prove inadequate or could require the prior consent of our
lenders.
We
Need Substantial Liquidity to Operate Our Business.
We have
historically funded our operations principally through internally generated cash
flows, sales of debt and equity securities, including through securitizations
and warehouse credit facilities, borrowings under senior subordinated debt
agreements and sales of subordinated notes. However, we may not be able to
obtain sufficient funding for our future operations from such sources. As of the
date of this report, we have access to no active warehouse credit
facilities. If we are unable to access the capital markets or obtain
other acceptable financing, our results of operations, financial condition and
cash flows would be materially and adversely affected. We require a substantial
amount of cash liquidity to operate our business. Among other things, we use
such cash liquidity to:
· acquire
automobile contracts;
11
· fund
overcollateralization in warehouse credit facilities and
securitizations;
· pay
securitization fees and expenses;
· fund
spread accounts in connection with securitizations;
· satisfy
working capital requirements and pay operating expenses;
· pay
taxes; and
· pay
interest expense.
We have
to date matched our liquidity needs to our available sources of funding by
reducing to nominal levels our acquisition of new automobile
contracts. There can be no assurance that we will continue to be
successful with that strategy.
Our
Results of Operations Will Depend on Our Ability to Secure and Maintain Adequate
Credit and Warehouse Financing on Favorable Terms.
We have
historically depended on warehouse credit facilities to finance our purchases of
automobile contracts, although we have no warehouse financing available to us at
this time. Our business strategy requires that warehouse credit facilities be
available in order to purchase significant volumes of receivables.
Historically,
our primary sources of day-to-day liquidity were our warehouse credit
facilities, in which we sold and contributed automobile contracts, as often as
twice a week, to special-purpose subsidiaries, where they were "warehoused"
until they were securitized, at which time funds advanced under one or more
warehouse credit facilities were repaid from the proceeds of the
securitizations. The special-purpose subsidiaries obtained the funds
to purchase these contracts by pledging the contracts to a trustee for the
benefit of senior warehouse lenders, who advanced funds to our special-purpose
subsidiaries based on the dollar amount of the contracts pledged. Through
November 2008, we depended substantially on two warehouse credit facilities: (i)
a $200 million warehouse credit facility, which we established in November 2005
and expired by its terms in November 2008; and (ii) a $200 million
warehouse credit facility, which we established in June 2004 and which was
amended in December 2008 to eliminate future advances and to provide for
repayment of the related debt from the cash collections on the related pledged
contracts, and certain other principal reductions until its maturity in
September 2009.
As stated
elsewhere in this report, we have observed adverse changes in the market for
securitized pools of automobile contracts. If we are unable to
arrange new warehousing on acceptable terms, our results of operations,
financial condition and cash flows could be materially and adversely
affected.
Our
Results of Operations Will Depend on Our Ability to Securitize Our Portfolio of
Automobile Contracts.
Historically
we have depended upon our ability to obtain permanent financing for pools of
automobile contracts by conducting term securitization transactions. By
"permanent financing" we mean financing that extends to cover the full term
during which the underlying contracts are outstanding and requires repayment as
the underlying contracts are repaid or charged off. By contrast, our warehouse
credit facilities permitted us to borrow against the value of such receivables
only for limited periods of time. Our past practice and future plan has been and
is to repay loans made to us under our warehouse credit facilities with the
proceeds of securitizations. There can be no assurance that any securitization
transaction will be available on terms acceptable to us, or at all. The timing
of any securitization transaction is affected by a number of factors beyond our
control, any of which could cause substantial delays, including, without
limitation:
· market
conditions;
· the
approval by all parties of the terms of the securitization;
· the
availability of credit enhancement on acceptable terms; and
· our
ability to acquire a sufficient number of automobile contracts for
securitization.
As stated
elsewhere in this report, we have observed adverse changes in the market for
securitized pools of automobile contracts, which has made permanent financing in
the form of securitization transactions difficult to obtain and more costly than
in prior periods. These changes include reduced liquidity and reduced
demand for asset-backed securities, particularly for securities carrying a
financial guaranty or for securities backed by sub-prime automobile
receivables. Should we chose not to securitize automobile contracts
in the future or do so on more costly terms prevalent in current market
conditions, we could expect a further material adverse effect on our
results of operations.
12
Our
Results of Operations Will Depend on Cash Flows from Our Residual Interests in
Our Securitization Program and Our Warehouse Credit Facilities.
When we
finance our automobile contracts through securitizations and warehouse credit
facilities, we receive cash and a residual interest in the assets financed.
Those financed assets are owned by the special-purpose subsidiary that is formed
for the related securitization. This residual interest represents the right to
receive the future cash flows to be generated by the automobile contracts in
excess of (i) the interest and principal paid to investors on the indebtedness
issued in connection with the financing, (ii) the costs of servicing the
contracts and (iii) certain other costs incurred in connection with completing
and maintaining the securitization or warehouse credit facility. We sometimes
refer to these future cash flows as "excess spread cash flows."
Under the
financial structures we have used to date in our securitizations and warehouse
credit facilities, excess spread cash flows that would otherwise be paid to the
holder of the residual interest are first used to increase overcollateralization
or are retained in a spread account within the securitization trusts or the
warehouse facility to provide liquidity and credit enhancement for the related
securities.
While the
specific terms and mechanics vary among transactions, our securitization and
warehousing agreements generally provide that we will receive excess spread cash
flows only if the amount of overcollateralization and spread account balances
have reached specified levels and/or the delinquency, defaults or net losses
related to the contracts in the automobile contract pools are below certain
predetermined levels. In the event delinquencies, defaults or net losses on
contracts exceed these levels, the terms of the securitization or warehouse
credit facility:
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·
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may
require increased credit enhancement, including an increase in the amount
required to be on deposit in the spread account to be accumulated for the
particular pool;
|
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·
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may
restrict the distribution to us of excess spread cash flows associated
with other securitized or warehoused pools;
and
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·
|
in
certain circumstances, may permit affected parties to require the transfer
of servicing on some or all of the securitized or warehoused contracts
from us to an unaffiliated
servicer.
|
We
typically retain residual interests or use them as collateral to borrow cash. In
any case, the future excess spread cash flow received in respect of the residual
interests is integral to the financing of our operations. The amount of cash
received from residual interests depends in large part on how well our portfolio
of securitized and warehoused automobile contracts performs. If our portfolio of
securitized and warehoused automobile contracts has higher delinquency and loss
ratios than expected, then the amount of money realized from our retained
residual interests, or the amount of money we could obtain from the sale or
other financing of our residual interests, would be reduced. Such higher than
expected losses have been incurred, which has had an adverse effect on our
operations, financial condition and cash flows. Should losses continue to rise,
we would expect further material adverse effects on our results of operations,
financial condition and cash flows.
If
We Are Unable to Obtain Credit Enhancement for Our Securitizations Upon
Favorable Terms, Our Results of Operations Would Be Impaired.
In our
securitizations, we historically have utilized credit enhancement in the form of
one or more financial guaranty 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 enhancement 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, would not be economic for us in the future. As
we pursue future securitizations, we may not be able to obtain:
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·
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credit
enhancement in any form on terms acceptable to us, or at all;
or
|
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·
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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 operations.
13
If
We Are Unable to Successfully Compete With Our Competitors, Our Results of
Operations May Be Impaired.
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 retail loan financing and lease financing for new and used
vehicles and captive finance companies affiliated with major automobile
manufacturers such as General Motors Acceptance Corporation and Ford Motor
Credit Corporation. Many of our competitors and potential competitors possess
substantially greater financial, marketing, technical, personnel and other
resources than we do, including greater access to capital markets for unsecured
commercial paper and investment grade rated debt instruments, and to other
funding sources which may be unavailable to us. Moreover, our future
profitability will be directly related to the availability and cost of our
capital relative to that of our competitors. Many of these companies also have
long-standing relationships with automobile dealers and may provide other
financing to dealers, including floor plan financing for the dealers' purchases
of automobiles from manufacturers, which we do not offer. There can be no
assurance that we will be able to continue to compete successfully and, as a
result, we may not be able to purchase contracts from dealers at a price
acceptable to us, which could result in reductions in our revenues or the cash
flows available to us.
If
Our Dealers Do Not Submit a Sufficient Number of Suitable Automobile Contracts
to Us for Purchase, Our Results of Operations May Be Impaired.
We are
dependent upon establishing and maintaining relationships with a large number of
unaffiliated automobile dealers to supply us with automobile contracts. During
the year ended December 31, 2008, no dealer accounted for more than 1.0% of the
contracts we purchased. The agreements we have with dealers to purchase
contracts do not require dealers to submit a minimum number of contracts for
purchase. The failure of dealers to submit contracts that meet our underwriting
criteria could result in reductions in our revenues or the cash flows available
to us, and, therefore, could have an adverse effect on our results of
operations.
If
a Significant Number of Our Automobile Contracts Experience Defaults, Our
Results of Operations May Be Impaired.
We
specialize in the purchase and servicing of contracts to finance automobile
purchases by sub-prime customers, those who have limited credit history, low
income, or past credit problems. Such contracts entail a higher risk
of non-performance, higher delinquencies and higher losses than contracts with
more creditworthy customers. While we believe that our pricing of the automobile
contracts and the underwriting criteria and collection methods we employ enable
us to control, to a degree, the higher risks inherent in contracts with
sub-prime customers, no assurance can be given that such pricing, criteria and
methods will afford adequate protection against such risks. We have experienced
increases in the delinquency of, and credit losses on, our
contracts.
If
automobile contracts that we purchase and hold experience defaults to a greater
extent than we have anticipated, this could materially and adversely affect our
results of operations, financial condition, cash flows and liquidity. Our
results of operations, financial condition, cash flows and liquidity, depend, to
a material extent, on the performance of automobile contracts that we purchase,
warehouse and securitize. A portion of the automobile contracts acquired by us
will default or prepay. In the event of payment default, the collateral value of
the vehicle securing an automobile contract realized by us in a repossession
will most likely not cover the outstanding principal balance on that contract
and the related costs of recovery. We maintain an allowance for credit losses on
automobile contracts held on our balance sheet, which reflects our estimates of
probable credit losses that can be reasonably estimated for securitizations that
are accounted for as financings and warehoused contracts. If the allowance is
inadequate, then we would recognize the losses in excess of the allowance as an
expense and our results of operations could be adversely affected. In addition,
under the terms of our warehouse credit facilities, we are not able to borrow
against defaulted automobile contracts, including contracts that are, at the
time of default, funded under our warehouse credit facilities, which will reduce
the overcollateralization of those warehouse credit facilities and possibly
reduce the amount of cash flows available to us.
If
We Lose Servicing Rights on Our Portfolio of Automobile Contracts, Our Results
of Operations Would Be Impaired.
We are
entitled to receive servicing fees only while we act as servicer under the
applicable sale and servicing agreements governing our warehouse facilities and
securitizations. Under such agreements, we may be terminated as servicer upon
the occurrence of certain events, including:
· our
failure generally to observe and perform covenants and agreements applicable to
us;
· certain
bankruptcy events involving us; or
14
· the
occurrence of certain events of default under the documents governing the
facilities.
We have
received waivers regarding the potential breach of certain covenants relating to
minimum net worth and maintenance of active warehouse credit
facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. The loss of
our servicing rights could materially and adversely affect our results of
operations, financial condition and cash flows. Our results of operations,
financial condition and cash flows, would be materially and adversely affected
if we were to be terminated as servicer with respect to a material portion of
the automobile contracts for which we are receiving servicing fees.
If
We Lose Key Personnel, Our Results of Operations May Be Impaired.
Our
senior management team averages thirteen years of service with
us. Charles E. Bradley, Jr., our President and CEO, has been our
President since our formation in 1991. Our future operating results depend in
significant part upon the continued service of our key senior management
personnel, none of whom is bound by an employment agreement. Our future
operating results also depend in part upon our ability to attract and retain
qualified management, technical, sales and support personnel for our operations.
Competition for such personnel is intense. We cannot assure you that we will be
successful in attracting or retaining such personnel. Reductions in force
implemented in 2008 may have reduced employee loyalty, which may in turn result
in decreased employee performance. Conversely, adverse general
economic conditions may have had a countervailing effect. The loss of
any key employee, the failure of any key employee to perform in his or her
current position or our inability to attract and retain skilled employees, as
needed, could materially and adversely affect our results of operations,
financial condition and cash flows.
If
We Fail to Comply with Regulations, Our Results of Operations May Be
Impaired.
Failure
to materially comply with all laws and regulations applicable to us could
materially and adversely affect our ability to operate our business. Our
business is subject to numerous federal and state consumer protection laws and
regulations, which, among other things:
· require
us to obtain and maintain certain licenses and qualifications;
· limit the
interest rates, fees and other charges we are allowed to charge;
· limit or
prescribe certain other terms of our automobile contracts;
· require
specific disclosures to our customers;
· define
our rights to repossess and sell collateral; and
· maintain
safeguards designed to protect the security and confidentiality of customer
information.
We
believe that we are in compliance in all material respects with all such laws
and regulations, and that such laws and regulations have had no material adverse
effect on our ability to operate our business. However, we may be materially and
adversely affected if we fail to comply with:
· applicable
laws and regulations;
· changes
in existing laws or regulations;
· changes
in the interpretation of existing laws or regulations; or
· any
additional laws or regulations that may be enacted in the future.
If
We Experience Unfavorable Litigation Results, Our Results of Operations May Be
Impaired.
Unfavorable
outcomes in any of our current or future litigation proceedings could materially
and adversely affect our results of operations, financial conditions and cash
flows. As a consumer finance company, we are subject to various consumer claims
and litigation seeking damages and statutory penalties based upon, among other
things, disclosure inaccuracies and wrongful repossession, which could take the
form of a plaintiff's class action complaint. We, as the assignee of finance
contracts originated by dealers, may also be named as a co-defendant in lawsuits
filed by consumers principally against dealers. We are also subject to other
litigation common to the automobile industry and businesses in general. The
damages and penalties claimed by consumers and others in these types of matters
can be substantial. The relief requested by the plaintiffs varies but includes
requests for compensatory, statutory and punitive damages.
15
While we
intend to vigorously defend ourselves against such proceedings, there is a
chance that our results of operations, financial condition and cash flows could
be materially and adversely affected by unfavorable outcomes.
If
We Experience Problems with Our Originations, Accounting or Collection Systems,
Our Results of Operations May Be Impaired.
We are
dependent on our receivables originations, accounting and collection systems to
service our portfolio of automobile contracts. Such systems are vulnerable to
damage or interruption from natural disasters, power loss, telecommunication
failures, terrorist attacks, computer viruses and other events. A significant
number of our systems are not redundant, and our disaster recovery planning is
not sufficient for every eventuality. Our systems are also subject to break-ins,
sabotage and intentional acts of vandalism by internal employees and contractors
as well as third parties. Despite any precautions we may take, such problems
could result in interruptions in our services, which could harm our reputation
and financial condition. We do not carry business interruption insurance
sufficient to compensate us for losses that may result from interruptions in our
service as a result of system failures. Such systems problems could materially
and adversely affect our results of operations, financial conditions and cash
flows.
We
Have Substantial Indebtedness.
We have
and will continue to have a substantial amount of indebtedness. At December 31,
2008, we had approximately $1,527.3 million of debt outstanding. Such debt
consisted primarily of $1,404.2 million of securitization trust debt, and also
included $9.9 million of warehouse indebtedness, $67.3 million of residual
interest financing, $20.1 million of senior secured related party debt and $25.7
million owed under a subordinated notes program. We are also
currently offering the subordinated notes to the public on a continuous basis,
and such notes have maturities that range from three months to ten
years.
Our
substantial indebtedness could adversely affect our financial condition by,
among other things:
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·
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increasing
our vulnerability to general adverse economic and industry
conditions;
|
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·
|
requiring
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing amounts available for
working capital, capital expenditures and other general
corporate purposes;
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·
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limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
|
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·
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placing
us at a competitive disadvantage compared to our competitors that have
less debt; and
|
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·
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limiting
our ability to borrow additional
funds.
|
Although
we believe we are able to service and repay such debt, there is no assurance
that we will be able to do so. If we do not generate sufficient operating
profits, our ability to make required payments on our debt would be impaired.
Failure to pay our indebtedness when due could have a material adverse
effect.
Because
We Are Subject to Many Restrictions in Our Existing Credit Facilities and
Securitization Transactions, Our Ability to Pay Dividends or Engage in Specified
Transactions May Be Impaired.
The terms
of our existing credit facility, term securitizations and our other outstanding
debt impose significant operating and financial restrictions on us and our
subsidiaries and require us to meet certain financial tests. These restrictions
may have an adverse effect on our business activities, results of operations and
financial condition. These restrictions may also significantly limit or prohibit
us from engaging in certain transactions, including the following:
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·
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incurring
or guaranteeing additional
indebtedness;
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making
capital expenditures in excess of agreed upon
amounts;
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paying
dividends or other distributions to our stockholders or redeeming,
repurchasing or retiring our capital stock or subordinated
obligations;
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making
investments;
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creating
or permitting liens on our assets or the assets of our
subsidiaries;
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issuing
or selling capital stock of our
subsidiaries;
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transferring
or selling our assets;
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engaging
in mergers or consolidations;
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·
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permitting
a change of control of our company;
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·
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liquidating,
winding up or dissolving our
company;
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changing
our name or the nature of our business, or the names or nature of the
business of our subsidiaries;
and
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16
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·
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engaging
in transactions with our affiliates outside the normal course of
business.
|
These
restrictions may limit our ability to obtain additional sources of capital,
which may limit our ability to generate earnings. In addition, the failure to
comply with any of the covenants of one or more of our debt
agreements could cause a default under other debt agreements that may be
outstanding from time to time. A default, if not waived, could result in
acceleration of the related indebtedness, in which case such debt would become
immediately due and payable. A continuing default or acceleration of one or more
of our credit facilities or any other debt agreement, would likely cause a
default under other debt agreements that otherwise would not be in default, in
which case all such related indebtedness could be accelerated. If this occurs,
we may not be able to repay our debt or borrow sufficient funds to refinance our
indebtedness. Even if any new financing is available, it may not be on terms
that are acceptable to us or it may not be sufficient to refinance all of our
indebtedness as it becomes due.
In
addition, the transaction documents for our securitizations restrict our
securitization subsidiaries from declaring or making payment to us of (i) any
dividend or other distribution on or in respect of any shares of their capital
stock, or (ii) any payment on account of the purchase, redemption, retirement or
acquisition of any option, warrant or other right to acquire shares of their
capital stock unless (in each case) at the time of such declaration or payment
(and after giving effect thereto) no amount payable under any transaction
document with respect to the related securitization is then due and owing, but
unpaid. These restrictions may limit our ability to receive
distributions in respect of the residual interests from our securitization
facilities, which may limit our ability to generate earnings.
Risks
Related to General Factors
If
The Economy of All or Certain Regions of the United States Continues to Slow
Down or the Current Recession Worsens, Our Results of Operations May Be
Impaired.
Our
business is directly related to sales of new and used automobiles, which are
sensitive to employment rates, prevailing interest rates and other domestic
economic conditions. Delinquencies, repossessions and losses generally increase
during economic slowdowns or recessions. Because of our focus on sub-prime
customers, the actual rates of delinquencies, repossessions and losses on our
automobile contracts could be higher under adverse economic conditions than
those experienced in the automobile finance industry in general, particularly in
the states of Texas, California, Ohio, Florida, Pennsylvania and Louisiana,
states in which our automobile contracts are geographically
concentrated. Any sustained period of economic slowdown or recession
could adversely affect our ability to acquire suitable contracts, or to
securitize pools of such contracts. The timing of any economic changes is
uncertain, and weakness in the economy could have an adverse effect on our
business and that of the dealers from which we purchase contracts and result in
reductions in our revenues or the cash flows available to us.
Our
Results Of Operations May Be Impaired As a Result of Natural
Disasters.
Our
automobile contracts are geographically concentrated in the states of Texas,
California, Ohio, Florida, Pennsylvania, and Louisiana. Several of such states
are particularly susceptible to natural disasters: earthquake in the case of
California, and hurricanes and flooding in the states of Florida, Texas and
Louisiana. Natural disasters, in those states or others, could cause
a material number of our vehicle purchasers to lose their jobs, or could damage
or destroy vehicles that secure our automobile contracts. In either
case, such events could result in our receiving reduced collections on our
automobile contracts, and could thus result in reductions in our revenues or the
cash flows available to us.
If
an Increase in Interest Rates Results in a Decrease in Our Cash Flow from Excess
Spread, Our Results of Operations May Be Impaired.
Our
profitability is largely determined by the difference, or "spread," between the
effective interest rate received by us on the automobile contracts that we
acquire and the interest rates payable under our warehouse credit facilities and
on the asset-backed securities issued in our securitizations. Recent disruptions
in the market for asset-backed securities are likely to result in an increase in
the interest rates we would pay on asset-backed securities that we may issue in
future securitizations. Although we have the ability to partially
offset increases in our cost of funds by increasing fees we charge to dealers
when purchasing contracts, or by demanding higher interest rates on contracts we
purchase, there is no assurance that such actions will materially offset
increases in interest we pay to finance our managed portfolio.
Several
factors affect our ability to manage interest rate risk. Specifically, we are
subject to interest rate risk during the period between when automobile
contracts are purchased from dealers and when such contracts are sold and
financed in a securitization. Interest rates on our warehouse credit facilities
are adjustable while the interest rates on
17
To
mitigate, but not eliminate, the short-term risk relating to interest rates
payable by us under the warehouse facilities, we have historically held
automobile contracts in the warehouse credit facilities for less than four
months. To mitigate, but not eliminate, the long-term risk relating to interest
rates payable by us in securitizations, we have in the past, and intend to
continue to, structure some of our securitization transactions to include
pre-funding structures, whereby the amount of securities issued exceeds the
amount of contracts initially sold into the securitization. In pre-funding, the
proceeds from the pre-funded portion are held in an escrow account until we sell
the additional contracts into the securitization in amounts up to the balance of
the pre-funded escrow account. In pre-funded securitizations, we effectively
lock in our borrowing costs with respect to the contracts we subsequently sell
into the securitization. However, we incur an expense in pre-funded
securitizations equal to the difference between the money market yields earned
on the proceeds held in escrow prior to subsequent delivery of contracts and the
interest rate paid on the securities issued in the
securitization. The amount of such expense may
vary. Despite these mitigation strategies, an increase in prevailing
interest rates would cause us to receive less excess spread cash flows on
automobile contracts, and thus could adversely affect our earnings and cash
flows.
The
Effects Of Terrorism And Military Action May Impair Our Results of
Operations.
The
long-term economic impact of the events of September 11, 2001, possible future
terrorist attacks or other incidents and related military action, or current or
future military action by United States forces in Iraq and other regions, could
have a material adverse effect on general economic conditions, consumer
confidence, and market liquidity in the United States. No assurance can be given
as to the effect of these events on the performance of our automobile contracts.
Any adverse effect resulting from these events could materially affect our
results of operations, financial condition and cash flows. In addition,
activation of a substantial number of U.S. military reservists or members of the
National Guard may significantly increase the proportion of contracts whose
interest rates are reduced by the application of the Servicemembers' Civil
Relief Act, which provides, generally, that an obligor who is covered by that
act may not be charged interest on the related contract in excess of 6% annually
during the period of the obligor's active duty.
Risks
Related to Our Common Stock
Our
Common Stock Is Thinly-Traded.
Our stock
is thinly-traded, which means investors will have limited opportunities to sell
their shares of common stock in the open market. Limited trading of
our common stock also contributes to more volatile price
fluctuations. Because there historically has been low trading volume
in our common stock, there can be no assurance that our stock price will not
decline as additional shares are sold in the public market. As of
December 31, 2008, all of our directors and executive officers beneficially
owned 3,297,165 shares of our common stock, or approximately 17%.
Our
Common Stock May Be Delisted.
Our stock
is trading at less than one dollar per share, which is the minimum price
required for continued listing on the Nasdaq Stock
Market. Enforcement of such minimum price has been suspended since
October 16, 2008. Although there has been an extension of the suspension period
(through July 20, 2009), there can be no assurance as to whether the minimum
price rule will continue to be suspended. If our common shares
continue to trade at a price below the Nasdaq minimum and the rule is
reinstated, we would be required to take steps to increase the price, or suffer
delisting from the Nasdaq Stock Market. The most likely step to
increase the trading price would be a reverse split of outstanding shares, which
would result in each existing shareholder receiving one new share in exchange
for some larger number of local shares.
We
Do Not Intend to Pay Dividends on Our Common Stock.
We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings and do not expect to pay any dividends in
the foreseeable future. See "Dividend
Policy".
18
Forward-Looking
Statements
Discussions
of certain matters contained in this report may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities
Act") and
Section 21E of the Exchange Act, and as such, may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which we operate, projections of
future performance, perceived opportunities in the market and statements
regarding our mission and vision. You can generally identify forward-looking
statements as statements containing the words "will," "would," "believe," "may," "could," "expect," "anticipate," "intend," "estimate," "assume" or other similar
expressions. Our actual results, performance and achievements may differ
materially from the results, performance and achievements expressed or implied
in such forward-looking statements. The discussion under "Risk Factors" identifies some
of the factors that might cause such a difference, including the
following:
|
·
|
changes
in general economic conditions;
|
|
·
|
changes
in interest rates;
|
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·
|
our
ability to generate sufficient operating and financing cash
flows;
|
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·
|
competition;
|
|
·
|
level
of future provisioning for receivables losses; and
|
| · | regulatory requirements. |
Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties
and assumptions. Actual results may differ from expectations due to many factors
beyond our ability to control or predict, including those described herein, and
in documents incorporated by reference in this report. For these statements, we
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
We
undertake no obligation to publicly update any forward-looking information. You
are advised to consult any additional disclosure we make in our periodic reports
filed with the SEC. See "Where You Can Find
More Information" and "Documents
Incorporated by Reference."
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Property
The
Company’s headquarters are located in Irvine, California, where it leases
approximately 90,000 square feet of general office space from an unaffiliated
lessor. The annual base rent is approximately $2.5 million, increasing to
approximately $2.7 million through 2016.
In March
1997, the Company established a branch collection facility in Chesapeake,
Virginia. The Company leases approximately 28,000 square feet of general office
space in Chesapeake, Virginia, at a base rent that is approximately $525,000 per
year, increasing to approximately $571,000 through 2012.
The
remaining two regional servicing centers occupy a total of approximately 41,000
square feet of leased space in Maitland, Florida; and Westchester, Illinois. The
termination dates of such leases range from 2011 to 2013.
Item
3. Legal Proceedings
Stanwich
Litigation. CPS was for some time a defendant in a class
action (the "Stanwich Case") brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that
case were persons entitled to receive regular payments (the "Settlement
Payments")
pursuant to earlier settlements of claims, generally personal injury claims,
against unrelated defendants. Stanwich
Financial
Services Corp. ("Stanwich"), which was an
affiliate of the former chairman of the board of directors of CPS, is the entity
that was obligated to pay the Settlement Payments. Stanwich defaulted on its
payment obligations to the plaintiffs and in June 2001 filed for reorganization
under the Bankruptcy Code, in the federal bankruptcy court in Connecticut. At
December 31, 2004, CPS was a defendant only in a cross-claim brought by one of
the other defendants in the case, Bankers Trust Company, which asserted a claim
of contractual indemnity against CPS.
By
February 2005, CPS had settled all claims brought against it in the Stanwich
Case.
19
In
November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The litigation between Mr. Pardee and CPS is stayed, awaiting resolution
of an adversary action brought against Mr. Pardee in the bankruptcy court, which
is hearing the bankruptcy of Stanwich.
CPS has
reached an agreement in principle with the representative of creditors in the
Stanwich bankruptcy to resolve the adversary action. Under the
agreement in principle, CPS was to pay the bankruptcy estate $625,000 and
abandon its claims against the estate, while the estate would abandon its
adversary action against Mr. Pardee. The bankruptcy court has
rejected that proposed settlement, and the representative of creditors has
appealed that rejection. If the agreement in principle were to be
approved upon appeal, CPS would expect that the agreement would result in (i)
limitation of its exposure to Mr. Pardee to no more than some portion of
his attorneys fees incurred and (ii) stays in Rhode Island being lifted, causing
those cases to become active again. CPS is unable to predict whether
the ruling of the bankruptcy court will be sustained or overturned on
appeal.
The
reader should consider that an adverse judgment against CPS in the Rhode Island
case for indemnification, if in an amount materially in excess of any liability
already recorded in respect thereof, could have a material adverse effect on our
financial condition.
Other Litigation.
We are routinely involved in various legal proceedings resulting from our
consumer finance activities and practices, both continuing and discontinued. We
believe that there are substantive legal defenses to such claims, and intend to
defend them vigorously. There can be no assurance, however, as to their
outcomes. We have recorded a liability as of December 31, 2008 that we believe
represents a sufficient allowance for legal contingencies. Any adverse judgment
against us, if in an amount materially in excess of the recorded liability,
could have a material adverse effect on our financial position or results of
operations.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to our shareholders during the fourth quarter of
2008.
Item
4A. Executive Officers of the Registrant
Charles E. Bradley, Jr., 49,
has been our President and a director since our formation in March 1991, and was
elected Chairman of the Board of Directors in July 2001. In January 1992, Mr.
Bradley was appointed Chief Executive Officer. From April 1989
to November 1990, he served as Chief Operating Officer of Barnard and Company, a
private investment firm. From September 1987 to March 1989, Mr. Bradley, Jr. was
an associate of The Harding Group, a private investment banking
firm. Mr. Bradley does not currently serve on the board of directors
of any other publicly-traded companies.
Mark A. Creatura, 49, has
been Senior Vice President – General Counsel since October 1996. From October
1993 through October 1996, he was Vice President and General Counsel at Urethane
Technologies, Inc., a polyurethane chemicals formulator. Mr. Creatura was
previously engaged in the private practice of law with the Los Angeles law firm
of Troy & Gould Professional Corporation, from October 1985 through October
1993.
Jeffrey P. Fritz, 49, has been Senior Vice
President - Chief Financial Officer since April 2006. He was Senior Vice
President - Accounting from August 2004 through March 2006. He served as a
consultant to us from May 2004 to August 2004. Previously, he was the Chief
Financial Officer of SeaWest Financial Corp. from February 2003 to May 2004, and
the Chief Financial Officer of AFCO Auto Finance from April 2002 to February
2003. He practiced public accounting with Glenn M. Gelman & Associates from
March 2001 to April 2002 and was Chief Financial Officer of Credit Services
Group, Inc. from May 1999 to November 2000. He previously served as our
Chief Financial Officer from our inception through May 1999.
Curtis K. Powell, 52, has
been Senior Vice President – Contract Origination since June 2001. Previously,
he was our Senior Vice President – Marketing, from April 1995. He joined us in
January 1993 as an independent marketing representative until being appointed
Regional Vice President of Marketing for Southern California in
November 1994. From June 1985 through January 1993, Mr. Powell was in the
retail automobile sales and leasing business.
Robert E. Riedl, 45, has been
Senior Vice President - Chief Investment Officer since April 2006. Mr. Riedl was
Senior Vice President - Chief Financial Officer from August 2003 until assuming
his current position. Mr. Riedl joined the Company as Senior Vice President -
Risk Management in January 2003. Previously, Mr. Riedl was
a
20
Christopher Terry, 41, has
been Senior Vice President - Servicing since May 2005, and prior to that was
Senior Vice President - Asset Recovery since January 2003. He joined us in
January 1995 as a loan officer, held a series of successively more responsible
positions, and was promoted to Vice President - Asset Recovery in
June 1999. Mr. Terry was previously a branch manager with Norwest
Financial from 1990 to October 1994.
Teri L. Clements,
46, has been the Senior Vice President of
Originations since April 2008. Prior to that, she held the position of Vice
President of Originations since August 1998. She joined the Company in June 1991
as an Operations Specialist. Previously, Ms. Clements held an administrative
position at Greco & Associates.
Jayne E. Holland, 47, has
been the Senior Vice President of Operations since April 2008. Prior to that,
she held the position of Vice President of Operations since June 1999 and has
been with the company since 1993. Ms. Holland was previously the Assistant Vice
President of Operations for Far Western Bank from 1986 through 1990, and has
been in the auto finance industry since 1981.
21
PART
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
|
The
Company’s Common Stock is traded on the Nasdaq Global Market, under the symbol
"CPSS." The following
table sets forth the high and low sale prices as reported by Nasdaq for our
Common Stock for the periods shown.
|
High
|
Low
|
|||||
|
January
1 - March 31, 2007
|
7.77
|
5.25
|
||||
|
April
1 - June 30, 2007
|
7.21
|
5.49
|
||||
|
July
1 - September 30, 2007
|
6.75
|
4.28
|
||||
|
October
1 - December 31, 2007
|
6.20
|
3.00
|
||||
|
January
1 - March 31, 2008
|
3.61
|
2.11
|
||||
|
April
1 - June 30, 2008
|
3.18
|
1.13
|
||||
|
July
1 - September 30, 2008
|
2.85
|
1.22
|
||||
|
October
1 - December 31, 2008
|
2.58
|
0.37
|
||||
As of
March 25, 2009, there were 60 holders of record of the Company’s Common Stock.
To date, we have not declared or paid any dividends on our Common Stock. The
payment of future dividends, if any, on our Common Stock is within the
discretion of the Board of Directors and will depend upon our income, capital
requirements and financial condition, and other relevant factors. The
instruments governing our outstanding debt place certain restrictions on the
payment of dividends. We do not intend to declare any dividends on our Common
Stock in the foreseeable future, but instead intend to retain any cash flow for
use in our operations.
The table
below presents information regarding outstanding options to purchase our Common
Stock as of December 31, 2008:
|
Number
of securities
|
Weighted
average
|
Number
of
|
||||||||
|
to
be issued upon
|
exercise
price of
|
securities
remaining
|
||||||||
|
exercise
of outstanding
|
outstanding
|
available
for future
|
||||||||
|
options,
warrants
|
options,
warrants
|
issuance
under equity
|
||||||||
|
Plan
category
|
and
rights
|
and
rights
|
compensation
plans
|
|||||||
|
Equity
compensation plans
|
||||||||||
|
approved
by security holders
|
10,940,308 | $ | 2.99 | 2,435,000 | ||||||
|
Equity
compensation plans not
|
||||||||||
|
approved
by security holders
|
- | - | - | |||||||
|
Total
|
10,940,308 | $ | 2.99 | 2,435,000 | ||||||
22
Issuer
Purchases of Equity Securities in the Fourth Quarter
|
Total
Number of
|
Approximate
Dollar
|
||||||||||||||
|
Total
|
Shares
Purchased as
|
Value
of Shares that
|
|||||||||||||
|
Number
of
|
Average
|
Part
of Publicly
|
May
Yet be Purchased
|
||||||||||||
|
Shares
|
Price
Paid
|
Announced
Plans or
|
Under
the Plans or
|
||||||||||||
|
Period(1)
|
Purchased
|
per
Share
|
Programs(2)
|
Programs
|
|||||||||||
|
October
2008
|
113,315 | $ | 1.99 | 113,315 | $ | 2,406,297 | |||||||||
|
November
2008
|
65,729 | 0.92 | 65,729 | 2,345,790 | |||||||||||
|
December
2008
|
75,923 | 0.81 | 75,923 | 2,284,542 | |||||||||||
|
Total
|
254,967 | $ | 1.36 | 254,967 | |||||||||||
|
(1)
|
Each
monthly period is the calendar
month.
|
|
(2)
|
Through
December 31, 2008, our board of directors had authorized the purchase of
up to $32.5 million of our outstanding securities, which program was first
announced in our annual report for the year 2002, filed on March 26,
2003. All purchases described in the table above were under the plan
announced in March 2003, which has no fixed expiration
date.
|
Item
6. Selected Financial Data
The
following table presents our selected consolidated financial data and operating
data as of and for the dates indicated. The data under the captions "Statement of
Operations Data" and "Balance Sheet
Data" have
been derived from our audited and unaudited consolidated financial
statements. The remainder is derived from other records of
ours.
You
should read the selected consolidated financial data together with "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" and our audited
and unaudited financial statements and notes thereto that are included in this
report.
23
|
(dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Statement
of Operations Data
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Interest
income
|
$ | 351,551 | $ | 370,265 | $ | 263,566 | $ | 171,834 | $ | 105,818 | ||||||||||
|
Servicing
fees
|
2,064 | 1,218 | 2,894 | 6,647 | 12,480 | |||||||||||||||
|
Other
income
|
14,796 | 23,067 | 12,403 | 15,216 | 14,394 | |||||||||||||||
|
Total
revenues
|
368,411 | 394,550 | 278,863 | 193,697 | 132,692 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Employee
costs
|
48,874 | 46,716 | 38,483 | 40,384 | 38,173 | |||||||||||||||
|
General
and administrative
|
44,368 | 47,416 | 42,011 | 39,285 | 33,936 | |||||||||||||||
|
Interest
expense
|
156,253 | 139,189 | 93,112 | 51,669 | 32,147 | |||||||||||||||
|
Provision
for credit losses
|
148,408 | 137,272 | 92,057 | 58,987 | 32,574 | |||||||||||||||
|
Loss
on sale of receivables
|
13,963 | |||||||||||||||||||
|
Impairment
loss on residual assets (1)
|
- | - | - | - | 11,750 | |||||||||||||||
|
Total
expenses
|
411,866 | 370,593 | 265,663 | 190,325 | 148,580 | |||||||||||||||
|
Income
(loss) before income tax expense (benefit)
|
(43,455 | ) | 23,957 | 13,200 | 3,372 | (15,888 | ) | |||||||||||||
|
Income
tax expense (benefit)
|
(17,364 | ) | 10,099 | (26,355 | ) | - | - | |||||||||||||
|
Net
income (loss)
|
$ | (26,091 | ) | $ | 13,858 | $ | 39,555 | $ | 3,372 | $ | (15,888 | ) | ||||||||
|
Earnings
(loss) per share-basic
|
$ | (1.36 | ) | $ | 0.66 | $ | 1.82 | $ | 0.16 | $ | (0.75 | ) | ||||||||
|
Earnings
(loss) per share-diluted
|
$ | (1.36 | ) | $ | 0.61 | $ | 1.64 | $ | 0.14 | $ | (0.75 | ) | ||||||||
|
Pre-tax
income (loss) per share-basic (2)
|
$ | (2.26 | ) | $ | 1.15 | $ | 0.61 | $ | 0.16 | $ | (0.75 | ) | ||||||||
|
Pre-tax
income (loss) per share-diluted (3)
|
$ | (2.26 | ) | $ | 1.06 | $ | 0.55 | $ | 0.14 | $ | (0.75 | ) | ||||||||
|
Weighted
average shares outstanding-basic
|
19,230 | 20,880 | 21,759 | 21,627 | 21,111 | |||||||||||||||
|
Weighted
average shares outstanding-diluted
|
19,230 | 22,595 | 24,052 | 23,513 | 21,111 | |||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,638,807 | $ | 2,282,813 | $ | 1,728,594 | $ | 1,155,144 | $ | 766,599 | ||||||||||
|
Cash
and cash equivalents
|
22,084 | 20,880 | 14,215 | 17,789 | 14,366 | |||||||||||||||
|
Restricted
cash and equivalents
|
153,479 | 170,341 | 193,001 | 157,662 | 125,113 | |||||||||||||||
|
Finance
receivables, net
|
1,339,307 | 1,967,866 | 1,401,414 | 913,576 | 550,191 | |||||||||||||||
|
Residual
interest in securitizations
|
3,582 | 2,274 | 13,795 | 25,220 | 50,430 | |||||||||||||||
|
Warehouse
lines of credit
|
9,919 | 235,925 | 72,950 | 35,350 | 34,279 | |||||||||||||||
|
Residual
interest financing
|
67,300 | 70,000 | 31,378 | 43,745 | 22,204 | |||||||||||||||
|
Securitization
trust debt
|
1,404,211 | 1,798,302 | 1,442,995 | 924,026 | 542,815 | |||||||||||||||
|
Long-term
debt
|
45,826 | 28,134 | 38,574 | 58,655 | 74,829 | |||||||||||||||
|
Shareholders'
equity
|
89,849 | 114,355 | 111,512 | 73,589 | 69,920 | |||||||||||||||
|
(1)
|
The
impairment loss was related to our analysis and estimate of the expected
ultimate performance of our previously securitized pools that were held by
our non-consolidated subsidiaries and the residual interest in
securitizations. The impairment loss was a result of the actual net loss
and prepayment rates exceeding our previous estimates for the automobile
contracts held by our non-consolidated
subsidiaries.
|
|
(2)
|
Income
(loss) before income tax benefit divided by weighted average shares
outstanding-basic. Included for illustrative purposes because some of
the periods presented include significant income tax benefits while other
periods have neither income tax benefit nor
expense.
|
|
(3)
|
Income
(loss) before income tax benefit divided by weighted average shares
outstanding-diluted. Included for illustrative purposes because some
of the periods presented include significant income tax benefits while
other periods have neither income tax benefit nor
expense.
|
24
|
As
of and
|
||||||||||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
(dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Contract
Purchases/Securitizations
|
||||||||||||||||||||
|
Automobile
contract purchases
|
$ | 296,817 | $ | 1,282,311 | $ | 1,019,018 | $ | 691,252 | $ | 447,232 | ||||||||||
|
Automobile
contract acquisitions (1)
|
- | - | - | - | 74,901 | |||||||||||||||
|
Automobile
contracts securitized - structured
|
||||||||||||||||||||
|
as
sales
|
198,662 | - | - | - | - | |||||||||||||||
|
Automobile
contracts securitized - structured
|
||||||||||||||||||||
|
as
secured financings
|
310,360 | 1,118,097 | 957,681 | 674,421 | 479,369 | |||||||||||||||
|
Managed
Portfolio Data
|
||||||||||||||||||||
|
Contracts
held by consolidated subsidiaries
|
$ | 1,477,810 | $ | 2,125,755 | $ | 1,527,285 | $ | 1,000,597 | $ | 619,794 | ||||||||||
|
Contracts
held by non-consolidated subsidiaries
|
186,233 | - | 34,850 | 103,130 | 233,621 | |||||||||||||||
|
SeaWest
third party portfolio (2)
|
79 | 422 | 3,770 | 18,018 | 53,463 | |||||||||||||||
|
Total
managed portfolio
|
$ | 1,664,122 | $ | 2,126,177 | $ | 1,565,905 | $ | 1,121,745 | $ | 906,878 | ||||||||||
|
Average
managed portfolio
|
1,934,003 | 1,906,605 | 1,376,781 | 997,697 | 861,262 | |||||||||||||||
|
Weighted
average fixed effective interest rate
|
||||||||||||||||||||
|
(total
managed portfolio) (3)
|
18.0 | % | 18.2 | % | 18.5 | % | 18.6 | % | 19.2 | % | ||||||||||
|
Core
operating expense
|
||||||||||||||||||||
|
(%
of average managed portfolio) (4)
|
4.8 | % | 4.9 | % | 5.8 | % | 8.0 | % | 8.4 | % | ||||||||||
|
Allowance
for loan losses
|
$ | 78,036 | $ | 100,138 | $ | 79,380 | $ | 57,728 | $ | 42,615 | ||||||||||
|
Allowance
for loan losses (% of total contracts
|
||||||||||||||||||||
|
held
by consolidated subsidiaries)
|
5.3 | % | 4.7 | % | 5.2 | % | 5.8 | % | 6.9 | % | ||||||||||
|
Total
delinquencies (3) (5)
|
5.6 | % | 4.7 | % | 4.0 | % | 3.8 | % | 4.0 | % | ||||||||||
|
Total
delinquencies and repossessions (3) (5)
|
8.6 | % | 6.3 | % | 5.5 | % | 5.0 | % | 5.6 | % | ||||||||||
|
Net
charge-offs (3) (6)
|
7.7 | % | 5.3 | % | 4.5 | % | 5.3 | % | 7.8 | % | ||||||||||
|
(1)
|
Represents
automobile contracts not purchased directly from dealers, but acquired as
a result of our acquisition of certain assets of SeaWest in
2004.
|
|
(2)
|
Receivables
related to the SeaWest third party portfolio, on which we earn only a
servicing fee.
|
|
(3)
|
Excludes
receivables related to the SeaWest third party
portfolio.
|
|
(4)
|
Total
expenses excluding provision for credit losses, interest expense, loss on
sale of receivables and impairment loss on residual
assets.
|
|
(5)
|
For further information
regarding delinquencies and the managed portfolio, see the table captioned
"Delinquency
Experience," in Item 1, Part I of this
report and the notes to that
table.
|
|
(6)
|
Net charge-offs include the
remaining principal balance, after the application of the net proceeds
from the liquidation of the vehicle (excluding accrued and unpaid
interest) and amounts collected subsequent to the date of the charge-off,
including some recoveries which have been classified as other income in
the accompanying financial statements. For further information
regarding charge-offs, see the table captioned "Net Charge-Off
Experience," in Item I, Part I of this
report and the notes to that
table.
|
25
Item
7. Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto and other information
included or incorporated by reference herein.
Overview
We are a
specialty finance company engaged in purchasing and servicing retail automobile
contracts originated primarily by franchised automobile dealers and, to a lesser
extent, by select independent dealers in the United States in the sale of new
and used automobiles, light trucks and passenger vans. Through our automobile
contract purchases, we provide indirect financing to the customers of dealers
who have limited credit histories, low incomes or past credit problems, who we
refer to as sub-prime customers. We serve as an alternative source of
financing for dealers, facilitating sales to customers who otherwise might not
be able to obtain financing from traditional sources, such as commercial banks,
credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly
from dealers, we have also (i) acquired installment purchase contracts in three
merger and acquisition transactions, (ii) purchased immaterial amounts of
vehicle purchase money loans from non-affiliated lenders, and (iii) originated
ourselves an immaterial amount of vehicle purchase money loans by lending money
directly to consumers. In this report, we refer to all of such
contracts and loans as "automobile contracts."
We were
incorporated and began our operations in March 1991. From inception through
December 31, 2008, we have purchased a total of approximately $8.7 billion of
automobile contracts from dealers. In addition, we obtained a total
of approximately $605.0 million of automobile contracts in mergers and
acquisitions we made in 2002, 2003 and 2004. During 2008, unlike
recent prior years, our managed portfolio decreased from the previous year due
to our strategy of decreasing contract purchases to conserve our liquidity in
response to adverse economic conditions as discussed further
below. Our total managed portfolio, net of unearned interest on
pre-computed automobile contracts, was approximately $1,664.1 million at
December 31, 2008 compared to $2,162.2 million at December 31, 2007,
$1,565.9 million as of December 31, 2006 and $1,122.0 million as of
December 31, 2005.
We are
headquartered in Irvine, California, where most operational and administrative
functions are centralized. All credit and underwriting functions are
performed in our California headquarters, and we service our automobile
contracts from our California headquarters and from three servicing branches in
Virginia, Florida and Illinois.
We
purchase contracts in our own name (“CPS”) and, until July 2008, also in the
name of our wholly-owned subsidiary, TFC. Programs marketed under the
CPS name are intended to serve a wide range of sub-prime customers, primarily
through franchised new car dealers. Our TFC program served vehicle
purchasers enlisted in the U.S. Armed Forces, primarily through independent used
car dealers. In July 2008, we suspended contract purchases under our
TFC program.
We
purchase automobile contracts with the intention of financing them on a
long-term basis through securitizations. Securitizations are transactions in
which we sell a specified pool of contracts to a special purpose entity of ours,
which in turn issues asset-backed securities to fund the purchase of the pool of
contracts from us. Depending on the structure of the securitization, the
transaction may be treated, for financial accounting purposes, as a sale of the
contracts or as a secured financing.
Securitization
and Warehouse Credit Facilities
Generally
Throughout
the periods for which information is presented in this report, we have purchased
automobile contracts with the intention of financing them on a long-term basis
through securitizations, and on an interim basis through our warehouse credit
facilities. All such financings have involved identification of
specific automobile contracts, sale of those automobile contracts (and
associated rights) to one of our special-purpose subsidiaries, and issuance of
asset-backed securities to fund the transactions. Depending on the structure,
these transactions may be accounted for under generally accepted accounting
principles as sales of the automobile contracts or as secured
financings.
When
structured to be treated as a secured financing for accounting purposes, the
subsidiary is consolidated with us. Accordingly, the sold automobile contracts
and the related debt appear as assets and liabilities, respectively, on our
consolidated balance sheet. We then periodically: (i) recognize interest and fee
income on the contracts, (ii) recognize interest expense on the securities
issued in the transaction, and (iii) record as expense a provision for credit
losses on the contracts. From July 2003 through April 2008, all of
our securitizations were structured in this manner. In September 2008, we
securitized automobile contracts in a transaction that was in substance a sale,
that
26
When
structured to be treated as a sale for accounting purposes, the assets and
liabilities of the special-purpose subsidiary are not consolidated with us.
Accordingly, the transaction removes the sold automobile contracts from our
consolidated balance sheet, the related debt does not appear as our debt, and
our consolidated balance sheet shows, as an asset, a retained residual interest
in the sold automobile contracts. The residual interest represents the
discounted value of what we expect will be the excess of future collections on
the automobile contracts over principal and interest due on the asset-backed
securities. That residual interest appears on our consolidated balance sheet as
"residual
interest in securitizations," and the
determination of its value is dependent on our estimates of the future
performance of the sold automobile contracts. Of our managed
portfolio outstanding at December 31, 2008, only our September 2008
securitization was structured to be treated as a sale for accounting
purposes.
Credit
Risk Retained
Whether a
sale of automobile contracts in connection with a securitization or warehouse
credit facility is treated as a secured financing or as a sale for financial
accounting purposes, the related special-purpose subsidiary may be unable to
release excess cash to us if the credit performance of the related automobile
contracts falls short of pre-determined standards. Such releases represent a
material portion of the cash that we use to fund our
operations. An unexpected deterioration in the performance of
such automobile contracts could therefore have a material adverse effect on both
our liquidity and our results of operations, regardless of whether such
automobile contracts are treated for financial accounting purposes as having
been sold or as having been financed. For estimation of the magnitude of such
risk, it may be appropriate to look to the size of our "managed
portfolio,"
which represents both financed and sold automobile contracts as to which such
credit risk is retained. Our managed portfolio as of December 31, 2008 was
approximately $1,664.1 million.
Critical
Accounting Policies
We
believe that our accounting policies related to (a) Allowance for Finance Credit
Losses, (b) Amortization of Deferred Originations Costs and Acquisition Fees,
(c) Residual Interest in Securitizations and Gain on Sale of Automobile
Contracts and (d) Income Taxes are the most critical to understanding and
evaluating our reported financial results. Such policies are described
below.
Allowance
for Finance Credit Losses
In order
to estimate an appropriate allowance for losses to be incurred on finance
receivables, we use a loss allowance methodology commonly referred to as "static
pooling,"
which stratifies our finance receivable portfolio into separately identified
pools based on the period of origination. Using analytical and formula driven
techniques, we estimate an allowance for finance credit losses, which we believe
is adequate for probable credit losses that can be reasonably estimated in our
portfolio of automobile contracts. Provision for losses is charged to our
consolidated statement of operations. Net losses incurred on finance receivables
are charged to the allowance. We evaluate the adequacy of the allowance by
examining current delinquencies, the characteristics of the portfolio,
prospective liquidation values of the underlying collateral and general economic
and market conditions. As circumstances change, our level of provisioning and/or
allowance may change as well. We observed deterioration in performance of
automobile contracts held in our portfolio in 2008, which we attribute to a
general recession that began in December 2007, and which appears to be
continuing through the date of this report. Accordingly, we increased our
provision for credit losses in the fourth quarter of 2008.
Amortization
of Deferred Originations Costs and Acquisition Fees
Upon
purchase of a contract from a dealer, we generally either charge or advance the
dealer an acquisition fee. In addition, we incur certain direct costs
associated with originations of our contracts. All such acquisition
fees and direct costs are applied to the carrying value of finance receivables
and are accreted into earnings as an adjustment to the yield over the estimated
life of the contract using the interest method, in accordance with Statement of
Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.
Term
Securitizations
Our term
securitization structure has generally been as follows:
We sell
automobile contracts we acquire to a wholly-owned special purpose subsidiary,
which has been established for the limited purpose of buying and reselling our
automobile contracts. The special-purpose subsidiary
27
Our
September 2008 securitization was in substance a sale of the underlying
receivables, and is treated as a sale for financial accounting purposes. It
differs from those treated as secured financings in that the trust to which our
special-purpose subsidiaries sold the automobile contracts met the definition of
a "qualified
special-purpose entity" under Statement
of Financial Accounting Standards No. 140 ("SFAS 140"). As a result,
assets and liabilities of those trusts are not consolidated into our
consolidated balance sheet.
Historically,
our warehouse credit facility structures were similar to the above, except that
(i) our special-purpose subsidiaries that purchased the automobile contracts
pledged the automobile contracts to secure promissory notes that they issued,
(ii) no increase in the required amount of internal credit enhancement was
contemplated, and (iii) we did not purchase financial guaranty
insurance. Through November 2008, we depended substantially on two
warehouse credit facilities: (i) a $200 million warehouse credit facility, which
we established in November 2005 and expired by its terms in November 2008; and
(ii) a $200 million warehouse credit facility, which we established in June
2004 and which was amended in December 2008 to eliminate future advances and to
provide for repayment of the related notes from the cash collections on the
underlying pledged contracts, and certain other principal reductions until its
maturity in September 2009.
Upon each
sale of automobile contracts in a transaction structured as a secured financing
for financial accounting purposes, whether a term securitization or a warehouse
financing, we retain on our consolidated balance sheet the related automobile
contracts as assets and record the asset-backed notes issued in the transaction
as indebtedness.
Under the
September 2008 securitization and other term securitizations completed prior to
July 2003 that were structured as sales for financial accounting purposes, we
removed from our consolidated balance sheet the automobile contracts sold and
added to our consolidated balance sheet (i) the cash received, if any, and (ii)
the estimated fair value of the ownership interest that we retained in the
automobile contracts sold in the transaction. That retained or residual interest
consisted of (a) the cash held in the spread account, if any, (b)
overcollateralization, if any, (c) asset-backed securities retained, if any, and
(d) receivables from the trust, which include the net interest
receivables. Net interest receivables represent the estimated
discounted cash flows to be received from the trust in the future, net of
principal and interest payable with respect to the asset-backed notes, the
premium paid to the insurance company, if any, and certain other expenses. The
excess of the cash received and the assets we retained over the carrying value
of the automobile contracts sold, less transaction costs, equaled the net gain
on sale of automobile contracts we recorded.
We
receive periodic base servicing fees for the servicing and collection of the
automobile contracts. (Under our securitization structures treated as secured
financings for financial accounting purposes, such servicing fees
are
28
If the
amount of cash required for payment of fees, expenses, interest and principal on
the senior asset-backed notes exceeds the amount collected during the collection
period, the shortfall is withdrawn from the spread account, if any. If the cash
collected during the period exceeds the amount necessary for the above
allocations plus required principal payments on the subordinated asset-backed
notes, and there is no shortfall in the related spread account or the required
overcollateralization level, the excess is released to us. If the spread account
and overcollateralization is not at the required level, then the excess cash
collected is retained in the trust until the specified level is achieved.
Although spread account balances are held by the trusts on behalf of our
special-purpose subsidiaries as the owner of the residual interests (in the case
of securitization transactions structured as sales for financial accounting
purposes) or the trusts (in the case of securitization transactions structured
as secured financings for financial accounting purposes), we are restricted in
use of the cash in the spread accounts. Cash held in the various spread accounts
is invested in high quality, liquid investment securities, as specified in the
securitization agreements. The interest rate payable on the automobile contracts
is significantly greater than the interest rate on the asset-backed notes. As a
result, the residual interests described above historically have been a
significant asset of ours.
In all of
our term securitizations and warehouse credit facilities, whether treated as
secured financings or as sales, we have sold the automobile contracts (through a
subsidiary) to the securitization entity. The difference between the two
structures is that in securitizations that are treated as secured financings we
report the assets and liabilities of the securitization trust on our
consolidated balance sheet. Under both structures, recourse to us by holders of
the asset-backed securities and by the trust, for failure of the automobile
contract obligors to make payments on a timely basis, is limited to the
automobile contracts included in the securitizations or warehouse credit
facilities, the spread accounts and our retained interests in the respective
trusts.
Since the
third quarter of 2003, we have conducted 24 term securitizations. Of these 24,
19 were periodic (generally quarterly) securitizations of automobile contracts
that we purchased from automobile dealers under our regular programs. In
addition, in March 2004 and November 2005, we completed securitizations of our
retained interests in other securitizations that we and our affiliates
previously sponsored. The debt from the March 2004 transaction was repaid in
August 2005, and the debt from the November 2005 transaction was repaid in May
2007. Also, in June 2004, we completed a securitization of automobile contracts
purchased in the SeaWest asset acquisition and under our TFC programs. Further,
in December 2005 and May 2007 we completed securitizations that included
automobile contracts purchased under the TFC programs, automobile contracts
purchased under the CPS programs and automobile contracts we repurchased upon
termination of prior securitizations of our MFN and TFC
subsidiaries. Since July 2003 all such securitizations have been
structured as secured financings, except that our September 2008 securitization
was in substance a sale of the underlying receivables, and is treated as a sale
for financial accounting purposes
Income
Taxes
We
account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized
subject to management’s judgment that realization is more likely than
not. Although realization is not assured, we believe that the
realization of the recognized net deferred tax asset of $52.7 million is more
likely than not based on expectations as to future taxable income in the
jurisdictions in which we operate and available tax planning strategies that
could be implemented if necessary to prevent a carryforward from expiring. Our
net deferred tax asset of $52.7 million is net of a valuation allowance of $1.0
million and consists of approximately $48.8 million of net U.S. federal deferred
tax assets and $3.9 million of net state deferred tax assets. The
major components of the deferred tax asset are $27.4 million in net operating
loss carryforwards and built in losses and $22.2 million in net deductions which
have not yet been taken on a tax return. We estimate that we
would need to generate approximately $127.5 million of taxable income during the
applicable carryforward periods to realize fully our federal and state deferred
tax assets.
29
As a
result of the losses incurred in 2008, we are in a three-year cumulative pretax
loss position at December 31, 2008. A cumulative loss position is considered
significant negative evidence in assessing the realizability of a deferred tax
asset. However, we have concluded that there is sufficient positive evidence to
overcome this negative evidence. First, we recognized a $14.0 million
loss on the September 2008 securitization that was structured as a sale for
financial accounting purposes. Since our inception in 1991, we have
completed 49 securitizations of approximately $6.6 billion in contracts and have
never recognized a loss until the September 2008 securitization. We
view this securitization as an anomaly created by the unusual and adverse market
conditions at the time. Without the $14.0 million loss on the
September 2008 securitization, we would not be in a three-year cumulative loss
position at December 31, 2008. Moreover, from 2003 through 2007, we
generated approximately $107.0 million in taxable income. Finally, we
forecast sufficient taxable income in the carryforward period to fully realize
our deferred tax assets, exclusive of tax planning strategies, even under
stressed scenarios.
Nevertheless,
the amount of the deferred tax asset considered realizable, however, could be
significantly reduced in the future if adverse developments cause us to lower
our estimates of future taxable income during the carryforward period. Based
upon the foregoing discussion, as well as tax planning opportunities and other
factors discussed below, we have concluded that the U.S. and state net operating
loss carryforward periods provide enough time to utilize the deferred tax assets
pertaining to the existing net operating loss carryforwards and any net
operating loss that would be created by the reversal of the future net
deductions which have not yet been taken on a tax return. Regarding the estimate
of future taxable income, we have projected pretax earnings based upon our core
business that we intend to conduct going forward. Our core business has produced
strong earnings in the past, even with intermittent loss periods resulting from
economic cycles not unlike, although not as severe, as the current economic
downturn. We have already taken steps to reduce our cost structure
and have adjusted the contract interest rates and purchase prices applicable to
our purchases of automobile contracts from dealers. We appear to be able to
increase our acquisition fees and reduce our purchase prices because of lessened
competition for our services. Taking these items into account, we project
generating sufficient pretax earnings within the carryforward period to realize
our deferred tax assets. We have also examined tax planning
strategies available to us in accordance with SFAS 109 which would be
employed, if necessary, to prevent a carryforward from expiring. Our
projection of sufficient earnings is a forward-looking statement, and there can
be no assurance that our projections of such earnings will be correct. Factors
discussed under "Risk Factors," and in particular under the subheading "Risk
Factors -- Forward-Looking Statements" may affect whether such projections prove
to be correct.
In June
2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty
in income taxes recognized in the financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 provides that a tax benefit from
an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical
merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
We
adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized an increase of approximately $1.1
million in the liability for unrecognized tax benefits, which was accounted for
as a reduction to the January 1, 2007, balance of retained
earnings.
We
recognize interest and penalties related to unrecognized tax benefits within the
income tax expense line in the accompanying consolidated statement of
operations. Accrued interest and penalties are included within the
related tax liability line in the consolidated balance sheet.
Uncertainty
of Capital Markets and General Economic Conditions
Historically,
we have depended upon the availability of warehouse credit facilities and access
to long-term financing through the issuance of asset-backed securities
collateralized by our automobile contracts. Since 1994, we have completed 49
term securitizations of approximately $6.6 billion in contracts. We conducted
four term securitizations in 2006, four in 2007, and two in 2008. From July 2003
through April 2008 all of our securitizations were structured as secured
financings. The second of our two securitization transactions in 2008
(completed in
30
September
2008) was in substance a sale of the related contracts, and is treated as a sale
for financial accounting purposes.
Since the
fourth quarter of 2007, we have observed unprecedented adverse changes in the
market for securitized pools of automobile contracts. These changes include
reduced liquidity, and reduced demand for asset-backed securities, particularly
for securities carrying a financial guaranty and for securities backed by
sub-prime automobile receivables. Moreover, many of the firms that previously
provided financial guarantees, which were an integral part of our
securitizations, are no longer offering such guarantees. As of
December 31, 2008, we have no available warehouse credit facilities and no
immediate plans to complete a term securitization. The adverse
changes that have taken place in the market over the last 18 months have caused
us to seek to conserve liquidity by reducing our purchases of automobile
contracts to nominal levels. If the current adverse circumstances that have
affected the capital markets should continue or worsen, we may curtail further
or cease our purchases of new automobile contracts, which could lead to a
material adverse effect on our operations.
Current
economic conditions have negatively affected many aspects of our
industry. First, as stated above, there is little demand for
asset-backed securities secured by consumer finance receivables, including
sub-prime automobile receivables. Second, lenders who previously
provided short term warehouse financing for sub-prime automobile finance
companies such as ours are reluctant to provide such short-term financing due to
the uncertainty regarding the prospects of obtaining long-term financing through
the issuance of asset-backed securities. In addition, many capital
market participants such as investment banks, financial guaranty providers and
institutional investors who previously played a role in the sub-prime auto
finance industry have withdrawn from the industry, or in some cases, have ceased
to do business. Finally, the broad economic weakness and increasing
unemployment has made many of the obligors under our receivables less willing or
able to pay, resulting in higher delinquency, charge-offs and
losses. Each of these factors has adversely affected our results of
operations. Should existing economic conditions worsen, both our
ability to purchase new contracts and the performance of our existing managed
portfolio may be impaired, which, in turn, could have a further material adverse
effect on our results of operations.
Results
of Operations
Comparison
of Operating Results for the Year Ended December 31, 2008 with the Year Ended
December 31, 2007
Revenues. During
the year ended December 31, 2008, revenues were $368.4 million, a decrease of
$26.1 million, or 6.6%, from the prior year revenue of $394.6 million. The
primary reason for the decrease in revenues is a decrease in interest income.
Interest income for the year ended December 31, 2008 decreased $18.7 million, or
5.1%, to $351.6 million from $370.3 million in the prior year. The primary
reason for the decrease in interest income is the decrease in finance
receivables held by consolidated subsidiaries. At December 31, 2008
the aggregate outstanding balance of finance receivables held by consolidated
subsidiaries was $1,477.8 million compared to $2,125.7 million at December 31,
2007, resulting in a decrease of $12.3 million in interest
income. We also experienced decreases in interest earned on cash
deposits (including restricted cash deposits) of $4.7 million, and a decrease in
interest income on our residual interest in securitizations of $1.7
million.
Servicing
fees totaling $2.1 million in the year ended December 31, 2008 increased
$845,000, or 69.3%, from $1.2 million in the prior year. The increase in
servicing fees is the result our September 2008 securitization that was
structured as a sale for financial accounting purposes and on which we earn a
base servicing fee. During 2008 we also earned base servicing fees on
the SeaWest Third Party Portfolio, which has declined to an immaterial amount as
of December 31, 2008. As of December 31, 2008 and 2007, our managed
portfolio owned by consolidated vs. non-consolidated subsidiaries and other
third parties was as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Total
Managed Portfolio
|
($
in millions)
|
|||||||||||||||
|
Owned
by Consolidated Subsidiaries
|
$ | 1,477.8 | 88.8 | % | $ | 2,125.8 | 100.0 | % | ||||||||
|
Owned
by Non-Consolidated Subsidiaries
|
186.2 | 11.2 | % | - | 0.0 | % | ||||||||||
|
SeaWest
Third Party Portfolio
|
0.1 | 0.0 | % | 0.4 | 0.0 | % | ||||||||||
|
Total
|
$ | 1,664.1 | 100.0 | % | $ | 2,126.2 | 100.0 | % | ||||||||
At
December 31, 2008, we were generating income and fees on a managed portfolio
with an outstanding principal balance of $1,664.1 million compared to a managed
portfolio with an outstanding principal balance of
$2,126.2
31
million
as of December 31, 2007. At December 31, 2008 and 2007, the managed portfolio
composition was as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Originating
Entity
|
($
in millions)
|
|||||||||||||||
|
CPS
|
$ | 1,619.6 | 97.3 | % | $ | 2,062.8 | 97.0 | % | ||||||||
|
TFC
|
44.3 | 3.0 | % | 62.0 | 3.0 | % | ||||||||||
|
MFN
|
0.0 | 0.0 | % | 0.0 | 0.0 | % | ||||||||||
|
SeaWest
|
0.1 | 0.0 | % | 1.0 | 0.0 | % | ||||||||||
|
SeaWest
Third Party Portfolio
|
0.1 | 0.0 | % | 0.4 | 0.0 | % | ||||||||||
|
Total
|
$ | 1,664.1 | 100.0 | % | $ | 2,126.2 | 100.0 | % | ||||||||
Other
income decreased $8.3 million, or 35.9%, to $14.8 million in the year ended
December 31, 2008 from $23.1 million during the prior year. The
year-over-year decrease is the result of a variety of
factors. Current year other income includes $178,000 resulting from
an increase in the carrying value of our residual interest in securitizations,
compared to $6.2 million of such increases in 2007. The carrying
value was increased primarily as a result of the underlying receivables having
incurred fewer losses than we had previously estimated, which in turn resulted
in actual cash flows exceeding estimated cash flows. The prior year
period also included proceeds of $1.8 million from the sale of certain charged
off receivables acquired in the MFN, TFC and SeaWest
acquisitions. There was no sale of charged off receivables in
2008. In addition, in 2007 we realized $1.0 million in recoveries on
a note payable by a third party that we had previously written
off. Decreases to other income were somewhat offset by increases of
$1.7 million in convenience fees charged to our customers for web-based and
other electronic payments.
Expenses. Our
operating expenses consist primarily of provisions for credit losses, interest
expense, employee costs and general and administrative
expenses. Provisions for credit losses and interest expense are
significantly affected by the volume of automobile contracts we purchased during
a period and by the outstanding balance of finance receivables held by
consolidated subsidiaries. Employee costs and general and
administrative expenses are incurred as applications and automobile contracts
are received, processed and serviced. Factors that affect margins and net income
include changes in the automobile and automobile finance market environments,
and macroeconomic factors such as interest rates and the unemployment
level.
Employee
costs include base salaries, commissions and bonuses paid to employees, and
certain expenses related to the accounting treatment of outstanding warrants and
stock options, and are one of our most significant operating expenses. These
costs (other than those relating to stock options) generally fluctuate with the
level of applications and automobile contracts processed and
serviced.
Other
operating expenses consist primarily of facilities expenses, telephone and other
communication services, credit services, computer services, marketing and
advertising expenses, and depreciation and amortization.
Total
operating expenses were $411.9 million for the year ended December 31, 2008,
compared to $370.6 million for the prior year, an increase of $41.3 million, or
11.1%. The increase is primarily due to increases in provision for credit losses
and interest expense, which increased by $11.1 million and $16.2 million, or
8.1% and 11.7%, respectively. In addition, we recognized a loss on
sale of receivables of $14.0 million in conjunction with our September 2008
securitization.
In
September 2008, we securitized $198.7 million of our receivables in a
transaction that is treated as a sale of the receivables for financial
accounting purposes. The terms of the September 2008 securitization
provide for us (1) to continue servicing the sold portfolio, (2) to retain a
5.0% interest in the bonds issued by the trust to which we sold the receivables
and (3) to earn additional compensation contingent upon (a) the return to the
holders of the senior bonds issued by the trust reaching certain targets or (b)
“lifetime” cumulative net charge-offs on the receivables being below a
pre-determined level. We recognized a loss on the sale of $14.0
million. We used a portion of the proceeds of the sale to reduce
substantially the amounts outstanding under our warehouse credit
facilities.
Employee
costs increased by 4.6% to $48.9 million during the year ended December 31,
2008, representing 11.9% of total operating expenses, from $46.7 million for the
prior year, or 12.6% of total operating expenses. The decrease as a
percentage of total operating expenses reflects the higher total of operating
expenses, primarily a result of the increased provision for credit losses and
interest expense. In the recent years prior to 2008, we generally
had
32
General
and administrative expenses increased by 18.2% to $29.5 million and represented
7.2% of total operating expenses in the year ending December 31, 2008, as
compared to the prior year when general and administrative expenses represented
6.7% of total operating expenses. General and administrative expenses include
telecommunications costs, postage and delivery costs and other costs associate
with servicing our managed portfolio.
Interest
expense for the year ended December 31, 2008 increased $17.1 million, or 12.3%,
to $156.3 million, compared to $139.2 million in the previous year. The increase
is primarily the result of changes in the amount and composition of
securitization trust debt carried on our consolidated balance sheet. Interest on
securitization trust debt increased by $12.6 million in 2008 compared to the
prior year. We also experienced increases in senior secured and
subordinated debt interest expense and residual interest financing interest
expenses of $2.2 million and $4.0 million, respectively. In June and
July 2008 we issued $10 million and $15 million, respectively, in new senior
secured debt. In addition, in July 2008 we amended our residual
interest financing facility, which resulted in a higher rate of interest and
allows us the option to extend the maturity if certain conditions are
met. Increases in interest expense for securitization trust debt,
subordinated debt and residual interest financing were somewhat offset by a
decrease of $1.8 million in interest expense for warehouse
financing. Throughout 2008, we gradually reduced new contract
purchases, resulting in lower amounts outstanding under our warehouse facilities
compared to the prior year.
Marketing
expenses consist primarily of commission-based compensation paid to our employee
marketing representatives. These expenses decreased by $7.9 million,
or 43.7%, to $10.2 million, compared to $18.1 million in the previous year and
represented 2.5% of total operating expenses. The decrease is primarily due to
the decrease in automobile contracts we purchased during the year ended December
31, 2008 as compared to the prior year. During the year ended
December 31, 2008, we purchased 19,772 automobile contracts aggregating $296.8
million, compared to 83,246 automobile contracts aggregating $1,282.3 million in
the prior year.
Occupancy
expenses increased by $341,000 or 9.1%, to $4.1 million compared to $3.8 million
in the previous year and represented 1.0% of total operating
expenses.
Depreciation
and amortization expenses decreased by $10,000, or 1.9%, to $537,000 from
$547,000 in the previous year.
For the
year ended December 31, 2008, we recorded a tax benefit of $17.4 million or
40.0% of loss before income taxes. For the year ended December 31,
2007, we recorded income tax expense of $10.1 million.
Comparison
of Operating Results for the Year Ended December 31, 2007 with the Year Ended
December 31, 2006
Revenues. During
the year ended December 31, 2007, revenues were $394.6 million, an increase of
$115.7 million, or 41.5%, from the prior year revenue of $278.9 million. The
primary reason for the increase in revenues is an increase in interest income.
Interest income for the year ended December 31, 2007 increased $106.7 million,
or 40.5%, to $370.3 million from $263.6 million in the prior year. The primary
reason for the increase in interest income is the increase in finance
receivables held by consolidated subsidiaries (resulting in an increase of
$109.4 million in interest income) and the increase in interest earned on
cash deposits (including restricted cash deposits) of $2.8
million. These increases were partially offset by the decline in the
balance of the portfolios of automobile contracts we acquired in the MFN, TFC
and SeaWest transactions (in the aggregate, resulting in a decrease of
$2.2 million in interest income), and a decrease in interest income on our
residual interest in securitizations of $2.1 million.
Servicing
fees totaling $1.2 million in the year ended December 31, 2007 decreased $1.7
million, or 57.9%, from $2.9 million in the prior year. The decrease in
servicing fees is the result of the change in securitization structure and the
consequent decline in our managed portfolio held by non-consolidated
subsidiaries. As of December 31, 2007 and 2006, our managed portfolio owned by
consolidated vs. non-consolidated subsidiaries and other third parties was as
follows:
33
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
| Total Managed Portfolio |
(in
millions)
|
|||||||||||||||
|
Owned
by Consolidated Subsidiaries
|
$ | 2,125.8 | 100.0 | % | $ | 1,527.3 | 97.5 | % | ||||||||
|
Owned
by Non-Consolidated Subsidiaries
|
- | 0.0 | % | 34.8 | 2.2 | % | ||||||||||
|
SeaWest
Third Party Portfolio
|
0.4 | 0.0 | % | 3.8 | 0.2 | % | ||||||||||
|
Total
|
$ | 2,126.2 | 100.0 | % | $ | 1,565.9 | 100.0 | % | ||||||||
At
December 31, 2007, we were generating income and fees on a managed portfolio
with an outstanding principal balance of $2,126.2 million (this amount includes
$422,000 of automobile contracts securitized by SeaWest, on which we earn only
servicing fees), compared to a managed portfolio with an outstanding principal
balance of $1,565.9 million as of December 31, 2006. At December 31, 2007 and
2006, the managed portfolio composition was as follows:
|
December
31, 2007
|
December
31, 2006
|
||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Originating
Entity
|
($
in millions)
|
||||||||||||||
|
CPS
|
$ | 2,062.8 | 97.0 | % | $ | 1,496.5 | 95.6 | % | |||||||
|
TFC
|
62.0 | 3.0 | % | 60.9 | 3.9 | % | |||||||||
|
MFN
|
0.0 | 0.0 | % | 0.2 | 0.0 | % | |||||||||
|
SeaWest
|
1.0 | 0.0 | % | 4.5 | 0.3 | % | |||||||||
|
SeaWest
Third Party Portfolio
|
0.4 | 0.0 | % | 3.8 | 0.2 | % | |||||||||
|
Total
|
$ | 2,126.2 | 100.0 | % | $ | 1,565.9 | 100.0 | % | |||||||
Other
income increased $10.7 million, or 86.0%, to $23.1 million in the year ended
December 31, 2007 from $12.4 million during the prior year. The
year-over-year increase is the result of a variety of
factors. Current year other income includes $6.2 million resulting
from an increase in the carrying value of our residual interest in
securitizations (a $5.0 million increase over the increase in carrying value for
the prior year). The carrying value was increased primarily as a
result of the underlying receivables having incurred fewer losses than we had
previously estimated, which in turn resulted in actual cash flows exceeding cash
flows that were estimated in our valuation of the residual asset at December 31,
2006. We do not expect that future cash flows will significantly
exceed the estimates we are currently using for the valuation of our residual
interest. The current year period also includes proceeds of $1.8
million from the sale of certain charged off receivables acquired in the MFN,
TFC and SeaWest acquisitions. There was no sale of charged off
receivables in 2006. In addition, we experienced increases in
convenience fees charged to obligors for certain transaction types (an increase
of $1.3 million) and $1.0 million in recoveries on a note payable by a third
party that we had previously written off. We also experienced
increased revenue on our direct mail services (an increase of $1.6
million). These direct mail services are provided to our dealers and
consist of customized solicitations targeted to prospective vehicle purchasers,
in proximity to the dealer, who appear to meet our credit
criteria. These increases to other income were somewhat offset by
decreases in recoveries on MFN and certain other automobile contracts (a
decrease of $1.2 million) compared to the prior year.
Expenses. Our
operating expenses consist primarily of provisions for credit losses, interest
expense, employee costs and general and administrative
expenses. Provisions for credit losses and interest expense are
significantly affected by the volume of automobile contracts we purchased during
a period and by the outstanding balance of finance receivables held by
consolidated subsidiaries. Employee costs and general and
administrative expenses are incurred as applications and automobile contracts
are received, processed and serviced. Factors that affect margins and net income
include changes in the automobile and automobile finance market environments,
and macroeconomic factors such as interest rates and the unemployment
level.
Employee
costs include base salaries, commissions and bonuses paid to employees, and
certain expenses related to the accounting treatment of outstanding warrants and
stock options, and are one of our most significant operating expenses. These
costs (other than those relating to stock options) generally fluctuate with the
level of applications and automobile contracts processed and
serviced.
Other
operating expenses consist primarily of facilities expenses, telephone and other
communication services, credit services, computer services, marketing and
advertising expenses, and depreciation and amortization.
34
Total
operating expenses were $370.6 million for the year ended December 31, 2007,
compared to $265.7 million for the prior year, an increase of $104.9 million, or
39.5%. The increase is primarily due to increases in provision for credit losses
and interest expense, which increased by $45.2 million and $46.1 million, or
49.1% and 49.5%, respectively. Both interest expense and provision for credit
losses are directly affected by the growth in our portfolio of automobile
contracts held by consolidated affiliates.
Employee
costs increased by 21.4% to $46.7 million during the year ended December 31,
2007, representing 12.6% of total operating expenses, from $38.5 million for the
prior year, or 14.5% of total operating expenses. The decrease
as a percentage of total operating expenses reflects the higher total of
operating expenses, primarily a result of the increased provision for credit
losses and interest expense. The increase in employee costs is the
result of additions to our staff, generally throughout all areas of the Company,
to accommodate greater volumes of contract purchases and the resulting higher
balance of our managed portfolio. As of December 31, 2007 we had 997
employees compared to 789 employees at December 31, 2006.
General
and administrative expenses increased by 7.6% to $25.0 million and represented
6.7% of total operating expenses in the year ending December 31, 2007, as
compared to the prior year when general and administrative expenses represented
8.7% of total operating expenses. The decrease as a percentage of total
operating expenses reflects the higher operating expenses primarily a result of
the provision for credit losses and interest expense.
Interest
expense for the year ended December 31, 2007 increased $46.1 million, or 49.5%,
to $139.2 million, compared to $93.1 million in the previous year. The increase
is primarily the result of changes in the amount and composition of
securitization trust debt carried on our consolidated balance sheet. Interest on
securitization trust debt increased by $40.9 million in 2007 compared to the
prior year. We also experienced increases in warehouse interest
expense and residual interest financing interest expenses of $5.1 million and
$1.1 million, respectively. A portion of the increase in interest
expense can also be attributed to a gradual increase in market interest rates
during 2007. Increases in interest expense for securitization trust
debt, warehouse and residual interest financing were somewhat offset by a
decrease of $1.0 million in interest expense for subordinated debt.
Marketing
expenses consist primarily of commission-based compensation paid to our employee
marketing representatives and increased by $4.1 million, or 29.3%, to $18.1
million, compared to $14.0 million in the previous year and represented 4.9% of
total operating expenses. The increase is primarily due to the increase in
automobile contracts we purchased during the year ended December 31, 2007 as
compared to the prior year. During the year ended December 31, 2007,
we purchased 83,246 automobile contracts aggregating $1,282.3 million, compared
to 66,504 automobile contracts aggregating $1,019.0 million in the prior
year.
Occupancy
expenses decreased slightly by $219,000 or 5.5%, to $3.8 million compared to
$4.0 million in the previous year and represented 1.0% of total operating
expenses.
Depreciation
and amortization expenses decreased by $253,000, or 31.6%, to $547,000 from
$800,000 in the previous year.
For the
year ended December 31, 2007, we recorded tax expense of $10.1 million or 42.2%
of income before income taxes. For the year ended December 31, 2006,
we recorded an income tax benefit of $41.8 million related to the reversal of a
portion of the valuation allowance against deferred tax assets, offset by
current income tax paid or then payable of $20.2 million, less $4.8 million in
deferred tax benefit. As of December 31, 2007, we had remaining
deferred tax assets of $68.6 million, partially offset by a valuation allowance
of $9.8 million related to federal and state net operating losses and other
timing differences, leaving a net deferred tax asset of $58.8
million.
Liquidity
and Capital Resources
Liquidity
Our
business requires substantial cash to support purchases of automobile contracts
and other operating activities. Our primary sources of cash have been
cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities,
servicing fees on portfolios of automobile contracts previously sold in
securitization transactions or serviced for third parties, customer payments of
principal and interest on finance receivables, fees for origination of
automobile contracts, and releases of cash from securitized portfolios of
automobile contracts in which we have retained a residual ownership interest and
from the spread accounts associated with such pools. Our primary uses of cash
have been the purchases of automobile contracts, repayment of amounts borrowed
under warehouse credit facilities and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of spread accounts and initial
overcollateralization, if any, and the increase of credit enhancement to
required levels in
35
Net cash
provided by operating activities for the years ended December 31, 2008, 2007 and
2006 was $124.9 million, $153.4 million and $92.4 million, respectively.
Cash from operating activities is generally provided by our results from
operations.
Net cash
provided by investing activities for the year ended December 31, 2008 was $657.6
million compared to net cash used in investment activities of $665.4 million and
$603.7 million for 2007 and 2006, respectively. Cash used in investing
activities generally relates to purchases of automobile contracts. Purchases of
finance receivables held for investment were $296.8 million, $1,282.3 million
and $1,019.0 million in 2008, 2007 and 2006, respectively. The
significant decrease in contract purchases in 2008 compared to prior periods
together with onging significant proceeds received on finance receivables held
for investment resulted in net cash provided by investing activities in 2008
compared to net cash used by investing activities in 2007. Net cash
used in investing activities is also affected by changes in the amounts of
restricted cash and equivalents, which in turn, is affected by the timing and
structure of our asset-backed securitization transactions. In
December 2006, we completed a securitization transaction which included a
pre-funding component that resulted in specific restricted cash deposits of
$70.3 million at December 31, 2006. In December 2008 and 2007, we did
not complete a securitization transaction with a pre-funding component and, as
such, there was no corresponding restricted cash deposit at December 31, 2008 or
2007.
Net cash
used by financing activities for the year ended December 31, 2008, was $781.4
million compared with net cash provided by financing activities $518.6 million
and $507.7 million for the years ended December 31, 2007 and 2006, respectively.
Cash used or provided by financing activities is primarily attributable to the
issuance or repayment of debt. We issued $285.4 million of securitization trust
debt in 2008 as compared to $1,035.9 million in 2007. Issuances of
securitization debt were offset by repayments of $693.3 million, $685.9 million
and $487.7 million in 2008, 2007 and 2006, respectively.
We
purchase automobile contracts from dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee which may either increase or
decrease the automobile contract purchase price. Those automobile contracts
generate cash flow, however, over a period of years. As a result, we have been
dependent on warehouse credit facilities to purchase automobile contracts, and
on the availability of cash from outside sources in order to finance our
continuing operations, as well as to fund the portion of automobile contract
purchase prices not financed under revolving warehouse credit facilities. At
December 31, 2007, we had $425 million in warehouse credit capacity, in the form
of two $200 million senior facilities, and one $25 million subordinated
facility. One $200 million facility provided funding for automobile
contracts purchased under the TFC programs while both warehouse facilities
provided funding for automobile contracts purchased under the CPS programs. The
subordinated facility was established on January 12, 2007 and expired by its
terms in April 2008.
The first
of two warehouse facilities mentioned above was provided by an affiliate of
Bear, Stearns and was structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expired on November 6,
2008. On November 8, 2006 the facility was increased from $150
million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other
conditions and covenants. On January 12, 2007 the facility was amended to allow
for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields required for bonds issued in
our term securitizations. Senior notes under this facility accrued
interest at a rate of one-month LIBOR plus 2.50% per annum while the
subordinated notes accrued interest at a rate of one-month LIBOR plus 5.50% per
annum.
The
second of two warehouse facilities was provided by an affiliate of UBS AG and
was similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note
issued by our consolidated subsidiary Page Funding LLC. This facility
was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for
automobile contracts purchased under the TFC programs, in addition to our CPS
programs. The
36
We
securitized $509.0 million in auto contracts in two private placement
transactions in 2008 as compared to $1,118.1 million of automobile contracts in
four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in
2006. All but one of these transactions were structured as secured
financings and, therefore, resulted in no gain or loss on sale. The
September 2008 transaction was structured as a sale for financial accounting
purposes and resulted in a loss on sale of $14.0 million.
In
November 2005, we completed a securitization in which a wholly-owned bankruptcy
remote consolidated subsidiary of ours issued $45.8 million of asset-backed
notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million
outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on the Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet
37
The
acquisition of automobile contracts for subsequent sale in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of
capital required is most heavily dependent on the rate of our automobile
contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and
their related spread accounts either release cash to us or capture cash from
collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile
contracts.
We are
and may in the future be limited in our ability to purchase automobile contracts
due to limits on our capital. As of December 31, 2008, we had
unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a
securitization. Our plans to manage our liquidity include maintaining
our rate of automobile contract purchases at a merely nominal level,
and, wherever appropriate, reducing our operating costs. There
can be no assurance that we will be able to obtain future warehouse financing or
to complete securitizations on favorable economic terms or that we will be able
to complete securitizations at all. If we are unable to complete such
securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income
would decrease.
Our
liquidity will also be affected by releases of cash from the trusts established
with our securitizations. While the specific terms and mechanics of
each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the
amount of credit enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the automobile contracts in the
pool are below certain predetermined levels. In the event delinquencies,
defaults or net losses on the automobile contracts exceed such levels, the terms
of the securitization: (i) may require increased credit enhancement to be
accumulated for the particular pool; (ii) may restrict the distribution to us of
excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on
some or all of the automobile contracts to another servicer. There can be no
assurance that collections from the related trusts will continue to generate
sufficient cash. Moreover, most of our spread account balances
are pledged as collateral to our residual interest financing. As
such, most of the current releases of cash from our securitization trusts are
directed to pay the obligations of our residual interest financing.
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net worth,
financial loss in any one period and maintenance of active warehouse credit
facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.
Contractual
Obligations
The
following table summarizes our material contractual obligations as of December
31, 2008 (dollars in thousands):
38
|
Payment
Due by Period (1)
|
||||||||||||||||||||
|
Less
than
|
1
to 3
|
4
to 5
|
More
than
|
|||||||||||||||||
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
||||||||||||||||
|
Long
Term Debt (2)
|
$ | 113,126 | $ | 20,642 | $ | 70,065 | $ | 22,281 | $ | 138 | ||||||||||
|
Operating
Leases
|
$ | 25,771 | $ | 3,985 | $ | 7,443 | $ | 6,728 | $ | 7,615 | ||||||||||
|
(1)
|
Securitization
trust debt, in the aggregate amount of $1,404.2 million as of December 31,
2008, is omitted from this table because it becomes due as and when the
related receivables balance is reduced by payments and charge-offs.
Expected payments, which will depend on the performance of such
receivables, as to which there can be no assurance, are $639.4 million in
2009, $422.2 million in 2010, $235.9 million in 2011, $90.0 million in
2012, $16.7 million in
2013.
|
|
(2)
|
Long-term
debt includes residual interest debt, senior secured debt and subordinated
renewable notes.
|
Warehouse
Credit Facilities
The terms
on which credit has been available to us for purchase of automobile contracts
have varied over the three years 2006-2008 and through December 31, 2008, as
shown in the following summary of our warehouse credit facilities:
Facility in Use from June 2004 to
present. In June 2004, we (through our subsidiary Page Funding
LLC) entered into a floating rate variable note purchase facility. Up
to $200.0 million of borrowing capacity under this facility was available at any
time subject to certain collateral tests and other conditions. We used funds
derived from this facility to purchase automobile contracts under the CPS
programs and TFC programs, which were pledged to secure the notes. The
collateral tests and other conditions generally allowed us to borrow up to
approximately 93% of the principal balance of automobile contracts that we
purchased under our CPS programs (up to 83.0% in the form of senior notes and
the remainder in the form of subordinated notes), and of up to 70% of the
principal balance of automobile contracts that we purchased under our TFC
programs. The advance rate was subject to the lender’s valuation of the
collateral which, in turn, was affected by factors such as the credit
performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our
term securitizations. The facility was amended in December 2008 which
eliminated future advances and provided for repayment of the notes from proceeds
collected on the underlying pledged receivables, plus certain future scheduled
principal reductions until its maturity in September 2009. Senior
notes issued under this facility accrue interest at one-month LIBOR plus 9.85%
per annum. The balance of notes outstanding related to this facility
at December 31, 2008 was $9.9 million.
Facility in Use from November 2005
to November 2008. In November 2005, we (through our subsidiary
Page Three Funding LLC) entered into a floating rate variable note purchase
facility. Up to $200 million of borrowing capacity under this
facility was available at any time subject to certain collateral tests and other
conditions. We used funds derived from this facility to purchase
automobile contracts under the CPS programs, which were pledged to secure the
notes. The collateral tests and other conditions generally allowed us
to borrow up to approximately 93.0% of the principal balance of the automobile
contracts (up to 83.0% in the form of senior notes and the remainder in the form
of subordinated notes). The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields require for bonds issued in
our term securtizations. The facility expired by its terms in
November 2008.
Capital
Resources
Securitization
trust debt is repaid from collections on the related receivables, and becomes
due in accordance with its terms as the principal amount of the related
receivables is reduced. Although the securitization trust debt also has
alternative final maturity dates, those dates are significantly later than the
dates at which repayment of the related receivables is anticipated, and at no
time in our history have any of our sponsored asset-backed securities reached
those alternative final maturities.
The
acquisition of automobile contracts for subsequent transfer in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, when those transactions take place, results in a
continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level
of initial credit enhancement in securitizations, and the extent to which the
trusts and related spread accounts either release cash to us or capture cash
from collections on securitized automobile contracts. We plan to adjust our
levels of automobile contract purchases so as to match anticipated releases of
cash
39
from the
trusts and related spread accounts with our capital requirements. As we have
already reduced such purchases to nominal levels, we retain little ability to
reduce purchases further to meet any additional capital
requirements.
Capitalization
Over the
period from January 1, 2005 through December 31, 2008 we have managed our
capitalization by issuing and refinancing debt as summarized in the following
table:
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
RESIDUAL
INTEREST FINANCING:
|
|||||||||||||||||||
|
Beginning
balance
|
$ | 70,000 | $ | 31,378 | $ | 43,745 | |||||||||||||
|
Issuances
|
20,000 | 85,860 | 13,667 | ||||||||||||||||
|
Payments
|
(22,700 | ) | (47,238 | ) | (26,034 | ) | |||||||||||||
|
Ending
balance
|
$ | 67,300 | $ | 70,000 | $ | 31,378 | |||||||||||||
|
SECURITIZATION
TRUST DEBT:
|
|||||||||||||||||||
|
Beginning
balance
|
$ | 1,798,302 | $ | 1,442,995 | $ | 924,026 | |||||||||||||
|
Issuances
|
310,359 | 1,035,864 | 1,003,645 | ||||||||||||||||
|
Payments
|
(704,450 | ) | (680,557 | ) | (484,676 | ) | |||||||||||||
|
Ending
balance
|
$ | 1,404,211 | $ | 1,798,302 | $ | 1,442,995 | |||||||||||||
|
SENIOR
SECURED DEBT, RELATED PARTY:
|
|||||||||||||||||||
|
Beginning
balance
|
$ | - | $ | 25,000 | $ | 40,000 | |||||||||||||
|
Issuances
|
20,105 |
|
|
||||||||||||||||
|
Payments
|
- | (25,000 | ) | (15,000 | ) | ||||||||||||||
|
Ending
balance
|
$ | 20,105 | $ | - | $ | 25,000 | |||||||||||||
|
SUBORDINATED
DEBT:
|
|||||||||||||||||||
|
Beginning
balance
|
|
|
$ | 14,000 | |||||||||||||||
| Payments |
|
|
(14,000 | ) | |||||||||||||||
| Ending balance |
|
|
|
||||||||||||||||
|
SUBORDINATED
RENEWABLE NOTES:
|
|||||||||||||||||||
|
Beginning
balance
|
$ | 28,134 | $ | 13,574 | $ | 4,655 | |||||||||||||
|
Issuances
|
4,183 | 17,664 | 9,985 | ||||||||||||||||
|
Payments
|
(6,596 | ) | (3,104 | ) | (1,066 | ) | |||||||||||||
|
Ending
balance
|
$ | 25,721 | $ | 28,134 | $ | 13,574 | |||||||||||||
Residual Interest
Financing. In November 2005, we completed a securitization in
which a wholly-owned bankruptcy remote consolidated subsidiary of ours issued
$45.8 million of asset-backed notes secured by its retained interest in 10 term
securitization transactions. At December 31, 2006 there was $19.6
million outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on
the
40
Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million, by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
Securitization Trust
Debt. From July 2003 through April 2008, we have, for
financial accounting purposes, treated securitizations of automobile contracts
as secured financings, and the asset-backed securities issued in such
securitizations remain on our balance sheet as securitization trust
debt. Our most recent securitization, in September 2008, was
structured as a sale for financial accounting purposes and the asset-backed
securities issued in that transaction are not on our balance sheet.
Senior Secured
Debt. From 1998 to 2005, we entered into a series of financing
transactions with Levine Leichtman Capital Partners II, L.P. In July
2007 we repaid the final amounts due under these financing
transactions. On June 30, 2008, we entered into a series of
agreements pursuant to which an affiliate of Levine Leichtman Capital Partners
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet because the terms of the warrants also included a provision
whereby the lender could require us to purchase the warrants for cash. That
provision was eliminated by mutual agreement in September 2008.
Subordinated Renewable Notes
Debt. In June 2005, we began issuing registered subordinated
renewable notes in an ongoing offering to the public. Upon maturity,
the notes are automatically renewed for the same term as the maturing notes,
unless we elect not to have the notes renewed or unless the investor notifies us
within 15 days after the maturity date for his notes that he wants his notes
repaid. Renewed notes bear interest at the rate we are offering at
that time to other investors with similar aggregate note
portfolios. Based on the terms of the individual notes, interest
payments may be required monthly, quarterly, annually or upon
maturity.
We must
comply with certain affirmative and negative covenants related to debt
facilities, which require, among other things, that we maintain certain
financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions, restricted payments and certain dividend restrictions. We were in
compliance with all such covenants as of December 31, 2008. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare default
if a default occurred under a different facility.
Forward-looking
Statements
This
report on Form 10-K includes certain "forward-looking
statements".
Forward-looking statements may be identified by the use of words such as "anticipates," "expects," "plans," "estimates," or words of like
meaning. As to the specifically identified forward-looking statements, factors
that could affect charge-offs and recovery rates include changes in the general
economic climate, which could affect the willingness or ability of obligors to
pay pursuant to the terms of contracts, changes in laws respecting consumer
finance, which could affect our ability to enforce rights under contracts, and
changes in the market for used vehicles, which could affect the levels of
recoveries upon sale of repossessed vehicles. Factors that could affect our
revenues in the current year include the levels of cash releases from existing
pools of contracts, which would affect our ability to purchase contracts, the
terms on which we are able to finance such purchases, the willingness of dealers
to sell contracts to us on the terms that it offers, and the terms on which we
are able to complete term securitizations once contracts are acquired. Factors
that could affect our expenses in the current year include competitive
conditions in the market for qualified personnel, investor demand for
asset-backed securities and interest rates (which affect the rates that we pay
on asset-backed securities issued in our securitizations). The
statements concerning structuring securitization transactions as secured
financings and the effects of such structures on financial items and on future
profitability also are forward-
41
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position
(FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, to partially defer
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. SFAS 157 is effective for us on January 1,
2008, except for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value on a recurring basis. For those excepted
assets and liabilities our effective date is January 1, 2009. The adoption of
this statement did not have a material effect on our financial position or
results of operations.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements.. The three levels are defined as follows: Level 1 - inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets. Level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument. Level 3
– inputs to the valuation methodology are unobservable and significant to the
fair value measurement.
In
September 2008 we sold automobile contracts in a securitization that was
structured as a sale. In that sale, we retained certain
assets that are measured at fair value. Following is a description of
the valuation methodologies used for the securities retained and the residual
interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation hierarchy: The
securities retained total $8.5 million of notes and are classified as level 2
because there were similar notes sold in the transaction. We used the price at
which those similar notes were sold to value the securities
retained. The residual interest in the cash flows totals $2.5 million
and is classified as level 3. We determined the value of that residual interest
using a discounted cash flow model that included estimates for prepayments and
losses. We used a discount rate of 33% per annum. The assumptions we
used were based on historical performance of automobile contracts we had
originated and serviced in the past, adjusted for current market
conditions.
Off-Balance
Sheet Arrangements
From July
2003 through April 2008 all of our securitizationswere structured as secured
financings for financial accounting purposes. In September 2008, we securitized
$198.7 million of our automobile contracts in a structure that is treated as a
sale of the receivables for financial accounting purposes. The terms
of the September 2008 securitization provide for us (1) to continue servicing
the sold portfolio, (2) to retain a 5.0% interest in the bonds issued by the
trust to which we sold the automobile contracts and (3) to earn additional
compensation contingent upon (a) the return to the holders of the senior bonds
issued by the trust reaching certain targets or (b) “lifetime” cumulative net
charge-offs on the automobile contracts being below a pre-determined
level. See "Critical Accounting Policies" for a detailed discussion
of our securitization structure.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Interest
Rate Risk
We are
subject to interest rate risk during the period between when contracts are
purchased from dealers and when such contracts become part of a term
securitization. Specifically, the interest rate due on our warehouse credit
facility is adjustable while the interest rates on the contracts are fixed.
Historically, our term securitization facilities have had fixed rates of
interest. To mitigate some of this risk, we have in the past, and intend to
continue to structure
42
Item
8. Financial Statements and Supplementary Data
This
report includes Consolidated Financial Statements, notes thereto and an
Independent Auditors’ Report, at the pages indicated below, in the "Index to Financial
Statements." Certain
unaudited quarterly financial information is included in the Notes to
Consolidated Financial Statements, as Note 17.
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Disclosure Controls and
Procedures. Under the supervision and with the participation
of the Company’s Chief Executive Officer and Chief Financial Officer, management
of the Company has evaluated the effectiveness of the design and operation of
the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act") as of
December 31, 2008 (the "Evaluation
Date"). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, the Company’s disclosure controls and
procedures are effective (i) to ensure that information required to be
disclosed by us in reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission; and
(ii) to ensure that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is accumulated and
communicated to our management, including the Company’s Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosures.
The
certifications of our chief executive officer and chief financial officer
required under Section 302 of the Sarbanes-Oxley Act have been filed as
Exhibits 31.1 and 31.2 to this report.
Internal Control.
Management’s Report on Internal Control over Financial Reporting is included in
this Annual Report, immediately below. During the fiscal quarter ended
December 31, 2008, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Report on Internal
Control over Financial Reporting. We are responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our
internal control over financial reporting is designed to provide reasonable
assurance to our management and Board of Directors regarding the preparation and
fair presentation of published financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can only provide reasonable assurance with respect to financial
statement preparation and presentation.
Management,
with the participation of the chief executive and chief financial officers,
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated Framework. Based on this
assessment, management, with the participation of the chief executive and chief
financial officers, believes that, as of December 31, 2008, our internal
control over financial reporting is effective based on those
criteria.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securites and Exchange
Commission that permit us to provide only management’s report in this annual
report.
43
Item
9B. Other Information
Not
Applicable
PART
III
Item
10. Directors and Executive Officers of the Registrant
Information
regarding directors of the registrant is incorporated by reference to the
registrant’s definitive proxy statement for its annual meeting of shareholders
to be held in 2009 (the "2009 Proxy
Statement").
The 2009 Proxy Statement will be filed not later than April 30, 2009.
Information regarding executive officers of the registrant appears in Part I of
this report, and is incorporated herein by reference.
Item
11. Executive Compensation
Incorporated
by reference to the 2009 Proxy Statement.
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated
by reference to the 2009 Proxy Statement.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Incorporated
by reference to the 2009 Proxy Statement.
Item
14. Principal Accountant Fees and Services
Incorporated
by reference to the 2009 Proxy Statement.
44
PART
IV
Item
15. Exhibits, Financial Statement Schedules
The
financial statements listed below under the caption "Index to Financial
Statements"
are filed as a part of this report. No financial statement schedules are filed
as the required information is inapplicable or the information is presented in
the Consolidated Financial Statements or the related notes. Separate financial
statements of the Company have been omitted as the Company is primarily an
operating company and its subsidiaries are wholly owned and do not have minority
equity interests held by any person other than the Company in amounts that
together exceed 5% of the total consolidated assets as shown by the most recent
year-end Consolidated Balance Sheet.
The
exhibits listed below are filed as part of this report, whether filed herewith
or incorporated by reference to an exhibit filed with the report identified in
the parentheses following the description of such exhibit. Unless otherwise
indicated, each such identified report was filed by or with respect to the
registrant.
|
Exhibit
Number
|
Description (“**”
indicates compensatory plan or agreement.)
|
|
|
2.1
|
Agreement
and Plan of Merger, dated as of November 18, 2001, by and among the
Registrant, CPS Mergersub, Inc. and MFN Financial Corporation. (Exhibit
2.1 to Form 8-K filed on November 19, 2001 by MFN Financial
Corporation)
|
|
|
3.1
|
Articles
of Incorporation, as amended to date. (filed
herewith)
|
|
|
3.2
|
Amended
and Restated Bylaws (Exhibit 3.2.1 to Form 8-K filed August 17,
2007)
|
|
|
4.1
|
Instruments
defining the rights of holders of long-term debt of certain consolidated
subsidiaries of the registrant are omitted pursuant to the exclusion set
forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation
S-K (17 CFR 229.601). The registrant agrees to provide copies of such
instruments to the United States Securities and Exchange Commission upon
request.
|
|
|
4.2
|
Form
of Indenture re Renewable Unsecured Subordinated Notes (“RUS
Notes”), (Exhibit 4.1 to Form S-2,
no. 333-121913)
|
|
|
4.2.1
|
Form
of RUS Notes (Exhibit 4.2 to Form S-2, no.
333-121913)
|
|
|
4.23
|
Indenture
dated as of June 1, 2007, respecting notes issued by CPS Auto Receivables
Trust 2007-B (exhibit 4.23 to Form 8-K filed by the registrant
on June 29, 2007)
|
|
|
4.24
|
Sale
and Servicing Agreement dated as of June 1, 2007, related to notes issued
by CPS Auto Receivables Trust 2007-B (exhibit 4.24 to Form 8-K filed by
the registrant on June 29, 2007.)
|
|
|
4.25
|
Indenture
dated as of September 1, 2007, respecting notes issued by CPS Auto
Receivables Trust 2007-C (exhibit 4.25 to Form 8-K filed by the registrant
on November 2, 2007)
|
|
|
4.26
|
Sale
and Servicing Agreement dated as of September 1, 2007, related to notes
issued by CPS Auto Receivables Trust 2007-C (exhibit 4.26 to Form 8-K
filed by the registrant on November 2, 2007.)
|
|
|
4.27
|
Indenture
re Notes issued by CPS Auto Receivables Trust 2008-A (exhibit 4.27 to Form
8-K filed by the registrant on April 15,
2008)
|
|
|
4.28
|
Sale
and Servicing Agreement dated as of March 1, 2008, related to notes issued
by CPS Auto Receivables Trust 2008-A (exhibit 4.28 to Form 8-K filed by
the registrant on April 15, 2008)
|
|
|
10.1
|
1991
Stock Option Plan & forms of Option Agreements
thereunder (Exhibit 10.19 to Form S-2, no. 333-121913)
**
|
|
|
10.2
|
1997
Long-Term Incentive Stock Plan ("1997 Plan") (Exhibit 10.20 to Form S-2,
no. 333-121913) **
|
|
|
10.2.1
|
Form
of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K filed
March 13, 2006) **
|
|
|
10.4
|
Lease
of Headquarters Building (to be filed by
amendment)
|
|
|
10.5
|
Third
Amended & Restated Sale and Servicing Agreement dated February 14,
2007 by and among Page Funding LLC ("PFLLC"), the registrant and Wells
Fargo Bank, N.A. ("WFBNA") (Exhibit 10.5 to registrant's
Form 10-K filed March 9,
2007)
|
|
45
|
10.5.1
|
Amendment
dated March 30, 2007 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed July
23, 2007)
|
|
|
10.5.2
|
Amendment
dated June 29, 2007 to the Third Amended & Restated Sale and Servicing
Agreement dated February 14, 2007 by and among PFLLC, the registrant and
WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed July 23,
2007)
|
|
|
10.5.3
|
Amendment
dated September 30, 2007 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed
November 6, 2007)
|
|
|
10.5.4
|
Amendment
dated as of February 15, 2008 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (filed herewith)
|
|
|
10.5.5
|
Amendment
dated as of March 15, 2008 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (filed herewith)
|
|
|
10.6
|
Second
Amended & Restated Indenture dated as of February 14, 2007 by and
between PFLLC and WFBNA (Exhibit 10.6 to registrant's Form 10-K filed
March 9, 2007)
|
|
|
10.
8
|
Second
Amended & Restated Note Purchase Agreement dated as of February 14,
2007 by and among PFLLC, UBS Real Estate Securities Inc. and WFBNA
(Exhibit 10.8 to registrant's Form 10-K filed March 9,
2007)
|
|
|
10.9
|
Omnibus
Amendment Agreement containing Amendment dated as of September 30, 2008 to
the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among Page Funding LLC ("PFLLC"), the registrant
and Wells Fargo Bank, N.A. ("WFBNA"); and Amendment to Second
Amended & Restated Note Purchase Agreement dated as of February 14,
2007 by and among PFLLC, UBS Real Estate Securities Inc. and WFBNA (to be
filed by amendment)
|
|
|
10.9.1
|
Second
Omnibus Amendment Agreement containing Amendment dated as of December 12,
2008 to the Third Amended & Restated Sale and Servicing Agreement
dated February 14, 2007 by and among PFLLC, the registrant and WFBNA; and
Amendment to Second Amended & Restated Note Purchase Agreement dated
as of February 14, 2007 by and among PFLLC, UBS Real Estate Securities
Inc. and WFBNA; and Amendment to Second Amended & Restated Indenture
dated as of February 14, 2007 by and between PFLLC and WFBNA (to be filed
by amendment)
|
|
|
10.10
|
Amended
& Restated Sale and Servicing Agreement dated as of January 12, 2007,
among Page Three Funding LLC ("P3FLLC"), the registrant and WFBNA (Exhibit
10.10 to registrant's Form 10-K filed March 9, 2007)
|
|
|
10.10.1
|
Amendment
dated as of February 15, 2008 to the Amended & Restated Sale and
Servicing Agreement dated as of January 12, 2007, among P3FLLC, the
registrant and WFBNA (to be filed by amendment)
|
|
|
10.10.2
|
Amendment
dated as of September 12, 2008 to the Amended & Restated Sale and
Servicing Agreement dated as of January 12, 2007, among P3FLLC, the
registrant and WFBNA (to be filed by amendment)
|
|
|
10.11
|
Amended
& Restated Indenture dated as of January 12, 2007 between P3FLLC and
WFBNA (Exhibit 10.11 to registrant's Form 10-K filed March 9,
2007)
|
|
|
10.12
|
Amended
& Restated Note Purchase Agreement dated as of January 12, 2007 among
P3FLLC, the registrant and Bear, Stearns International Limited (Exhibit
10.12 to registrant's Form 10-K filed March 9, 2007)
|
|
|
10.14
|
2006
Long-Term Equity Incentive Plan as amended to date (filed
herewith)**
|
|
|
10.14.1
|
Form
of Option Agreement under the 2006 Long-Term Equity Incentive Plan
(Exhibit 10.14.1 to registrant's Form 10-K filed March 9,
2007)**
|
|
|
10.15
|
Securities
Purchase Agreement between the registrant and Levine Leichtman Capital
Partners IV, L. P. ("LLCP"), relating to the sale of an aggregate of $25
million of Notes. (incorporated by reference to exhibit 99.2 to Schedule
13D filed by LLCP on July 10, 2008)
|
|
|
10.15.1
|
Am.
No. 1 dated July 10, 2008 to Securities Purchase Agreement dated June 30,
2008 between the registrant and LLCP. (Exhibit 10.15.1 to
registrant's Form 10-Q filed August 11,
2008)
|
46
|
10.16
|
Registration
Rights Agreement between the registrant and LLCP. (Incorporated by
reference to exhibit 99.6 to Schedule 13D filed by LLCP on July 10,
2008)
|
|
|
10.17
|
Investor
Rights Agreement between the registrant and LLCP. (Incorporated
by reference to exhibit 99.7 to Schedule 13D filed by LLCP on July 10,
2008)
|
|
|
10.18
|
FMV
Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to
the FMV warrant appearing as pages A-1 through A-13 of the preliminary
proxy statement filed by the registrant on July 28,
2008.)
|
|
|
10.19
|
N
Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to
the FMV warrant appearing as pages B-1 through B-13 of the preliminary
proxy statement filed by the registrant on July 28,
2008.)
|
|
|
10.20
|
Amended
and Restated Note Purchase Agreement dated July 10, 2008 among the
registrant, its subsidiary Folio Funding II, LLC, and Citigroup Financial
Products Inc. (Exhibit 10.20 to registrant's Form 10-Q filed
August 11, 2008)
|
|
|
10.21
|
Amended
and Restated Indenture dated July 10, 2008 among Folio Funding II, LLC,
Citigroup Financial Products Inc. and Wells Fargo Bank,
N.A. (Exhibit 10.21 to registrant's Form 10-Q filed August 11,
2008)
|
|
|
10.22
|
Performance
Guaranty dated July 10, 2008 issued by the registrant in favor of
Citigroup Financial Products Inc. (Exhibit 10.22 to registrant's Form 10-Q
filed August 11, 2008)
|
|
|
10.23
|
Warrant
dated July 10, 2008, issued to Citigroup Global Markets Inc. (Exhibit
10.23 to registrant's Form 10-Q filed August 11, 2008)
|
|
|
10.24
|
Purchase
and Sale Agreement re Motor Vehicle Contracts dated as of September 26,
2008 (Exhibit 10.24 to Form 8-K/A filed by the registrant on November 7,
2008)
|
|
|
10.25
|
Transfer
and Servicing Agreement dated as of September 26, 2008 (Exhibit 10.25 to
Form 8-K/A filed by the registrant on November 7, 2008)
|
|
|
14
|
Registrant’s
Code of Ethics for Senior Financial Officers (Exhibit 14 to Form 10-K
filed March 13, 2006)
|
|
|
21
|
List
of subsidiaries of the registrant (filed herewith)
|
|
|
23.1a
|
Consent
of McGladrey & Pullen, LLP (filed herewith)
|
|
|
23.1b
|
Consent
of Crowe Horwath LLP (filed herewith)
|
|
|
31.1
|
Rule
13a-14(a) certification by chief executive officer (filed
herewith)
|
|
|
31.2
|
Rule
13a-14(a) certification by chief financial officer (filed
herewith)
|
|
|
32
|
Section
1350 certification (filed
herewith)
|
47
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
CONSUMER PORTFOLIO SERVICES,
INC. (registrant)
|
|||
|
March
31, 2009
|
By:
|
/s/
CHARLES E. BRADLEY, JR.
|
|
|
Charles
E. Bradley, Jr., President
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
March
31, 2009
|
/s/
CHARLES E. BRADLEY, JR.
|
||
|
Charles
E. Bradley, Jr., Director,
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|||
|
March
31, 2009
|
/s/
CHRIS A. ADAMS
|
||
|
Chris
A. Adams, Director
|
|||
|
March
31, 2009
|
/s/
E. BRUCE FREDRIKSON
|
||
|
E.
Bruce Fredrikson, Director
|
|||
|
March
31, 2009
|
/s/
BRIAN J. RAYHILL
|
||
|
Brian
J. Rayhill, Director
|
|||
|
March
31, 2009
|
/s/
WILLIAM B. ROBERTS
|
||
|
William
B. Roberts, Director
|
|||
|
March
31, 2009
|
/s/
JOHN C. WARNER
|
||
|
John
C. Warner, Director
|
|||
|
March
31, 2009
|
/s/
GREGORY S. WASHER
|
||
|
Gregory
S. Washer, Director
|
|||
|
March
31, 2009
|
/s/
DANIEL S. WOOD
|
||
|
Daniel
S. Wood, Director
|
|||
|
March
31, 2009
|
/s/
JEFFREY P. FRITZ
|
||
|
Jeffrey
P. Fritz, Sr. Vice
President and Chief Financial Officer
(Principal
Accounting Officer)
|
48
INDEX
TO FINANCIAL STATEMENTS
|
|
Page Reference
|
|
Report
of Independent Registered Public Accounting Firm – Crowe Horwath
LLP
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm – McGladrey & Pullen,
LLP
|
F-3
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006
|
F-5
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008,
2007, and 2006
|
F-6
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2008,
2007, and 2006
|
F-7
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Consumer
Portfolio Services, Inc.
We have
audited the accompanying consolidated balance sheet of Consumer Portfolio
Services, Inc. (the Company) as of December 31, 2008, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the year ended December 31, 2008. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Portfolio Services,
Inc. as of December 31, 2008, and the results of its operations and its
cash flows for the year ended December 31, 2008 in conformity with U.S.
generally accepted accounting principles.
The Company is currently in
compliance with debt covenants or has obtained waivers for all potential
covenant violations as of December 31, 2008. The waivers are temporary and will
expire during 2009. See Note 1 for a discussion of potential consequences
associated with the potential failure to obtain renewed waivers.
/s/ Crowe
Horwath LLP
Costa
Mesa, California
March 31,
2009
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Consumer
Portfolio Services, Inc.
We have
audited the consolidated balance sheets of Consumer Portfolio Services, Inc. and
subsidiaries (the Company) as of December 31, 2007, and the related
consolidated statements of operations, comprehensive income, shareholders’
equity and cash flows for each of the two years in the period ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Portfolio Services,
Inc. and subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
described in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for uncertain tax positions.
/s/
McGladrey & Pullen, LLP
Irvine,
California
March 17,
2008
F-3
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per
share data)
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 22,084 | $ | 20,880 | ||||
|
Restricted
cash and equivalents
|
153,479 | 170,341 | ||||||
|
Finance
receivables
|
1,417,343 | 2,068,004 | ||||||
|
Less:
Allowance for finance credit losses
|
(78,036 | ) | (100,138 | ) | ||||
|
Finance
receivables, net
|
1,339,307 | 1,967,866 | ||||||
|
Residual
interest in securitizations
|
3,582 | 2,274 | ||||||
|
Furniture
and equipment, net
|
1,404 | 1,500 | ||||||
|
Deferred
financing costs
|
8,954 | 15,482 | ||||||
|
Deferred
tax assets, net
|
52,727 | 58,835 | ||||||
|
Accrued
interest receivable
|
14,903 | 24,099 | ||||||
|
Other
assets
|
42,367 | 21,536 | ||||||
| $ | 1,638,807 | $ | 2,282,813 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 21,702 | $ | 18,391 | ||||
|
Warehouse
lines of credit
|
9,919 | 235,925 | ||||||
|
Income
taxes payable
|
- | 17,706 | ||||||
|
Residual
interest financing
|
67,300 | 70,000 | ||||||
|
Securitization
trust debt
|
1,404,211 | 1,798,302 | ||||||
|
Senior
secured debt, related party
|
20,105 | - | ||||||
|
Subordinated
renewable notes
|
25,721 | 28,134 | ||||||
| 1,548,958 | 2,168,458 | |||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Preferred
stock, $1 par value;
|
||||||||
|
authorized
5,000,000 shares; none issued
|
- | - | ||||||
|
Series
A preferred stock, $1 par value;
|
||||||||
|
authorized
5,000,000 shares; none issued
|
- | - | ||||||
|
Common
stock, no par value; authorized
|
||||||||
|
75,000,000
shares; 19,110,777 and 19,525,042
|
||||||||
|
shares
issued and outstanding at December 31, 2008 and
|
||||||||
|
2007,
respectively
|
54,702 | 55,216 | ||||||
|
Additional
paid in capital, warrants
|
7,471 | 794 | ||||||
|
Retained
earnings
|
34,703 | 60,794 | ||||||
|
Accumulated
other comprehensive loss
|
(7,027 | ) | (2,449 | ) | ||||
|
89,849
|
114,355 | |||||||
| $ | 1,638,807 | $ | 2,282,813 | |||||
See
accompanying Notes to Consolidated Financial Statements.
F-4
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues:
|
||||||||||||
|
Interest
income
|
$ | 351,551 | $ | 370,265 | $ | 263,566 | ||||||
|
Servicing
fees
|
2,064 | 1,218 | 2,894 | |||||||||
|
Other
income
|
14,796 | 23,067 | 12,403 | |||||||||
| 368,411 | 394,550 | 278,863 | ||||||||||
|
Expenses:
|
||||||||||||
|
Employee
costs
|
48,874 | 46,716 | 38,483 | |||||||||
|
General
and administrative
|
29,506 | 24,959 | 23,197 | |||||||||
|
Interest
|
153,720 | 137,543 | 87,510 | |||||||||
|
Interest,
related party
|
2,533 | 1,646 | 5,602 | |||||||||
|
Provision
for credit losses
|
148,408 | 137,272 | 92,057 | |||||||||
|
Loss
on sale of receivables
|
13,963 | - | - | |||||||||
|
Marketing
|
10,221 | 18,147 | 14,031 | |||||||||
|
Occupancy
|
4,104 | 3,763 | 3,983 | |||||||||
|
Depreciation
and amortization
|
537 | 547 | 800 | |||||||||
| 411,866 | 370,593 | 265,663 | ||||||||||
|
Income
(loss) before income tax expense (benefit)
|
(43,455 | ) | 23,957 | 13,200 | ||||||||
|
Income
tax expense (benefit)
|
(17,364 | ) | 10,099 | (26,355 | ) | |||||||
|
Net
income (loss)
|
$ | (26,091 | ) | $ | 13,858 | $ | 39,555 | |||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Basic
|
$ | (1.36 | ) | $ | 0.66 | $ | 1.82 | |||||
|
Diluted
|
(1.36 | ) | 0.61 | 1.64 | ||||||||
|
Number
of shares used in computing
|
||||||||||||
|
earnings
(loss) per share:
|
||||||||||||
|
Basic
|
19,230 | 20,880 | 21,759 | |||||||||
|
Diluted
|
19,230 | 22,595 | 24,052 | |||||||||
See
accompanying Notes to Consolidated Financial Statements
F-5
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income (loss)
|
$ | (26,091 | ) | $ | 13,858 | $ | 39,555 | |||||
|
Other
comprehensive income (loss); minimum
|
||||||||||||
|
pension
liability, net of tax
|
(4,578 | ) | (698 | ) | 678 | |||||||
|
Comprehensive
income (loss)
|
$ | (30,669 | ) | $ | 13,160 | $ | 40,233 | |||||
See accompanying Notes to
Consolidated Financial Statements.
F-6
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars
in thousands)
|
Additional
|
Accumulated
|
|||||||||||||||||||||||
|
Paid-in
|
Other
|
|||||||||||||||||||||||
|
Common
Stock
|
Capital,
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Warrants
|
Earnings
|
Loss
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2005
|
21,687 | $ | 66,748 | $ | 794 | $ | 8,476 | $ | (2,429 | ) | $ | 73,589 | ||||||||||||
|
Common
stock issued upon exercise
|
||||||||||||||||||||||||
|
of
options, including tax benefit
|
553 | 2,254 | - | - | - | 2,254 | ||||||||||||||||||
|
Purchase
of common stock
|
(735 | ) | (4,808 | ) | - | - | - | (4,808 | ) | |||||||||||||||
|
Pension
benefit obligation
|
- | - | - | - | 678 | 678 | ||||||||||||||||||
|
Stock-based
compensation
|
- | 244 | - | - | - | 244 | ||||||||||||||||||
|
Net
income
|
- | - | - | 39,555 | - | 39,555 | ||||||||||||||||||
|
Balance
at December 31, 2006
|
21,505 | 64,438 | 794 | 48,031 | (1,751 | ) | 111,512 | |||||||||||||||||
|
Common
stock issued upon exercise
|
||||||||||||||||||||||||
|
of
options, including tax benefit
|
337 | 1,356 | - | - | - | 1,356 | ||||||||||||||||||
|
Purchase
of common stock
|
(2,317 | ) | (11,711 | ) | - | - | - | (11,711 | ) | |||||||||||||||
|
Pension
benefit obligation
|
- | - | - | - | (698 | ) | (698 | ) | ||||||||||||||||
|
Stock-based
compensation
|
- | 1,133 | - | - | - | 1,133 | ||||||||||||||||||
|
Adjustment
to adopt FIN 48
|
- | - | - | (1,095 | ) | - | (1,095 | ) | ||||||||||||||||
|
Net
income
|
- | - | - | 13,858 | - | 13,858 | ||||||||||||||||||
|
Balance
at December 31, 2007
|
19,525 | $ | 55,216 | $ | 794 | $ | 60,794 | $ | (2,449 | ) | $ | 114,355 | ||||||||||||
|
Common
stock issued upon exercise
|
||||||||||||||||||||||||
|
of
options, including tax benefit
|
70 | 144 | - | - | - | 144 | ||||||||||||||||||
|
Common
stock issued upon issuance
|
||||||||||||||||||||||||
|
of
debt
|
1,225 | 1,801 | - | - | - | 1,801 | ||||||||||||||||||
|
Purchase
of common stock
|
(1,709 | ) | (3,717 | ) | - | - | - | (3,717 | ) | |||||||||||||||
|
Pension
benefit obligation
|
- | - | - | - | (4,578 | ) | (4,578 | ) | ||||||||||||||||
|
Valuation
of warrants issued
|
- | - | 6,677 | - | - | 6,677 | ||||||||||||||||||
|
Stock-based
compensation
|
- | 1,258 | - | - | - | 1,258 | ||||||||||||||||||
|
Net
loss
|
- | - | - | (26,091 | ) | - | (26,091 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
19,111 | $ | 54,702 | $ | 7,471 | $ | 34,703 | $ | (7,027 | ) | $ | 89,849 | ||||||||||||
See
accompanying Notes to Consolidated Financial
Statements.
F-7
CONSUMER
PORTFOLIO SERVICES, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(In
Thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | (26,091 | ) | $ | 13,858 | $ | 39,555 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Gain
on residual asset
|
- | (6,155 | ) | (1,200 | ) | |||||||
|
Accretion
of deferred acquisition fees
|
(15,177 | ) | (16,761 | ) | (11,912 | ) | ||||||
|
Amortization
of discount on securitization notes
|
13,868 | 5,316 | 3,005 | |||||||||
|
Amortization
of discount on senior secured debt, related party
|
519 | - | - | |||||||||
|
Depreciation
and amortization
|
537 | 547 | 800 | |||||||||
|
Amortization
of deferred financing costs
|
10,490 | 9,372 | 6,580 | |||||||||
|
Provision
for credit losses
|
148,408 | 137,272 | 92,057 | |||||||||
|
Stock-based
compensation expense
|
1,258 | 1,133 | 244 | |||||||||
|
Interest
income on residual assets
|
(979 | ) | (2,324 | ) | (5,656 | ) | ||||||
|
Cash
received from residual interest in securitizations
|
2,123 | 19,999 | 18,282 | |||||||||
|
Loss
on sale of receivables
|
13,963 | - | - | |||||||||
|
Change
in market value of warrants
|
555 | - | - | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Payments
on restructuring accrual
|
- | (366 | ) | (633 | ) | |||||||
|
Accrued
interest receivable
|
9,195 | (7,055 | ) | (6,113 | ) | |||||||
|
Other
assets
|
(20,830 | ) | (994 | ) | (8,051 | ) | ||||||
|
Deferred
tax assets
|
6,108 | (11,147 | ) | (57,435 | ) | |||||||
|
Accounts
payable and accrued expenses
|
(1,267 | ) | 3,311 | 12,629 | ||||||||
|
Tax
liabilities
|
(17,706 | ) | 7,409 | 10,297 | ||||||||
|
Net
cash provided by operating activities
|
124,974 | 153,415 | 92,449 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of finance receivables held for investment
|
(296,817 | ) | (1,282,312 | ) | (1,019,018 | ) | ||||||
|
Payments
received on finance receivables held for investment
|
775,730 | 595,347 | 451,037 | |||||||||
|
Proceeds
received from sale of receivables
|
162,307 | - | - | |||||||||
|
Decreases
(increases) in restricted cash and cash equivalents, net
|
16,862 | 22,661 | (35,338 | ) | ||||||||
|
Purchase
of furniture and equipment
|
(442 | ) | (1,087 | ) | (412 | ) | ||||||
|
Net
cash provided by (used in) investing activities
|
657,640
|
(665,391 | ) | (603,731 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of securitization trust debt
|
285,389 | 1,035,864 | 1,003,645 | |||||||||
|
Proceeds
from issuance of subordinated renewable notes
|
4,183 | 103,523 | 23,652 | |||||||||
|
Proceeds
from issuance of senior secured debt, related party
|
25,000 | - | - | |||||||||
|
Proceeds
from issuance of residual financing debt
|
20,000 | 85,860 | 13,667 | |||||||||
|
Payments
on subordinated renewable notes
|
(6,596 | ) | ||||||||||
|
Net
proceeds from (repayments to) warehouse lines of credit
|
(388,311 | ) | 162,975 | 37,599 | ||||||||
|
Repayment
of residual financing debt
|
(18,629 | ) | (47,238 | ) | (26,034 | ) | ||||||
|
Repayment
of securitization trust debt
|
(693,348 | ) | (685,873 | ) | (487,681 | ) | ||||||
|
Repayment
of senior secured debt, related party
|
- | (25,000 | ) | (15,000 | ) | |||||||
|
Repayment
of other debt
|
- | (88,964 | ) | (28,899 | ) | |||||||
|
Payment
of financing costs
|
(5,525 | ) | (12,151 | ) | (10,687 | ) | ||||||
|
Repurchase
of common stock
|
(3,717 | ) | (11,711 | ) | (4,808 | ) | ||||||
|
Exercise
of options and warrants
|
144 | 1,118 | 1,555 | |||||||||
|
Excess
tax benefit related to option exercises
|
- | 238 | 699 | |||||||||
|
Net
cash provided by (used in) financing activities
|
(781,410
|
) | 518,641 | 507,708 | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
1,204
|
6,665 | (3,574 | ) | ||||||||
|
Cash
and cash equivalents at beginning of period
|
20,880 | 14,215 | 17,789 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 22,084 | $ | 20,880 | $ | 14,215 | ||||||
|
|
See
accompanying Notes to Consolidated Financial
Statements.
|
F-8
CONSUMER
PORTFOLIO SERVICES, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(In
Thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid (received) during the period for:
|
||||||||||||
|
Interest
|
$ | 126,300 | $ | 121,631 | $ | 81,628 | ||||||
|
Income
taxes
|
(590 | ) | 7,273 | 10,219 | ||||||||
|
Non-cash
financing activities:
|
||||||||||||
|
Pension
benefit obligation, net
|
4,578 | 698 | (677 | ) | ||||||||
|
Common
stock issued in connection with new senior secured debt, related
party
|
1,801 | - | - | |||||||||
|
Warrants
issued in connection with residual financing and senior secured
debt
|
6,284 | - | - | |||||||||
See accompanying Notes to Consolidated
Financial Statements.
F-9
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Description
of Business
Consumer
Portfolio Services, Inc. ("CPS") was incorporated
in California on March 8, 1991. CPS and its subsidiaries (collectively, the
"Company") specialize in
purchasing, selling and servicing retail automobile installment sale contracts
("Contracts") originated by
licensed motor vehicle dealers ("Dealers") located
throughout the United States. Dealers located in California, Florida, Texas and
Pennsylvania represented 11.6%, 9.3%, 7.1% and 7.0%, respectively, of contracts
purchased during 2008 compared with 10.4%, 8.4%, 9.2% and 6.2%, respectively in
2007. No other state had a concentration in excess of 6.9%. We
specialize in contracts with obligors who generally would not be expected to
qualify for traditional financing, such as that provided by commercial banks or
automobile manufacturers’ captive finance companies.
We are
subject to various regulations and laws as they relate to the extension of
credit in consumer credit transactions. Although we believe we are currently in
material compliance with these regulations and laws, there can be no assurance
that we will be able to maintain such compliance. Failure to comply with such
laws and regulations could have a material adverse effect on the
Company.
Acquisitions
On March
8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger
(the "MFN
Merger"). On
May 20, 2003, we acquired TFC Enterprises, Inc. and its subsidiaries in a second
merger (the "TFC Merger"). Each merger was
accounted for as a purchase. MFN Financial Corporation and its subsidiaries
("MFN") and TFC
Enterprises, Inc. and its subsidiaries ("TFC") were engaged in
similar businesses: buying contracts from Dealers, financing those contracts
through securitization transactions, and servicing those contracts. MFN ceased
acquiring contracts in March 2002; TFC acquired contracts under its "TFC Programs"
until July 2008 when such purchases were suspended.
On April
2, 2004, we purchased a portfolio of contracts and certain other assets (the
"SeaWest
Asset Acquisition") from SeaWest
Financial Corporation ("SeaWest"). In addition, we
were named the successor servicer for three term securitization transactions
originally sponsored by SeaWest (the "SeaWest Third
Party Portfolio"). We do not offer
financing programs similar to those previously offered by SeaWest.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of Consumer Portfolio
Services, Inc. and its wholly-owned subsidiaries, certain of which are Special
Purpose Subsidiaries ("SPS"), formed to
accommodate the structures under which we purchase and securitize our contracts.
The Consolidated Financial Statements also include the accounts of CPS Leasing,
Inc., an 80% owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash
and Cash Equivalents
For
purposes of the statements of cash flows, we consider all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. Cash equivalents consist of cash on hand and due from banks and
money market accounts. Substantially all of our cash is deposited at two
financial institutions. We maintain cash due from banks in excess of the banks'
insured deposit limits. We do not believe we are exposed to any significant
credit risk on these deposits. As part of certain financial covenants related to
debt facilities, we are required to maintain a minimum unrestricted cash
balance.
Finance
Receivables
Finance
receivables, which we have the intent and ability to hold for the forseable
future or until maturity or payoff, are presented at cost. All finance
receivable contracts are held for investment. Interest income is accrued on the
unpaid principal balance. Origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level yield
method without anticipating prepayments. Generally, payments received on finance
receivables are restricted to certain securitized pools, and the related
contracts cannot be resold. Finance receivables are charged off pursuant to the
controlling documents of certain securitized pools, generally before they become
contractually delinquent five payments. Contracts that are deemed uncollectible
prior to the maximum delinquency period are charged off
F-10
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
immediately.
Management may authorize an extension of payment terms if collection appears
likely during the next calendar month.Our
portfolio of finance receivables consists of small-balance homogeneous contracts
that are collectively evaluated for impairment on a portfolio basis. We report
delinquency on a contractual basis. Once a Contract becomes greater than 90 days
delinquent, we do not recognize additional interest income until the obligor
under the Contract makes sufficient payments to be less than 90 days
delinquent. Any payments received on a Contract that is greater than 90 days
delinquent are first applied to accrued interest and then to principal
reduction.
Finance
Receivables Held for Sale
Finance
receivables originated and intended for sale in the secondary market are carried
at the lower of aggregate cost or market. Net unrealized losses, if any, are
recorded as a valuation allowance and charged to earnings. We had no finance
receivables held for sale at December 31, 2008 and 2007.
Allowance
for Finance Credit Losses
In order
to estimate an appropriate allowance for losses to be incurred on finance
receivables, we use a loss allowance methodology commonly referred to as "static
pooling,"
which stratifies the finance receivable portfolio into separately identified
pools based on their period of origination, then uses historical performance of
seasoned pools to estimate future losses on current pools. Historical loss
experience is adjusted as necessary for current economic conditions. Using
analytical and formula driven techniques, we estimate an allowance for finance
credit losses, which we believe is adequate for probable credit losses that can
be reasonably estimated in our portfolio of finance receivable contracts. Such
allowance for loss is charged to expense on a monthly basis. Net losses incurred
on finance receivables are charged to the allowance. We evaluate the adequacy of
the allowance by examining current delinquencies, the characteristics of the
portfolio, the value of the underlying collateral and historical loss trends. As
conditions change, our level of provisioning and/or allowance may change as
well.
Charge
Off Policy
Delinquent
contracts for which the related financed vehicle has been repossessed are
generally charged off at the earliest of (1) the month in which the proceeds
from the sale of the financed vehicle were received, (2) the month in which 90
days have passed from the date of repossession or (3) the month in which the
Contract becomes seven scheduled payments past due (see Repossessed and Other
Assets below). The amount charged off is the remaining principal balance of the
Contract, after the application of the net proceeds from the liquidation of the
financed vehicle. With respect to delinquent contracts for which the related
financed vehicle has not been repossessed, the remaining principal balance
thereof is generally charged off no later than the end of the month that the
Contract becomes five scheduled payments past due for CPS Program receivables,
and no later than the end of the month that the Contract becomes seven scheduled
payments past due for other receivables.
Contract
Acquisition Fees and Originations Costs
Upon
purchase of a Contract from a Dealer, we generally either charge or advance the
Dealer an acquisition fee. Dealer acquisition fees and deferred originations
costs are applied to the carrying value of finance receivables and are accreted
into earnings as an adjustment to the yield over the estimated life of the
Contract using the interest method.
Repossessed
and Other Assets
If a
Contract obligor fails to make or keep promises for payments, or if the obligor
is uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the obligor’s payment due date, but could
occur sooner or later, depending on the specific circumstances. At the time the
vehicle is repossessed we stop accruing interest on the Contract, and reclassify
the remaining Contract balance to other assets at its estimated fair value less
costs to sell. Included in other assets in the accompanying balance sheets are
repossessed vehicles pending sale of $14.8 million and $11.5 million at
December 31, 2008 and 2007, respectively.
In
addition, other assets as of December 31, 2008 include 5% of the structured
notes issued by our subsidiary in connection with our $199 million whole loan
sale completed in September 2008. These notes are held for
F-11
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
investment
and earn interest at a rate of LIBOR plus 5%. The amount outstanding as of
December 31, 2008 was $8.0 million.Treatment
of Securitizations
Prior to
July 2003, dispositions of Contracts in securitization transactions were
structured as sales for financial accounting purposes. As a result,
gain on sale was recognized on those securitization transactions in which the
Company, or a wholly-owned, consolidated subsidiary of the Company, retained a
residual interest in the Contracts that were sold to a wholly-owned,
unconsolidated special purpose subsidiary. These securitization transactions
included "term" securitizations
(the purchaser held the Contracts for substantially their entire term) and "warehouse" securitizations
(which financed the acquisition of the Contracts for future sale into term
securitizations).
The line
item "Residual interest
in securitizations" on our
Consolidated Balance Sheet represents the residual interests in term
securitizations completed prior to July 2003, together with our residual
interest in our September 2008 transaction. This line represents the discounted
sum of expected future cash flows from recoveries on charge-offs from the
pre-July 2003 securitization trusts plus the Residual (as defined below) from
the September 2008 transaction. The terms of the securitizations provide us the
option to repurchase the underlying receivables from the trust and retire the
related bonds. Such repurchases are referred to as "clean-ups". When
a clean-up takes place, we purchase the underlying receivables and record them
on the balance sheet and remove that portion of the residual interest that is
attributable to the trust that is terminated when the related bonds are retired.
We conducted such clean-ups on the three remaining unconsolidated trusts during
2007. The remaining portion of the residual interest at December 31,
2007 and 2008 represents an estimate of the future cash flows from recoveries on
charge offs from clean-up securitizations and will remain on the balance sheet
for some time until those particular cash flows are realized, but in no case
later than 84 months from the inception date of the term
securitization.
With the
exception of the September 2008 transaction, all securitizations since July 2003
have been structured as secured financings. The warehouse securitizations are
accordingly reflected in the line items "Finance
receivables"
and "Warehouse lines of
credit" on
our Consolidated Balance Sheet, and the term securitizations are reflected in
the line items "Finance
receivables"
and "Securitization
trust debt."
Our term
securitization structure has generally been as follows:
We sell
Contracts we acquire to a wholly-owned special purpose subsidiary ("SPS"), which has been
established for the limited purpose of buying and reselling our contracts. The
SPS then transfers the same Contracts to another entity, typically a statutory
trust ("Trust"). The Trust
issues interest-bearing asset-backed securities ("Notes"), in a principal
amount equal to or less than the aggregate principal balance of the contracts.
We typically sell these contracts to the Trust at face value and without
recourse, except that representations and warranties similar to those provided
by the Dealer to us are provided by us to the Trust. One or more investors
purchase the Notes issued by the Trust (the "Noteholders"); the proceeds
from the sale of the Notes are then used to purchase the contracts from us. We
may retain or sell subordinated Notes issued by the Trust. Historically we have
purchased a financial guaranty insurance policy for most of our term
securitizations, guaranteeing timely payment of interest and ultimate payment of
principal on the senior Notes, from an insurance company (a "Note Insurer"). In addition, we
provide "Credit
Enhancement"
for the benefit of the Note Insurer and the Noteholders in three forms: (1) an
initial cash deposit to a bank account (a "Spread
Account")
held by the Trust, (2) overcollateralization of the Notes, where the
principal balance of the Notes issued is less than the principal balance of the
contracts, and (3) in the form of subordinated Notes. The agreements governing
the securitization transactions (collectively referred to as the "Securitization
Agreements")
require that the initial level of Credit Enhancement be supplemented by a
portion of collections from the contracts until the level of Credit Enhancement
reaches specified levels which are then maintained. The specified levels are
generally computed as a percentage of the principal amount remaining unpaid
under the related contracts. The specified levels at which the Credit
Enhancement is to be maintained will vary depending on the performance of the
portfolios of contracts held by the Trusts and on other conditions, and may also
be varied by agreement among the Company, the SPS, the Note Insurers and the
trustee. Such levels have increased and decreased from time to time based on
performance of the various portfolios, and have also varied by from one Trust to
another. The Securitization Agreements generally grant us the option to
repurchase the sold contracts from the Trust (i.e., a "clean-up call") when the
aggregate outstanding balance of the contracts has amortized to a specified
percentage of the initial aggregate balance.
F-12
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Our
warehouse securitization structures are similar to the above, except that (i)
the SPS that purchases the contracts pledges the contracts to secure promissory
notes that it issues, (ii) no increase in the required amount of Credit
Enhancement was contemplated, and (iii) we do not purchase financial guaranty
insurance. Upon each sale of contracts in a securitization structured as a
secured financing, we retain as assets on our Consolidated Balance Sheet the
securitized contracts and record as indebtedness the Notes issued in the
transaction.
Under the
September 2008 securitization and other term securitizations completed prior to
July 2003 (which were structured as sales for financial accounting purposes), we
removed from our Consolidated Balance Sheet the contracts sold and added to our
Consolidated Balance Sheet (i) the cash received, if any, and (ii) the estimated
fair value of the ownership interest that we retained in contracts sold in the
securitization. That retained or residual interest (the "Residual") consists of (a)
the cash held in the Spread Account, if any, (b) overcollateralization, if any,
(c) Notes retained, if any, and (d) receivables from the Trust, which include
the net interest receivables ("NIRs"). NIRs represent
the estimated discounted cash flows to be received from the Trust in the future,
net of principal and interest payable with respect to the Notes, the premium
paid to the Note Insurer, if any, and certain other expenses.
We
recognize gains or losses attributable to any changes in the estimated fair
value of the Residuals. Gains in fair value are recognized as other income in
the income statement, and losses are recorded as an impairment loss in the
income statement. We are not aware of an active market for the purchase or sale
of interests such as the Residuals; accordingly, we determine the estimated fair
value of the Residuals by discounting the amount of anticipated cash flows that
we estimate will be released to us in the future (the cash out method), using a
discount rate that we believe is appropriate for the risks involved. The
anticipated cash flows may include collections from both current and charged off
receivables. Historically we have used an effective pre-tax discount rate of 14%
per annum for cash flows from current receivables and of 25% per annum for cash
flows from charged-off receivables. As a result of changing market
conditions as discussed below, we have used an effective pre-tax discount rate
of 33% per annum for the September 2008 Residual.
We
receive periodic base servicing fees for the servicing and collection of the
contracts. In addition, we are entitled to the cash flows from the Trusts that
represent collections on the contracts in excess of the amounts required to pay
principal and interest on the Notes, the base servicing fees, and the premium
paid to the Note Insurer, and certain other fees (such as trustee and custodial
fees). Required principal payments on the Notes are generally defined as the
payments sufficient to keep the principal balance of the Notes equal to the
aggregate principal balance of the related contracts (excluding those contracts
that have been charged off), or a pre-determined percentage of such balance.
Where that percentage is less than 100%, the related Securitization Agreements
require accelerated payment of principal until the principal balance of the
Notes is reduced to the specified percentage. Such accelerated principal payment
is said to create "overcollateralization" of the
Notes.
If the
amount of cash required for payment of fees, interest and principal on the
senior Notes exceeds the amount collected during the collection period, the
shortfall is withdrawn from the Spread Account, if any. If the cash collected
during the period exceeds the amount necessary for the above allocations plus
required principal payments on the subordinated Notes, if any, and there is no
shortfall in the related Spread Account or other form of Credit Enhancement, the
excess is released to us. If the total Credit Enhancement amount is not at the
required level, then the excess cash collected is retained in the Trust until
the specified level is achieved. Cash in the Spread Accounts is restricted from
our use. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. In
determining the value of the Residuals, we have estimated the future rates of
prepayments, delinquencies, defaults, default loss severity, and recovery rates,
as all of these factors affect the amount and timing of the estimated cash
flows. Our estimates are based on historical performance of comparable
contracts.
Following
a securitization that is structured as a sale for financial accounting purposes,
we recognize interest income on the balance of the Residuals. In addition, we
will recognize additional revenue in other income if the actual performance of
the contracts related to the Residuals is better than our estimate of the value
of the Residual. If the actual performance of the contracts is worse than our
estimate, then a downward adjustment to the carrying value of the Residuals and
a related impairment charge would be required. In a securitization structured as
a secured financing for financial accounting purposes, interest income is
recognized when accrued under the terms of the related contracts and, therefore,
presents less potential for fluctuations in performance when compared to the
approach used in a transaction structured as a sale for financial accounting
purposes.
In all
our term securitizations, whether treated as secured financings or as sales, we
have transferred the receivables (through a subsidiary) to the securitization
Trust. The difference between the two structures is that
in
F-13
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
securitizations
that are treated as secured financings we report the assets and liabilities of
the securitization Trust on our Consolidated Balance Sheet. Under both
structures the Noteholders’ and the related securitization Trusts’ recourse to
us for failure of the contract obligors to make payments on a timely basis is
limited to our Finance receivables, Spread Accounts and
Residuals.Servicing
We
consider the contractual servicing fee received on our managed portfolio held by
non-consolidated subsidiaries to be equal to adequate compensation.
Additionally, we consider that these fees would fairly compensate a substitute
servicer, should one be required. As a result, no servicing asset or liability
has been recognized. Servicing fees received on the managed portfolio held by
non-consolidated subsidiaries are reported as income when earned. Servicing fees
received on the managed portfolio held by consolidated subsidiaries are included
in interest income when earned. Servicing costs are charged to expense as
incurred. Servicing fees receivable, which are included in Other Assets in the
accompanying balance sheets, represent fees earned but not yet remitted to us by
the trustee.
Furniture
and Equipment
Furniture
and equipment are stated at cost net of accumulated depreciation. We calculate
depreciation using the straight-line method over the estimated useful lives of
the assets, which range from three to five years. Assets held under capital
leases and leasehold improvements are amortized over the lesser of the estimated
useful lives of the assets or the related lease terms. Amortization expense on
assets acquired under capital lease is included with depreciation expense on
owned assets.
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
Other
Income
Other
Income consists primarily of gains recognized on our Residual interest in
securitizations, recoveries on previously charged off contracts, convenience
fees charged to obligors for certain types of payment transaction methods, fees
paid to us by Dealers for certain direct mail services we provide and proceeds
from the sale of previously charged-off receivables to independent third
parties. The gain recognized related to the Residual interest was $178,000 for
2008, $6.2 million for 2007 and $1.2 million for 2006. The recoveries on the
charged-off CPS contracts relate to contracts from previously unconsolidated
trusts and MFN contracts acquired in the MFN acquisition. These recoveries
totaled $2.1 million, $3.0 million and $4.3 million for the years ended 2008,
2007 and 2006, respectively. The
convenience fees charged to obligors were $6.0 million, $3.5 million
and $2.1 million for the same periods, respectively. The direct mail
revenues were $5.3 million for 2008 and 2007 and $3.8 million for 2006. The
proceeds from the sale of previously charged-off receivables to independent
third parties were $1.8 million in 2007. There were no sales of previously
charged-off receivables in 2008 and 2006.
Earnings
(Loss) Per Share
The
following table illustrates the computation of basic and diluted earnings (loss)
per share:
F-14
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands, except per share data)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Numerator
for basic and diluted earnings (loss) per share
|
$ | (26,091 | ) | $ | 13,858 | $ | 39,555 | |||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings (loss) per share
|
||||||||||||
|
-
weighted average number of common shares
|
||||||||||||
|
outstanding
during the year
|
19,230 | 20,880 | 21,759 | |||||||||
|
Incremental
common shares attributable to exercise
|
||||||||||||
|
of
outstanding options and warrants
|
- | 1,715 | 2,293 | |||||||||
|
Denominator
for diluted earnings (loss) per share
|
19,230 | 22,595 | 24,052 | |||||||||
|
Basic
earnings (loss) per share
|
$ | (1.36 | ) | $ | 0.66 | $ | 1.82 | |||||
|
Diluted
earnings (loss) per share
|
$ | (1.36 | ) | $ | 0.61 | $ | 1.64 | |||||
Incremental
shares of 6,320,000, 1,539,000 and 950,000 related to stock options have been
excluded from the diluted earnings per share calculation for the year ended
December 31, 2008, 2007 and 2006, respectively, because the effect is
anti-dilutive. The exercise prices of these stock options were greater than the
average market price of the Company’s common shares or the Company was in a net
loss position and, therefore, the effect would be anti-dilutive to earnings
(loss) per share.
Deferral
and Amortization of Debt Issuance Costs
Costs
related to the issuance of debt are deferred and amortized using the interest
method over the contractual or expected term of the related debt.
Income
Taxes
The
Company and its subsidiaries file a consolidated federal income tax return and
combined or stand-alone state franchise tax returns for certain states. We
utilize the asset and liability method of accounting for income taxes, under
which deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statement values of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. We have
estimated a valuation allowance against that portion of the deferred tax asset
whose utilization in future periods is not more than likely.
In July
2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes”. Fin 48 is an interpretation of
“Statement of Financial Accounting Standards No. 109”, which provides criteria
for the recognition, measurement, presentation and disclosures of uncertain tax
positions. A tax benefit from an uncertain tax position may be
recognized if it is “more likely than not” that the position is sustainable
based solely on its technical merits. We adopted FIN 48 on January 1,
2007.
Purchases
of Company Stock
We record
purchases of our own common stock at cost and treat the shares as
retired.
Stock
Option Plan
Effective
January 1, 2006, we adopted SFAS No. 123 (revised), "Share-Based
Payment"
(SFAS 123(R)) utilizing the modified prospective approach. Under the modified
prospective approach, Employee Costs include all share based payments granted
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R).
The per
share weighted-average fair value of stock options granted during the years
ended December 31, 2008, 2007 and 2006, was $1.57, $2.89, and $3.39,
respectively. That fair value was estimated using the Black-Scholes option
pricing model using the weighted average assumptions noted in the following
table. We estimate the expected life of each option as the average of the
vesting period and the contractual life of the option. The volatility estimate
is based on the historical volatility of our stock over the period that equals
the expected life of the option. Volatility assumptions ranged from 43% to 50%
for 2008, 36% to 48% for 2007 and 34% to 50% for 2006. The
risk-free
F-15
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
interest
rate is based on the yield on a US Treasury bond with a maturity comparable to
the expected life of the option. The dividend yield is estimated to be zero
based on our intention not to issue dividends for the foreseeable
future.|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Expected
life (years)
|
5.95 | 5.94 | 5.69 | ||||||||
|
Risk-free
interest rate
|
3.21 | % | 4.54 | % | 4.80 | % | |||||
|
Volatility
|
49 | % | 46 | % | 47 | % | |||||
|
Expected
dividend yield
|
- | - | - | ||||||||
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position
(FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, to partially defer
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. SFAS 157 is effective for us on January 1,
2008, except for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value on a recurring basis. For those excepted
assets and liabilities our effective date is January 1, 2009. The adoption of
this statement did not have a material effect on our financial position or
results of operations. In October 2008, the FASB issued Staff Position (FSP) No.
157-3, “Determining the Fair Value of a Financial Asset when the Market for that
Asset is not Active”. This FSP clarifies the application of FAS 157 in a market
that is not active. The effect of adoption was not material.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The three levels are defined as follows: level 1 - inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets; level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument; and
level 3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
In
September 2008 we sold automobile contracts in a securitization that was
structured as a sale. In that sale, we retained certain assets that
are measured at fair value. Following is a description of the
valuation methodologies used for the securities retained and the residual
interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation
hierarchy. The securities retained total $8.5 million of notes and
are classified as level 2 because there were similar assets sold in the
transaction. We used the price at which those similar notes were sold to value
the securities retained. The residual interest in the cash flows
totals $2.5 million and is classified as level 3. We determined the value of
that residual interest using a discounted cash flow model that included
estimates for prepayments and losses. We used a discount rate of 33%
per annum. The assumptions we used were based on historical performance of
automobile contracts we had originated and serviced in the past, adjusted for
current market conditions.In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities. Effective January
1, 2008, the standard provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The Company did not elect the fair value option on
any of its financial assets or liabilities on January 1, 2008.
On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan
Commitments, stated that in measuring the fair value of a derivative loan
commitment, a company should not incorporate the expected net future cash flows
related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and
indicates that the expected net future cash flows related to the associated
servicing of the loan should
F-16
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
be
included in measuring fair value for all written loan commitments that are
accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB 109 retains that
view. SAB 109 was effective for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15,
2007. The effect of adoption was not material.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of income and expenses during the reported periods. Specifically, a
number of estimates were made in connection with determining an appropriate
allowance for finance credit losses, valuing the Residuals, accreting discounts
and acquisition fees, amortizing deferred costs, the recording of deferred tax
assets and reserves for uncertain tax positions. These are material estimates
that could be susceptible to changes in the near term and, accordingly, actual
results could differ from those estimates.
Reclassification
Certain
amounts for the prior years have been reclassified to conform to the current
year’s presentation with no effect on previously reported earnings or
shareholders’ equity.
Uncertainty
of Capital Markets and General Economic Conditions
Historically,
we have depended upon the availability of warehouse credit facilities and access
to long-term financing through the issuance of asset-backed securities
collateralized by our automobile contracts. We conducted four term
securitizations in 2006, four in 2007, and two in 2008. From July 2003 through
April 2008 all of our securitizations were structured as secured
financings. The second of our two securitization transactions in 2008
(completed in September 2008) was in substance a sale of the related contracts,
and is treated as a sale for financial accounting purposes.
Since the
fourth quarter of 2007, we have observed unprecedented adverse changes in the
market for securitized pools of automobile contracts. These changes include
reduced liquidity, and reduced demand for asset-backed securities, particularly
for securities carrying a financial guaranty and for securities backed by
sub-prime automobile receivables. Moreover, many of the firms that previously
provided financial guarantees, which were an integral part of our
securitizations, are no longer offering such guarantees. As of
December 31, 2008, we have no available warehouse credit facilities and no
immediate plans to complete a term securitization.
The
adverse changes that have taken place in the market over the last 18 months have
caused us to significantly curtail our purchases of automobile contracts in
order to conserve our capital. If the current adverse circumstances that have
affected the capital markets should continue or worsen, we may further curtail
further or cease our purchases of new automobile contracts, which could lead to
a material adverse effect on our operations.
Current
economic conditions have negatively affected many aspects of our
industry. First, as stated above, there is little demand for
asset-backed securities secured by consumer finance receivables, including
sub-prime automobile receivables. Second, lenders who previously
provided short-term warehouse financing for sub-prime automobile finance
companies such as ours are reluctant to provide such short-term financing due to
the uncertainty regarding the prospects of obtaining long-term financing through
the issuance of asset-backed securities. In addition, many capital
market participants such as investment banks, financial guaranty providers and
institutional investors who previously played a role in the sub-prime auto
finance industry have withdrawn from the industry, or in some cases, have ceased
to do business. Finally, the broad economic weakness and increasing
unemployment has negatively affected many of the obligors under our receivables,
resulting in higher delinquency, charge-offs and losses. Each of
these factors has adversely affected our results of
operations. Should existing economic conditions worsen, both our
ability to purchase new contracts and the performance of our existing managed
portfolio may be impaired, which, in turn, could have a further material adverse
effect on our results of operations.
F-17
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Covenants
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net
worth, financial loss in any one period and maintenance of active warehouse
credit facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.
(2)
Restricted Cash
Restricted
cash consists of the following components:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Securitization
trust accounts
|
$ | 153,479 | $ | 170,191 | ||||
|
Other
|
- | 150 | ||||||
|
Total
restricted cash
|
$ | 153,479 | $ | 170,341 | ||||
Certain
of our financing agreements require that we establish cash reserves for the
benefit of the other parties to the agreements, in case those parties are
subject to any claims or exposure.
(3)
Finance Receivables
The
following table presents the components of Finance Receivables, net of unearned
interest:
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Finance
Receivables
|
(In
thousands)
|
||||||
|
Automobile
finance receivables, net of unearned interest
|
$ | 1,430,227 | $ | 2,091,892 | |||
|
Less:
Unearned acquisition fees and discounts
|
(12,884 | ) | (23,888 | ) | |||
|
Finance
Receivables
|
$ | 1,417,343 | $ | 2,068,004 | |||
Finance
receivables totaling $33.3 million and $28.5 million at December 31, 2008 and
2007, respectively, have been placed on non-accrual status as a result of their
delinquency status.
The
following table presents a summary of the activity for the allowance for credit
losses, for the years ended December 31, 2008, 2007 and 2006:
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 100,138 | $ | 79,380 | $ | 57,728 | ||||||
|
Provision
for credit losses
|
148,408 | 137,272 | 92,057 | |||||||||
|
Charge-offs
|
(195,039 | ) | (140,963 | ) | (88,335 | ) | ||||||
|
Recoveries
|
30,400 | 24,449 | 17,930 | |||||||||
|
Allowance
attributable to receivables sold
|
(5,871 | ) | - | - | ||||||||
|
Balance
at end of year
|
$ | 78,036 | $ | 100,138 | $ | 79,380 | ||||||
Excluded
from finance receivables are contracts that were previously classified as
finance receivables but were reclassified as other assets because we have
repossessed the vehicle securing the Contract. The following table
presents a summary of such repossessed inventory together with the allowance for
losses in repossessed inventory that is not included in the allowance for credit
losses.
F-18
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
(In
thousands)
|
|||||||
|
Gross
balance of repossessions in inventory
|
$ | 47,452 | $ | 33,380 | |||
|
Allowance
for losses on repossessed inventory
|
(32,690 | ) | (21,849 | ) | |||
|
Net
repossessed inventory included in other assets
|
$ | 14,762 | $ | 11,531 | |||
(4)
Residual Interest in Securitizations
As of
December 31, 2008 we have exercised our clean-up call option on each of our
unconsolidated securitization transactions completed from 2001 to 2003. Residual
assets of $935,000 and $2.3 million as of December 31, 2008 and 2007,
respectively, remains, which represents our discounted estimate of cash flows
from recoveries of previously charged off receivables from these unconsolidated
securitization transactions. We have used a discount rate of 25%, which is
consistent with previous periods. The effect of a 20% adverse change to the fair
value of residual cash flows at December 31, 2008 would result in a decrease of
$109,000 to the value of the asset recorded.
During
the third quarter we completed a structured loan sale in which we retained a
residual interest. The residual interest in the cash flows from this
September 2008 transaction was $2.6 million as of December 31, 2008 and was
determined using a discounted cash flow model that included estimates for
prepayments and losses. The discount rate utilized was 33%. The
assumptions utilized were based on our historical performance adjusted for
current market conditions.
(5)
Furniture and Equipment
The
following table presents the components of furniture and equipment:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
(In
thousands)
|
|||||||
|
Furniture
and fixtures
|
$ | 4,128 | $ | 3,996 | |||
|
Computer
and telephone equipment
|
5,651 | 5,680 | |||||
|
Leasing
assets
|
673 | 673 | |||||
|
Leasehold
improvements
|
1,190 | 1,085 | |||||
|
Other
fixed assets
|
244 | 17 | |||||
| 11,886 | 11,451 | ||||||
|
Less:
accumulated depreciation and amortization
|
(10,482 | ) | (9,951 | ) | |||
| $ | 1,404 | $ | 1,500 | ||||
Depreciation
expense totaled $537,000, $406,000 and $667,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
(6)
Securitization Trust Debt
We have
completed a number of term securitization transactions that are structured as
secured borrowings for financial accounting purposes. The debt issued in these
transactions is shown on our consolidated balance sheets as “Securitization
trust debt,” and the components of such debt are summarized in the following
table:
F-19
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Weighted
|
||||||||||||||||||||||
|
Final
|
Receivables
|
Outstanding
|
Outstanding
|
Average
|
||||||||||||||||||
|
Scheduled
|
Pledged
at
|
Principal
at
|
Principal
at
|
Interest
Rate at
|
||||||||||||||||||
|
Payment
|
December
31,
|
Initial
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||||||
|
Series
|
Date
(1)
|
2008
|
Principal
|
2008
|
2007
|
2008
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
CPS
2003-C
|
March
2010
|
$ | 964 | $ | 87,500 | $ | 1,023 | $ | 5,683 | 3.57 | % | |||||||||||
|
CPS
2003-D
|
October
2010
|
1,568 | 75,000 | 1,704 | 6,695 | 3.91 | % | |||||||||||||||
|
CPS
2004-A
|
October
2010
|
2,999 | 82,094 | 3,277 | 9,849 | 4.32 | % | |||||||||||||||
|
CPS
2004-B
|
February
2011
|
5,821 | 96,369 | 6,192 | 14,937 | 4.17 | % | |||||||||||||||
|
CPS
2004-C
|
April
2011
|
7,964 | 100,000 | 8,223 | 18,763 | 4.24 | % | |||||||||||||||
|
CPS
2004-D
|
December
2011
|
12,230 | 120,000 | 12,395 | 25,994 | 4.44 | % | |||||||||||||||
|
CPS
2005-A
|
October
2011
|
18,517 | 137,500 | 17,586 | 34,154 | 5.30 | % | |||||||||||||||
|
CPS
2005-B
|
February
2012
|
23,455 | 130,625 | 21,991 | 39,008 | 4.67 | % | |||||||||||||||
|
CPS
2005-C
|
May
2012
|
41,170 | 183,300 | 39,478 | 67,834 | 5.13 | % | |||||||||||||||
|
CPS
2005-TFC
|
July
2012
|
12,425 | 72,525 | 12,333 | 24,654 | 5.76 | % | |||||||||||||||
|
CPS
2005-D
|
July
2012
|
37,016 | 145,000 | 36,548 | 61,857 | 5.69 | % | |||||||||||||||
|
CPS
2006-A
|
November
2012
|
74,068 | 245,000 | 73,257 | 120,667 | 5.33 | % | |||||||||||||||
|
CPS
2006-B
|
January
2013
|
93,318 | 257,500 | 92,106 | 144,941 | 6.33 | % | |||||||||||||||
|
CPS
2006-C
|
July
2013
|
102,382 | 247,500 | 101,716 | 159,308 | 5.62 | % | |||||||||||||||
|
CPS
2006-D
|
August
2013
|
107,516 | 220,000 | 105,687 | 159,384 | 5.56 | % | |||||||||||||||
|
CPS
2007-A
|
November
2013
|
164,138 | 290,000 | 160,122 | 233,092 | 5.53 | % | |||||||||||||||
|
CPS
2007-TFC
|
December
2013
|
51,157 | 113,293 | 51,115 | 84,685 | 5.77 | % | |||||||||||||||
|
CPS
2007-B
|
January
2014
|
200,207 | 314,999 | 195,800 | 277,878 | 5.99 | % | |||||||||||||||
|
CPS
2007-C
|
May
2014
|
232,744 | 327,499 | 228,478 | 308,919 | 6.05 | % | |||||||||||||||
|
CPS
2008-A
|
October
2014
|
254,931 | 310,359 | 235,180 | - | 6.79 | % | |||||||||||||||
| $ | 1,444,590 | $ | 3,556,063 | $ | 1,404,211 | $ | 1,798,302 | |||||||||||||||
|
(1)
|
The
Final Scheduled Payment Date represents final legal maturity of the
securitization trust debt. Securitization trust debt is expected to become
due and to be paid prior to those dates, based on amortization of the
finance receivables pledged to the Trusts. Expected payments, which will
depend on the performance of such receivables, as to which there can be no
assurance, are $639.4 million in 2009, $422.2 million in 2010, $235.9
million in 2011, $90.0 million in 2012, $16.7 million in
2013.
|
All of
the securitization trust debt was issued in private placement transactions to
qualified institutional investors. The debt was issued through wholly-owned,
bankruptcy remote subsidiaries of CPS and is secured by the assets of such
subsidiaries, but not by other assets of the Company. Principal and interest
payments on the senior notes are guaranteed by financial guaranty insurance
policies.
The terms
of the various Securitization Agreements related to the issuance of the
securitization trust debt require that certain delinquency and credit loss
criteria be met with respect to the collateral pool, and require that we
maintain minimum levels of liquidity and net worth and not exceed maximum
leverage levels and maximum financial losses. We were in compliance with all
such covenants as of December 31, 2008, in some cases only after giving effect
to waivers of otherwise applicable standards.
We are
responsible for the administration and collection of the contracts. The
Securitization Agreements also require certain funds be held in restricted cash
accounts to provide additional collateral for the borrowings or to be applied to
make payments on the securitization trust debt. As of December 31, 2008,
restricted cash under the various agreements totaled approximately $153.5
million. Interest expense on the securitization trust debt is composed of the
stated rate of interest plus amortization of additional costs of borrowing.
Additional costs of borrowing include facility fees, insurance premiums,
amortization of transaction costs, and amortization of discounts given on the
notes at the time of issuance. Deferred financing costs related to the
securitization trust debt are amortized using the interest method. Accordingly,
the effective cost of borrowing of the securitization trust debt is greater than
the stated rate of interest.
The
wholly-owned, bankruptcy remote subsidiaries of CPS were formed to facilitate
the above asset-backed financing transactions. Similar bankruptcy remote
subsidiaries issue the debt outstanding under our warehouse
line
F-20
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
of
credit. Bankruptcy remote refers to a legal structure in which it is expected
that the applicable entity would not be included in any bankruptcy filing by its
parent or affiliates. All of the assets of these subsidiaries have been pledged
as collateral for the related debt. All such transactions, treated as secured
financings for accounting and tax purposes, are treated as sales for all other
purposes, including legal and bankruptcy purposes. None of the assets of these
subsidiaries are available to pay other creditors of the Company or its
affiliates.
(7)
Debt
The terms
of our debt outstanding at December 31, 2008 and 2007 are summarized
below:
|
December
31,
|
||||
|
2008
|
2007
|
|||
|
(In
thousands)
|
||||
|
Residual
interest financing
|
||||
|
Notes
secured by our residual interests in securitizations. The terms
of the $60 million term residual facility and the $60 million revolving
residual credit facility were amended on July 10, 2008 to eliminate the
revolving feature, increase the interest rate, establish an amortization
schedule for principal reductions, and provide an extension of the
maturity from June 2009 to June 2010 at our option if certain conditions
are met. The aggregate indebtedness under this facility was $67.3 million
at December 31, 2008. It bears interest at 10.875% over
LIBOR.
|
$67,300
|
$70,000
|
||
|
Senior
secured debt, related party
|
||||
|
Notes
payable to Levine Leichtman Capital Partners IV, L.P.
(“LLCP”). The notes consisted of a $10 million term note and a
$15 million term note that each accrue interest at 16% per annum and are
due in June and July 2013. The amount outstanding at December 31, 2008 is
net of the unamortized debt discount of $4.9 million relating to the
valuation of 1,225,000 shares of stock, warrants to purchase 1,564,324
shares of our common stock at an exercise price of $2.4672, warrants to
purchase 283,985 of our common stock at an exercise price of $0.01 and
$1.4 million in cash paid to the lender at issuance.
|
20,105
|
--
|
||
|
Subordinated
renewable notes
|
||||
|
Notes
bearing interest ranging from 5.85% to 15.30%, with a weighted average
rate of 12.82%, and with maturities from January 2009 to November 2018
with a weighted average maturity of October 2011. We began
issuing the notes in June 2005 and incurred issuance costs of
$250,000. Payments are made monthly, quarterly, annually or
upon maturity based on the terms of the individual notes.
|
25,721
|
28,134
|
||
|
$113,126
|
$98,134
|
|||
The
outstanding debt on our warehouse facility was $9.9 million as of December 31,
2008, compared to $235.9 million outstanding on our two warehouse facilities as
of December 31, 2007. See Note 15 for a discussion of our warehouse
lines of credit.
The costs
incurred in conjunction with the above debt are recorded as deferred financing
costs on the accompanying balance sheets and are more fully described in Note
1.
We must
comply with certain affirmative and negative covenants related to debt
facilities, which require, among other things, that we maintain certain
financial ratios related to liquidity, net worth, capitalization and
maximum
F-21
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
financial
losses. Further covenants include matters relating to investments, acquisitions,
restricted payments and certain dividend restrictions.
The
following table summarizes the contractual and expected maturity amounts of debt
as of December 31, 2008:
|
Contractual
maturity
date
|
Residual
interest
financing
(1)
|
Senior
secured
debt
(2)
|
Subordinated
renewable
notes
|
Total
|
|||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||
|
2009
|
$ | 10,370 | $ | - | $ | 10,272 | $ | 20,642 | |||||||||||||
|
2010
|
56,930 | - | 10,349 | 67,279 | |||||||||||||||||
|
2011
|
- | - | 2,786 | 2,786 | |||||||||||||||||
|
2012
|
- | - | 1,660 | 1,660 | |||||||||||||||||
|
2013
|
- | 20,105 | 516 | 20,621 | |||||||||||||||||
|
Thereafter
|
- | - | 138 | 138 | |||||||||||||||||
| $ | 67,300 | $ | 20,105 | $ | 25,721 | $ | 113,126 | ||||||||||||||
_________________________
|
(1)
|
Assumes
that we meet certain conditions that allow us to exercise our option to
extend the maturity from June 2009 to June
2010.
|
|
(2)
|
The senior
secured debt maturing in 2013 is shown net of unamortized debt discounts
of $4.9 million. On a gross basis the scheduled maturity of this debt in
2013 is $25 million.
|
(8)
Shareholders’ Equity
Common
Stock
Holders
of common stock are entitled to such dividends as our Board of Directors, in its
discretion, may declare out of funds available, subject to the terms of any
outstanding shares of preferred stock and other restrictions. In the event of
liquidation of the Company, holders of common stock are entitled to receive,
pro rata, all of the
assets of the Company available for distribution, after payment of any
liquidation preference to the holders of outstanding shares of preferred stock.
Holders of the shares of common stock have no conversion or preemptive or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the common stock.
We
are required to comply with various operating and financial covenants defined in
the agreements governing the warehouse lines of credit, senior debt, residual
interest financing and subordinated debt. The covenants restrict the payment of
certain distributions, including dividends (See Note 7).
Included
in compensation expense for the years ended December 31, 2008, 2007, and 2006,
is $1.3 million, $1.1 million and $244,000 related to the amortization of
deferred compensation expense and valuation of stock options.
Stock
Purchases
At
four different times between 2000 and 2008, our Board of Directors, authorized
us to purchase a total of up to $32.5 million of our securities. As of December
31, 2008, we had purchased $5.0 million in principal amount of the debt
securities, and $25.3 million of our common stock, representing 7,126,657
shares.
Options
and Warrants
In
July 1997, the Company adopted and its shareholders approved the 1997 Long-Term
Incentive Plan (the “1997 Plan”) pursuant to which our Board of Directors may
grant stock options, restricted stock and stock appreciation rights to
employees, directors or employees of entities in which we have a controlling or
significant equity interest. Options that have been granted under the 1997 Plan
have been granted at an exercise price equal to (or greater than) the stock’s
fair market value at the date of the grant, with terms generally of 10 years and
vesting generally over five years. Subsequent amendments to the 1997 Plan have
increased the aggregate maximum 6,900,000 shares. There are no shares available
for grant in the 1997 Plan as of December 31, 2008.
In
2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term
Equity Incentive Plan (the “2006 Plan”) pursuant to which our Board of
Directors, or a duly-authorized committee thereof, may grant
stock
F-22
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
options,
restricted stock, restricted stock units and stock appreciation rights to our
employees or our subsidiaries, to directors of the Company, and to individuals
acting as consultants to the Company or its subsidiaries. In June 2008, the
shareholders of the Company approved an amendment to the 2006 Plan to increase
the maximum number of shares that may be subject to awards under the 2006 Plan
from 3,000,000 to 5,000,000. Options that have been granted under the
2006 Plan have been granted at an exercise price equal to (or greater than) the
stock’s fair market value at the date of the grant, with terms generally of 10
years and vesting generally over five years.Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment, revised 2004” (“SFAS 123R”), prospectively for all
option awards granted, modified or settled after January 1, 2006, using the
modified prospective method. Under this method, we recognize compensation costs
in the financial statements for all share-based payments granted subsequent to
January 1, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R).
For the
year ended December 31, 2008, we recorded stock-based compensation costs in the
amount of $1.3 million. As of December 31, 2008, unrecognized stock-based
compensation costs to be recognized over future periods equaled $4.2 million.
This amount will be recognized as expense over a weighted-average period of 3.3
years.
At
December 31, 2008, the options outstanding and exercisable had no intrinsic
value. The total intrinsic value of options exercised was $50,000, $1.0 million,
and $2.2 million for the years ended December 31, 2008, 2007, and 2006,
respectively. New shares were issued for all options exercised during the years
ended December 31, 2008, 2007 and 2006. At December 31, 2008, there were a total
of 2.4 million additional shares available for grant under the 2006
Plan.
Stock
option activity for the year ended December 31, 2008 is as follows:
|
Weighted
|
||||||||
|
Number
of
|
Weighted
|
Average
|
||||||
|
Shares
|
Average
|
Remaining
|
||||||
|
(in
thousands)
|
Exercise
Price
|
Contractual
Term
|
||||||
|
Options
outstanding at the beginning of period
|
6,196
|
$
|
4.47
|
N/A
|
||||
|
Granted
|
575
|
3.18
|
N/A
|
|||||
|
Exercised
|
(70)
|
1.52
|
N/A
|
|||||
|
Forfeited
|
(381)
|
5.01
|
N/A
|
|||||
|
Options
outstanding at the end of period
|
6,320
|
$
|
4.35
|
6.04
years
|
||||
|
Options
exercisable at the end of period
|
4,643
|
$
|
3.97
|
5.18
years
|
||||
The per
share weighted average fair value of stock options granted whose exercise price
was equal to the market price of the stock on the grant date during the years
ended December 31, 2008, 2007 and 2006, was $1.57, $2.91, and $3.39,
respectively.
The per
share weighted average fair value and exercise price of stock options granted
whose exercise price was above the market price of the stock on the grant date
during the year ended December 31, 2008 were $1.62 and $3.37, respectively. The
per share weighted average fair value and exercise price of stock options
granted whose exercise price was above the market price of the stock on the
grant date during the year ended December 31, 2007 were $2.53 and $5.00,
respectively. We did not issue any stock options above the market price of the
stock during the year ended December 31, 2006.
We have
not issued any stock options with an exercise price below the market price of
the stock on the grant date.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants,
which
F-23
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
are
exercisable for 283,985 shares of our common stock, at a nominal exercise price.
Both the FMV Warrants and the N Warrants are exercisable in whole or in part and
at any time up to and including June 30, 2018. We valued the warrants
using the Black-Scholes valuation model.
In
connection with the amendment to our residual credit facility discussed in Note
15, we issued warrants valued as being equivalent to 2,500,000 common shares, or
$4,071,429. The warrants represent the right to purchase 2,500,000
CPS common shares at a nominal exercise price, at any time prior to July 10,
2018.
(9)
Interest Income
The
following table presents the components of interest income:
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
(In
thousands)
|
|||||||||||
|
Interest
on finance receivables
|
$ | 346,594 | $ | 358,862 | $ | 251,609 | |||||
|
Residual
interest income
|
606 | 2,324 | 5,656 | ||||||||
|
Other
interest income
|
4,351 | 9,079 | 6,301 | ||||||||
|
Net
interest income
|
$ | 351,551 | $ | 370,265 | $ | 263,566 | |||||
(10) Income
Taxes
Income
taxes consist of the following:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current
federal tax expense
|
$ | (23,218 | ) | $ | 10,385 | $ | 19,036 | |||||
|
Current
state tax expense
|
(178 | ) | 2,200 | 1,193 | ||||||||
|
Deferred
federal tax (benefit)
|
5,886 | (2,538 | ) | (9,660 | ) | |||||||
|
Deferred
state tax expense (benefit)
|
(854 | ) | 52 | 4,877 | ||||||||
|
Change
in valuation allowance
|
1,000 | - | (41,801 | ) | ||||||||
|
Income
tax expense (benefit)
|
$ | (17,364 | ) | $ |
10,099
|
$ | (26,355 | ) | ||||
Income
tax expense/(benefit) for the years ended December 31, 2008, 2007 and 2006,
differs from the amount determined by applying the statutory federal rate of 35%
to income before income taxes as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Expense
at federal tax rate
|
$ | (15,208 | ) | $ | 8,385 | $ | 4,620 | |||||
|
State
taxes, net of federal income tax benefit
|
(319 | ) | 1,458 | 5,585 | ||||||||
|
Other
adjustments to tax reserve
|
(3,608 | ) | (110 | ) | 5,136 | |||||||
|
Effect
of change in state tax rate
|
- | - | 486 | |||||||||
|
Valuation
allowance
|
1,000 | - | (41,801 | ) | ||||||||
|
Stock-based
compensation
|
411 | 279 | 47 | |||||||||
|
Other
|
360 | 87 | (428 | ) | ||||||||
| $ | (17,364 | ) | $ | 10,099 | $ | (26,355 | ) | |||||
F-24
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The tax
effected cumulative temporary differences that give rise to deferred tax assets
and liabilities as of December 31, 2008 and 2007 are as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
Tax Assets:
|
||||||||
|
Finance
receivables
|
$ | 22,187 | $ | 37,812 | ||||
|
Accrued
liabilities
|
839 | 728 | ||||||
|
Furniture
and equipment
|
327 | 417 | ||||||
|
NOL
carryforwards and BILs
|
27,379 | 19,547 | ||||||
|
Pension
Accrual
|
2,877 | 123 | ||||||
|
Other
|
118 | 208 | ||||||
|
Total
deferred tax assets
|
53,727 | 58,835 | ||||||
|
Valuation
allowance
|
(1,000 | ) | - | |||||
| 52,727 | 58,835 | |||||||
|
Deferred
Tax Liabilities:
|
||||||||
|
Pension
Accrual
|
- | - | ||||||
|
Total
deferred tax liabilities
|
- | - | ||||||
|
Net
deferred tax asset
|
$ | 52,727 | $ | 58,835 | ||||
As part
of the MFN and TFC Mergers, CPS acquired certain net operating losses and
built-in loss assets. Moreover, both MFN and TFC have undergone an ownership
change for purposes of Internal Revenue Code (“IRC”) Section 382. In general,
IRC Section 382 imposes an annual limitation on the ability of a loss
corporation (that is, a corporation with a net operating loss (“NOL”)
carryforward, credit carryforward, or certain built-in losses (“BILs”)) to
utilize its pre-change NOL carryforwards or BILs to offset taxable income
arising after an ownership change.
In
determining the possible future realization of deferred tax assets,
we have considered the taxes paid in the current and prior years that
may be available to recapture, as well as future taxable income from the
following sources: (a) reversal of taxable temporary differences; (b) future
operations exclusive of reversing temporary differences; and (c) tax planning
strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire. During the year
ended December 31, 2007, the Company determined that deferred tax assets
totaling approximately $9.8 million, which were subject to a 100% valuation
allowance at December 31, 2006, were permanently not available for future
utilization. As a result, the deferred tax assets and the related valuation
allowance were adjusted, with no effect on the net deferred tax assets recorded
or to the provision for income taxes. At December 31, 2008 we have estimated a
$1.0 million valuation allowance against that portion of the deferred tax asset
whose utilization in future periods is not more than likely.
As of
December 31, 2008, we had net operating loss carryforwards for federal and state
income tax purposes of $19.5 million and $91.8 million,
respectively. The federal net operating losses begin to expire in
2028. The state net operating losses begin to expire in 2013.
The
following is a tabular reconciliation of the total amounts of unrecognized tax
benefits including interest and penalties for the year:
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Unrecognized
tax benefit - opening balance
|
$ | 12,280 | $ | 11,612 | ||||
|
Gross
increases - tax positions in prior period
|
- | 1,357 | ||||||
|
Gross
decreases - tax positions in prior period
|
(1,764 | ) | (965 | ) | ||||
|
Gross
increases - tax positions in current period
|
1,052 | 1,279 | ||||||
|
Settlements
|
- | (119 | ) | |||||
|
Lapse
of statute of limitations
|
(3,385 | ) | (884 | ) | ||||
|
Unrecognized
tax benefit - ending balance
|
$ |
8,183
|
$ | 12,280 | ||||
F-25
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Included
in the balance of unrecognized tax benefits at December 31, 2008, are $14.9
million of tax benefits that, if recognized, would affect the effective tax
rate. Also included in the balance of unrecognized tax benefits at December 31,
2008 are $1.3 million of tax benefits that, if recognized, would result in
adjustments to other tax accounts, primarily deferred taxes.
We
recognize potential interest and penalties related to unrecognized tax benefits
as income tax expense. Related to the uncertain tax benefits noted above, we
accrued penalties of $0.2 million and gross interest of $0.2 million during 2008
and in total, as of December 31, 2008, have recognized a liability for penalties
of $0.6 million and gross interest of $1.0 million.
We do not
anticipate a significant change in unrecognized tax positions within the coming
year. In addition, we believe that it is reasonably possible that
none of our currently remaining unrecognized tax positions, each of which is
individually insignificant, may be recognized by the end of 2008 as a result of
a lapse of the statute of limitations.
We are
subject to taxation in the US and various states and foreign
jurisdictions. The Company’s tax years for 2001through 2007 are
subject to examination by the tax authorities. With few exceptions,
we are no longer subject to U.S. federal, state, or local examinations by tax
authorities for years before 2001.
(11)
Related Party Transactions
Loans
to Officers to Exercise Certain Stock Options
During
2002, our Board of Directors approved a program under which officers of the
Company were advanced amounts sufficient to enable them to exercise certain of
their outstanding options. Such loans were available for a limited period of
time, and available only to exercise previously repriced options. The loans
accrued interest at a rate of 5.50% per annum, and were due in 2007. At December
31, 2007 there was $383,000 outstanding related to three such
loans. Such amounts were recorded as contra-equity within common
stock in the Shareholders’ Equity section of our Consolidated Balance Sheet. Two
of the loans were paid off during 2008 with cash. The third loan was paid off on
August 5, 2008 through a transfer of 210,000 shares of company stock. This is
reported in the consolidated statement of shareholders equity in “Purchase of
common stock”. At December 31, 2008 all loans have been repaid and there are no
amounts outstanding.
Director
Purchase of Retail Note
In
December 2007, one of our directors purchased a $4 million subordinated
renewable note pursuant to our ongoing program of issuing such notes to the
public. The note was purchased through the registered agent and under
the same terms and conditions, including the interest rate, that were offered to
other purchasers at the time the note was issued. As of December 31, 2008, $4
million remains outstanding on this note.
(12)
Commitments and Contingencies
Leases
The
Company leases its facilities and certain computer equipment under
non-cancelable operating leases, which expire through 2016. Future minimum lease
payments at December 31, 2008, under these leases are due during the years ended
December 31 as follows:
|
Amount
|
||
|
(In
thousands)
|
||
|
2009
|
$ |
3,985
|
|
2010
|
3,875
|
|
|
2011
|
3,568
|
|
|
2012
|
3,496
|
|
|
2013
|
3,232
|
|
|
Thereafter
|
7,615
|
|
|
Total
minimum lease payments
|
$ |
25,771
|
Rent
expense for the years ended December 31, 2008, 2007 and 2006, was $4.2 million,
$4.0 million, and $3.9 million, respectively.
F-26
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Our
facility leases contain certain rental concessions and escalating rental
payments, which are recognized as adjustments to rental expense and are
amortized on a straight-line basis over the terms of the leases.
During
2007 and 2006, we received $113,000 and $194,000, respectively, of sublease
income, which is included in occupancy expense. We did not receive any sublease
income in 2008.
Litigation
Stanwich Litigation. CPS was
for some time a defendant in a class action (the “Stanwich Case”) brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that
case were persons entitled to receive regular payments (the “Settlement
Payments”) pursuant to earlier settlements of claims, generally personal injury
claims, against unrelated defendants. Stanwich Financial Services Corp.
(“Stanwich”), an affiliate of the former chairman of the board of directors of
CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich
defaulted on its payment obligations to the plaintiffs and in June 2001 filed
for reorganization under the Bankruptcy Code, in the federal bankruptcy court in
Connecticut. By February 2005, CPS had settled all claims brought against it in
the Stanwich Case.
In
November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The litigation between Mr. Pardee and CPS is stayed, awaiting resolution
of an adversary action brought against Mr. Pardee in the bankruptcy court, which
is hearing the bankruptcy of Stanwich.
CPS has
reached an agreement in principle with the representative of creditors in the
Stanwich bankruptcy to resolve the adversary action. Under the
agreement in principle, CPS would pay the bankruptcy estate $625,000 and abandon
its claims against the estate, while the estate would abandon its adversary
action against Mr. Pardee. The bankruptcy court has rejected that
proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon
appeal, CPS would expect that the agreement would result in (i) limitation of
its exposure to Mr. Pardee to no more than some portion of his attorneys
fees incurred and (ii) stays in Rhode Island being lifted, causing those cases
to become active again. CPS is unable to predict whether the ruling
of the bankruptcy court will be sustained or overturned on appeal.
The
reader should consider that an adverse judgment against CPS in the Rhode Island
case for indemnification, if in an amount materially in excess of any liability
already recorded in respect thereof, could have a material adverse
effect.
Other
Litigation.
The
Company has recorded a liability as of December 31, 2008 that it believes
represents a sufficient allowance for legal contingencies. Any adverse judgment
against the Company, if in an amount materially in excess of the recorded
liability, could have a material adverse effect on the financial position of the
Company. The Company is involved in various other legal matters
arising in the normal course of business. Management believes that any liability
as a result of those matters would not have a material effect on the Company’s
financial position.
(13)
Employee Benefits
The
Company sponsors a pretax savings and profit sharing plan (the “401(k) Plan”)
qualified under Section 401(k) of the Internal Revenue Code. Under the 401(k)
Plan, eligible employees are able to contribute up to 15% of their compensation
(subject to stricter limitation in the case of highly compensated employees). We
may, at our discretion, match 100% of employees’ contributions up to $1,500 per
employee per calendar year. Our contributions to the 401(k) Plan were $672,000,
$674,000 and $520,000 for the year ended December 31, 2008, 2007 and 2006,
respectively.
We also
sponsor the MFN Financial Corporation Pension Plan (the “Plan”). The Plan
benefits were frozen June 30, 2001.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS
No. 158 requires an employer that sponsors one or more single-employer
defined benefit plans to (a) recognize the overfunded or underfunded status
of a benefit plan in its statement of financial position, (b) recognize as
a component of other comprehensive income, net of tax, the gains or losses and
prior service costs
F-27
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
or
credits that arise during the period but are not recognized as components of net
periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for
Pensions”, or SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions,” (c) measure defined benefit plan assets and
obligations as of the date of the employer’s fiscal year-end, and
(d) disclose in the notes to financial statements additional information
about certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses, prior service costs or
credits, and transition asset or obligation. SFAS No. 158 was adopted by the
Company in the fourth quarter of 2006. The adoption did not have a significant
effect on our financial position or results of operations. The disclosure
requirements of this standard are included herein.The
following tables set forth the plan’s benefit obligations, fair value of plan
assets, and amounts recognized at December 31, 2008 and 2007:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Change
in Projected Benefit Obligation
|
||||||||
|
Projected
benefit obligation, beginning of year
|
$ | 14,969 | $ | 15,456 | ||||
|
Service
cost
|
- | - | ||||||
|
Interest
cost
|
930 | 881 | ||||||
|
Actuarial
gain (loss)
|
837 | (723 | ) | |||||
|
Benefits
paid
|
(651 | ) | (645 | ) | ||||
|
Projected
benefit obligation, end of year
|
$ | 16,085 | $ | 14,969 | ||||
The
accumulated benefit obligation for the plan was $16.1 million and $15.0 million
at December 31, 2008 and 2007, respectively.
|
December
31,
|
||||||||
|
Change
in Plan Assets
|
2008
|
2007
|
||||||
|
Fair
value of plan assets, beginning of year
|
$ | 14,643 | $ | 15,696 | ||||
|
Return
on assets
|
(5,418 | ) | (543 | ) | ||||
|
Employer
contribution
|
- | 200 | ||||||
|
Expenses
|
(59 | ) | (65 | ) | ||||
|
Benefits
paid
|
(651 | ) | (645 | ) | ||||
|
Fair
value of plan assets, end of year
|
$ | 8,515 | $ | 14,643 | ||||
Additional
Information
Weighted
average assumptions used to determine benefit obligations and cost at December
31, 2008 and 2007 were as follows:
|
December,
31
|
|||||||
|
2008
|
2007
|
||||||
|
Weighted
average assumptions used to determine benefit obligations
|
|||||||
|
Discount
rate
|
6.00 | % | 6.45 | % | |||
|
Weighted
average assumptions used to determine net periodic benefit
cost
|
|||||||
|
Discount
rate
|
6.45 | % | 5.88 | % | |||
|
Expected
return on plan assets
|
8.50 | % | 8.50 | % | |||
Our
overall expected long-term rate of return on assets is 8.50% per annum as of
December 31, 2008. The expected long-term rate of return is based on the
weighted average of historical returns on individual asset categories, which are
described in more detail below.
F-28
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
(In
thousands)
|
|||||||
|
Amounts
recognized on Consolidated Balance Sheet
|
|||||||
|
Other
assets
|
$ | - | $ | - | |||
|
Other
liabilities
|
(7,570 | ) | (326 | ) | |||
|
Net
amount recognized
|
$ | (7,570 | ) | $ | (326 | ) | |
|
Amounts
recognized in accumulated other comprehensive income consists
of:
|
|||||||
|
Net
loss (gain)
|
$ | 11,347 | $ | 3,964 | |||
|
Unrecognized
transition asset
|
- | - | |||||
|
Net
amount recognized
|
$ | 11,347 | $ | 3,964 | |||
|
Components
of net periodic benefit cost
|
|||||||
|
Interest
Cost
|
$ | 930 | $ | 881 | |||
|
Expected
return on assets
|
(1,222 | ) | (1,312 | ) | |||
|
Amortization
of transition asset
|
- | - | |||||
|
Amortization
of net loss
|
153 | 71 | |||||
|
Net
periodic benefit cost
|
$ | (139 | ) | $ | (360 | ) | |
|
Benefit
Obligation Recognized in Other Comprehensive Income
|
|||||||
|
Net
loss (gain)
|
$ | 7,383 | $ | 1,126 | |||
|
Prior
service cost (credit)
|
- | - | |||||
|
Amortization
of prior service cost
|
- | - | |||||
|
Net
amount recognized in other comprehensive income
|
$ | 7,383 | $ | 1,126 | |||
The
weighted average asset allocation of our pension benefits at December 31, 2008
and 2007 were as follows:
|
December
31,
|
||||||
|
2008
|
2007
|
|||||
|
Weighted
Average Asset Allocation at Year-End
|
||||||
|
Asset
Category
|
||||||
|
Equity
securities
|
71 | % | 77 | % | ||
|
Debt
securities
|
28 | % | 23 | % | ||
|
Cash
and cash equivalents
|
1 | % | 0 | % | ||
|
Total
|
100 | % | 100 | % | ||
Our
investment policies and strategies for the pension benefits plan utilize a
target allocation of 75% equity securities and 25% fixed income securities. Our
investment goals are to maximize returns subject to specific risk management
policies. We address risk management and diversification by the use of a
professional investment advisor and several sub-advisors which invest in
domestic and international equity securities and domestic fixed income
securities. Each sub-advisor focuses its investments within a specific sector of
the equity or fixed income market. For the sub-advisors focused on the equity
markets, the sectors are differentiated by the market capitalization and the
relative valuation of the underlying issuer. For the sub-advisors focused on the
fixed income markets, the sectors are differentiated by the credit quality and
the maturity of the underlying fixed income investment. The investments made by
the sub-advisors are readily marketable and can be sold to fund benefit payment
obligations as they become payable.
F-29
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Cash
Flows
|
|||
|
Expected
Benefit Payouts (In thousands)
|
|||
|
2009
|
$ |
564
|
|
|
2010
|
583
|
||
|
2011
|
663
|
||
|
2012
|
698
|
||
|
2013
|
757
|
||
|
Years
2014 - 2018
|
4,584
|
||
|
Anticipated
Contributions in 2009
|
$ |
-
|
(14) Fair Value of Financial
Instruments
The
following summary presents a description of the methodologies and assumptions
used to estimate the fair value of our financial instruments. Much of the
information used to determine fair value is highly subjective. When applicable,
readily available market information has been utilized. However, for a
significant portion of our financial instruments, active markets do not exist.
Therefore, considerable judgments were required in estimating fair value for
certain items. The subjective factors include, among other things, the estimated
timing and amount of cash flows, risk characteristics, credit quality and
interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 2008 and 2007, the amounts that will actually be
realized or paid at settlement or maturity of the instruments could be
significantly different. The estimated fair values of financial assets and
liabilities at December 31, 2008 and 2007, were as follows:
|
December
31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Financial Instrument
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 22,084 | $ | 22,084 | $ | 20,880 | $ | 20,880 | ||||||||
|
Restricted
cash and equivalents
|
153,479 | 153,479 | 170,341 | 170,341 | ||||||||||||
|
Finance
receivables, net
|
1,339,307 | 1,312,148 | 1,967,866 | 1,967,866 | ||||||||||||
|
Residual
interest in securitizations
|
3,582 | 3,582 | 2,274 | 2,274 | ||||||||||||
|
Accrued
interest receivable
|
14,903 | 14,903 | 24,099 | 24,099 | ||||||||||||
|
Warehouse
lines of credit
|
9,919 | 9,919 | 235,925 | 235,925 | ||||||||||||
|
Notes
payable
|
- | - | - | - | ||||||||||||
|
Accrued
interest payable
|
5,605 | 5,605 | 6,740 | 6,740 | ||||||||||||
|
Residual
interest financing
|
67,300 | 67,300 | 70,000 | 70,000 | ||||||||||||
|
Securitization
trust debt
|
1,404,211 | 1,378,271 | 1,798,302 | 1,786,263 | ||||||||||||
|
Senior
secured debt
|
20,105 | 20,105 | - | - | ||||||||||||
|
Subordinated
renewable notes
|
25,721 | 25,721 | 28,134 | 28,134 | ||||||||||||
Cash,
Cash Equivalents and Restricted Cash
The
carrying value equals fair value.
Finance
Receivables, net
The fair
value of finance receivables is estimated by discounting future cash flows
expected to be collected using current rates at which similar receivables could
be originated.
Residual
Interest in Securitizations
The fair
value is estimated by discounting future cash flows using credit and discount
rates that we believe reflect the estimated credit, interest rate and prepayment
risks associated with similar types of instruments.
Accrued
Interest Receivable and Payable
The
carrying value approximates fair value because the related interest rates are
estimated to reflect current market conditions for similar types of
instruments.
F-30
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Warehouse
Lines of Credit, Notes Payable, Residual Interest Financing, and Senior Secured
Debt and Subordinated Renewable Notes
The
carrying value approximates fair value because the related interest rates are
estimated to reflect current market conditions for similar types of secured
instruments.
Securitization
Trust Debt
The fair
value is estimated by discounting future cash flows using interest rates that we
believe reflects the current market rates.
(15) Liquidity
Our
business requires substantial cash to support purchases of automobile contracts
and other operating activities. Our primary sources of cash have been
cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities,
servicing fees on portfolios of automobile contracts previously sold in
securitization transactions or serviced for third parties, customer payments of
principal and interest on finance receivables, fees for origination of
automobile contracts, and releases of cash from securitized portfolios of
automobile contracts in which we have retained a residual ownership interest and
from the spread accounts associated with such pools. Our primary uses of cash
have been the purchases of automobile contracts, repayment of amounts borrowed
under warehouse credit facilities and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of spread accounts and initial
overcollateralization, if any, and the increase of credit enhancement to
required levels in securitization transactions, and income taxes. There can be
no assurance that internally generated cash will be sufficient to meet our cash
demands. The sufficiency of internally generated cash will depend on the
performance of securitized pools (which determines the level of releases from
those portfolios and their related spread accounts), the rate of expansion or
contraction in our managed portfolio, and the terms upon which we are able to
purchase, sell, and borrow against automobile contracts.
We
purchase automobile contracts from dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee which may either increase or
decrease the automobile contract purchase price. Those automobile contracts
generate cash flow, however, over a period of years. As a result, we have been
dependent on warehouse credit facilities to purchase automobile contracts, and
on the availability of cash from outside sources in order to finance our
continuing operations, as well as to fund the portion of automobile contract
purchase prices not financed under revolving warehouse credit facilities. At
December 31, 2007, we had $425 million in warehouse credit capacity, in the form
of two $200 million senior facilities, and one $25 million subordinated
facility. One $200 million facility provided funding for automobile
contracts purchased under the TFC programs while both warehouse facilities
provided funding for automobile contracts purchased under the CPS programs. The
subordinated facility was established on January 12, 2007 and expired by its
terms in April 2008.
The first
of two warehouse facilities mentioned above was provided by an affiliate of
Bear, Stearns and was structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expired on November 6,
2008. On November 8, 2006 the facility was increased from $150
million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other
conditions and covenants. On January 12, 2007 the facility was amended to allow
for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields required for bonds issued in
our term securitizations. Senior notes under this facility accrued
interest at a rate of one-month LIBOR plus 2.50% per annum while the
subordinated notes accrued interest at a rate of one-month LIBOR plus 5.50% per
annum.
The
second of two warehouse facilities was provided by an affiliate of UBS AG and
was similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note
issued by our consolidated subsidiary Page Funding LLC. This facility
was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for
automobile contracts purchased under the TFC programs, in addition to our CPS
programs. The available credit under the facility was increased again
to $200 million on August 31, 2005. In April 2006, the terms
F-31
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
of this
facility were amended to allow advances to us of up to 80% of the principal
balance of automobile contracts that we purchase under our CPS programs, and of
up to 70% of the principal balance of automobile contracts that we purchase
under our TFC programs, in all events subject to collateral tests and certain
other conditions and covenants. On June 30, 2006, the terms of this
facility were amended to allow advances to us of up to 83% of the principal
balance of automobile contracts that we purchase under our CPS programs, in all
events subject to collateral tests and certain other conditions and covenants.
In February 2007 the facility was amended to allow for the issuance of
subordinated notes resulting in an increase of the maximum advance rate to
93%. The advance rate was subject to the lender’s valuation of the
collateral which, in turn, was affected by factors such as the credit
performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields for bonds issued in our term
securitizations. Senior notes under this facility accrue interest at
a rate of one-month LIBOR plus 9.85% per annum. The facility was
amended in December 2008 which eliminated future advances and provided for
repayment of the notes from proceeds collected on the underlying pledged
receivables, plus certain future scheduled principal reductions until its
maturity in September 2009. At December 31, 2008, $9.9 million was outstanding
under this facility.We
securitized $509.0 million in auto contracts in two private placement
transactions in 2008 as compared to $1,118.1 million of automobile contracts in
four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in
2006. All but one of these transactions were structured as secured
financings and, therefore, resulted in no gain or loss on sale. The
September 2008 transaction was structured as a sale for financial accounting
purposes and resulted in a loss on sale of $14.0 million.
In
November 2005, we completed a securitization in which a wholly-owned bankruptcy
remote consolidated subsidiary of ours issued $45.8 million of asset-backed
notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million
outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on the Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet
F-32
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
because
the terms of the warrants also included a provision whereby the lender could
require us to purchase the warrants for cash. That provision was eliminated by
mutual agreement in September 2008.The
acquisition of automobile contracts for subsequent sale in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of
capital required is most heavily dependent on the rate of our automobile
contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and
their related spread accounts either release cash to us or capture cash from
collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile
contracts.
We are
and may in the future be limited in our ability to purchase automobile contracts
due to limits on our capital. As of December 31, 2008, we had
unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a
securitization. Our plans to manage our liquidity include maintaining
our rate of automobile contract purchases at a merely nominal level, and,
wherever appropriate, reducing our operating costs. There can be no
assurance that we will be able to obtain future warehouse financing or to
complete securitizations on favorable economic terms or that we will be able to
complete securitizations at all. If we are unable to complete such
securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income
would decrease.
Our
liquidity will also be affected by releases of cash from the trusts established
with our securitizations. While the specific terms and mechanics of
each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the
amount of credit enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the automobile contracts in the
pool are below certain predetermined levels. In the event delinquencies,
defaults or net losses on the automobile contracts exceed such levels, the terms
of the securitization: (i) may require increased credit enhancement to be
accumulated for the particular pool; (ii) may restrict the distribution to us of
excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on
some or all of the automobile contracts to another servicer. There can be no
assurance that collections from the related trusts will continue to generate
sufficient cash. Moreover, most of our spread account balances
are pledged as collateral to our residual interest financing. As
such, most of the current releases of cash from our securitization trusts are
directed to pay the obligations of our residual interest financing.
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net worth,
financial loss in any one period and maintenance of active warehouse credit
facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.
F-33
EXHIBIT
3.1
Restated
Articles of Incorporation of
CONSUMER
PORTFOLIO SERVICES, INC.
(filed
December 13, 1993)
Charles
E. Bradley, Jr. and Jeffrey P. Fritz certify that:
1. They
are the President and Secretary, respectively, of CONSUMER PORTFOLIO SERVICES,
INC., a California corporation (the "Corporation").
2. The
Articles of Incorporation of the Corporation, as amended to the date of the
filing of this certificate, including amendments set forth herein but not
separately filed (and with the omissions required by Section 910 of the
Corporation Code) are restated as follows:
ARTICLE I
- - NAME. The name of the Corporation is: CONSUMER PORTFOLIO
SERVICES,
INC.
ARTICLE
II - PURPOSE. The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code:
ARTICLE
III - DIRECTOR LIABILITY. The liability of the directors of the Corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
ARTICLE
IV - INDEMNIFICATION. The Corporation is authorized to provide indemnification
of agents (as defined in Section 317 of the Corporations Code) for breach of
duty to the Corporation and its stockholders through bylaw provisions or through
agreements with agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the Corporations Code, subject to the limits on such
excess indemnification set forth in Section 204 of the Corporations
Code.
ARTICLE V
- - CAPITAL STRUCTURE. The Corporation is authorized to issue two (2) classes of
shares of stock. One class of shares is to be called "Common Stock," the second
class of shares is to be called "Serial Preferred Stock." The total number of
shares of stock which the Corporation shall have authority to issue is Forty
Million (40,000,000), of which Thirty Million (30,000,000) shall be Common
Stock, without par value, and Ten Million (10,000,000) shall be Serial Preferred
Stock, having a par value of $1.00 per share.
The
designations and the powers, preferences, and rights and the qualifications,
limitations or restrictions thereof, of each class of stock of the corporation
shall be as follows:
(a)
SERIAL PREFERRED STOCK The Serial Preferred Stock may be issued from time to
time in one or more series, including but not limited to the Series A Preferred
Stock established by ARTICLE VI hereof (hereinafter referred to as the "Series A
Preferred Stock"). Excluding with respect to said Series A Preferred Stock, the
Board of Directors is hereby authorized, without further approval of the holders
of the Common Stock of the Corporation, to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of preferred shares, and the number of shares constituting any such
series and a designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issue of shares of that
series, but not below the number of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such
series.
(b)
COMMON STOCK. Except where otherwise provided in these Articles of Incorporation
or required by law, the holders of the Common Stock shall have the exclusive
voting rights and power of the Corporation, including the exclusive right to
notice of shareholders' meetings. Subject to the rights of the Serial Preferred
Stock as provided in these Articles, dividends may b e paid on the Common Stock
as and when declared by the Board of Directors out of any funds of the
Corporation legally available for the payment of such dividends.
ARTICLE
VI - SERIES A PREFERRED STOCK. The rights, preferences, privileges and
restrictions of the Series A Preferred Stock are as follows:
(a)
The number of authorized shares of Series A Preferred Stock is
5,000,000.
(b)
No dividends shall be paid with respect to the Series A Preferred Stock until
after the Corporation has consummated an initial public offering of its Common
Stock ("IPO") and the Corporation's net income, on a cumulative basis from and
after the date of the consummation of the IPO, has equalled or exceeded
$5,000,000. Thereafter, the Series A Preferred Stock shall be entitled to
receive out of funds legally available therefore, dividends at an annual rate of
6% per share, payable in cash or additional shares of Series A Preferred Stock,
payable when and as declared by the Board of Directors of the Corporation. No
dividends or other distributions shall be made with respect to the Common Stock
during any fiscal year of the Corporation until dividends have been declared and
paid or set apart during that fiscal year. Dividends on the Series A Preferred
Stock shall not be cumulative and no rights shall accrue to the Series A
Preferred Stock by reason of the fact that the Corporation may fail to declare
or pay dividends for any fiscal year, whether or not the earnings of the
Corporation were or are sufficient to pay such dividends in whole or in
part. After dividends on the Series A Preferred Stock shall have been
declared and paid or set apart during any fiscal year, if the Board of Directors
shall elect to declare additional dividends out of funds legally available
therefore during such fiscal year, such additional dividends shall be declared
solely with respect to the Common Stock.
(c)
Upon the voluntary or involuntary liquidation, winding up or dissolution of the
Corporation, out of the assets available for distribution to shareholders, the
Series A Preferred Stock shall be entitled to receive, in preference to any
payment on the Common Stock, an amount equal to $1.00 per share plus any
dividends previously declared and which remain unpaid and no more. After the
full preferential liquidation amount has been paid to, or
determined
and set apart for, the Series A Preferred Stock, the remaining assets shall be
distributed solely with respect to the Common Stock. In the event the assets of
the Corporation are insufficient to pay the full preferential liquidation amount
required to be paid to the Series A Preferred Stock, the entire remaining assets
shall be paid to the Series A Preferred Stock, and the Common Stock shall
receive nothing. A reorganization shall not be considered to be a
liquidation, winding up or dissolution within the meaning of this subdivision
(c) and the Series A Preferred Stock shall be entitled only to the rights
provided in the plan of reorganization, Division 1, Chapter 17, Article 5 of the
Financial Code of the State of California, and Chapters 12 and 13 of the
California General Corporation Law.
(d)
Without the approval of at least a majority of the outstanding shares of Series
A Preferred Stock, the Corporation shall not:
(i)
amend the Articles of Incorporation to alter or change any rights, preferences
or privileges of the Series A Preferred Stock;
(ii)
increase the authorized number of shares of Series A Preferred
Stock;
(iii)
authorize another class of shares senior to or on a parity with the Series A
Preferred Stock with respect to dividends or distribution of assets on
liquidation;
(iv)
enter into a reorganization with any other corporation or sell all or
substantially all of the assets to any other corporation, even though the
transaction is not a reorganization, except a reorganization not
requiring
approval of the Common Stock;
(v)
establish special qualifications of persons who may be holders of Series A
Preferred Stock;
(vi)
restrict the transfer or hypothecation of shares of Series A Preferred Stock
other than as required by federal or state securities laws or
regulations;
(vii)
voluntarily elect to wind up and dissolve; or
2
(viii)
redeem any of the outstanding shares of Series A Preferred Stock if such
redemption is at a price per share less than the original purchase price paid
per share redeemed plus an amount equal to declared but
unpaid dividends.
(e)
Except as otherwise expressly provided by law or by these Articles of
Incorporation, the Common Stock has exclusive voting rights on all matters
requiring a vote of shareholders, including election of directors, and the
Series A Preferred Stock has no voting rights. If the Corporation fails to
declare and pay dividends on the Series A Preferred Stock for four (4) or more
consecutive quarters as provided for in subdivision (b) of this ARTICLE VI,
whether or not funds are legally available therefore, the Series A Preferred
Stock shall have the right to elect one (1) direct and the Common Stock shall
have the right to elect the remaining directors. Such right in the Series A
Preferred Stock shall continue until the Corporation declares and pays dividends
on the Series A Preferred Stock for the then current fiscal year, after which
the exclusive right to elect directors shall revert to the Common Stock, subject
to renewal of the voting right of the Series A Preferred Stock from time to
time. At any time after the right to elect only one (1) director is vested in
the Series A Preferred Stock, and at any time after the exclusive right to elect
directors shall revert to the Common Stock, the holders of 10% or more of the
outstanding shares of Series A Preferred Stock or Common Stock, as the case may
be, have a right to call a special meeting of shareholders for the purpose of
electing all of the members of the Board of Directors, such right to be
exercisable by delivering a request in writing for the calling of the special
meeting to the president or secretary, or to the chairman of the board or
vice-president if there be such. The officer receiving the request shall
forthwith cause notice to be given to the shareholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than 35 nor more than 60 days after the receipt of the
request. If the notice is not given within 30 days after receipt of the request,
the shareholders calling the meeting shall have the rights accorded to them
pursuant to subdivision (c) of Section 601 of the California Corporation Code.
Upon the election of one (1) director by the Series A Preferred Stock at a
special meeting, the terms of all persons who were directors immediately prior
thereto shall terminate and the director elected by the Series A Preferred Stock
together with those elected at the special meeting by the Common Stock shall
serve until the exclusive right to elect directors has reverted to the Common
Stock, at which time the terms of all persons who were directors immediately
prior thereto shall terminate and the directors elected by the Common Stock
shall constitute the directors of Corporation until the next annual
meeting.
(f)
The Series A Preferred Stock is subject to redemption, out of funds legally
available therefore, in whole, or from time to time in part, at the option of
the Board of Directors of the Corporation; provided, however, that no such
redemption, in whole or in part, shall occur until after March 31, 1994. In the
case of a partial redemption, the shares to be redeemed shall be selected at the
discretion of or in any manner approved by, the Board of Directors, which
selection need not be, but may be, determined prorata or by lot. The redemption
price shall be $1.00 per share plus an amount equal to accrued but unpaid
dividends per share (herein called the "redemption price").
(g)
The Corporation shall mail a notice of redemption to each holder of record of
shares to be redeemed addressed to the holder at the address of such holder
appearing on the books of the purpose of notice, or if not such address appears
or is given at the place where the principal executive office of the Corporation
is located, not earlier than 60 nor later than 20 days before the date fixed for
redemption. The notice of redemption shall include (i) the class of shares or
the part of shares to be redeemed, (ii) the date fixed for redemption, (iii) the
redemption price, (iv) the place at which the shareholders may obtain payment of
the redemption price upon surrender or their share certificates and (v) the last
date prior to the date of redemption that the right of conversion may be
exercised. If funds are available on the date fixed for the redemption, then
whether or not the share certificates are surrendered for payment of the
redemption price, the shares shall no longer be outstanding and the holders
thereof shall cease to be shareholders after the date fixed for redemption and
shall be entitled only to receive the redemption price without interest upon
surrender of the share certificate. If less than all the shares represented by
one share certificate are to be redeemed, the Corporation shall issue a new
share certificate for the shares not redeemed.
3
(h)
If, on or prior to any date fixed for redemption, the Corporation deposits with
any bank or trust company in this state as a trust fund a sum sufficient to
redeem, on the date fixed for redemption thereof, the shares called for
redemption, with irrevocable instructions and authority to the bank or trust
company to publish the notice of redemption thereof (or to complete such
publication if theretofore commenced) and to pay, on and after the date fixed
for redemption or prior thereto, the redemption price of the shares to their
respective holders upon the surrender of their share certificates, then shares
so called and tendered shall be redeemed on the date fixed for redemption. The
deposit shall constitute full payment of the shares to their holders and from
and after the date of the deposit the shares shall no longer be outstanding and
the holders thereof shall cease to be shareholders with respect to such shares
and shall have no rights with respect thereto except the right to receive from
the bank or trust company payment of the redemption price of the shares without
interest, upon surrender of their certificate therefore, and the right to
convert the shares in accordance with subdivision (i) of ARTICLE VI. The bank or
trust company forthwith shall return to the Corporation funds deposited for
shares converted. After 120 days, the bank or trust company shall return to the
Corporation funds deposited and not claimed and thereafter the holder of a share
certificate for shares redeemed shall look to the Corporation for
payment.
(i)
Shares of Series A Preferred Stock are not convertible into Common Stock of the
Corporation.
3. This
certificate has been duly approved by the Board of Directors of the
Corporation.
4. The
article amendment as included in the Restated Articles of Incorporation (other
than omissions required by Section 910 of the Corporations Code) has been duly
approved by the required vote of shareholders of the Corporation in accordance
with Section 902 of the Corporations Code. As of the record date for determining
shareholders entitled to vote on such amendment, the Corporation had 4,200,000
shares of Common Stock and 3,415,000 shares of Series A Preferred Stock issued
and outstanding. The number of shares of Common Stock and Series A Preferred
Stock voting in favor of the amendment equalled or exceeded the vote required.
The percentage vote of both Common Stock and Series A Preferred Stock required
for the approval of the amendment was
more than 50%.
Dated: December
9, 1993
_______________/S/________________ ___________/S/___________________
Charles
E. Bradley, Jr.,
President Jeffrey
P. Fritz, Secretary
4
VERIFICATION
------------
Charles
E. Bradley, Jr. and Jeffrey P. Fritz declare under penalty of perjury that they
have read the foregoing Restated Articles of Incorporation and know the contents
thereof and that the same are true of their own knowledge.
Dated:
December 9, 1993
__________/S/__________ ___________/S/_________
Charles
E. Bradley,
Jr. Jeffrey
P. Fritz
5
CERTIFICATE
OF AMENDMENT
TO
RESTATED
ARTICLES
OF INCORPORATION
OF
CONSUMER
PORTFOLIO SERVICES, INC.
(filed
March 7, 1996)
Charles
E. Bradley, Jr. and Jeffrey P. Fritz, certify that:
1. They
are the President and Secretary, respectively, of Consumer Portfolio Services,
Inc., a California corporation (the "Corporation").
2. The
first paragraph of Article V of the Restated Articles of Incorporation of the
Corporation is hereby amended to read as follows:
"The
Corporation is authorized to issue two (2) classes of shares of stock. One class
of shares is to be called "Common Stock, the second class of shares is to be
called "Serial Preferred Stock." The total number of shares of stock which the
Corporation shall have authority to issue is Forty Million (40,000,000), of
which Thirty Million (30,000,000) shall be Common Stock, without par value, and
Ten Million (10,000,000) shall be Serial Preferred Stock, having a par value of
$1.00 per share. Upon this amendment of the first paragraph of this Article V
each outstanding share of Common Stock is divided into two shares of Common
Stock."
3. The
foregoing amendment to the Corporation's Restated Articles of Incorporation has
been duly approved by the Board of Directors.
4. The
foregoing amendment to the Corporation's Restated Articles of Incorporation was
one which may be adopted with approval by th2 Board of Directors alone pursuant
to Section 902(c) of the California Corporations Code. The shares of
Common Stock are the only shares of stock of the Company
outstanding.
5. We
further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated:
March 1, 1996
_________/S/_______________
Charles
E. Bradley, Jr.,
President
_________/S/_______________
Jeffrey
P. Fritz, Secretary
6
CERTIFICATE
OF AMENDMENT OF
ARTICLES
OF INCORPORATION
The
undersigned certify that:
1. They
are the president and
the secretary,
respectively, of CONSUMER PORTFOLIO SERVICES, INC., a California
corporation.
2.
Article V of the Articles of Incorporation of this corporation is amended to
read as follows:
ARTICLE V
- - CAPITAL STRUCTURE. The Corporation is authorized to issue two (2)
classes of shares of stock. One class of shares is to be called
"Common Stock," the second class of shares is to be called "Serial Preferred
Stock." The total number of shares of stock which the Corporation
shall have authority to issue is Eighty-Five Million (85,000,000), of which
Seventy-Five Million (75,000,000) shall be Common Stock, without par value, and
Ten Million (10,000,000) shall be Serial Preferred Stock, having a par value of
$1.00 per share.
The
designations and the powers, preferences, and rights and the qualifications,
limitations or restrictions thereof, of each class of stock of the corporation
shall be as follows:
(a) Serial Preferred
Stock The Serial Preferred Stock may be issued from time to
time in one or more series, including but not limited to the Series A Preferred
Stock established by ARTICLE VI hereof (hereinafter referred to as the "Series A
Preferred Stock"). Excluding with respect to said Series A Preferred
Stock, the Board of Directors is hereby authorized, without further approval of
the holders of the Common Stock of the Corporation, to fix or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of preferred shares, and the number of shares constituting any
such series and a designation thereof, or any of them; and to increase or
decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
(b) Common
Stock. Except where otherwise provided in these Articles of
Incorporation or required by law, the holders of the Common Stock shall have the
exclusive voting rights and power of the Corporation, including the exclusive
right to notice of shareholders' meetings. Subject to the rights of
the Serial Preferred Stock as provided in these Articles, dividends may be paid
on the Common Stock as and when declared by the Board of Directors out of any
funds of the Corporation legally available for the payment of such
dividends.
3. The
foregoing amendment of Articles of Incorporation has been duly approved by the
board of directors.
4. The
foregoing amendment of Articles of Incorporation has been duly approved by the
required vote of shareholders in accordance with Section 902, California
Corporations Code. The total number of outstanding shares of Common Stock of the
corporation is 19,729,703. The total number of outstanding shares of Serial
Preferred Stock of the corporation is zero. The number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50% of the outstanding shares of Common
Stock.
We
further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATE: September
17, 2008
/s/
Charles E. Bradley, Jr.
_________________________
Charles
E. Bradley, Jr., President
/s/ Mark
Creatura
________________________
Mark
Creatura, Secretary
7
Exhibit 10.5.4
AMENDMENT
NO. 7
dated as
of February 15, 2008
among
PAGE FUNDING
LLC,
as
Purchaser and Issuer,
CONSUMER PORTFOLIO SERVICES,
INC.,
as
Seller and Servicer,
and
WELLS FARGO BANK,
NATIONAL ASSOCIATION,
as Backup
Servicer and Trustee
to
the
Amended
and Restated Sale and Servicing Agreement
dated as
of February 14, 2007
AMENDMENT
NO. 7 TO
AMENDED
AND RESTATED SALE AND SERVICING AGREEMENT
AMENDMENT
NO. 7, dated as of February 15, 2008 (the “Amendment”) by and
among PAGE FUNDING LLC, a Delaware limited liability company (in its capacities
as Purchaser, the “Purchaser” and as
Issuer, the “Issuer,”
respectively), CONSUMER PORTFOLIO SERVICES, INC., a California corporation (in
its capacities as Seller, the “Seller” and as
Servicer, the “Servicer,”
respectively), WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking
association (in its capacities as Backup Servicer, the “Backup Servicer” and
as Trustee, the “Trustee,”
respectively).
PRELIMINARY
STATEMENT
Reference is made to the Amended and
Restated Sale and Servicing Agreement dated as of February 14, 2007, among PAGE
FUNDING LLC, CONSUMER PORTFOLIO SERVICES, INC., and WELLS FARGO BANK, NATIONAL
ASSOCIATION, as previously amended by Amendment No. 1 thereto, dated as of March
30, 2007, by Amendment No. 2 thereto, dated as of June 29, 2007, by Amendment
No. 3 thereto, dated as of September 30, 2007, by Amendment No. 4 thereto, dated
as of January 11, 2008, by Amendment No. 5 thereto, dated as of January 24,
2008, and by Amendment No. 6 thereto, dated as of January 31,
2008 (as so amended, the “Sale and Servicing
Agreement”).
Reference is also made to the Note
Purchase Agreement dated as of February 14, 2007, among the Issuer and
Purchaser, the Seller and Servicer, The Patriot Group LLC ("Patriot"), as a Class
B Note Purchaser and as a Class B Noteholder, and Waterfall Eden Fund, LP
("Waterfall"),
as a Class B Note Purchaser and as a Class B Noteholder (the “Note Purchase
Agreement”).
RECITALS
WHEREAS,
PAGE FUNDING LLC, CONSUMER PORTFOLIO SERVICES, INC., and WELLS FARGO BANK,
NATIONAL ASSOCIATION (collectively, the “Amending Parties”)
have executed the Sale and Servicing Agreement and the Amending Parties desire
to amend the Sale and Servicing Agreement in certain respects as provided below,
with the effect of extending the Commitment referenced in Section
2.05 of the Note Purchase Agreement;
WHEREAS,
Waterfall and Eden desire to consent to this Amendment, and as the Class B Note
Purchasers desire to consent to the resulting extension of their several
Commitments under the Note Purchase Agreement; and
WHEREAS,
UBS REAL ESTATE SECURITIES INC., as Controlling Note Purchaser and Majority
Noteholder of the Highest Priority Class, desires to consent to this
Amendment.
ARTICLE
I - DEFINITIONS
SECTION
1.1. Defined
Terms. Unless otherwise defined in this Amendment, capitalized
terms used in this Amendment (including in the Preamble and the Recitals) shall
have the meaning given such terms in the Annex A to the Sale and Servicing
Agreement, as identifiable from the context in which such term is
used.
ARTICLE II-
AMENDMENT
SECTION
2.1 Amendment to Annex A to the
Sale and Servicing Agreement. In Annex A to the Sale and
Servicing Agreement, the definitions of the following terms:
Class B
Applicable Margin
Class B
Default Applicable Margin
Class B
Scheduled Maturity Date
are
hereby amended and restated in their entirety to read as follows:
“Class B Applicable
Margin” means (I) with respect to any day on or prior to the effective
date of this Amendment, 10.00%; and (II) with respect to any day after the
effective date of this Amendment, 12.00%; provided (III) that on any day on
which an Event of Default shall exist, the Class B Applicable Margin shall be
the Class B Default Applicable Margin.
“Class B Default Applicable
Margin” means (I) with respect to any day on or prior to the effective
date of this Amendment, 12.00%; and (II) with respect to any day on or
after the effective date of this Amendment, 14.00%.
“Class B Scheduled Maturity
Date” means the first to occur of (i) the closing of a Securitization
Transaction subsequent to the date of this Amendment or (ii) March 15, 2008; or
such later date as agreed upon pursuant to Section 2.05 of the Class B Note
Purchase Agreement.
ARTICLE III-
EFFECTIVENESS
Effective
Date. This Amendment shall be effective as of the date first
written above upon execution and delivery of this Amendment by the Amending
Parties hereto, by Waterfall, by Patriot and by UBS Real Estate Securities
Inc.
ARTICLE VI -
MISCELLANEOUS
SECTION
4.1. Ratification;
Representations and Warranties, Etc.
(a) Except
as expressly amended hereby, all of the terms of the Basic Documents shall
remain in full force and effect and are hereby ratified and confirmed in all
respects. This Amendment shall not constitute a
novation;
(b) The
Purchaser, Seller, Issuer and Servicer each hereby represents and warrants that
(i) it has the requisite power and authority, and legal right, to execute and
deliver this Amendment and to perform its obligations under this Amendment, the
Sale and Servicing Agreement, as amended hereby, and the Basic Documents,
(ii) it has taken all necessary corporate and legal action to duly
authorize the execution and delivery of this Amendment and the performance of
its obligations under this Amendment, (iii) this Amendment has been duly
executed and delivered by it, (iv) this Amendment constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally and by general equitable principles (whether enforcement is
sought by proceedings in equity or at law), and (v) after giving effect to this
Amendment, no Default or Event of Default has occurred and is
continuing;
(c) Each
representation and warranty contained in the Basic Documents (as modified by
this Amendment, if applicable) is true and correct and is hereby restated and
affirmed;
(d) Each
covenant contained in the Basic Documents (as modified by this Amendment, if
applicable) is hereby restated and affirmed; and
(e) The
parties hereto, including without limitation Wells Fargo Bank, National
Association, in its capacities as Bank and Lockbox Processor under the Lockbox
Agreement and as Deposit Account Bank under the Account Control Agreement,
hereby acknowledge and agree that each reference to the Sale and Servicing
Agreement (including, without limitation, Annex A thereto) in the Basic
Documents shall be deemed to refer to such documents or instruments as amended
by this Amendment.
SECTION
4.2. Further
Assurances. The parties hereto hereby agree to execute and
deliver such additional documents, instruments or agreements as may be
reasonably necessary and appropriate to effectuate the purposes of this
Amendment and the other Basic Documents.
SECTION
4.3. Conflicts. In
the event of a conflict of any provision hereof with any provision or definition
set forth in the Basic Documents, the provisions and definitions of this
Amendment shall control.
SECTION
4.4. Severability. Any
provision of this Amendment or any other Basic Document that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or non-authorization without invalidating the remaining provisions hereof or
thereof or affecting the validity, enforceability or legality of such provisions
in any other jurisdiction.
SECTION 4.5. Entire Agreement. This
Amendment and the other Basic Documents constitute the entire agreement among
the parties relative to the subject matter hereof. Any previous
agreement among the parties with respect to the subject matter hereof is
superseded by this Amendment and the other Basic Documents. Nothing
in this Amendment or in the other Basic Documents, expressed or implied, is
intended to confer upon any party other than the parties hereto and thereto any
rights, remedies, obligations or liabilities under or by reason of this
Amendment or the other Basic Documents.
SECTION
4.6. Binding
Effect. This Amendment and the other Basic Documents shall be
binding upon and shall be enforceable by Purchaser, Seller, Issuer, Servicer,
Note Purchasers, the Backup Servicer and the Trustee and their respective
successors and permitted assigns.
SECTION
4.7. Counterparts. This
Amendment may be executed in any number of counterparts, each of which so
executed shall be deemed to be an original, but all of such counterparts shall
together constitute but one and the same instrument.
SECTION
4.8. GOVERNING
LAW. THIS AMENDMENT AND ALL MATTERS ARISING OUT OF OR
RELATING TO THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF
LAW PRINCIPLES.
SECTION
4.9. Headings. The
headings of Sections contained in this Amendment are provided for convenience
only. They form no part of this Amendment, and shall not affect the
construction or interpretation of this Amendment or any provisions
hereof.
[Remainder
of page intentionally left blank.]
IN
WITNESS WHEREOF, the Amending Parties have caused this Amendment to be duly
executed by their respective duly authorized officers as of the day and year
first above written.
PAGE FUNDING LLC, as Purchaser and as
Issuer
By: /s/ Mark
Creatura
Title: Vice
President
CONSUMER
PORTFOLIO SERVICES, INC., as Seller and as Servicer
By: /s/ Jeff Fritz
Title: Sr.
Vice President & CFO
WELLS
FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as
Trustee, Backup Servicer and Deposit Account Bank
By: /s/ Julie A. Tanner
Fischer
Name: Julie
A. Tanner
Fischer
Title: Assistant Vice
President
WELLS
FARGO BANK, NATIONAL ASSOCIATION, as Lockbox Processor and Bank
By:
Name:
Title:
CONSENTED
TO BY:
UBS REAL
ESTATE SECURITIES INC.,
as
Controlling Note Purchaser and Majority Noteholder of the Highest Priority
Class
and as
the Class A Note Purchaser under the Note Purchase Agreement
By: /s/ Thomas
Dang
Name: Thomas
Dang
Title: Director
By: /s/ Verdi
Contente
Name: Verdi
Contente
Title: Associate
Director
CONSENTED
TO BY:
THE
PATRIOT GROUP, LLC, as a Class B Note Purchaser and as Holder of a 50%
Percentage Interest of the Class B Notes
By: /s/ Bruce
P. Katz
Name: Bruce
P.
Katz
Title: Managing
Director
CONSENTED
TO BY:
WATERFALL
EDEN FUND, LP, as a Class B Note Purchaser and as Holder of a 50% Percentage
Interest of the Class B Notes
By:
WATERFALL MANAGEMENT, LLC, as general partner
By: /s/ Jack
Ross
Name:
Jack
Ross
Title: Principal
Exhibit 10.5.5
AMENDMENT
NO. 8
dated as
of March 15, 2008
among
PAGE FUNDING
LLC,
as
Purchaser and Issuer,
CONSUMER PORTFOLIO SERVICES,
INC.,
as
Seller and Servicer,
and
WELLS FARGO BANK,
NATIONAL ASSOCIATION,
as Backup
Servicer and Trustee
to
the
Amended
and Restated Sale and Servicing Agreement
dated as
of February 14, 2007
AMENDMENT
NO. 8 TO
AMENDED
AND RESTATED SALE AND SERVICING AGREEMENT
AMENDMENT
NO. 8, dated as of March 15, 2008 (the “Amendment”) by and
among PAGE FUNDING LLC, a Delaware limited liability company (in its capacities
as Purchaser, the “Purchaser” and as
Issuer, the “Issuer,”
respectively), CONSUMER PORTFOLIO SERVICES, INC., a California corporation (in
its capacities as Seller, the “Seller” and as
Servicer, the “Servicer,”
respectively), WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking
association (in its capacities as Backup Servicer, the “Backup Servicer” and
as Trustee, the “Trustee,”
respectively).
PRELIMINARY
STATEMENT
Reference is made to the Amended and
Restated Sale and Servicing Agreement dated as of February 14, 2007, among PAGE
FUNDING LLC, CONSUMER PORTFOLIO SERVICES, INC., and WELLS FARGO BANK, NATIONAL
ASSOCIATION, as previously amended by Amendment No. 1 thereto, dated as of March
30, 2007, by Amendment No. 2 thereto, dated as of June 29, 2007, by Amendment
No. 3 thereto, dated as of September 30, 2007, by Amendment No. 4 thereto, dated
as of January 11, 2008, by Amendment No. 5 thereto, dated as of January 24,
2008, by Amendment No. 6 thereto, dated as of January 31,
2008, and by Amendment No. 7 thereto dated as of February 15, 2008 (as so
amended, the “Sale and
Servicing Agreement”).
Reference is also made to the Note
Purchase Agreement dated as of February 14, 2007, among the Issuer and
Purchaser, the Seller and Servicer, The Patriot Group LLC ("Patriot"), as a Class
B Note Purchaser and as a Class B Noteholder, and Waterfall Eden Fund, LP
("Waterfall"),
as a Class B Note Purchaser and as a Class B Noteholder (the “Note Purchase
Agreement”).
RECITALS
WHEREAS,
PAGE FUNDING LLC, CONSUMER PORTFOLIO SERVICES, INC., and WELLS FARGO BANK,
NATIONAL ASSOCIATION (collectively, the “Amending Parties”)
have executed the Sale and Servicing Agreement and the Amending Parties desire
to amend the Sale and Servicing Agreement in certain respects as provided below,
with the effect of extending the Commitment referenced in Section
2.05 of the Note Purchase Agreement;
WHEREAS,
Waterfall and Eden desire to consent to this Amendment, and as the Class B Note
Purchasers desire to consent to the resulting extension of their several
Commitments under the Note Purchase Agreement; and
WHEREAS,
UBS REAL ESTATE SECURITIES INC., as Controlling Note Purchaser and Majority
Noteholder of the Highest Priority Class, desires to consent to this
Amendment.
-
DEFINITIONS
SECTION
1.1. Defined
Terms. Unless otherwise defined in this Amendment, capitalized
terms used in this Amendment (including in the Preamble and the Recitals) shall
have the meaning given such terms in the Annex A to the Sale and Servicing
Agreement, as identifiable from the context in which such term is
used.
ARTICLE II -
AMENDMENT
SECTION
2.1 Amendment to Annex A to the
Sale and Servicing Agreement. In Annex A to the Sale and
Servicing Agreement, the definition of Class B Scheduled Maturity Date is hereby
amended and restated in its entirety to read as follows:
“Class B Scheduled Maturity
Date” means the first to occur of (i) the closing of a Securitization
Transaction subsequent to the date of this Amendment or (ii) April 15, 2008; or
such later date as agreed upon pursuant to Section 2.05 of the Class B Note
Purchase Agreement.
ARTICLE III -
EFFECTIVENESS
Effective
Date. This Amendment shall be effective as of the date first
written above upon execution and delivery of this Amendment by the Amending
Parties hereto, by Waterfall, by Patriot and by UBS Real Estate Securities
Inc.
ARTICLE IV -
MISCELLANEOUS
SECTION
4.1. Ratification;
Representations and Warranties, Etc.
(a) Except
as expressly amended hereby, all of the terms of the Basic Documents shall
remain in full force and effect and are hereby ratified and confirmed in all
respects. This Amendment shall not constitute a
novation;
(b) The
Purchaser, Seller, Issuer and Servicer each hereby represents and warrants that
(i) it has the requisite power and authority, and legal right, to execute and
deliver this Amendment and to perform its obligations under this Amendment, the
Sale and Servicing Agreement, as amended hereby, and the Basic Documents,
(ii) it has taken all necessary corporate and legal action to duly
authorize the execution and delivery of this Amendment and the performance of
its obligations under this Amendment, (iii) this Amendment has been duly
executed and delivered by it, (iv) this Amendment constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally and by general equitable principles (whether enforcement is
sought by proceedings in equity or at law), and (v) after giving effect to this
Amendment, no Default or Event of Default has occurred and is
continuing;
(c) Each
representation and warranty contained in the Basic Documents (as modified by
this Amendment, if applicable) is true and correct and is hereby restated and
affirmed;
(d) Each
covenant contained in the Basic Documents (as modified by this Amendment, if
applicable) is hereby restated and affirmed; and
(e) The
parties hereto, including without limitation Wells Fargo Bank, National
Association, in its capacities as Bank and Lockbox Processor under the Lockbox
Agreement and as Deposit Account Bank under the Account Control Agreement,
hereby acknowledge and agree that each reference to the Sale and Servicing
Agreement (including, without limitation, Annex A thereto) in the Basic
Documents shall be deemed to refer to such documents or instruments as amended
by this Amendment.
SECTION
4.2. Further
Assurances. The parties hereto hereby agree to execute and
deliver such additional documents, instruments or agreements as may be
reasonably necessary and appropriate to effectuate the purposes of this
Amendment and the other Basic Documents.
SECTION
4.3. Conflicts. In
the event of a conflict of any provision hereof with any provision or definition
set forth in the Basic Documents, the provisions and definitions of this
Amendment shall control.
SECTION
4.4. Severability. Any
provision of this Amendment or any other Basic Document that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or non-authorization without invalidating the remaining provisions hereof or
thereof or affecting the validity, enforceability or legality of such provisions
in any other jurisdiction.
SECTION
4.5. Entire
Agreement. This Amendment and the other Basic Documents
constitute the entire agreement among the parties relative to the subject matter
hereof. Any previous agreement among the parties with respect to the
subject matter hereof is superseded by this Amendment and the other Basic
Documents. Nothing in this Amendment or in the other Basic Documents,
expressed or implied, is intended to confer upon any party other than the
parties hereto and thereto any rights, remedies, obligations or liabilities
under or by reason of this Amendment or the other Basic Documents.
SECTION
4.6. Binding
Effect. This Amendment and the other Basic Documents shall be
binding upon and shall be enforceable by Purchaser, Seller, Issuer, Servicer,
Note Purchasers, the Backup Servicer and the Trustee and their respective
successors and permitted assigns.
SECTION
4.7. Counterparts. This
Amendment may be executed in any number of counterparts, each of which so
executed shall be deemed to be an original, but all of such counterparts shall
together constitute but one and the same instrument.
SECTION
4.8. GOVERNING
LAW. THIS AMENDMENT AND ALL MATTERS ARISING OUT OF OR
RELATING TO THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF
LAW PRINCIPLES.
Headings. The
headings of Sections contained in this Amendment are provided for convenience
only. They form no part of this Amendment, and shall not affect the
construction or interpretation of this Amendment or any provisions
hereof.
[Remainder
of page intentionally left blank.]
IN
WITNESS WHEREOF, the Amending Parties have caused this Amendment to be duly
executed by their respective duly authorized officers as of the day and year
first above written.
PAGE FUNDING LLC, as Purchaser and as
Issuer
By:
________________________
Title: Vice President
CONSUMER
PORTFOLIO SERVICES, INC., as Seller and as Servicer
By:
________________________
Title: Sr.
Vice President & CFO
WELLS
FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as
Trustee, Backup Servicer and Deposit Account Bank
By:
Name:
Title:
WELLS
FARGO BANK, NATIONAL ASSOCIATION, as Lockbox Processor and Bank
By:
Name:
Title:
CONSENTED
TO BY:
UBS REAL
ESTATE SECURITIES INC.,
as
Controlling Note Purchaser and Majority Noteholder of the Highest Priority
Class
and as
the Class A Note Purchaser under the Note Purchase Agreement
By:
Name:
Title:
By:
Name:
Title:
CONSENTED
TO BY:
THE
PATRIOT GROUP, LLC, as a Class B Note Purchaser and as Holder of a 50%
Percentage Interest of the Class B Notes
By:
Name:
Title:
CONSENTED
TO BY:
WATERFALL
EDEN FUND, LP, as a Class B Note Purchaser and as Holder of a 50% Percentage
Interest of the Class B Notes
By:
WATERFALL MANAGEMENT, LLC, as general partner
By:
Name:
Title:
CPS 2006 LONG-TERM EQUITY INCENTIVE
PLAN
PART I - PURPOSE, ADMINISTRATION AND
RESERVATION OF SHARES
SECTION 1. Purpose of the Plan. The
purposes of this Plan are (a) to attract and retain the most talented
Employees, officers and Directors available, and (b) to promote the growth
and success of the Company’s business, (i) by aligning the long-term
interests of Employees, officers and Directors with those of the shareholders by
providing an opportunity to acquire an interest in the Company and (ii) by
providing both rewards for exceptional performance and long term incentives for
future contributions to the success of the Company and its
Subsidiaries.
The Plan permits the grant of Incentive Stock Options, Nonqualified Stock
Options, Restricted Stock, Restricted Stock Units, or SARs, at the discretion of
the Committee and as reflected in the terms of the Award Agreement. Each Award
will be subject to conditions specified in the Plan, such as continued
employment or satisfaction of performance criteria.
This Plan will serve as a framework for the Committee to establish sub-plans or
procedures governing the grants to employees, officers, directors and
consultants. The awards granted under the Former Plan shall continue to be
administered under the Former Plan until such time as those options are
exercised, expire or become unexercisable for any reason.
SECTION 2. Definitions. As used herein,
the following definitions shall apply:
(a) “Active Status”
shall mean (i) for employees, the absence of any interruption or
termination of service as an employee, (ii) for Directors, that the
Director has not been removed from the Board for cause (as determined by the
Company’s shareholders), and (iii) for Consultants, the absence of any
interruption, expiration, or termination of such person’s consulting or advisory
relationship with the Company or any Subsidiary or the occurrence of any
termination event as set forth in such person’s Award Agreement. Active Status
shall not be considered interrupted (A) for an employee in the case of sick
leave, maternity leave, infant care leave, medical emergency leave, military
leave, or any other leave of absence properly taken in accordance with the
policies of the Company or any applicable Subsidiary as may be in effect from
time to time, and (B) for a Consultant, in the case of any temporary
interruption in such person’s availability to provide services to the Company or
any Subsidiary which has been granted in writing by an authorized officer of the
Company. Whenever a mandatory severance period applies under applicable law with
respect to a termination of service as an employee, Active Status shall be
considered terminated upon such Employee’s receipt of notice of termination in
whatever form prescribed by applicable law.
(b) “Award” shall
mean any award or benefits granted under the Plan, including Options, Restricted
Stock, Restricted Stock Units, and SARs.
(c) “Award Agreement”
shall mean a written or electronic agreement between the Company and the
Participant setting forth the terms of the Award.
(d) “Beneficial
Ownership” shall have the meaning set forth in Rule 13d-3
promulgated under the Exchange Act.
(e) “Board” shall
mean the Board of Directors of the Company.
(f) “Change of Control”
shall mean the first day that any one or more of the following conditions
shall have been satisfied:
|
(i) the sale, liquidation or other disposition of all or
substantially all of the Company’s assets in one or a series of related
transactions;
|
|
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(ii) an acquisition (other than directly from the Company) of any
outstanding voting securities by any person, after which such person (as
the term is used for purposes of Section 13(d) or 14(d) of the
Exchange Act) has Beneficial Ownership of twenty-five percent (25%) or
more of the then outstanding voting securities of the Company, other than
a Board approved transaction;
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(iii) during any 36-consecutive month period, the individuals who, at
the beginning of such period, constitute the Board (“Incumbent Directors”)
cease for any reason other than death to constitute at least a majority of
the members of the Board; provided however that except as set forth in
this Section 2(f)(iii), an individual who becomes a member of the
Board subsequent to the beginning of the 36-month period, shall be deemed
to have satisfied such 36-month requirement and shall be deemed an
Incumbent Director if such Director was elected by or on the
recommendation of or with the approval of at least two-thirds of the
Directors who then qualified as Incumbent Directors either actually
(because they were Directors at the beginning of such period) or by
operation
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of
the provisions of this section; if any such individual initially assumes
office as a result of or in connection with either an actual or threatened
solicitation with respect to the election of Directors (as such terms are
used in Rule 14a-12(c) of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitations of proxies or
consents by or on behalf of a person other than the Board, then such
individual shall not be considered an Incumbent
Director; or
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(iv) a merger, consolidation or reorganization of the Company, as a
result of which the shareholders of the Company immediately prior to such
merger, consolidation or reorganization own directly or indirectly
immediately following such merger, consolidation or reorganization less
than fifty percent (50%) of the combined voting power of the outstanding
voting securities of the entity resulting from such merger, consolidation
or reorganization.
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(g) “Code” shall mean the
Internal Revenue Code of 1986, as amended.
(h) “Committee”
shall mean the Compensation Committee appointed by the
Board.
(i) “Common Stock”
shall mean the common stock of the Company, no par value per
share.
(j) “Company”
shall mean CPS, a California corporation, and any successor
thereto.
(k) “Consultant”
shall mean any person, except an employee, engaged by the Company or any
Subsidiary of the Company, to render personal services to such entity, including
as an advisor, pursuant to the terms of a written agreement.
(l) “Director”
shall mean a member of the Board.
(m) “Disability”
shall mean (i) in the case of a Participant whose employment with
the Company or a Subsidiary is subject to the terms of an employment or
consulting agreement that includes a definition of “Disability” as used in this
Plan shall have the meaning set forth in such employment or consulting agreement
during the period that such employment or consulting agreement remains in
effect; and (ii) in all other cases, the term “Disability” as used in this
Plan shall have the same meaning as set forth under the Company’s long-term
disability plan applicable to the Participant as may be amended from time to
time, and in the event the Company does not maintain any such plan with respect
to a Participant, a physical or mental condition resulting from bodily injury,
disease or mental disorder which renders the Participant incapable of continuing
his or her usual and customary employment with the Company or a Subsidiary, as
the case may be, for a period of not less than 120 days or such other
period as may be required by applicable law.
(n) “Effective
Date” shall mean the date on which the Company’s shareholders have
approved this Plan in accordance with applicable Nasdaq rules.
(o) “Employee”
shall mean any person, including an officer, who is a common law employee
of, receives remuneration for personal services to, is reflected on the official
human resources database as an employee of, and is on the payroll of the Company
or any Subsidiary of the Company. A person is on the payroll if he or she is
paid from or at the direction of the payroll department of the Company, or any
Subsidiary of the Company. Persons providing services to the Company, or to any
Subsidiary of the Company, pursuant to an agreement with a staff leasing
organization, temporary workers engaged through or employed by temporary or
leasing agencies, and workers who hold themselves out to the Company, or a
Subsidiary to which they are providing services as being independent
contractors, or as being employed by or engaged through another company while
providing the services, and persons covered by a collective bargaining agreement
(unless the collective bargaining agreement applicable to the person
specifically provides for participation in this Plan) are not employees for
purposes of this Plan and do not and cannot participate in this Plan, whether or
not such persons are, or may be reclassified by the courts, the Internal Revenue
Service, the U.S. Department of Labor, or other person or entity as, common
law employees of the Company, or any Subsidiary, either solely or jointly with
another person or entity.
(p)
“Exchange Act” shall
mean the Securities Exchange Act of 1934, as amended.
(q) “Executive
Officers” shall mean the officers of the Company as such term is defined
in Rule 16a-1 under the Exchange Act.
(r) “Fair Market
Value” shall mean the closing price per share of the Common Stock on
Nasdaq as to the date specified (or the previous trading day if the date
specified is a day on which no trading occurred), or if Nasdaq shall cease to be
the principal exchange or quotation system upon which the shares of Common Stock
are listed or quoted,
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then such
exchange or quotation system as the Company elects to list or quote its shares
of Common Stock and that the Committee designates as the Company’s principal
exchange or quotation system.
(s) “FAS 123”
shall mean Statements of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation”, as promulgated by the Financial
Accounting Standards Board.
(t) “FLSA” shall
mean the Fair Labor Standards Act of 1938, as amended.
(u) “Former Plan”
shall mean the CPS 1997 Long-Term Incentive Plan, as
amended.
(v) “Incentive Stock
Option” shall mean any Option intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code.
(w) “Independent
Director” shall mean a Director who: (1) meets the independence
requirements of Nasdaq, or if Nasdaq shall cease to be the principal exchange or
quotation system upon which the shares of Common Stock are listed or quoted,
then such exchange or quotation system as the Company elects to list or quote
its shares of Common Stock and that the Committee designates as the Company’s
principal exchange or quotation system; (2) qualifies as an “outside
director” under Section 162(m) of the Code; (3) qualifies as a
“non-employee director” under Rule 16b-3 promulgated under the Exchange
Act; and (4) satisfies independence criteria under any other applicable
laws or regulations relating to the issuance of Shares to
Employees.
(x) “Maximum Annual
Participant Award” shall have the meaning set forth in
Section 6(b).
(y) “Misconduct”
shall mean any of the following; provided, however, that with respect to
Non-Employee Directors “Misconduct” shall mean
subsection (viii) only:
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(i) any material breach of an agreement between the Participant and
the Company or any Subsidiary which, if curable, has not been cured within
twenty (20) days after the Participant has been given written notice
of the need to cure such breach, or which breach, if previously cured,
recurs;
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(ii) willful unauthorized use or disclosure of confidential
information or trade secrets of the Company or any Subsidiary by the
Participant;
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(iii) the Participant’s continued willful and intentional failure to
satisfactorily perform Participant’s essential responsibilities, provided
that the Participant has been given at least thirty (30) days’
written notice of the need to cure the failure and cure has not been
effected within that time period, or which failure, if previously cured,
recurs;
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(iv) material failure of the Participant to comply with rules,
policies or procedures of the Company or any Subsidiary as they may be
amended from time to time, provided that the Participant has been given at
least thirty (30) days’ written notice of the need to cure the
failure, if such failure is curable, and cure has not been effected within
that time period, or which failure, if previously cured,
recurs;
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(v) Participant’s dishonesty, fraud or gross negligence related to
the business or property of the Company or any
Subsidiary;
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(vi) personal conduct that is materially detrimental to the business
of the Company or any Subsidiary;
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(vii) conviction of or plea of nolo contendere to a
felony; or
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(viii) in the case of Non-Employee Directors, the removal from the
Board for cause (as determined by the Company’s
shareholders).
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(z) “Nasdaq” shall
mean The Nasdaq Stock Market, Inc.
(aa) “Non-Employee
Director” shall mean a Director who is not an employee.
(bb) “Nonqualified Stock
Option” shall mean an Option that does not qualify or is not intended to
qualify as an Incentive Stock Option.
(cc) “Option”
shall mean a stock option granted pursuant to Section 10 of the
Plan.
(dd) “Optionee”
shall mean a Participant who has been granted an Option.
(ee) “Parent”
shall mean a “parent corporation,” whether now or hereafter existing, as
defined in Section 424(e) of the Code.
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(ff) “Participant”
shall mean an employee, Director or Consultant granted an
Award.
(gg) “Performance Criteria” shall
have the meaning set forth in Section 11(b).
(hh) “Plan” shall
mean this CPS 2006 Long-Term Equity Incentive Plan, including any amendments
thereto.
(ii) “Reprice”
shall mean the adjustment or amendment of the exercise price of Options
or SARs previously awarded whether through amendment, cancellation, replacement
of grants or any other means.
(jj) “Resignation (or
Resign) for Good Reason” shall mean any voluntary termination by written
resignation of the Active Status of any employee after a Change of Control
because of: (1) a material reduction in the employee’s authority,
responsibilities or scope of employment; (2) an assignment of duties to the
Employee inconsistent with the employee’s role at the Company (including its
Subsidiaries) prior to the Change of Control, (3) a reduction in the
employee’s base salary or total incentive compensation; (4) a material
reduction in the Employee’s benefits unless such reduction applies to all
employees of comparable rank; or (5) the relocation of the employee’s
primary work location more than fifty (50) miles from the employee’s
primary work location prior to the Change of Control; provided that the
employee’s written notice of voluntary resignation must be tendered within one
(1) year after the Change of Control, and shall specify which of the events
described in (1) through (5) resulted in the resignation.
(kk) “Restricted Stock”
shall mean a grant of Shares pursuant to Section 11 of the
Plan.
(ll) “Restricted Stock
Units” shall mean a grant of the right to receive Shares in the future or
their cash equivalent (or both) pursuant to Section 11 of the
Plan.
(mm) “Retirement”
shall mean, (i) with respect to any employee, voluntary termination
of employment after age 55 and at least ten (10) years of credited
service with the Company or any Subsidiary (but only during the time the
Subsidiary was a Subsidiary), as determined by the Committee in its sole
discretion, and (ii) with respect to any Non-Employee Director, ceasing to
be a Director pursuant to election by the Company’s shareholders or by voluntary
resignation with the approval of the Board’s chair after having attained the age
of 55 years and served continuously on the Board for at least six
years.
(nn) “SAR” shall
mean a stock appreciation right awarded pursuant to Section 12 of the
Plan.
(oo) “SEC” shall
mean the Securities and Exchange Commission.
(pp) “Share” shall
mean one share of Common Stock, as adjusted in accordance with Section 5 of
the Plan.
(qq) “Stand-Alone
SARs” shall have the meaning set forth in Section 12(c) of the
Plan.
(rr) “Subcommittee” shall have the
meaning set forth in Section 3(d).
(ss) “Subsidiary”
shall mean (1) in the case of an Incentive Stock Option a
“subsidiary corporation,” whether now or hereafter existing, as defined in
Section 424(f) of the Code, and (2) in the case of a Nonqualified
Stock Option, Restricted Stock, a Restricted Stock Unit or a SAR, in addition to
a subsidiary corporation as defined in (1), (A) a limited liability
company, employeeship or other entity in which the Company controls fifty
percent (50%) or more of the voting power or equity interests, or (B) an
entity with respect to which the Company possesses the power, directly or
indirectly, to direct or cause the direction of the management and policies of
that entity, whether through the Company’s ownership of voting securities, by
contract or otherwise.
(tt) “Tandem SARs”
shall have the meaning set forth in Section 12(b) of the Plan.
SECTION 3. Administration of the
Plan.
(a) Authority. The
Plan shall be administered by the Committee. The Committee shall have full and
exclusive power to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Committee may prescribe. Notwithstanding anything
herein to the contrary, the Committee’s power to administer the Plan, and
actions the Committee takes under the Plan, shall be limited by the provisions
set forth in the Committee’s charter, as such charter may be amended from time
to time, and the further limitation that certain actions may be subject to
review and approval by either the full Board or a panel consisting of all of the
Independent Directors of the Company.
(b) Powers of the
Committee. Subject to the other provisions of this Plan, the Committee
shall have the authority, in its discretion:
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(i) to grant Incentive Stock Options, Nonqualified Stock Options,
Restricted Stock, Restricted Stock Units, and
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(ii) to determine the Participants, to whom Awards, if any, will be
granted hereunder, the timing of such Awards, and the number of Shares to
be represented by each Award;
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(iii) to construe and interpret the Plan and the Awards granted
hereunder;
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(iv) to prescribe, amend, and rescind rules and regulations relating
to the Plan, including the form of Award Agreement, and manner of
acceptance of an Award, such as correcting a defect or supplying any
omission, or reconciling any inconsistency so that the Plan or any Award
Agreement complies with applicable law, regulations and listing
requirements and to avoid unanticipated consequences deemed by the
Committee to be inconsistent with the purposes of the Plan or any Award
Agreement;
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(v) to establish performance criteria for Awards made pursuant to the
Plan in accordance with a methodology established by the Committee, and to
determine whether performance goals have been attained;
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(vi) to accelerate or defer (with the consent of the Participant) the
exercise or vested date of any Award;
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(vii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Award previously granted
by the Committee;
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(viii) to establish sub-plans, procedures or guidelines for the grant
of Awards to Directors, Consultants and Employees working outside of the
United States; and
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(ix) to make all other determinations deemed necessary or advisable
for the administration of the Plan;
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Provided
that, no consent
of a Participant is necessary under clauses (i) or (vi) if a
modification, amendment, acceleration, or deferral, in the reasonable judgment
of the Committee confers a benefit on the Participant or is made pursuant to an
adjustment in accordance with Section 5.
(c) Effect of Committee’s
Decision. All decisions, determinations, and interpretations of the
Committee shall be final and binding on all Participants, the Company (including
its Subsidiaries), any shareholder and all other persons.
(d) Delegation.
Consistent with the Committee’s charter, as such charter may be amended from
time to time, the Committee may delegate (i) to one or more separate
committees consisting of members of the Committee or other Directors who are
Independent Directors (any such committee a “Subcommittee”), or (ii) to an
Executive Officer of the Company, the ability to grant Awards and take the other
actions described in Section 3(b) with respect to Participants who are not
Executive Officers, and such actions shall be treated for all purposes as if
taken by the Committee; provided that the grant of Awards shall be made in
accordance with parameters established by the Committee. Any action by any such
Subcommittee or Executive Officer within the scope of such delegation shall be
deemed for all purposes to have been taken by the Committee.
(e) Administration. The Committee
may delegate the administration of the Plan to an officer or officers of the
Company, and such administrator(s) may have the authority to directly, or under
their supervision, execute and distribute agreements or other documents
evidencing or relating to Awards granted by the Committee under this Plan, to
maintain records relating to the grant, vesting, exercise, forfeiture or
expiration of Awards, to process or oversee the issuance of Shares upon the
exercise, vesting and/or settlement of an Award, to interpret the terms of
Awards and to take such other actions as the Committee may specify. Any action
by any such administrator within the scope of its delegation shall be deemed for
all purposes to have been taken by the Committee and references in this Plan to
the Committee shall include any such administrator, provided that the actions
and interpretations of any such administrator shall be subject to review and
approval, disapproval or modification by the Committee.
SECTION 4. Shares Subject to the
Plan.
(a) Reservation of
Shares. The shares of Common Stock reserved under this Plan will include
reserved shares of Common Stock that are not subject to a grant or as to which
the option award granted has been forfeited under the Former Plan, and an
additional 5,000,000 shares of Common Stock. The aggregate number of Shares
available for issuance under the Plan will be reduced by one Share for each
Share delivered in settlement of any award of Restricted Stock, Restricted Stock
Unit, or SAR and one Share for each Share delivered in settlement of an Option.
If an Award expires, is forfeited or becomes unexercisable for any reason
without having been exercised in full, the undelivered Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future
5
Awards
under the Plan. Without limiting the foregoing, unless the Plan shall have been
terminated, Shares underlying an Award that has been exercised, either in part
or in full, including any Shares that would otherwise be issued to a Participant
that are used to satisfy any withholding tax obligations that arise with respect
to any Award, shall become available for future Awards under the Plan except to
the extent Shares were issued in settlement of the Award. Shares available for
issuance under the Plan shall be increased by any shares of Common Stock subject
to outstanding awards under the Former Plans on the date of shareholder approval
of the Plan that later cease to be subject to such awards for any reason other
than such awards having been exercised, subject to adjustment from time to time
as provided in Section 5, which shares of Common Stock shall, as of the
date such shares cease to be subject to such awards, cease to be available for
grant and issuance under the Former Plans, but shall be available for issuance
under the Plan. The Shares may be authorized but unissued, or reacquired shares
of Common Stock. The Company, during the term of this Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) Time of Granting
Awards. The date of grant of an Award shall, for all purposes, be the
date on which the Company completes the corporate action relating to the grant
of such Award and all conditions to the grant have been satisfied, provided that
conditions to the exercise of an Award shall not defer the date of grant. Notice
of a grant shall be given to each Participant to whom an Award is so granted
within a reasonable time after the determination has been made.
(c) Securities Law
Compliance. Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated under either such Act, and
the requirements of any stock exchange or quotation system upon which the Shares
may then be listed or quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(d) Substitutions and
Assumptions. The Board or the Committee shall have the right to
substitute or assume Awards in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code
applies, provided such substitutions and assumptions are permitted by
Section 424 of the Code and the regulations promulgated thereunder. The
number of Shares reserved pursuant to Section 4(a) may be increased by the
corresponding number of Awards assumed and, in the case of a substitution, by
the net increase in the number of Shares subject to Awards before and after the
substitution.
SECTION 5. Adjustments to Shares Subject to the
Plan. If any change is made to the Shares by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Shares as a class without the Company’s
receipt of consideration, appropriate adjustments shall be made to (i) the
maximum number and/or class of securities issuable under the Plan, (ii) the
number and/or class of securities and/or the price per Share covered by
outstanding Awards under the Plan and (iii) the Maximum Annual Participant
Award. The Committee may also make adjustments described in (i)-(iii) of the
previous sentence in the event of any distribution of assets to shareholders
other than a normal cash dividend. In determining adjustments to be made under
this Section 5, the Committee may take into account such factors as it
deems appropriate, including the restrictions of applicable law and the
potential tax consequences of an adjustment, and in light of such factors may
make adjustments that are not uniform or proportionate among outstanding Awards.
Adjustments, if any, and any determinations or interpretations, including any
determination of whether a distribution is other than a normal cash dividend,
made by the Committee shall be final, binding and conclusive. For purposes of
this Section 5, conversion of any convertible securities of the Company
shall not be deemed to have been “effected without receipt of
consideration.”
Except as expressly provided herein, no issuance by the Company of shares of any
class, or securities convertible into shares of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Award.
PART II - TERMS APPLICABLE TO ALL
AWARDS
SECTION 6. General
Eligibility.
(a) Awards. Awards
may be granted to Participants who are Employees, Directors or Consultants;
provided however that Incentive Stock Options may only be granted to
Employees.
(b) Maximum Annual
Participant Award. The aggregate number of Shares with respect to which
an Award or Awards may be granted to any one Participant over the life of the
Plan (the “Maximum Participant Award”) shall not
6
exceed
1,000,000 shares of Common Stock (increased, proportionately, in the event
of any stock split or stock dividend with respect to the Shares). If an Option
is in tandem with a SAR, such that the exercise of the Option or SAR with
respect to a Share cancels the tandem SAR or Option right, respectively, with
respect to each Share, the tandem Option and SAR rights with respect to each
Share shall be counted as covering but one Share for purposes of the Maximum
Annual Participant Award.
(c) No Employment/
Service Rights. Nothing in the Plan shall confer upon any Participant the
right to an Award or to continue in service as an employee or Consultant for any
period of specific duration, or interfere with or otherwise restrict in any way
the rights of the Company (or any Subsidiary employing or retaining such
person), or of any Participant, which rights are hereby expressly reserved by
each, to terminate such person’s services at any time for any reason, with or
without cause.
SECTION 7. Procedure for Exercise of Awards;
Rights as a Shareholder.
(a) Procedure. An
Award shall be exercised when written, electronic or verbal notice of exercise
has been given to the Company, or the brokerage firm or firms approved by the
Company to facilitate exercises and sales under this Plan, in accordance with
the terms of the Award by the person entitled to exercise the Award and full
payment for the Shares with respect to which the Award is exercised has been
received by the Company or the brokerage firm or firms, as applicable. The
notification to the brokerage firm shall be made in accordance with procedures
of such brokerage firm approved by the Company. Full payment may, as authorized
by the Committee, consist of any consideration and method of payment allowable
under Section 7(b) of the Plan. The Company shall issue (or cause to be
issued) such share certificate promptly upon exercise of the Award. In the event
that the exercise of an Award is treated in part as the exercise of an Incentive
Stock Option and in part as the exercise of a Nonqualified Stock Option pursuant
to Section 10(a), the Company shall issue a share certificate evidencing
the Shares treated as acquired upon the exercise of an Incentive Stock Option
and a separate share certificate evidencing the Shares treated as acquired upon
the exercise of a Nonqualified Stock Option, and shall identify each such
certificate accordingly in its share transfer records. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the share certificate is issued, except as provided in Section 5 of
the Plan.
(b) Method of
Payment. The consideration to be paid for any Shares to be issued upon
exercise or other required settlement of an Award, including the method of
payment, shall be determined by the Committee at the time of settlement and
which forms may include: (i) with respect to an Option, a request that the
Company or the designated brokerage firm conduct a cashless exercise of the
Option; (ii) cash; and (iii) tender of shares of Common Stock owned by
the Participant in accordance with rules established by the Committee from time
to time. Shares used to pay the exercise price shall be valued at their Fair
Market Value on the exercise date. Payment of the aggregate exercise price by
means of tendering previously-owned shares of Common Stock shall not be
permitted when the same may, in the reasonable opinion of the Company, cause the
Company to record a loss or expense as a result thereof.
(c) Withholding
Obligations. To the extent required by applicable federal, state, local
or foreign law, the Committee may and/or a Participant shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise with respect to any Incentive Stock Option, Nonqualified
Stock Option, SAR, Restricted Stock or Restricted Stock Units, or any sale of
Shares. The Company shall not be required to issue Shares or to recognize the
disposition of such Shares until such obligations are satisfied. These
obligations may be satisfied by having the Company withhold a portion of the
Shares that otherwise would be issued to a Participant under such Award or by
tendering Shares previously acquired by the Participant in accordance with rules
established by the Committee from time to time.
(d) Shareholder
Rights. Except as otherwise provided in this Plan, until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the share certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Shares subject to the Award,
notwithstanding the exercise of the Award.
(e) Non-Transferability
of Awards. An Award may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in exchange for consideration, except that an Award
may be transferred by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Participant, only by the Participant;
unless the Committee permits further transferability, on a general or specific
basis, in which case the Committee may impose conditions and limitations on any
permitted transferability.
SECTION 8. Expiration of
Awards.
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(a) Expiration,
Termination or Forfeiture of Awards. Unless otherwise provided in the
applicable Award Agreement or any severance agreement, vested Awards granted
under this Plan shall expire, terminate, or otherwise be forfeited as
follows:
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(i) three (3) months after the date the Company delivers a
notice of termination of a Participant’s Active Status, other than in
circumstances covered by (ii), (iii), (iv) or
(v) below;
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(ii) immediately upon termination of a Participant’s Active Status
for Misconduct;
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(iii) twelve (12) months after the date on which a Participant
other than a Non-Employee Director ceased performing services as a result
of his or her total and permanent Disability;
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(iv) twelve (12) months months after the date on which the
Participant ceased performing services as a result of Retirement, or after
his death.
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(b) Extension of
Term. Notwithstanding subsection (a) above, the Committee shall
have the authority to extend the expiration date of any outstanding Option,
other than an Incentive Stock Option, or SAR in circumstances in which it deems
such action to be appropriate (provided that no such extension shall extend the
term of an Option or SAR beyond the date on which the Option or SAR would have
expired if no termination of the Employee’s Active Status had
occurred).
SECTION 9. Effect of Change of Control.
Notwithstanding any other provision in the Plan to the contrary, the following
provisions shall apply unless otherwise provided in the most recently executed
agreement between the Participant and the Company, or specifically prohibited
under applicable laws, or by the rules and regulations of any applicable
governmental agencies or national securities exchanges or quotation
systems.
(a) Acceleration.
Awards of a Participant shall be Accelerated (as defined in Section 9(b)
below) as follows:
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(i) With respect to Non-Employee Directors, upon the occurrence of a
Change of Control;
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(ii) With respect to any employee, upon the occurrence of a Change of
Control described in Section 2(f)(i);
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(iii) With respect to any employee who Resigns for Good Reason or
whose Active Status is terminated within one year after a Change of
Control described in Section 2(f)(ii) or (iii);
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(iv) With respect to any employee, upon the occurrence of a Change of
Control described in Section 2(f)(iv) in connection with which each
Award is not assumed or an equivalent award substituted by such successor
entity or a parent or subsidiary of such successor
entity; and
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(v) With respect to any employee who Resigns for Good Reason or whose
Active Status is terminated within one year after a Change of Control
described in Section 2(f)(iv) in connection with which each Award is
assumed or an equivalent award substituted by the successor entity or a
parent or subsidiary of such successor
entity.
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(b) Definition.
For purposes of this Section 9, Awards of a Participant being “Accelerated”
means, with respect to such Participant:
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(i) any and all Options and SARs shall become fully vested and
immediately exercisable, and shall remain exercisable throughout their
entire term;
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(ii) any restriction periods and restrictions imposed on Restricted
Stock or Restricted Stock Units that are not performance-based shall
lapse; and
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(iii) the restrictions and deferral limitations and other conditions
applicable to any other Awards shall lapse, and such other Awards shall
become free of all restrictions, limitations or conditions and become
fully vested and transferable to the full extent of the original
grant.
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PART III -
SPECIFIC TERMS APPLICABLE TO
OPTIONS, STOCK AWARDS AND SARS
SECTION 10. Grant, Terms
and Conditions of Options.
(a) Designation.
Each Option shall be designated in an Award Agreement as either an Incentive
Stock Option or a Nonqualified Stock Option. However, notwithstanding such
designations, to the extent that the aggregate Fair Market Value of the Shares
with respect to which Options designated as Incentive Stock Options are
exercisable for the first time by any employee during any calendar year (under
all plans of the Company) exceeds $100,000, such excess
8
Options
shall be treated as Nonqualified Stock Options. Options shall be taken into
account in the order in which they were granted.
(b) Terms of
Options. The term of each Incentive Stock Option shall be no more than
ten (10) years from the date of grant. However, in the case of an Incentive
Stock Option granted to a Participant who, at the time the Option is granted,
owns Shares representing more than ten percent (10%) of the voting power of all
classes of shares of the Company or any Parent or Subsidiary, the term of the
Option shall be no more than five (5) years from the date of grant. The
terms of all Nonqualified Stock Options shall be at the discretion of the
Committee.
(c) Option Exercise
Prices.
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(i) The per Share exercise price under an Incentive Stock Option
shall be as follows:
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(A) If
granted to an employee who, at the time of the grant of such Incentive
Stock Option, owns shares representing more than ten percent (10%) of the
voting power of all classes of shares of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
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(B) If granted to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
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(ii) The per Share exercise price under a Nonqualified Stock Option
or SAR shall be no less than
one hundred percent (100%)
of the Fair Market Value per Share on the date of
grant.
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(iii) In no event shall the Board or the Committee be permitted to
Reprice an Option after the date
of grant without shareholder
approval.
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(d) Vesting. To
the extent Options vest and become exercisable in increments, such Options shall
cease vesting as of the date of the Optionee’s Disability or termination of such
Optionee’s Active Status for reasons other than Retirement or death, in each of
which cases such Options shall immediately vest in full.
(e) Substitution of Stock
SARs for Options. Notwithstanding anything in this Plan to the contrary,
if the Company is required to or elects to record as an expense in its
consolidated statements of earnings the cost of Options pursuant to FAS 123
or a similar accounting requirement, the Committee shall have the sole
discretion to substitute, without receiving Participants’ permission, SARs paid
only in stock for outstanding Options; provided, the terms of the substituted
stock SARs are the same as the terms of the Options, the number of shares
underlying the number of stock SARs equals the number of shares underlying the
Options and the difference between the Fair Market Value of the underlying
Shares and the grant price of the SARs is equivalent to the difference between
the Fair Market Value of the underlying shares and the exercise price of the
Options.
(f) Exercise. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Committee at the time of grant, and as are
permissible under the terms of the Plan. An Option may not be exercised for a
fraction of a Share.
SECTION 11. Grant, Terms
and Conditions of Stock Awards.
(a) Designation.
Restricted Stock or Restricted Stock Units may be granted either alone, in
addition to, or in tandem with other Awards granted under the Plan. Restricted
Stock or Restricted Stock Units may include a dividend equivalent right, as
permitted by Section 5. After the Committee determines that it will offer
Restricted Stock or Restricted Stock Units, it will advise the Participant in
writing or electronically, by means of an Award Agreement, of the terms,
conditions and restrictions, including vesting, if any, related to the offer,
including the number of Shares that the Participant shall be entitled to receive
or purchase, the price to be paid, if any, and, if applicable, the time within
which the Participant must accept the offer. The offer shall be accepted by
execution of an Award Agreement or as otherwise directed by the Committee.
Restricted Stock Units may be paid as permitted by Section 7(b). The term
of each award of Restricted Stock or Restricted Stock Units shall be at the
discretion of the Committee.
(b) Performance
Criteria. Restricted Stock and Restricted Stock Units granted pursuant to
the Plan that are intended to qualify as “performance based compensation” under
Section 162(m) of the Code shall be subject to the fulfillment of
performance goals relating to the Performance Criteria selected by the Committee
and specified at the time such Restricted Stock and Restricted Stock Units are
granted. For purposes of this Plan, “Performance Criteria” means one or more of
the following (as selected by the Committee): (i) earnings per
share, including earnings per share as adjusted (a) to exclude the effect
of any (1) significant acquisitions or dispositions of businesses by the
Company,
9
(2) one-time,
non-operating charges and (3) accounting changes (including but not limited
to any accounting changes that alter the recognition of stock option expense and
any accounting changes the Company adopts early); and (b) for any stock
split, stock dividend or other recapitalization; (ii) earnings per share
before taxes, subject to any of the adjustments described above;
(iii) earnings; (iv) earnings before interest, taxes and amortization;
(v) total shareholder return; (vi) share price performance;
(vii) return on equity; (viii) return on managed assets;
(ix) revenue; (x) operating expenses; (xi) operating income;
(xii) originations volume; (xiii) originations growth; (xiv) net
charge-offs; (xv) net charge-off percentage; (xvi) portfolio growth;
(xvii) net interest margin; or (xviii) cash flow.
(c) Vesting.
Unless the Committee determines otherwise, the Award Agreement shall provide for
the forfeiture of the non-vested Shares underlying Restricted Stock or
Restricted Stock Units upon the termination of a Participant’s Active Status. To
the extent that the Participant purchased the Shares granted under such
Restricted Stock or Restricted Stock Units and any such Shares remain non-vested
at the time the Participant’s Active Status terminates, the termination of
Active Status shall cause an immediate sale of such non-vested Shares to the
Company at the original price per Share paid by the Participant.
SECTION 12. Grant, Terms
and Conditions of SARs.
(a) Grants. The
Committee shall have the full power and authority, exercisable in its sole
discretion, to grant SARs to selected Participants. The Committee is authorized
to grant both tandem stock appreciation rights, consisting of SARs with
underlying Options (“Tandem SARs”), and stand-alone stock appreciation rights
(“Stand-Alone SARs”) as described below. The terms of SARs shall be at the
discretion of the Committee. In no event shall the Board or the Committee be
permitted to Reprice a SAR after the date of grant without shareholder
approval.
(b) Tandem
SARs.
(i) Participants may be granted a Tandem SAR, exercisable upon such terms
and conditions as the Committee shall establish, to elect between the exercise
of the underlying Option for Shares or the surrender of the Option in exchange
for a distribution from the Company in an amount equal to the excess of
(A) the Fair Market Value (on the Option surrender date) of the number of
Shares in which the Participant is at the time vested under the surrendered
Option (or surrendered portion thereof) over (B) the aggregate exercise
price payable for such vested Shares.
(ii) No such Option surrender shall be effective unless it is approved by
the Committee, either at the time of the actual Option surrender or at any
earlier time. If the surrender is so approved, then the distributions to which
the Participant shall become entitled under this Section 12(b) may be made
in Shares valued at Fair Market Value (on the Option surrender date), in cash,
or partly in Shares and partly in cash, as the Committee shall deem
appropriate.
(iii) If the surrender of an Option is not approved by the Committee, then
the Participant shall retain whatever rights he or she had under the surrendered
Option (or surrendered portion thereof) on the Option surrender date and may
exercise such rights at any time prior to the later of (A) five
(5) business days after the receipt of the rejection notice or (B) the
last day on which the Option is otherwise exercisable in accordance with the
terms of the instrument evidencing such Option, but in no event may such rights
be exercised more than ten (10) years after the date of the Option
grant.
(c) Stand-Alone
SARs.
(i) A Participant may be granted a Stand-Alone SAR not tied to any
underlying Option under Section 10 of the Plan. The Stand-Alone SAR shall
cover a specified number of Shares and shall be exercisable upon such terms and
conditions as the Committee shall establish. Upon exercise of the Stand-Alone
SAR, the holder shall be entitled to receive a distribution from the Company in
an amount equal to the excess of (A) the aggregate Fair Market Value (on
the exercise date) of the Shares underlying the exercised right over
(B) the aggregate base price in effect for those Shares.
(ii) The number of Shares underlying each Stand-Alone SAR and the base
price in effect for those Shares shall be determined by the Committee at the
time the Stand-Alone SAR is granted. In no event, however, may the base price
per Share be less than the Fair Market Value per underlying Share on the grant
date.
(iii) The distribution with respect to an exercised Stand-Alone SAR may be
made in Shares valued at Fair Market Value on the exercise date, in cash, or
partly in Shares and partly in cash, as the Committee shall deem
appropriate.
(d) Exercised
SARs. The Shares issued in settlement of any SARs exercised under this
Section 12 shall not be available for subsequent issuance under the Plan.
In accordance with Section 4, Shares underlying any exercised SARs that
were not issued in settlement of the SAR shall become available for future
issuance under the Plan.
10
PART IV - TERM OF PLAN AND SHAREHOLDER
APPROVAL
SECTION 13. Term of Plan. The Plan shall
become effective as of the Effective Date. It shall continue in effect until the
tenth anniversary of the Effective Date or until terminated under
Section 14 of the Plan or extended by an amendment approved by the
shareholders of the Company pursuant to Section 14(a).
SECTION 14. Amendment and Termination of the
Plan.
(a) Amendment and
Termination. The Board or the Committee may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable (including,
but not limited to amendments which the Board deems appropriate to enhance the
Company’s ability to claim deductions related to stock option exercises);
provided that to the extent required by the Code or the rules of Nasdaq, of any
national stock exchange on which the Company’s common shares are listed, or of
the SEC, shareholder approval shall be required for any amendment of the Plan.
Subject to the foregoing, it is specifically intended that the Board or
Committee may amend the Plan without shareholder approval to comply with legal,
regulatory and listing requirements and to avoid unanticipated consequences
deemed by the Committee to be inconsistent with the purpose of the Plan or any
Award Agreement.
(b) Participants in
Foreign Countries. The Committee shall have the authority to adopt such
modifications, procedures, and sub-plans as may be necessary or desirable to
comply with provisions of the laws of foreign countries in which the Company or
its Subsidiaries may operate to assure the viability of the benefits from Awards
granted to Participants performing services in such countries and to meet the
objectives of the Plan.
(c) Effect of Amendment
or Termination. Any amendment or termination of the Plan shall not affect
Awards already granted and such Awards shall remain in full force and effect as
if this Plan had not been amended or terminated, unless mutually agreed
otherwise between the Participant and the Committee, which agreement must be in
writing and signed by the Participant and the Company.
SECTION 15. Shareholder Approval. The
effectiveness of the Plan is subject to approval by the shareholders of the
Company in accordance with applicable Nasdaq rules.
11
EXHIBIT
21 - SUBSIDIARIES OF THE REGISTRANT.
The
following corporations and limited liabilities are direct or indirect
subsidiaries of the registrant. Each does business under its own
name.
Name State
or other jurisdiction of incorporation
or organization
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CPS
Leasing, Inc.
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DE
|
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CPS
Marketing, Inc.
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CA
|
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CPS
Residual Corp.
|
DE
|
|
Page
Funding LLC
|
DE
|
|
Page
Three Funding LLC
|
DE
|
|
Folio
Funding LLC
|
DE
|
|
Folio
Funding II LLC
|
DE
|
|
CPS
Receivables LLC
|
DE
|
|
CPS
Receivables Two LLC
|
DE
|
|
CPS
Receivables Three LLC
|
DE
|
|
Canyon
Receivables LLC
|
DE
|
|
Mercury
Finance Company LLC
|
DE
|
|
TFC
Enterprises LLC
|
DE
|
|
Mercury
Finance Corporation of Alabama
|
AL
|
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Mercury
Finance Company of Colorado
|
DE
|
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Gulfco
Investment, Inc.
|
LA
|
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Gulfco
Finance Company
|
LA
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CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statements (Nos.
33-78680, 33-80327, 333-35758, 333-58199, 333-75594, 333-115622 and 333-135907)
on Form S-8 and (No. 333-121913) on Form S-3 of Consumer Portfolio
Services, Inc. of our report dated March 31, 2009, which is incorporated by
reference in the 2008 Annual Report on Form 10-K of Consumer Portfolio Services,
Inc.
/s/ Crowe Horwath
LLP
Costa
Mesa, California
March 31,
2009
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in Registration Statements (Nos.
33-78680, 33-80327, 333-35758, 333-58199, 333-75594, 333-115622 and 333-135907)
on Form S-8 and (Nos. 333-121913 and 333-152969) on Form S-3 of Consumer
Portfolio Services, Inc. of our report dated March 17, 2008 relating to our
audit of the consolidated financial statements, which appears in the Annual
Report on Form 10-K of Consumer Portfolio Services, Inc. for the year ended
December 31, 2008.
/s/
MCGLADREY & PULLEN LLP
McGladrey
& Pullen, LLP
Irvine,
California
March
31, 2009
CERTIFICATION
I,
Charles E. Bradley, Jr., certify that:
1. I
have reviewed this annual report on Form 10-K of Consumer Portfolio Services,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
March 31,
2009
By: /s/
CHARLES E. BRADLEY, JR.
Charles
E. Bradley, Jr.
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
CERTIFICATION
I,
Jeffrey P. Fritz, certify that:
1. I
have reviewed this annual report on Form 10-K of Consumer Portfolio Services,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
March 31,
2009
By: /s/
JEFFREY P. FRITZ
Jeffrey
P. Fritz
SR. VICE
PRESIDENT AND CHIEF FINANCIAL OFFICER
CERTIFICATION
Each of
the undersigned hereby certifies, for the purposes of Section 1350 of chapter 63
of title 18 of the United States Code, in his capacity as an officer of Consumer
Portfolio Services, Inc., that, to his knowledge, the Annual Report of Consumer
Portfolio Services, Inc. on Form 10-K for the year ended December 31, 2008,
fully complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that the information contained in such report fairly presents,
in all material respects, the financial condition and results of operations of
Consumer Portfolio Services, Inc.
March 31,
2009 By: /s/
CHARLES E. BRADLEY, JR.
Charles E. Bradley, Jr.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
March 31,
2009 By: /s/
JEFFREY P. FRITZ
Jeffrey P. Fritz
CHIEF FINANCIAL OFFICER