SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 1-14116
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0459135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 753-6800
Securities registered pursuant to section 12(b) of the Act:
Title of each class:
RISING INTEREST SUBORDINATED REDEEMABLE SECURITIES DUE 2006
10.50% PARTICIPATING EQUITY NOTES DUE 2004
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes / x / No / /
Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value on April 14, 1999 (based on the $3.50 closing price on the Nasdaq Stock Market on that date) of the
voting stock beneficially held by non-affiliates of the registrant was $29,506,281. The number of shares of the registrant's
Common Stock outstanding on April 14, 1999 was 15,658,501.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for its 1999 annual meeting of shareholders is incorporated by reference into Part III of this
report.
ITEM 1. BUSINESS
General
PART I
Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries, the "Company") is a consumer finance company
specializing in the business of purchasing, selling and servicing retail automobile installment contracts ("Contracts") originated by
licensed motor vehicle dealers ("Dealers") in the sale of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides indirect financing to Dealer customers with limited credit histories, low incomes or past credit
problems ("Sub-Prime Customers"). The Company serves as an alternative source of financing for Dealers, allowing sales to
customers who otherwise might not be able to obtain financing. The Company does not lend money directly to consumers. Rather,
it purchases installment Contracts from Dealers.
The Company has various wholly owned and partially owned subsidiaries. The wholly owned subsidiaries include CPS
Marketing, Inc., Alton Receivables Corp. ("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding Corp. ("CPSFC") and CPS
Warehouse Corp. ("CPSWC"). Alton, CPSRC, CPSFC and CPSWC are limited purpose corporations formed to accommodate the
structures under which the Company purchases and sells its Contracts. CPS Marketing, Inc. employs marketing representatives
who solicit business from Dealers. The Company's partially owned subsidiaries include Samco Acceptance Corp., Linc
Acceptance Company, LLC, and CPS Leasing, Inc., each of which is 80% owned by the Company.
CPS was incorporated and began its operations in 1991. From inception through December 31, 1998 the Company has
purchased approximately $2.4 billion of Contracts, and as of December 31, 1998, had an outstanding servicing portfolio of
approximately $1.5 billion. The Company makes the decision to purchase Contracts exclusively from its headquarters location. It
obtains the funds for such purchases primarily by reselling the Contracts in securitization transactions. The Company services the
Contracts from two regional centers, one in its California headquarters, and the other in Virginia.
Prior to December 11, 1995, the Company was a majority-owned subsidiary of CPS Holdings, Inc., a Delaware corporation
("Holdings"). In September 1995, the shareholders of the Company approved the merger of Holdings into the Company. The
merger was completed on December 11, 1995, and had no effect on the Company's consolidated financial statements. Prior to the
merger, Charles E. Bradley, Sr., the Company's Chairman of the Board, was the principal shareholder of Holdings.
The Market We Serve
The Company's automobile financing programs are designed to serve customers who generally would not qualify for automobile
financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with
major automobile manufacturers. Such customers ("Sub-Prime Customers") generally have limited credit histories, low incomes
or past credit problems, and are therefore often unable to obtain credit from traditional sources of automobile financing. (The
terms "prime" and "sub-prime" reflect the Company's categorization of customers and bear no relationship to the prime rate of
interest or persons who are able to borrow at that rate.) Because the Company serves customers who are unable to meet the credit
standards imposed by most traditional automobile financing sources, the Company generally receives interest at rates higher than
those charged by traditional automobile financing sources. The Company also expects to sustain a higher level of credit losses
than traditional automobile financing sources since the Company provides financing in a relatively high risk market.
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Marketing
The Company directs its marketing efforts to Dealers, rather than to consumers. As of December 31, 1998, the Company was a
party to its standard form dealer agreements ("Dealer Agreements") with 4,547 Dealers. Approximately 93.0% of these Dealers
are franchised new car dealers that sell both new and used cars and the remainder are independent used car dealers. For the year
ended December 31, 1998, approximately 92.0% of the Contracts purchased by the Company consisted of financing for used cars
and the remaining 8.0% for new cars.
The Company establishes relationships with Dealers through Company representatives who contact a prospective Dealer to
explain the Company's Contract purchase programs, and who and thereafter provide Dealer training and support services. As of
December 31, 1998, the Company had 72 representatives, 69 of whom are employees and 3 of whom are independent. The
representatives are contractually obligated to represent the Company's financing program exclusively. The Company's
representatives present the Dealer with a marketing package, which includes the Company's promotional material containing the
terms offered by the Company for the purchase of Contracts, a copy of the Company's standard-form Dealer Agreement, examples
of monthly reports and required documentation relating to Contracts. Marketing representatives have no authority relating to the
decision to purchase Contracts from Dealers. The Company's acceptance of a Dealer is subject to its analysis of, among other
things, the Dealer's operating history.
Most of the Dealers under contract with CPS regularly submit Contracts to the Company for purchase, although they are under
no obligation to submit any Contracts to the Company, nor is the Company obligated to purchase any Contracts. During the year
ended December 31, 1998, no Dealer accounted for more than 1.0% of the total number of Contracts purchased by the Company.
The following table sets forth the geographical sources of the Contracts purchased by the Company (based on the addresses of the
customers as stated on the Company's records) during the years ended December 31, 1998 and December 31, 1997:
Contracts Purchased During Year Ended
----------------------------------------------------------
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Number Percent Number Percent
------------- ---------- ----------- ------------
California 13,960 16.7% 9,035 18.1%
Florida 5,832 7.0% 3,404 6.8%
North Carolina 5,304 6.3% 1,613 3.2%
Texas 5,193 6.2% 3,649 7.3%
Alabama 4,707 5.6% 2,070 4.1%
Louisiana 4,355 5.2% 3,142 6.3%
Pennsylvania 4,239 5.1% 3,622 7.2%
Michigan 4,119 4.9% 1,954 3.9%
Illinois 3,808 4.6% 2,413 4.8%
Tennessee 2,997 3.6% 2,012 4.0%
Georgia 2,738 3.3% 1,503 3.0%
New York 2,690 3.2% 2,941 5.9%
South Carolina 2,152 2.6% 715 1.4%
Maryland 1,859 2.2% 1,586 3.2%
Ohio 1,768 2.1% 992 2.0%
Hawaii 1,585 1.9% 867 1.7%
Other States 16,261 19.5% 8,545 17.1%
------------- -----------
Total 83,567 50,063
============= ===========
As discussed in greater detail below (see "Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources"), the Company has recently elected to conserve captial by materially reducing its
Contract purchase activities. In connection with this decision, the Company has reduced the number of its marketing
representatives to 48, as of April 10, 1999, and as of that
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date was purchasing Contracts in 23 states. Dealers in such states under contract with the Company totaled 2,837 as of April 10,
1999.
Origination of Contracts
Dealer Origination. When a retail automobile buyer elects to obtain financing from a Dealer, the Dealer takes a credit
application to submit to its financing sources. Typically, a Dealer will submit the buyer's application to more than one financing
source for review. The Company believes the Dealer's decision to finance the automobile purchase with the Company, rather than
other financing sources, is based primarily upon an analysis of the monthly payment that will be offered to the automobile buyer,
the discounted purchase price offered for the Contract, the timeliness, consistency and predictability of response, the cash
resources of the financing source, and any conditions to purchase.
Upon receipt of an application from a Dealer, the Company's administrative personnel order a credit report to document the
buyer's credit history. If, upon review by a Company loan officer, it is determined that the application meets the Company's
underwriting criteria, or would meet such criteria with modification, the Company requests and reviews further information and
supporting documentation and, ultimately, decides whether to purchase the Contract. When presented with an application, the
Company attempts to notify the Dealer within four hours as to whether it intends to purchase such Contract.
The actual agreement for purchase of the vehicle ("Contract") is prepared by the Dealer. The Dealer also arranges for recording
the Company's lien on the vehicle. After the appropriate documents are signed by the Dealer and the customer, the Dealer sells the
Contract to the Company. The customer then receives monthly billing statements.
Through December 1996, the Company had purchased Contracts from Dealers at percentage discounts ranging from 0% to 10%
of the total amount financed under the Contracts, depending on the perceived credit risk of the Contract, plus a flat acquisition fee,
generally $200, for each Contract purchased. Percentage discounts averaged 4.1% and 2.8% for the years ended December 31,
1995 and 1996, respectively. The Company believes that the level of discounts and fees are a significant factor in the Dealer's
decision to submit a Contract to the Company for purchase, and will continue to play such a role in the future. Effective January
10, 1997, the Company began purchasing Contracts in general without a percentage discount, charging Dealers only an acquisition
fee ranging from zero to $1,195 for each Contract purchased. The fees vary based on the perceived credit risk and, in some cases,
the interest rate on the Contract. The acquisition fees instituted in January 1997 are larger, on average, than the acquisition fees
previously charged in conjunction with percentage discounts, so as to result in a similar net purchase price on a typical Contract.
For the years ended December 31, 1998 and 1997, the average amount charged per Contract purchased was $418 and $438,
respectively, or 3.2% and 3.5%, respectively, of the amount financed. In addition, during 1998 the Company began purchasing
certain Contracts of higher credit quality for which the Company pays a fee to the Dealer. During 1998, the Company purchased
1,583 of these Contracts representing approximately 1.9% of all Contracts purchased. The average fee paid to Dealers on these
Contracts was $531.
The Company attempts to control misrepresentation regarding the customer's credit worthiness by carefully screening the
Contracts it purchases, by establishing and maintaining professional business relationships with Dealers, and by including certain
representations and warranties by the Dealer in the Dealer Agreement. Pursuant to the Dealer Agreement, the Company may
require the Dealer to repurchase any Contract in the event that the Dealer breaches its representations or warranties. There can be
no assurance, however, that any Dealer will have the financial resources to satisfy its repurchase obligations to the Company.
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Objective Contract Purchase Criteria. To be eligible for purchase by the Company, a Contract must have been originated by a
Dealer that has entered into a Dealer Agreement to sell Contracts to the Company. The Contracts must be secured by a first
priority lien on a new or used automobile, light truck or passenger van and must meet the Company's underwriting criteria. In
addition, each Contract requires the customer to maintain physical damage insurance covering the financed vehicle and naming
the Company as a loss payee. The Company or any purchaser of the Contract from the Company may, nonetheless, suffer a loss
upon theft or physical damage of any financed vehicle if the customer fails to maintain insurance as required by the Contract and
is unable to pay for repairs to or replacement of the vehicle or is otherwise unable to fulfill his or her obligations under the
Contract.
The Company believes that its objective underwriting criteria enable it to evaluate effectively the creditworthiness of Sub-Prime
Customers and the adequacy of the financed vehicle as security for a Contract. These criteria include standards for price; term;
amount of down payment, installment payment and add-on interest rate; mileage, age and type of vehicle; principal amount of the
Contract in relation to the value of the vehicle; customer income level, job and residence stability, credit history and debt
serviceability; and other factors. Specifically, the Company's guidelines limit the maximum principal amount of a purchased
Contract to 115% of wholesale book value in the case of used vehicles or to 110% of the manufacturer's invoice in the case of new
vehicles, plus, in each case, sales tax, licensing and, when the customer purchases such additional items, a service contract or a
credit life or disability policy. The Company does not finance vehicles that are more than eight model years old or have in excess
of 85,000 miles. Under most CPS programs, the maximum term of a purchased Contract is 60 months; a shorter maximum term
may be applied based on the year and mileage of the vehicle, and contracts with terms up to 72 months may be purchased if the
customer is among the more creditworthy of CPS' obligors. Contract purchase criteria are subject to change from time to time as
circumstances may warrant. Upon receiving this information with the customer's application, the Company's underwriters verify
the customer's employment, residency, insurance and credit information provided by the customer by contacting various parties
noted on the customer's application, credit information bureaus and other sources.
Credit Scoring. In November 1996, the Company implemented a proprietary scoring model that assigns each Contract a numeric
value, (a "credit score") at the time the application is received from the Dealer and the customers credit information is retrieved
from the credit reporting agencies. The credit score is based on a variety of parameters, such as the customer's job and residence
stability, the amount of the down payment, and the age and mileage of the vehicle. The Company has developed the credit score as
a means of identifying Contracts where a review by a supervisor or manager, prior to approval, is warranted. Regardless of the
credit score a Contract originally receives, the Company's underwriters perform the same extensive review and verification
procedures on all Contracts that are purchased. During 1998, the Company made significant enhancements to its scoring model.
These enhancements included incorporating more of the obligor's past credit history.
Characteristics of Contracts. All of the Contracts purchased by the Company are fully amortizing and provide for level payments
over the term of the Contract. The average original principal amount financed under Contracts purchased in the year ended
December 31, 1998 was approximately $12,903 with an average original term of approximately 57 months and an average down
payment of 14.6%. Based on information contained in customer applications, for this twelve-month period, the retail purchase
price of the related automobiles averaged $13,202 (which excludes tax and license fees, and any additional costs such as a
maintenance contract), the average age of the vehicle at the time the Contract was purchased was 3.5 years, and the Company's
average customer at the time of purchase was approximately 36 years old, with approximately $35,227 in average annual
household income and an average of 4.4 years' history with his or her current employer.
5
All Contracts may be prepaid at any time without penalty. In the event a customer elects to prepay a Contract in full, the payoff
amount is calculated by deducting the unearned interest from the Contract balance, in the case of a pre-computed Contract, or by
adding accrued interest to the Contract balance, in the case of a simple interest Contract.
Each Contract purchased by the Company prohibits the sale or transfer of the financed vehicle without the Company's consent
and allows for the acceleration of the maturity of a Contract upon a sale or transfer without such consent. In most circumstances,
the Company will not consent to a sale or transfer of a financed vehicle unless the related Contract is prepaid in full.
Dealer Compliance. The Dealer Agreement and related assignment contain representations and warranties by the Dealer that an
application for state registration of each financed vehicle, naming the Company as secured party with respect to the vehicle, was
effected at the time of sale of the related Contract to the Company, and that all necessary steps have been taken to obtain a
perfected first priority security interest in each financed vehicle in favor of the Company under the laws of the state in which the
financed vehicle is registered. If a Dealer or the Company, because of clerical error or otherwise, has failed to take such action in a
timely manner, or to maintain such interest with respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in the financed vehicle and its security interest may
be subordinate to the interest of, among others, subsequent purchasers of the financed vehicle, holders of perfected security
interests and a trustee in bankruptcy of the customer. The security interest of the Company or the purchaser of a Contract may also
be subordinate to the interests of third parties if the interest is not perfected due to administrative error by state recording officials.
Moreover, fraud or forgery by the customer could render a Contract unenforceable against third parties. In such events, the
Company could suffer a loss with respect to the related Contract. In the event the Company suffers such a loss, it will generally
have recourse against the Dealer from which it purchased the Contract. This recourse will be unsecured, and there can be no
assurance that any Dealer will have the financial resources to satisfy its repurchase obligations to the Company.
Servicing of Contracts
General. The Company's servicing activities consist of collecting, accounting for and posting of all payments received;
responding to customer inquiries; taking all necessary action to maintain the security interest granted in the financed vehicle or
other collateral; investigating delinquencies; communicating with the customer to obtain timely payments; repossessing and
reselling the collateral when necessary; and generally monitoring each Contract and any related collateral.
Collection Procedures. The Company believes that its ability to monitor performance and collect payments owed from Sub-
Prime Customers is primarily a function of its collection approach and support systems. The Company believes that if payment
problems are identified early and the Company's collection staff works closely with customers to address these problems, it is
possible to correct many of them before they deteriorate further. To this end, the Company utilizes pro-active collection
procedures, which include making early and frequent contact with delinquent customers; educating customers as to the importance
of maintaining good credit; and employing a consultative and customer service approach to assist the customer in meeting his or
her obligations, which includes attempting to identify the underlying causes of delinquency and cure them whenever possible. In
support of its collection activities, the Company maintains a computerized collection system specifically designed to service
automobile installment sale contracts with Sub-Prime Customers and similar consumer obligations.
With the aid of its high penetration auto dialer, the Company typically attempts to make telephonic contact with delinquent
customers on the sixth day after their monthly payment due date. Using coded instructions from a collection supervisor, the
automatic dialer will attempt to contact customers based on their physical
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location, state of delinquency, size of balance or other parameters. If the automatic dialer obtains a "no-answer" or a busy signal, it
records the attempt on the customer's record and moves on to the next call. If a live voice answers the automatic dialer's call, the
call is transferred to a waiting collector at the same time that the customer's pertinent information is simultaneously displayed on
the collector's workstation. The collector then inquires of the customer the reason for the delinquency and when the Company can
expect to receive the payment. The collector will attempt to get the customer to make a promise for the delinquent payment for a
time generally not to exceed one week from the date of the call. If the customer makes such a promise, the account is routed to a
pending queue and is not contacted until the outcome of the promise is known. If the payment is made by the promise date and the
account is no longer delinquent, the account is routed out of the collection system. If the payment is not made, or if the payment is
made, but the account remains delinquent, the account is returned to the automatic dialing queue for subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to evade contact or
hide the vehicle, a supervisor will review the collection activity relating to the account to determine if repossession of the vehicle
is warranted. Generally, such a decision will occur between the 45th and 90th day past the customer's payment due date, but could
occur sooner or later, depending on the specific circumstances.
If CPS elects to repossess the vehicle, it assigns the task to an independent local repossession service. Such services are licensed
and/or bonded as required by law. When the vehicle is recovered, the repossessor delivers it to a wholesale auto auction, where it
is kept until sold, usually within 30 days of the repossession. The UCC and other state laws regulate repossession sales by
requiring that the secured party provide the customer with reasonable notice of the date, time and place of any public sale of the
collateral, the date after which any private sale of the collateral may be held and of the customer's right to redeem the financed
vehicle prior to any such sale and by providing that any such sale be conducted in a commercially reasonable manner. Financed
vehicles repossessed generally are resold by the Company through unaffiliated wholesale automobile networks or auctions, which
are attended principally by used car dealers. Net liquidation proceeds are applied to the customer's outstanding obligation under
the Contract.
Under the UCC and other laws applicable in most states (including California), a creditor is entitled to obtain a deficiency
judgment from a customer for any deficiency on repossession and resale of the motor vehicle securing the unpaid balance of such
customer's Contract. However, some states impose prohibitions or limitations on deficiency judgments. When obtained, deficiency
judgements are entered against defaulting individuals who may have little capital or income. Therefore, in many cases, it may not
be useful to seek a deficiency judgment against a customer or, if one is obtained, it may be settled at a significant discount.
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Credit Experience
The Company's financial results are dependent on the performance of the Contracts it has purchased. The tables below document
the delinquency, repossession and net credit loss experience of all Contracts purchased by the Company:
DELINQUENCY EXPERIENCE (1)
As of December 31,
----------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Number Number Number
of of of
Contracts Amount Contracts Amount Contracts Amount
--------- ---------- --------- ---------- --------- --------
(Dollars in thousands)
Gross servicing portfolio....... 141,396 $1,674,417 83,414 $1,031,573 47,187 $604,092
Period of delinquency (2)
31-60 days...................... 4,202 48,324 3,092 36,609 1,801 22,099
61-90 days...................... 1,869 22,335 1,243 15,303 724 9,068
91+ days........................ 1,694 20,096 1,393 17,869 768 9,906
------- ---------- ------ ---------- ------ --------
Total delinquencies(2).......... 7,765 90,755 5,728 69,781 3,293 41,073
Amount in repossession (3)...... 2,961 32,772 1,977 24,463 1,168 14,563
------- ---------- ------ ---------- ------ --------
Total delinquencies and amount
in repossession (2)............. 10,726 $123,527 7,705 $94,244 4,461 $55,636
======= ========== ====== ========== ====== ========
Delinquencies as a percent of
gross servicing portfolio....... 5.5% 5.4% 6.9% 6.8% 7.0% 6.8%
Total delinquencies and amount
in repossession as a percent of
gross servicing portfolio....... 7.6% 7.4% 9.2% 9.1% 9.5% 9.2%
(1) All amounts and percentages are based on the full amount remaining to be
repaid on each Contract, including, for pre-computed Contracts, any unearned
finance charges. The information in the table represents the principal
amount of all Contracts purchased by the Company, including Contracts
subsequently sold by the Company, which it continues to service.
(2) The Company considers a Contract delinquent when an obligor fails to make at
least 90% of a contractually due payment by the following due date, which
date may have been extended within limits specified in the Servicing
Agreements. The period of delinquency is based on the number of days
payments are contractually past due. Contracts less than 31 days delinquent
are not included.
(3) Amount in repossession represents financed vehicles that have been
repossessed but not yet liquidated.
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NET CHARGE-OFF EXPERIENCE(1)
Year Ended December 31,
----------------------------------
(Dollars in thousands)
1998 1997 1996
---------- -------- --------
Average servicing portfolio outstanding.... $1,300,519 $703,100 $397,430
Net charge-offs as a percent of average
servicing portfolio (2).................... 6.5% 5.9% 5.1%
(1) All amounts and percentages are based on the principal amount scheduled to
be paid on each Contract. The information in the table represents all
Contracts purchased by the Company including Contracts subsequently sold by
the Company that it continues to service.
(2) Net charge-offs include the remaining principal balance, after the
application of the net proceeds from the liquidation of the vehicle
(excluding accrued and unpaid interest).
Securitization and Sale of Contracts to Institutional Investors
The Company purchases Contracts with the primary intention of reselling them to investors as asset-backed securities through
securitizations. In connection with the sale of the Contracts, the Company is required to make certain representations and
warranties, which are generally similar to the representations and warranties made by Dealers in connection with the Company's
purchase of the Contracts. If the Company breaches any of its representations or warranties to a purchaser of the Contracts, the
Company will be obligated to repurchase the Contract from such purchaser at a price equal to such purchaser's purchase price less
the related cash securitization reserve and any payments received by such purchaser on the Contract. The Company may then be
entitled under the terms of its Dealer Agreement to require the selling Dealer to repurchase the Contract at a price equal to the
Company's purchase price, less any payments made by the customer. Subject to any recourse against Dealers, the Company will
bear the risk of loss on repossession and resale of vehicles under Contracts repurchased by it.
Upon the sale of a portfolio of Contracts, to an investor or a trust, the Company mails to obligors monthly billing statements
directing them to mail payments on the Contracts to a lock-box account. The Company engages an independent lock-box
processing agent to retrieve and process payments received in the lock-box account. This results in a daily deposit to the investor's
or the Trust's bank account of the entire amount of each day's lock-box receipts and the simultaneous electronic data transfer to the
Company of customer payment data records. Pursuant to the Servicing Agreements, the Company is required to deliver monthly
reports to the investor or the Trust reflecting all transaction activity with respect to the Contracts. The reports contain, among
other information, a reconciliation of the change in the aggregate principal balance of the Contracts in the portfolio to the amounts
deposited into the investor's or the Trust's bank account as reflected in the daily reports of the lock-box processing agent.
Pursuant to its securitization purchase commitments, the Company generally warrants that, to the best of the Company's
knowledge, no such liens or claims are pending or threatened with respect to a financed vehicle, which may be or become prior to
or equal with the lien of the related Contracts. In the event that any of the Company's representations or warranties proves to be
incorrect, the Trust or the investor would be entitled to require the Company to repurchase the Contract relating to such financed
vehicle.
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The Servicing Portfolio
The Company currently services all Contracts that it owns, as well as those Contracts included in portfolios that it has sold to
investors or securitization trusts. Pursuant to the Company's usual form of servicing agreement (the Company's servicing
agreements with purchasers of portfolios of Contracts are collectively referred to as the "Servicing Agreements"), CPS is obligated
to service all Contracts sold to the investors or Trusts in accordance with the Company's standard procedures. The Servicing
Agreements generally provide that the Company will bear all costs and expenses incurred in connection with the management,
administration and collection of the Contracts serviced. The Servicing Agreements also provide that the Company will take all
actions necessary or reasonably requested by the investor to maintain perfection and priority of the investor's or the Trust's
security interest in the financed vehicles. CPS may in the future sell Contracts "servicing - released," that is, with the purchaser
assuming the future servicing of the purchased Contracts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
The Company is entitled under most of the Servicing Agreements to receive a base monthly servicing fee of 2.0% per annum
computed as a percentage of the declining outstanding principal balance of the non-defaulted Contracts in the portfolio. Each
month, after payment of the Company's base monthly servicing fee and certain other fees, the investor or trust receives the paid
principal reduction of the Contracts in its portfolios and interest thereon at the fixed rate that was agreed when the Contracts were
sold to the Trust. If, in any month, collections on the Contracts are insufficient to pay such amounts and any principal reduction
due to charge-offs, the shortfall is satisfied from the "Spread Account" established in connection with the sale of the portfolio. The
"Spread Account" is an account established at the time the Company sells a portfolio of Contracts, to provide security to the
purchaser of the portfolio. If collections on the Contracts exceed such amounts, the excess is utilized, first, to build up or replenish
the Spread Account to the extent required, next, to cover deficiencies in Spread Accounts for other portfolios, and the balance, if
any, constitutes excess cash flows, which are distributed to the Company. The Company has not received any such distributions
since June 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Servicing Agreements also provide that the Company is entitled to receive certain late fees collected from
customers.
Pursuant to the Servicing Agreements, the Company is generally required to charge off the balance of any Contract by the
earlier of the end of the month in which the Contract becomes five scheduled installments past due or, in the case of repossessions,
the month that the proceeds from the liquidation of the financed vehicle are received by the Company. In the case of a
repossession, the amount of the charge-off is the difference between the outstanding principal balance of the defaulted Contract
and the net repossession sale proceeds. In the event collections on the Contracts are not sufficient to pay to the investors the entire
principal balance of Contracts charged off during the month, the trustee draws on the related Spread Account to pay the investors.
The amount drawn would then have to be restored to the Spread Account from future collections on the Contracts remaining in the
portfolio before the Company would again be entitled to receive excess cash. In addition, the Company would not be entitled to
receive any further monthly servicing fees with respect to the defaulted Contracts. Subject to any recourse against the Company in
the event of a breach of the Company's representations and warranties with respect to any Contracts and after any recourse to any
insurer guarantees backing the Certificates, the investor bears the risk of all charge-offs on the Contracts in excess of the Spread
Account. The investors' rights with respect to distributions from the Trusts are senior to the Company's rights. Accordingly,
variation in performance of pools of Contracts affects the Company's ultimate realization of value derived from such Contracts.
The Servicing Agreements are terminable by the trust (or by the insurer of certificates issued by the trust) in the event of certain
defaults by the Company and under certain other circumstances. As of December 31, 1998, 7 of the Company's 22 securitized
pools had incurred cumulative losses exceeding certain predetermined levels, which in turn has
10
given the insurer the right to terminate the Servicing Agreements. To date, the insurer has waived its right to terminate the
Servicing Agreements.
Competition
The automobile financing business is highly competitive. The Company competes with a number of national, local and regional
finance companies with operations similar to those of the Company. In addition, competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings and loan associations, leasing companies, credit
unions providing retail loan financing and lease financing for new and used vehicles, and captive finance companies affiliated
with major automobile manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit Corporation, Chrysler
Credit Corporation and Nissan Motors Acceptance Corporation. Many of the Company's competitors and potential competitors
possess substantially greater financial, marketing, technical, personnel and other resources than the Company. Moreover, the
Company's future profitability will be directly related to the availability and cost of its capital in relation to the availability and
cost of capital to its competitors. The Company's competitors and potential competitors include far larger, more established
companies that have access to capital markets for unsecured commercial paper and investment grade-rated debt instruments and to
other funding sources which may be unavailable to the Company. Many of these companies also have long-standing relationships
with Dealers and may provide other financing to Dealers, including floor plan financing for the Dealers' purchase of automobiles
from manufacturers, which is not offered by the Company.
The Company believes that the principal competitive factors affecting a Dealer's decision to offer Contracts for sale to a
particular financing source are the monthly payments made available to the vehicle purchaser, the purchase price offered for the
Contracts, the reasonableness of the financing source's underwriting guidelines and documentation requests, the predictability and
timeliness of purchases and the financial stability of the funding source. The Company believes that it can obtain from Dealers
sufficient Contracts for purchase at attractive prices by consistently applying reasonable underwriting criteria and making timely
purchases of qualifying Contracts.
Government Regulation
Several federal and state consumer protection laws, including the federal Truth-In-Lending Act, the federal Equal Credit
Opportunity Act, the federal Fair Debt Collection Practices Act and the federal Trade Commission Act, regulate the extension of
credit in consumer credit transactions. These laws mandate certain disclosures with respect to finance charges on Contracts and
impose certain other restrictions on Dealers. In many states, a license is required to engage in the business of purchasing Contracts
from Dealers. In addition, laws in a number of states impose limitations on the amount of finance charges that may be charged by
Dealers on credit sales. The so-called Lemon Laws enacted by the Federal government and various states provide certain rights to
purchasers with respect to motor vehicles that fail to satisfy express warranties. The application of Lemon Laws or violation of
such other Federal and state laws may give rise to a claim or defense of a customer against a Dealer and its assignees, including
the Company and purchasers of Contracts from the Company. The Dealer Agreement contains representations by the Dealer that,
as of the date of assignment of Contracts, no such claims or defenses have been asserted or threatened with respect to the
Contracts and that all requirements of such Federal and state laws have been complied with in all material respects. Although a
Dealer would be obligated to repurchase Contracts that involve a breach of such warranty, there can be no assurance that the
Dealer will have the financial resources to satisfy its repurchase obligations to the Company. Certain of these laws also regulate
the Company's servicing activities, including its methods of collection.
Although the Company believes that it is currently in material compliance with applicable statutes and regulations, there can be
no assurance that the Company will be able to maintain such compliance. The
11
failure to comply with such statutes and regulations could have a material adverse effect upon the Company. Furthermore, the
adoption of additional statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations or
the expansion of the Company's business into jurisdictions that have adopted more stringent regulatory requirements than those in
which the Company currently conducts business could have a material adverse effect upon the Company. In addition, due to the
consumer-oriented nature of the industry in which the Company operates and the application of certain laws and regulations,
industry participants are regularly named as defendants in litigation involving alleged violations of Federal and state laws and
regulations and consumer law torts, including fraud. Many of these actions involve alleged violations of consumer protection
laws. A significant judgment against the Company or within the industry in connection with any such litigation could have a
material adverse effect on the Company's financial condition, results of operations or liquidity. See "Legal Proceedings."
Alternative Marketing Programs
From 1996 through 1998, the Company invested in an 80 percent-owned subsidiary, Samco Acceptance Corporation ("Samco"),
which pursued a business strategy of purchasing Contracts from independent finance companies that had in turn purchased the
Contracts from Dealers. The Contracts purchased from Samco showed consistently higher losses than Contracts purchased by CPS
directly from Dealers. In December 1998, the Company ceased further investments in Samco, and terminated all operations during
the first quarter of 1999. The Company believes that any credit losses related to Samco-originated Contracts have been adequately
reserved for, and that no material losses will result from Samco's terminated operations.
For the year ended December 31, 1998, Samco purchased 5,337 Contracts with original balances aggregating $64.3 million.
During the first quarter of 1999, the Company terminated all operations of Samco in conjunction with the Company's plan to
reduce the level of Contract purchases and thus to decrease future capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
In May 1996, CPS formed LINC Acceptance Corp. ("LINC"), an 80 percent-owned subsidiary based in Norwalk, Connecticut.
LINC provides the Company's sub-prime auto finance products to credit unions, banks and savings and loans ("Depository
Institutions"). The Company believes that Depository Institutions do not generally make loans to Sub-Prime Customers, even
though they may have relationships with Dealers and have Sub-Prime Customers.
LINC calls on various Depository Institutions and presents them with a financing program that is similar to those that CPS
markets directly to Dealers through its marketing representatives. The LINC program is intended to result in a slightly more
creditworthy customer than the Company's regular programs, by requiring slightly higher income and lower debt-to-income ratios.
LINC's customers may offer its financing program to customers directly or to local Dealers. Unlike Samco, which has employees
who evaluate applications and make decisions to purchase Contracts, LINC applications are submitted by the Depository
Institution directly to CPS, where the approval, underwriting and purchase procedures are performed by CPS staff who work with
LINC as well as with CPS Dealers. Servicing and collection procedures on LINC Contracts are performed entirely by the
Company's collections personnel. For the year ended December 31, 1998, LINC purchased 1,813 Contracts with original balances
aggregating $24.3 million. CPS intends to terminate the separate operations of LINC during the second quarter of 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
12
Employees
As of December 31, 1998, the Company had 666 full-time and 2 part-time employees, of whom 11 are senior management
personnel, 316 are collections personnel, 152 are Contract origination personnel, 81 are marketing personnel (72 of whom are
marketing representatives), 81 are operations and systems personnel, and 27 are accounting and human resource personnel. The
Company believes that its relations with its employees are good. The Company is not a party to any collective bargaining
agreement.
ITEM 2. PROPERTY
The Company's headquarters are located in Irvine, California, where it leases approximately 115,000 square feet of general
office space from an unaffiliated lessor. The annual rent is approximately $1.9 million for the first five years of the lease term, and
increases to $2.1 million for years six through ten. The Company has the option to cancel the lease after five years without
penalty. In addition to the foregoing base rent, the Company has agreed to pay the property taxes, maintenance and other expenses
of the premises. Prior to November 1998, the Company's headquarters were located in a different facility of approximately 51,400
square feet, also in Irvine, California. The Company has subleased its former headquarters location, on terms that should yield
immaterial sublease income through the remainder of that lease.
The Company in March 1997 established a branch collection facility in Chesapeake, Virginia. The Company leases
approximately 27,988 square feet of general office space in Chesapeake, Virginia at a base rent that is currently $401,628 per
year, increasing to $504,545 over a ten-year term.
ITEM 3. LEGAL PROCEEDINGS
CPS is party to litigation in the ordinary course of business, generally involving actions against automobile purchasers to collect
amounts due on purchased Contracts or to recover vehicles. In one such case, relating to the Chapter 13 bankruptcy of obligors
Madeline and Darryl Brownlee, of Chicago, Illinois, the obligors counterclaimed against CPS on June 30, 1997 in the bankruptcy
court for the Northern District of Illinois. The obligors seek class-action treatment of their allegation that the cost of an extended
service contract on the automobile they purchased was inadequately disclosed by the automobile dealer, Joe Cotton Ford of Carol
Stream, Illinois. The disclosure allegedly violated the federal Truth in Lending Act and Illinois consumer protection statutes. The
plaintiffs amended their complaint in September 1998, dropping all Truth in Lending allegations against CPS. The court in
February 1999, dismissed all remaining claims against CPS. The case remains pending against the dealer, and there is a remote
chance that a possible appeal could result in a reinstatement of claims against the Company.
In another proceeding, arising out of efforts to collect a deficiency balance from Joseph Barrios of Chicago, Illinois, the debtor
has brought suit against CPS alleging defects in the notice given upon repossession of the vehicle. This lawsuit was filed on
February 18, 1998, in the circuit court of Cook County, Illinois and sought relief for a punitive class of persons who have received
such notice. A settlement of this litigation has been reached on a class basis, which does not involve material expense.
It is management's opinion that all litigation of which it is aware, including the matters discussed above, will not have a material
adverse effect on the Company's consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers follows:
Charles E. Bradley, Jr., 39, has been the President and a director of the Company since its formation in March 1991. In
January 1992, Mr. Bradley was appointed Chief Executive Officer of the Company. From March 1991 until December 1995 he
served as Vice President and a director of CPS Holdings, Inc. From April 1989 to November 1990, he served as Chief Operating
Officer of Barnard and Company, a private investment firm. From September 1987 to March 1989, Mr. Bradley, Jr. was an
associate of The Harding Group, a private investment banking firm. Mr. Bradley, Jr. is currently serving as a director of NAB
Asset Corporation, Chatwins Group, Inc., Texon Energy Corporation, and Thomas Nix Distributor, Inc. Charles E. Bradley, Sr.,
Chairman of the board of directors of the Company, is his father.
Jeffrey P. Fritz, 39, has been Senior Vice President - Chief Financial Officer and Secretary of the Company since March 1991.
From December 1988 to March 1991, Mr. Fritz was Vice President and Chief Financial Officer of Far Western Bank. From 1985
to December 1988, Mr. Fritz was a management consultant for Price Waterhouse in St. Louis, Missouri.
William L. Brummund, Jr., 46, has been Senior Vice President - Systems Administration since March 1991. From 1986 to
March 1991, Mr. Brummund was Vice President and Systems Administrator for Far Western Bank.
Nicholas P. Brockman, 54, has been Senior Vice President - Asset Recovery & Liquidation since January 1996. He was Senior
Vice President of Contract Originations from April 1991 to January 1996. From 1986 to March 1991, Mr. Brockman served as a
Vice President and Branch Manager of Far Western Bank.
Richard P. Trotter, 55, has been Senior Vice President-Contract Origination since January 1996. He was Senior Vice President
of Administration from April 1995 to December 1995. From January 1994 to April 1995 he was Senior Vice President-Marketing
of the Company. From December 1992 to January 1994, Mr. Trotter was Executive Vice President of Lange Financial
Corporation, Newport Beach, California. From May 1992 to December 1992, he was Executive Director of Fabozzi, Prenovost &
Normandin, Santa Ana, California. From December 1990 to May 1992 he was Executive Vice President/Chief Operating Officer
of R. Thomas Ashley, Newport Beach, California. From April 1984 to December 1990, he was President/Chief Executive Officer
of Far Western Bank, Tustin, California.
Curtis K. Powell, 42, has been Senior Vice President - Marketing of the Company since April 1995. He joined the Company in
January 1993 as an independent marketing representative until being appointed Regional Vice President of Marketing for
Southern California in November 1994. From June 1985 through January 1993, Mr. Powell was in the retail automobile sales and
leasing business.
Mark A. Creatura, 39, has been Senior Vice President - General Counsel since October 1996. From October 1993 through
October 1996, he was Vice President and General Counsel at Urethane Technologies, Inc., a polyurethane chemicals formulator.
Mr. Creatura was previously engaged in the private practice of law with the Los Angeles law firm of Troy & Gould Professional
Corporation, from October 1985 through October 1993.
Thurman Blizzard, 56, has been Senior Vice President - Collections since January 1998. The Company had previously engaged
Mr. Blizzard as a consultant from October 1997 to December 1997 to provide recommendations to the Company concerning its
collections operation. Prior thereto, Mr. Blizzard served as Chief Operations Officer of Monaco Finance from May 1994 to March
1997. Mr. Blizzard was previously an Asset Liquidation Manager with the Resolution Trust Corporation, from November 1991 to
May 1994.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System, under the symbol "CPSS." The following
table sets forth the high and low closing prices reported for the Common Stock for the periods. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission.
High Low
-------- --------
January 1 - March 31, 1997.................................. $ 13.875 $ 7.375
April 1 - June 30, 1997..................................... 12.375 7.000
July 1 - September 30, 1997................................. 18.250 10.500
October 1 - December 31, 1997............................... 17.750 7.500
January 1-March 31, 1998.................................... 12.750 9.000
April 1-June 30, 1998....................................... 15.063 10.000
July 1-September 30, 1998................................... 12.875 1.813
October 1-December 31, 1998................................. 5.125 2.000
As of April 13, 1999, there were 69 holders of record of the Company's Common Stock. To date, the Company has not declared
or paid any dividends on its Common Stock. The payment of future dividends, if any, on the Company's Common Stock is within
the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial
condition, and other relevant factors. The instruments governing the Company's outstanding debt place certain restrictions on the
payment of dividends. The Company does not intend to declare any dividends on its Common Stock in the foreseeable future, but
instead intends to retain any earnings for use in the Company's operations.
15
ITEM 6. SELECTED FINANCIAL DATA
Nine-Month
Period Ended Fiscal Year Ended
Year ended December 31, December 31, March 31,
--------------------------------------- ------------ -----------------
1998 1997 1996 1995 1995
----------- ---------- ---------- ------------ -----------------
(in thousands, except per share data)
STATEMENT OF INCOME DATA:
Gain on sale of Contracts, net .... $ 58,306 $ 35,045 $ 20,565 $ 10,721 $ 8,922
Interest income.................... 41,841 23,526 19,980 9,220 10,561
Servicing fees..................... 25,156 14,487 7,893 3,485 2,489
Total revenue...................... 126,280 75,251 48,438 23,426 21,972
Operating expenses ................ 81,960 43,292 24,746 10,769 10,825
Net income......................... $ 25,703 $ 18,532 $ 14,097 $ 7,575 $ 6,666
Basic earnings per share (1)....... $ 1.67 $ 1.29 $ 1.05 $ 0.65 $ 0.75
Diluted net earnings per share (1). $ 1.50 $ 1.17 $ 0.93 $ 0.52 $ 0.61
December 31, March 31,
-------------------------------------------- -------------------
1998 1997 1996 1995 1995 1994
-------- ------- ------- ------- ------- --------
(in thousands)
BALANCE SHEET DATA:
Contracts held for sale......... $ 165,582 $ 68,271 $ 21,657 $ 19,549 $ 21,896 $ 647
Residual interest in
securitizations............... 217,848 124,616 67,252 41,586 5,154 2,294
Total assets.................... 431,962 225,895 101,946 77,878 57,975 16,538
Total liabilities............... 312,881 143,288 44,989 36,397 30,981 6,337
Total shareholders' equity...... $ 119,081 $ 82,607 $ 56,957 $ 41,481 $ 26,994 $ 10,201
(1) All prior periods have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition of the Company should be read in conjunction with "Selected Financial Data"
and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere in this
report.
Overview
Consumer Portfolio Services, Inc. (the "Company") and its subsidiaries primarily engage in the business of purchasing, selling
and servicing retail automobile installment sale contracts ("Contracts") originated by automobile dealers ("Dealers") located
throughout the Unites States. Through its purchase of Contracts, the Company provides indirect financing to Dealer customers
with limited credit histories, low incomes or past credit problems, who generally would not be expected to qualify for financing
provided by banks or by automobile manufacturers' captive finance companies.
The Company generates revenue primarily from the gains recognized on the sale or securitization of its Contracts, servicing fees
earned on Contracts sold, and interest earned on Residuals (as defined below) and on Contracts held for sale. Revenues from gains
on sale, interest and servicing fees for the year ended December 31, 1998, were $58.3 million, $41.8 million, and $25.2 million,
respectively. Such revenues for the year ended December 31, 1997, were $35.0 million, $23.5 million, and $14.5 million,
respectively, and for the year ended December 31, 1996, such revenues were $20.6 million, $20.0 million and $7.9 million,
respectively. The Company's income is affected by losses incurred on Contracts, whether such Contracts are held for sale or have
been sold in securitizations. The Company's cash requirements have been and will continue to be significant. Net cash used in
operating activities for the years ended December 31, 1998, 1997 and 1996, were $71.1 million, $26.1 million and $8.4 million,
respectively. See "Liquidity and Capital Resources."
The Company purchases Contracts with the primary intention of reselling them in securitization transactions as asset-backed
securities. The securitizations are generally structured as follows: First, the Company sells a portfolio of Contracts to a wholly
owned subsidiary ("SPS"), which has been established for the limited purpose of buying and reselling the Company's Contracts.
The SPS then transfers the same Contracts to either a grantor trust or an owner trust (the "Trust"). The Trust in turn issues interest-
bearing asset-backed securities (the "Certificates"), generally in an amount equal to the aggregate principal balance of the
Contracts. The Company typically sells these Contracts to the Trust at face value and without recourse, except that representations
and warranties similar to those provided by the Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Certificates issued by the Trust; the proceeds from the sale of the Certificates are then used to purchase the
Contracts from the Company. The Company purchases a financial guaranty insurance policy, guaranteeing timely payment of
principal and interest on the senior Certificates, from an insurance company (the "Certificate Insurer"). In addition, the Company
provides a credit enhancement for the benefit of the Certificate Insurer and the investors in the form of an initial cash deposit to an
account ("Spread Account") held by the Trust. The agreements governing the securitization transactions (collectively referred to
as the "Servicing Agreements") require that the initial deposits to the Spread Accounts be supplemented by a portion of collections
from the Contracts until the Spread Accounts reach specified levels, and then maintained at those levels. The specified levels are
generally computed as a percentage of the principal amount remaining unpaid under the related Certificates. The specified levels
at which the Spread Accounts are to be maintained will vary depending on the performance of the portfolios of Contracts held by
the Trusts and on other conditions, and may also be varied by agreement among the Company, the SPS, the Certificate Insurer and
the trustee. Such levels have increased and decreased from time to time based on performance of the portfolios, and have also
been varied by agreement. The specified levels applicable to the Company's sold pools increased materially in 1998, and have
recently been decreased, as is discussed under the heading "Liquidity and Capital Resources."
At the closing of each securitization, the Company removes from its consolidated balance sheet the Contracts held for sale and
adds to its consolidated balance sheet (i) the cash received and (ii) the estimated
17
fair value of the ownership interest that the Company retains in the Contracts sold in the securitization. That retained interest (the
"Residual") consists of (a) the cash held in the Spread Account and (b) the net interest receivables ("NIRs"). NIRs represent the
estimated discounted cash flows to be received by the Trust in the future, net of principal and interest payable with respect to the
Certificates, and certain expenses. The excess of the cash received and the assets retained by the Company over the carrying value
of the Contracts sold, less transaction costs, equals the net gain on sale of Contracts recorded by the Company.
The Company allocates its basis in the Contracts between the Certificates and the Residuals retained based on the relative fair
values of those portions on the date of the sale. The Company recognizes gains or losses attributable to the change in the fair value
of the Residuals, which are recorded at estimated fair value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of interests such as the Residuals, and accordingly, the Company determines the
estimated fair value of the Residuals by discounting the amount and timing of anticipated cash flows released from the Spread
Account (the cash out method), using a discount rate that the Company believes is appropriate for the risks involved. For that
valuation, the Company has used an effective discount rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and collection of the Contracts. In addition, the Company is
entitled to the cash flows from the Residuals that represent collections on the Contracts in excess of the amounts required to pay
principal and interest on the Certificates, the base servicing fees, and certain other fees (such as trustee and custodial fees). At the
end of each collection period, the aggregate cash collections from the Contracts are allocated first to the base servicing fees and
certain other fees such as trustee and custodial fees for the period, then to the Certificateholders for interest at the pass-through
rate on the Certificates plus principal as defined in the Servicing Agreements. If the amount of cash required for the above
allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related Spread
Account, the excess is released to the Company or in certain cases is transferred to other Spread Accounts that may be below their
required levels. Pursuant to certain Servicing Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create excess collateral (over-collateralization or OC account). If the Spread Account
balance is not at the required credit enhancement level, then the excess cash collected is retained in the Spread Account until the
specified level is achieved. The cash in the Spread Accounts is restricted from use by the Company. Cash held in the various
Spread Accounts is invested in high quality, liquid investment securities, as specified in the Servicing Agreements. Spread
Account balances are held by the Trusts on behalf of the Company as the owner of the Residuals. Such balances are generally
defined as percentages of the principal amount remaining unpaid on the balance.
The annual percentage rate ("APR") payable on the Contracts is significantly greater than the interest rate payable on the
Certificates. Accordingly, the Residuals described above are a significant asset of the Company. In determining the value of the
Residuals described above, the Company must estimate the future rates of prepayments, delinquencies, defaults and default loss
severity as they affect the amount and timing of the estimated cash flows. The Company estimates prepayments by evaluating
historical prepayment performance of comparable Contracts and the effect of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company estimates defaults and default loss severity using
available historical loss data for comparable Contracts and the specific characteristics of the Contracts purchased by the Company.
In valuing the residuals, the Company estimates that losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company would recognize additional revenue from the Residuals if the actual performance of the
Contracts were to be better than the original estimate, or the Company would increase the estimated fair value of the Residuals. If
the actual performance of the Contracts were to be worse than the original estimate, then a downward adjustment to the carrying
value of the Residuals would be required. Due
18
to the inherent uncertainty of the future performance of the underlying Contracts, the Company during 1998 established a
provision for future losses on the Residuals.
RESULTS OF OPERATIONS
The Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. During the year ended December 31, 1998, revenue increased $51.0 million, or 67.8%, compared to the year ended
December 31, 1997. Gain on sale of Contracts, net, increased by $23.3 million, or 66.4%, and represented 46.2% of total revenue
for the year ended December 31, 1998. The increase in gain on sale is largely due to the volume of Contracts which were sold in
the period. During the year ended December 31, 1998, the Company sold $948.3 million in Contracts, compared to $573.3 million
in the year ended December 31, 1997. For the years ended December 31, 1998 and 1997, $3.5 million and $4.1 million,
respectively, of provision for losses on Contracts held for sale was charged against gain on sale. Due to the inherent uncertainty of
the future performance of the underlying Contracts, the Company during 1998 established a provision for future losses on the
Residuals in the amount of $7.8 million that was charged against gain on sale.
Interest income increased by $18.3 million, or 77.8%, representing 33.1% of total revenues for the year ended December 31,
1998. The increase is due to the increase in the volume of contracts purchased and held for sale. During the year ended December
31, 1998, the Company purchased $1,076.5 million in Contracts from Dealers, compared to $632.1 million in the year ended
December 31, 1997. The Company expects that Contract purchases in the near future will be significantly reduced. Such a
reduction in Contract purchases are expected to cause a reduction in revenues (both interest and gain on sale) in future periods.
(See "Liquidity and Capital Resources").
Servicing fees increased by $10.7 million, or 73.6%, and represented 19.9% of total revenue. The increase in servicing fees is
due to the increase in Contract purchase, sale and servicing activities. As of December 31, 1998, the Company was earning
servicing fees on 128,025 Contracts approximating $1,362.8 million compared to 77,731 Contracts approximating $830.9 million
as of December 31, 1997. In addition to the $1,362.8 million in sold Contracts on which servicing fees were earned, the Company
was holding for sale and servicing an additional $176.1 million in Contracts for an aggregate servicing portfolio of $1,538.9
million. Amortization of NIRs increased by $22.2 million and represented 104.9% of residual interest income for the year ended
December 31, 1998, versus 59.0% for year ended December 31, 1997. The increase is due to higher losses on the servicing
portfolio and the increase in the NIRs from 1997 to 1998.
Expenses. During the year ended December 31, 1998, operating expenses increased $38.7 million, or 89.3%, compared to the
year ended December 31, 1997. Employee costs increased by $12.9 million, or 81.5%, and represented 35.2% of total operating
expenses. The increase is due to the addition of staff necessary to accommodate the Company's growth and certain increases in
salaries of existing staff. In light of the Company's decision to reduce its level of Contract purchases, it anticipates reducing
certain expenses in the immediate future, and maintaining such expenses at levels appropriate for the Company's level of activity
in future periods. General and administrative expenses increased by $6.5 million, or 45.7% and represented 25.2% of total
operating expenses. Increases in general and administrative expenses included increases in telecommunications, stationary, credit
reports and other related items as a result of increases in the volume of purchasing and servicing of Contracts.
Interest expense increased $12.8 million, or 139.7%, and represented 26.9% of total operating expenses. The increase is due in
part to the interest paid on an additional $30.0 million in subordinated debt securities issued by the Company during 1998 as well
as interest paid on the outstanding balance on a revolving line of credit (the "Residual Line"). Interest expense was also affected
by the volume of Contracts held for sale as well as by the Company's cost of borrowed funds. (See "Liquidity and Captial
Resources").
Marketing expenses increased by $5.0 million or 272.7%, and represented 8.4% of total expenses. The increase is primarily due
to the increase in printing, travel, promotion and convention expenses. Fees paid to
19
marketing representatives for their role in the submission of Contracts ultimately purchased by the Company are included as a
component in gain on sale of Contracts, net.
Occupancy expenses increased by $863,000 or 61.5%, and represented 2.8% of total expenses. Depreciation and amortization
expenses increased by $498,000 or 65.8%, and represented 1.5% of total expenses. In November 1998, the Company moved its
headquarters to a new 115,000 square foot facility. The Company has agreed to lease the new headquarters facility for a ten-year
term, with base rent of $1.9 million for the first five years, and $2.1 million for years six through ten. In addition to base rent, the
Company has agreed to pay property taxes, maintenance, and other expenses of the property. Occupancy of the new building can
be expected to increase the Company's overall occupancy expenses in the future beginning with commencement of the lease. The
Company has subleased its former headquarters location.
The result for the year ended December 31, 1998, includes a net operating loss of $1.1 million from the Company's subsidiary
Samco. For the year ended December 31, 1997, Samco had net income of $1.2 million. The Company terminated all operations of
Samco during the first quarter of 1999.
The result for the year ended December 31, 1998, includes net income of $1.2 million from the Company's subsidiary LINC. For
the year ended Decmber 31, 1997, LINC had a net operating loss of $11,000. The Company intends to terminate the operations of
LINC during the second quarter of 1999.
The result for the year ended December 31, 1998, includes net income of $298,000 from the Company's subsidiary CPS
Leasing, Inc. For the year ended Decmber 31, 1997, CPS Leasing, Inc. had a net operating loss of $88,000. The Company intends
to sell CPS Leasing, Inc. during the second quarter of 1999.
The results for the years ended December 31, 1998 and 1997, include $52,000 and $849,000, respectively, in net income from
the Company's investment in 38% of NAB Asset Corp.
The Company's effective tax rate was 42.0% for the years ended December 31, 1998 and 1997.
The Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenue. During the year ended December 31, 1997, revenue increased $26.8 million, or 55.4%, compared to the year ended
December 31, 1996. Gain on sale of Contracts, net, increased by $14.5 million, or 70.4%, and represented 46.6% of total revenue
for the year ended December 31, 1997. The increase in gain on sale is largely due to the volume of Contracts which were sold in
the period. During the year ended December 31, 1997, the Company sold $573.3 million in Contracts, compared to $341.0 million
in the year ended December 31, 1996. For the years ended December 31, 1997 and 1996, $4.1 million and $2.8 million,
respectively, of provision for losses on Contracts held for sale was charged against gain on sale.
Interest income increased by $3.5 million, or 17.7%, representing 31.3% of total revenues for the year ended December 31,
1997. The increase is due to the increase in the volume of contracts purchased and held for sale. During the year ended December
31, 1997, the Company purchased $632.1 million in Contracts from Dealers, compared to $351.4 million in the year ended
December 31, 1996.
Servicing fees increased by $6.6 million, or 83.5%, and represented 19.3% of total revenue. The increase in servicing fees is due
to the Company's continued expansion of its Contract purchase, sale and servicing activities. As of December 31, 1997, the
Company was earning servicing fees on 77,731 Contracts approximating $830.9 million compared to 45,363 Contracts
approximating $483.1 million as of December 31, 1996. In addition to the $830.9 million in sold Contracts on which servicing
fees were earned, the Company was holding for sale and servicing an additional $71.8 million in Contracts for an aggregate
servicing portfolio of $902.7 million. Amortization of NIRs increased by $7.2 million and represented 59.0% of residual interest
income for the year ended December 31, 1997 versus 38.0% for year ended December 31, 1996. The increase is primarily due to
the increase in the average age of the Contracts making up the Company's servicing portfolio and consequently the increase in
charge-offs and corresponding reduction of residual interest income. The Company expects these increases in the ratio of
amortization of NIRs to Residual interest income to continue until the size and average age of the servicing portfolio stabilizes.
20
Expenses. During the year ended December 31, 1997, operating expenses increased $18.5 million, or 75.0%, compared to the
year ended December 31, 1996. Employee costs increased by $7.0 million, or 78.0%, and represented 36.7% of total operating
expenses. The increase is due to the addition of staff necessary to accommodate the Company's growth and certain increases in
salaries of existing staff. General and administrative expenses increased by $6.9 million, or 95.2% and represented 32.7% of total
operating expenses. Increases in general and administrative expenses included increases in telecommunications, stationery, credit
reports and other related items as a result of increases in the volume of purchasing and servicing of Contracts.
Interest expense increased $3.4 million, or 58.9%, and represented 21.2% of total operating expenses. The increase is due in part
to the interest paid on an additional $35.0 million in subordinated debt securities issued by the Company during 1997. Interest
expense was also impacted by the volume of Contracts held for sale as well as by the Company's cost of borrowed funds.
Marketing expenses increased by $170,789 or 10.2%, and represented 4.3% of total expenses. The increase is primarily due to
the increase in printing, travel, promotion and convention expenses. Fees paid to marketing representatives for their role in the
submission of Contracts ultimately purchased by the Company are included as a component in gain on sale of Contracts, net.
Occupancy expenses increased by $635,506 or 82.7%, and represented 3.2% of total expenses. Depreciation and amortization
expenses increased by $481,548 or 174.9%, and represented 1.8% of total expenses. During 1997, the Company established a
satellite collection branch in Chesapeake, Virginia and leased additional office space near its headquarters in Irvine, California.
This resulted in an increase in base rent expense of $906,066 for the year ended December 31, 1997. The increase in occupancy,
depreciation and amortization is due primarily to the establishment of this additional office space and the related furniture, fixtures
and equipment. The Company has agreed to lease a new headquarters facility, which is currently under construction. The lease
will be for a ten-year term, with base rent of $1.9 million for the first five years, and $2.1 million for years six through ten. In
addition to base rent, the Company has agreed to pay property taxes, maintenance, and other expenses of the property. Occupancy
of the new building can be expected to increase the Company's overall occupancy expenses in the future beginning with
commencement of the lease, which will commence upon completion of the building, currently scheduled for September 1998.
The results for the year ended December 31, 1997 include net income of $1.2 million from the Company's subsidiary Samco.
For the year ended December 31, 1996, Samco incurred a net operating loss of $491,000.
The results for the year ended December 31, 1997 also include net operating losses of $11,000 from the Company's subsidiary
LINC. For the year ended December 31, 1996, LINC incurred a net operating loss of $324,000.
In addition, the Company's results for the year ended December 31, 1997, include $88,000 in net operating losses from the
Company's subsidiary, CPS Leasing, Inc., which was acquired in January 1997, and $849,000 in net income from the Company's
investment in 38% of NAB Asset Corp.
The Company's effective tax rate was 42.0% for the year ended December 31, 1997 and 40.5% for the year ended December 31,
1996. See note 12 to the Notes to Consolidated Financial Statements.
21
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's business requires substantial cash to support its operating activities. The Company's primary sources of cash
from operating activities are amounts borrowed under its various warehouse lines, servicing fees on portfolios of Contracts
previously sold, proceeds from the sales of Contracts, customer payments on Contracts held for sale, interest earned on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary uses of cash are the purchases of Contracts,
repayment of amounts borrowed under its various warehouse lines, operating expenses such as employee, interest, and occupancy
expenses, the establishment of and further contributions to Spread Accounts and income taxes. As a result, the Company is
dependent on its warehouse lines of credit and its residual financing facility in order to finance its continued operations. If the
Company's principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of
borrowing capacity would have a material adverse effect on the Company's results of operations unless the Company found a
suitable alternative source.
Net cash used in operating activities was $71.1 million during the year ended December 31, 1998, compared to net cash used of
$26.1 million during the year ended December 31, 1997. Cash used for purchasing Contracts was $1,076.5 million, an increase of
$444.4 million, or 70.3%, over cash used for purchasing Contracts in the year ended December 31, 1997. Cash provided from the
liquidation of Contracts was $975.6 million, an increase of $394.2 million, or 67.8%, over cash provided from liquidation of
Contracts in the year ended December 31, 1997.
On a day-to-day basis, the Company funds its purchases of Contracts from Dealers by drawing on either of two warehouse lines
of credit (collectively referred to as the "Warehouse Lines"), and pledges the purchased Contracts to one or the other warehouse
lender. The amount borrowed under the Warehouse Lines increases until the Company sells the pledged Contracts in a
securitization transaction, at which time the majority of the proceeds of the sale are used to pay down the related balance of the
Warehouse Lines. Securitization transactions are typically completed on a quarterly basis. The amount of Contracts that the
Company can hold for sale prior to a securitization is limited by its available cash and the Warehouse Lines, which permit
borrowings of up to a maximum total of $300.0 million.
The Company's cash requirements have been and will continue to be significant. The Company may borrow under the
Warehouse Lines no more than an amount generally defined as a percentage ("advance rate") of the principal amount of the
Contracts pledged to the respective warehouse lenders. The difference between what the Company may borrow and what it pays
Dealers for Contracts must come from the Company's working capital.
Under one of the Company's two Warehouse Lines, an affiliate of First Union National Bank lends to the Company, with the
loans funded by commercial paper issued by that affiliate, and secured by Contracts pledged periodically by the Company. The
First Union line has a maximum lending amount of $200.0 million. Under the Company's second warehouse line of credit, the
Company borrows from General Electric Capital Corporation ("GECC"). The GECC line was entered into in November 1998, and
replaced a prior line of credit arrangement under which an affiliate of GECC lent money to the Company in a structure similar to
that of the First Union line. The GECC line has an aggregate maximum lending amount of $100.0 million. The maximum amount
outstanding under the GECC line or its predecessor line in 1998 was $100.0 million and the average was $51.3 million. Interest
under the First Union line is at a variable rate, indexed to prevailing rates for commercial paper. Interest under the GECC line is
payable at a rate of 3.75% per annum over LIBOR. The two lines together had an outstanding balance of $151.9 million at
December 31, 1998, as compared to $61.7 million at December 31, 1997. The Company uses the two Warehouse Lines in tandem,
pledging specific Contracts to each lender alternatively.
22
The amount of cash that the Company needs for daily operations is most heavily dependent on (i) its level of Contract purchases,
and (ii) the amount that the Company may borrow under its Warehouse Lines, secured by the Contracts purchased. Over the three-
year period 1996 through 1998, the Company's annual Contract purchases increased from $351.4 million in 1996 to $1,076.5
million in 1998. From January 1996 through November 1997, the Company was able to borrow, under the predecessor to the
GECC Line, 97% of the principal amount of the Contracts purchased. The First Union Line allows the Company to borrow a
varying percentage (not in excess of 95%) of Contract balances, depending on the performance of Contracts pledged to that
lender. The advance rate under the First Union Line decreased during 1998 to an average of approximately 91% in the fourth
quarter, and the Company has no expectation that it will be able to borrow a higher percentage with respect to Contracts pledged
to the First Union Line in the immediate future. The GECC Line (entered into in November 1998) allows the Company to borrow
no more than 88% of the principal amount of the pledged Contracts. The reduction in the relative advance rates under the
Warehouse Lines, combined with the Company's increased Contract purchase activity in 1998 as compared with previous years,
has materially increased the Company's working capital requirements.
When the Company subsequently sells the warehoused Contracts in securitization transactions, the Servicing Agreements
require the Company to make a significant initial cash deposit, for purposes of credit enhancement, to the Spread Accounts.
Excess cash flows from the securitized Contracts are also deposited into the Spread Accounts until such time as the Spread
Account balance reaches its requisite level, which is computed as a specified percent of the outstanding balance of the related
asset-backed securities or collateral.
During the year ended December 31, 1998, cash used for initial deposits to Spread Accounts was $45.6 million, an increase of
$25.6 million, or 127.4%, from the amount of cash used for initial deposits to Spread Accounts in the year ended December 31,
1997. The cash used increased because (i) the Company sold more Contracts in 1998 than in 1997, and (ii) in order to achieve the
desired ratings for the Certificates, the required percentage initial deposit was raised from 3.5% in the prior year's transactions to
8.0% in the transaction completed in the third quarter, with an additional credit enhancement of 2.0% over-collateralization. The
Company subsequently reached an agreement, discussed below, that allowed a reduced initial cash deposit of 3.0% in the
Company's fourth quarter 1998 securitization transaction. Cash used for subsequent deposits to Spread Accounts for the year
ended December 31, 1998, was $54.0 million, an increase of $22.3 million, or 70.4%, over cash used for subsequent deposits to
Spread Accounts in the year ended December 31, 1997. Such subsequent deposits into Spread Accounts in 1998 include $22.2
million of cash used to pay down certain senior series of Certificates to create excess collateral in an over-collateralization
account. Cash released from Spread Accounts for the year ended December 31, 1998, was $16.1 million, an increase of $229,000,
or 1.5%, over cash released from Spread Accounts in the year ended December 31, 1997. Changes in deposits to and releases from
Spread Accounts are affected by the relative size, seasoning and performance of the various pools of sold Contracts that make up
the Company's Servicing Portfolio.
During 1998, 13 of the 22 Trusts incurred cumulative net losses as a percentage of the original contract balance in excess of the
predetermined levels specified in the respective Servicing Agreements. Accordingly, pursuant to the Servicing Agreements, the
specified credit enhancement levels were increased. As a result of this and certain cross collateralization arrangements, excess
cash flows that would otherwise have been released to the Company were retained in the Spread Accounts to bring the balance of
those Spread Accounts up to a higher level. In addition to requiring higher Spread Account levels, the Servicing Agreements
provide the Certificate Insurer with certain other rights and remedies which have been waived on a monthly basis by the
Certificate Insurer. Approximately $24.3 million of cash flows were delayed and retained in the Spread Accounts as of December
31, 1998. The higher requisite Spread Account levels ranged from 30% to 100% of the related outstanding balance of the
securitized pools. In April 1999, the Company entered into an amendment with the Certificate Insurer of the Company's asset-
backed securities to cap the amount of cash retained in the Spread Accounts at 21% of the outstanding securities balance for 19 of
the Company's 22 securitized pools. The agreement is subject to certain performance measures that may
23
result in an increase in the maximum level to 25% of the outstanding principal balance of the securities. The effectiveness of the
amendment is contingent upon approval by holders of certain subordinated interests in several of the Trusts. As of March 31,
1999, the aggregate Spread Account balance of the related 19 securitized pools was 15.9% of the outstanding principal balance of
the securities.
The Servicing Agreements call for the requisite levels of the various Spread Accounts to increase if the related receivables
experience delinquencies, repossessions or net losses in excess of certain predetermined levels. During the Company's history, the
predetermined levels have frequently been reached or exceeded, causing the requisite levels of certain Spread Accounts to be
raised. During 1998, the requisite levels of the Spread Accounts were raised to the extent that the Company did not receive any
releases of cash from the Spread Accounts subsequent to June 1998. The requisite levels of the Spread Accounts may be returned
to the original lower levels if the delinquency, repossession and net loss performance of the related receivables is reduced below
the pre-determined levels. In addition, on two occasions, the parties to the pertinent agreements have made modifications that
effectively raised the permissible delinquency, repossession and net loss levels, thus resulting in Spread Accounts reverting to
their original requisite levels. As of December 31, 1998, the Spread Accounts for 18 of the Company's 22 securitized pools had
greater cash balances than original requisite levels would require due to delinquency, repossession or net loss performance of 13
of the 22 securitized pools. Such Spread Account balances therefore included approximately $24.3 million more than would have
been required at the original requisite levels. Funding such increased balances has materially increased the Company's capital
requirements.
The Company did not sell any Contracts in the first quarter of 1999, and is currently evaluating alternative structures for selling
its Contracts during the second quarter of 1999. Due to the absence of any gain on sale in the first quarter, the Company expects to
report a loss for such quarter. Alternatives being considered by the Company include various securitization structures,
unsecuritized sale of Contracts, or perhaps, some combination of those structures for future Contract sales. The Company expects
that if an unsecuritized sale of Contracts is completed on a servicing released basis, a loss on sale of such Contracts would be
incurred, which may result in the Company's reporting a loss for the second quarter. The Company has entered into a letter of
intent regarding a proposed sale in the second quarter of up to $300.0 million of Contracts on an unsecuritized basis, servicing-
released. Such a sale would be at a price in excess of the blended warehouse line advance rates applicable to the Contracts to be
sold, but slightly less than the Company's cost basis in such Contracts. Accordingly, such a transaction (as to which there can be
no assurance) would result in the Company's (i) recording a loss on such sale, and (ii) receiving net cash. Recording such a loss
may result in the Company reporting a loss for the second quarter. Cash received in such a transaction would be applied to meet in
part the Company's liquidity and capital requirements identified herein. If the Company were to incur a loss for the second quarter
of 1999 it would be in default under its agreements regarding the Residual Line. Unless waived by the lender, the default could
result in acceleration of the indebtedness under the Residual Line and a cross default on the Warehouse Lines. The lender would
receive any releases from Spread Accounts to retire outstanding principal and interest. The Company believes that the lender
would waive such a default. In the event the lender does not waive the default, the Company believes that cash flows from
operations would be sufficient to fund its obligations as they become due and payable. There can be no assurance, however, that
the lender would waive the default or that other cash flows would be sufficient to fund the Company's operations.
The Company is also exploring additional financing possibilities, focusing on issuance of additional secured debt. Although
such explorations have involved discussions with, and expressions of interest from, various investment banks, there can be no
assurance that any such transactions will take place.
Capital Resources
The Company funds the increase in its servicing portfolio through off balance sheet securitization transactions, as discussed
above, and funds its other capital needs with cash from operations and with the proceeds from the issuance of long-term debt
and/or equity. During the year ended December 31, 1998, the Company completed four securitization transactions, borrowed
$33.0 million under a new revolving line of credit, issued $25.0 million of subordinated debt, sold common stock to an affiliated
party for $5.0 million, and received $5.0 million in loans from affiliated parties. The interest rate payable on the senior Certificates
issued in the Company's 1998 securitization transactions ranged from 5.47% - 6.09%, as compared with 6.07% - 6.65% payable
on the similar securities issued in 1997. The reduction in the rates payable is primarily due to reductions in rates payable on U.S.
Treasuries of similar maturity.
The table below documents the Company's history of Contract securitizations, comprising sales to 25 securitization trusts.
24
Securitized
Period Funded Dollar Amount Ratings(1) Rating Agency Pool Name
------------- ------------- ---------- ------------- ---------
(In thousands)
April 1993 $4,990 A Duff & Phelps Alton Grantor Trust 1993-1
May 1993 3,933 A Duff & Phelps Alton Grantor Trust 1993-1
June 1993 3,467 A Duff & Phelps Alton Grantor Trust 1993-1
July 1993 5,575 A Duff & Phelps Alton Grantor Trust 1993-2
August 1993 3,336 A Duff & Phelps Alton Grantor Trust 1993-2
September 1993 3,578 A Duff & Phelps Alton Grantor Trust 1993-2
October 1993 1,921 A Duff & Phelps Alton Grantor Trust 1993-2
November 1993 1,816 A Duff & Phelps Alton Grantor Trust 1993-3
December 1993 6,694 A Duff & Phelps Alton Grantor Trust 1993-3
January 1994 1,998 A Duff & Phelps Alton Grantor Trust 1993-3
March 1994 20,787 A Duff & Phelps Alton Grantor Trust 1993-4
June 1994 24,592 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-1
September 1994 28,916 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-2
October 1994 13,136 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-3
December 1994 28,893 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-4
February 1995 20,084 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-1
June 1995 49,290 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-2
September 1995 45,009 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-3
September 1995 2,369 BB S&P CPS Auto Grantor Trust 1995-3
December 1995 53,634 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-4
December 1995 2,823 BB S&P CPS Auto Grantor Trust 1995-4
March 1996 63,747 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-1
March 1996 3,355 BB S&P CPS Auto Grantor Trust 1996-1
June 1996 (2) 84,456 Aaa/AAA Moody's/S&P Fasco Auto Grantor Trust 1996-1
June 1996 4,445 BB S&P Fasco Auto Grantor Trust 1996-1
September 1996 87,523 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-2
September 1996 4,606 BB S&P CPS Auto Grantor Trust 1996-2
December 1996 88,215 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-3
December 1996 4,643 BB S&P CPS Auto Grantor Trust 1996-3
March 1997 97,211 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1997-1
March 1997 5,116 BB S&P CPS Auto Grantor Trust 1997-1
May 1997 113,394 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1997-2
May 1997 5,968 BB S&P CPS Auto Grantor Trust 1997-2
August 1997 142,500 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-3 (3)
August 1997 7,499 BB S&P CPS Auto Receivables Trust 1997-3 (3)
October 1997 100,568 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-4 (3)
October 1997 5,293 BB S&P CPS Auto Receivables Trust 1997-4 (3)
December 1997 90,925 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1997-5 (3)
December 1997 4,781 BB S&P CPS Auto Receivables Trust 1997-5 (3)
March 1998 177,607 Aaa/AAA Moody's/S&P CPS Grantor Trust 1998-1
March 1998 9,348 BB S&P CPS Grantor Trust 1998-1
May 1998 200,490 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1998-2
May 1998 10,552 BB S&P CPS Auto Grantor Trust 1998-2
July 1998 (4) 36,000 P-1/A-1+ Moody's/S&P CPS Auto Receivables Trust 1998-3 (3)
July 1998 199,532 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1998-3 (3)
December 1998 32,500 P-1/A-1+ Moody's/S&P CPS Auto Receivables Trust 1998-4 (3)
December 1998 277,500 Aaa/AAA Moody's/S&P CPS Auto Receivables Trust 1998-4 (3)
---------
TOTAL 2,184,615
(1) Commencing with the securitization completed on June 28, 1994, the
principal and interest due on the asset-backed securities issued by the
various trusts have been guaranteed by Financial Security Assurance Inc.
("FSA"), enabling the issuer to obtain Aaa/AAA or P-1/A-1+ ratings for the
asset-backed securities issued in such transactions. See "Business --
Purchase and Sale of Contracts -- Securitization and Sale of Contracts to
Institutional Investors."
(2) Commencing with the securitization completed on June 27, 1996, asset-backed
securities with Aaa/AAA or P-1/A-1+ ratings have been sold through public
offerings pursuant to registration statements filed with the Securities and
Exchange Commission.
(3) These Trusts are structured as "owner trusts" rather than as "grantor
trusts".
(4) Commencing with the securitization completed on July 28, 1998, the Company
began using a structure that included a guaranteed money market tranche of
asset-backed securities, rated P-1/A-1+.
In April 1998, the Company established a $33.3 million Residual Line with State Street Bank and Trust Company, Prudential
Insurance and an affiliate of Prudential. Borrowings under the Residual Line bear
25
interest at LIBOR + 4.0%, and are secured by all of the Company's assets, including its residual interest in securitizations. The
Residual Line is a revolving facility for one year, after which it converts into a loan with a maximum term of four years, due and
payable earlier if and to the extent that the Company has "available cash," as defined in the Residual Line.
Due to the Company's continuing purchases of Contracts and the need to fund Spread Accounts when those Contracts are sold in
securitization transactions, the Company has a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company's Contract purchases, the required level of initial Spread Account deposits, and the extent to
which the Spread Accounts either release cash to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any releases of cash from Spread Accounts since June 1998, together with the reduction in advance rates
available to the Company under its Warehouse Lines, has materially increased the Company's capital requirements. To reduce its
capital requirements and to meet those requirements, the Company has begun to implement a three-part plan: the plan includes (i)
issuance of debt and equity securities, (ii) agreements with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 issued $25.0 million of subordinated promissory notes due
November 30, 2003, to an affiliate of Levine Leichtman Capital Partners, Inc. ("LLCP"), and received the proceeds (net of fees
and expenses) of approximately $23.7 million. The Company also issued warrants to purchase up to 3,450,000 shares of common
stock at $3.00 per share, exercisable through November 30, 2005. The debt bears interest at 13.5% per annum, and may not be
prepaid without penalty prior to November 1, 2002. Simultaneously with the consummation of that transaction, certain affiliates of
the Company, who had lent the Company an aggregate of $5.0 million on a short-term basis in August and September 1998,
agreed to subordinate their indebtedness to the indebtedness in favor of LLCP, to extend the maturity of their debt until June 2004,
and to reduce their interest rate from 15% to 12.5%. Such affiliates received in return the option to convert such debt into an
aggregate of 1,666,667 shares of common stock at the rate of $3.00 per share through maturity at June 30, 2004. The effective cost
of this new capital is affected by the valuation of the warrant and the conversion option, but in all events represents a material
increase in the cost of capital resources as compared with the Company's previous issuances of senior or subordinated debt, which
are reviewed below. Additional capital will be required and the Company is exploring its alternatives to raise such capital of
approximately $15.0 million, which could include sale of debt or equity instruments. Any debt issued may involve some equity
participation. The sale of any equity or convertible debt could be dilutive to existing stockholders. The terms of any such
additional issuance have not been determined as of the date of this report, and there can be no assurance that any such transaction
will occur.
Also in November 1998, as the second step in its plan, the Company reached an agreement with the Certificate Insurer regarding
initial cash deposits. In this agreement, the Certificate Insurer has committed to insure asset-backed securities issued by the Trusts
with respect to at least $560.0 million of Contracts, while requiring an initial cash deposit of 3% of principal. The commitment is
subject to underwriting criteria and
26
market conditions. Of the $560.0 million committed, $310.0 million was used in the Company's December 1998 securitization
transaction. The Company expects to use the balance of that commitment in its next securitization transaction. The Company's
agreement with the Certificate Insurer also required that the Company issue to the Certificate Insurer or its designee warrants to
purchase common stock at $3.00 per share, exercisable through the fifth anniversary of the warrant's issuance. Such warrants are
exercisable with respect to 2,525,114 of the Company's common shares, subject to standard anti-dilution adjustments. In April
1999, the Company entered into an amendment with the Certificate Insurer to reduce and limit the maximum levels for the Spread
Accounts of certain pools to 21% of the outstanding principal balance of the securities. The agreement is subject to certain
performance measures that may result in an increase in the maximum level to 25% of the outstanding principal balance of the
securities. The effectiveness of the amendment is contingent upon approval of certain subordinated Certificateholders.
As the third part of its plan, the Company reduced its planned level of Contract purchases initially to not more than $200.0
million per quarter beginning in November 1998. In the first quarter of 1999, the Company purchased $158.0 million of Contracts.
Since such time, the Company has further reduced Contract purchases and expects to purchase less than $100.0 million for the
second quarter of 1999. Such reductions in Contract purchases will reduce materially the Company's capital requirements.
Over the three-year period ended December 31, 1998, the Company has increased its capitalization by issuing $33.0 million of
senior debt, an aggregate of $65.0 million of subordinated debt (which is convertible into, or was issued with warrants to
purchase, common stock), $20.0 million of related party debt ($15.0 million of which is partially convertible and $5.0 million
which is entirely convertible) and $5.0 million of capital stock. The following review of the terms of such issuances shows that the
cost of such capital increased materially in 1998:
In April 1997 the Company issued, in a public offering, $20.0 million of subordinated partially convertible notes due 2004,
which bear an interest rate of 10.50% per annum. These notes are convertible as to 25% of their principal amount into common
stock of CPS at $10.15 per share. In June 1997 the Company issued to a related party $15.0 million of partially convertible notes
due 2004. These notes are convertible as to 20% of their principal amount into common stock of CPS at $11.25 per share. In April
1998, the Company borrowed $33.0 million as a senior secured loan, which may commence amortization in April 1999. This loan
bears interest at a rate equal to 4% of per annum over LIBOR (9.54% at December 31, 1998. CPS borrowed $5.0 million from
related parties in August and September 1998, the terms of which were renegotiated in November 1998, in connection with the
issuance of $25.0 million of subordinated notes to LLCP, now restructured as described below. A related party also purchased
$5.0 million of Company common stock in July 1998, at $11.275 per share.
The cost of capital has increased further in 1999. To meet a portion of its capital requirements, the Company on April 15, 1999,
issued $5.0 million in subordinated notes to LLCP (the "New LLCP Notes"). The notes bear interest at 14.5% per annum and
include warrants to purchase 1,335,000 shares of the Company's common stock at $0.01 per share. As part of the agreement to
issue the New LLCP Notes, the Company was required to restructure the terms of the $25.0 subordinated promissory notes
discussed above. Such restructuring included an increase in the interest rate from 13.5% to 14.5%, a reduction in the number of
warrants issued to purchase the Company's common stock from 3,450,000 to 3,115,000, a waiver by LLCP of certain defaults
under the notes sold to LLCP in November 1998, and a reduction in the exercise price of the warrants from $3.00 per share to
$0.01 per share. Among the agreements entered into in connection with the issuance of the New LLCP Notes are agreements by
Stanwich Financial Services Corp. ("SFSC"), an affiliate of the chairman of the Company's board of directors, to purchase an
additional $15.0 million of notes, and of the Company to sell such notes. The terms of such notes are to be not less favorable to
the Company then (i) those that would be available in a transaction with a non-affiliate, and (ii) those applicable to the New LLCP
Notes. Sale of such notes would likely therefore involve some degree of equity participation, which could be dilutive to other
holders of the Company's common stock. SFSC's commitment in turn has been collateralized by certain assets pledged by the
chairman of the Company's board of directors and the president of the Company. Additionally, the New LLCP Notes have been
personally guaranteed by the chairman of the Company's board of directors and the president of the Company.
27
Forward-Looking Statements
The descriptions of the Company's business and activities set forth in this report and in other past and future reports and
announcements by the Company may contain forward-looking statements and assumptions regarding the future activities and
results of operations of the Company. Actual results may be adversely affected by various factors including the following:
increases in unemployment or other changes in domestic economic conditions which adversely affect the sales of new and used
automobiles and may result in increased delinquencies, foreclosures and losses on Contracts; adverse economic conditions in
geographic areas in which the Company's business is concentrated; changes in interest rates, adverse changes in the market for
securitized receivables pools, or a substantial lengthening of the Company's warehousing period, each of which could restrict the
Company's ability to obtain cash for new Contract originations and purchases; increases in the amounts required to be set aside in
Spread Accounts or to be expended for other forms of credit enhancement to support future securitizations; the reduction or
unavailability of warehouse lines of credit which the Company uses to accumulate Contracts for securitization transactions;
increased competition from other automobile finance sources; reduction in the number and amount of acceptable Contracts
submitted to the Company by its automobile Dealer network; changes in government regulations affecting consumer credit; and
other economic, financial and regulatory factors beyond the Company's control. A further discussion of factors that may cause
actual results to differ, or may otherwise have an adverse effect on the Company's financial condition or results of operations, is
contained in the exhibit to this report titled "cautionary statement," incorporated herein by this reference.
New Accounting Pronouncements
The Company has adopted in 1998 and will adopt in future periods new accounting pronouncements. For information on how
adoption has affected and will affect the Financial Statements, see Note 1 of Notes to Consolidated Financial Statements.
Year 2000
Overview. The Year 2000 issue is predicated on the concept that some database files may contain date fields that will not
support century functions and that some programs may not support century functions even if the date fields are present. With the
change of millennium, the inability to properly process century functions may create halts or sort/calculation errors within
programs that use century information in calculation and functions.
The Company predominantly uses accounting and installment loan application processing software against defined relational
database files. Most financial software has long ago been forced to deal with a four byte date field due to long term maturity dates,
bond yield calculations and mortgage amortization schedules. The
28
Company has been cognizant of Year 2000 considerations since late 1994, when contracts with maturity dates in the year 2000
were first purchased.
Plan. The Company's plan to assess the Year 2000 issue consists of a three-phase process. The first phase of the process, which
has been completed, consisted of assessing all user programs of the Company's mainframe computer. Those user programs that
were not compliant were either corrected or the necessary software patches have been identified and ordered. There were no
critical user programs identified that could not be modified to be compliant. In addition, the Company's mainframe computer's
operating system was also tested and was deemed to be compliant as well.
The second phase of the Company's testing will consist of testing all personal computers for compliance. The Company has
engaged an outside specialist to facilitate testing and administering corrective procedures where needed. The Company estimates
that phase two will be completed by June 30, 1999.
The third and final stage of testing consists of identifying key vendors of the Company's operations and requesting that those
vendors complete a Year 2000 compliance questionnaire. Any vendors found to be non-compliant will be continuously monitored
for progress towards compliance. The Company estimates this phase of testing will also be completed by June 30, 1999.
Costs. As the majority of the testing was performed internally by the Company's information systems department, the Company
estimates the costs to complete all phases of testing, including any necessary modifications, to be insignificant to the results of
operations.
At this time, the risks associated with the Company's Year 2000 issues, both internally and as related to third party business
partners and suppliers are not completely known. Through the Company's plan of analysis and identification, it expects to identify
substantially all of its Year 2000 related risks. Although the risks have not been completely identified, the Company believes that
the most realistic worst case scenario would be that the Company would suffer from full or intermittent power outages at some or
all of its locations. Depending upon the locations affected and estimated duration, this would entail recovery of the main
application systems at other locations and or move to manual processes. Manual processes have been developed as part of the
overall contingency plan. In relation to this, system data dumps are scheduled to take place prior to the millennium date change to
ensure access to all Company mission critical data should any system not be accessible for any reason.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company's funding strategy is largely dependent upon issuing interest bearing asset-backed securities and incurring debt.
Therefore, upward fluctuations in interest rates may adversely impact the Company's profitability, while downward fluctuations
may improve the Company's profitability. The Company uses several strategies to minimize the risk of interest rate fluctuations,
including offering only fixed rate contracts to obligors, regular sales of auto Contracts to the Trusts, and pre-funding
securitizations, whereby the amount of asset-backed securities issued in a securitization exceeds the amount of Contracts initially
sold to the Trusts. The proceeds from the pre-funded portion are held in an escrow account until the Company sells the additional
Contracts to the Trust in amounts up to the balance of the pre-funded escrow account. In pre-funded securitizations, the Company
locks in the borrowing costs with respect to the loans it subsequently delivers to the Trust. However, the Company incurs an
expense in pre-funded securitizations equal to the difference between the money market yields earned on the proceeds held in
escrow prior to subsequent delivery of Contracts and the interest rate paid on the asset-backed securities outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This report includes Consolidated Financial Statements, Notes thereto and an Independent Auditors' Report, at the pages
indicated below. Certain unaudited quarterly financial information is included in the Notes to Consolidated Financial Statements,
as Note 18.
INDEX TO FINANCIAL STATEMENTS
Page
Reference
---------
Independent Auditors' Report.............................................................................F-1
Consolidated Balance Sheets as of December 31, 1998, and 1997............................................F-2
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996..................F-3
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1997, and 1996..................................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996..............F-5
Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997, and 1996.........F-6
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
PART III
Information regarding directors of the registrant is incorporated by reference to the registrant's definitive proxy statement for its
annual meeting of shareholders to be held in 1999 (the "1999 Proxy Statement"). The 1999 Proxy Statement will be filed not later
than April 30, 1999. Information regarding executive officers of the registrant appears in Part I of this report, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the 1999 Proxy Statement.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements listed above under the caption "Index to Financial Statements" are filed as a part of this report. No
financial statement schedules are filed as the required information is inapplicable or the information is presented in the
consolidated financial statements or the related notes. Separate financial statements of the Company have been omitted as the
Company is primarily an operating company and its subsidiaries are wholly owned and do not have minority equity interests
and/or indebtedness to any person other than the Company in amounts which together exceed 5% of the total consolidated assets
as shown by the most recent year-end consolidated balance sheet.
The following exhibits are filed as part of this report:
3.1 Restated Articles of Incorporation (incorporated by reference to exhibit
filed with registrant's report on Form 10-KSB dated December 31, 1995)
3.2 Amended and Restated Bylaws. (incorporated by reference to exhibit filed
with registrant's report on Form 10-K dated December 31, 1997)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities ("RISRs")
(incorporated by reference to exhibit filed with registrant's report on
Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRs (incorporated by reference to
exhibit filed with registrant's report on Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")
(incorporated by reference to exhibit filed with registrant's
registration statement on Form S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (incorporated by reference
to exhibit filed with registrant's registration statement on Form S-3,
no. 333-21289)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder
(incorporated by reference to exhibit filed with registrant's report on
Form 10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (incorporated by reference to exhibit
filed with registrant's report on Form 10-K dated December 31, 1997)
10.3 Purchase Agreement relating to PENs. (incorporated by reference to
exhibit filed with registrant's registration statement on Form S-3 no.
333-21289)
10.4 Lease Agreement, First Amendment to Lease, Assignment and Assumption of
Lease (incorporated by reference to exhibit filed with registrant's
registration statement on Form S-1, no. 33-49770)
10.5 Amendment #2 to Lease Agreement, First Amendment to Lease and Assignment
and Assumption of Lease. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB, dated March 31, 1995)
10.6 Lease Agreement re Chesapeake Collection Facility. (incorporated by
reference to exhibit filed with registrant's report on Form 10-K dated
December 31, 1996)
10.7 Consulting Agreement. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB dated December 31, 1995)
10.8 Agreement to Build and Lease Headquarters Building. (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q dated
September 30, 1997)
10.9 Lease of Headquarters Building. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
31
10.10 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement re Redwood Warehouse Line. (incorporated by reference to
exhibit filed with registrant's report on Form 10-KSB dated December 31,
1995)
10.11 The Receivables Funding and Servicing Agreement re Redwood Warehouse
Line. (incorporated by reference to exhibit filed with registrant's
report on Form 10-KSB dated December 31, 1995)
10.12 Partially Convertible Subordinated Note. (incorporated by reference to
exhibit filed with registrant's report on Form 10-Q dated September 30,
1997)
10.13 Registration Rights Agreement. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
10.14 Receivables Funding and Servicing Agreement relating to First Union
Warehouse Line (incorporated by reference to exhibit filed with
registrant's report on Form 10-K dated December 31, 1997)
10.14a Amendment dated July 17, 1998 to the Receivables Funding and Servicing
Agreement relating to First Union Warehouse Line (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.15 Receivables Transfer Agreement relating to First Union Warehouse Line
(incorporated by reference to exhibit filed with registrant's report on
Form 10-K dated December 31, 1997)
10.16 Residual Interest in Securitizations Revolving Credit and Term Loan
Agreement dated as of April 30, 1998, between registrant and State Street
Bank and Trust Company (incorporated by reference to exhibit filed with
registrant's report on 10-Q filed 5/15/98)
10.16a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement (filed herewith)
10.17 Pledge and Security Agreement dated as of April 30, 1998, between the
Company and State Street Bank and Trust Company (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
May 15, 1998)
10.18 Revolving Credit and Term Note dated April 30, 1998, (the "State Street
Note") (incorporated by reference to exhibit filed with registrant's
report on Form 10-Q filed May 15, 1998)
10.19 Subscription Agreement regarding shares issued in July 1998 (incorporated
by reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.20 Registration Rights Agreement regarding shares issued in July 1998
(incorporated by reference to exhibit filed with registrant's report on
Form 10-Q filed August 14, 1998)
10.21 Line of Credit Note Issued to Stanwich Financial Services Corp. (the "
1998 Stanwich Note") (incorporated by reference to exhibit filed with
registrant's report on Form 10-K filed March 3, 1998)
10.22 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement (filed herewith)
10.23 FSA Warrant Agreement dated November 30, 1998 (filed herewith)
10.24 Securities Purchase Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the statement on Schedule 13D filed with
respect to the registrant on November 25, 1988, by Levine Leichtman
Capital Partners II L.P. and others (the "LLCP report")
32
10.25 Senior Subordinated Primary Note dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.26 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998 (incorporated by reference to exhibit filed with the
LLCP report)
10.27 Investor Rights Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.28 Registration Rights Agreement dated as of November 17, 1998 (incorporated
by reference to exhibit filed with the LLCP report)
10.29 Subordination Agreement dated as of November 17, 1998 re: Stanwich Note
and Poole Note (filed herewith)
10.30 Consolidated Registration Rights Agreement dated November 17, 1998 re:
1997 Stanwich Notes (filed herewith)
23.1 Consent of independent auditors. (filed herewith)
27
Financial Data Schedule. (filed herewith)
99.1 Cautionary Statements.*
* To be filed by amendment
(b)
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 1998, the Company filed ten reports on Form 8-K.
Five of the ten reports on Form 8-K were monthly servicing reports for several of the Company's trusts. The following five
reports were monthly servicing reports for several securitization trusts sponsored by the Company: (i) report dated March 15, 1996
and filed October 1, 1998; (ii) report dated October 15, 1998 and filed October 30, 1998; (iii) report dated November 16, 1998 and
filed November 17; (iv) report dated November 15 and filed November 25, 1998; and (v) report dated December 15, 1998 and
filed December 28, 1998. These reports include monthly performance statements (which are not financial statements) of certain of
the Company's securitization trusts.
Each of the remaining five reports on Form 8-K related to the Company's December 1998 securitization transaction. Three of
these six reports were made pursuant to Item 7, as follows: (i) report dated November 16, 1998 and filed November 17, 1998; (ii)
report dated and filed November 25, 1998; and (iii) report dated and filed December 1, 1998. The remaining two reports on Form
8-K were made pursuant to Items 5 and 7, as follows: (i) report dated December 4, 1998 and filed December 18, 1998; and (ii)
report dated December 18, 1998 and filed December 31, 1998. None of the reports included financial statements.
33
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.
SIGNATURES
CONSUMER PORTFOLIO SERVICES, INC. April 15, 1999
(Registrant)
By: /s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr.,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Charles E. Bradley, Sr.
April 15, 1999
Charles E. Bradley, Sr.
Chairman of the Board
By: /s/ Charles E. Bradley, Jr.
April 15, 1999
Charles E. Bradley, Jr., Director,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William B. Roberts
April 15, 1999
William B. Roberts, Director
By: /s/ John G. Poole
April 15, 1999
John G. Poole, Director
By: /s/ Thomas L. Chrystie
April 15, 1999
Thomas L. Chrystie, Director
By: /s/ Robert A. Simms
April 15, 1999
Robert A. Simms, Director
By: /s/ Jeffrey P. Fritz
April 15, 1999
Jeffrey P. Fritz, Chief Financial Officer
(Principal Financial Officer)
By: /s/ James L. Stock
April 15, 1999
James L. Stock, Controller
(Principal Accounting Officer)
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Consumer Portfolio Services, Inc.:
We have audited the accompanying consolidated balance sheets of Consumer Portfolio Services, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Orange County, California
March 3, 1999, except as to
notes 13, 16 and 17 to the
consolidated financial statements,
which are as of April 15, 1999.
KPMG LLP
F-1
PART I - FINANCIAL INFORMATION
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Cash $ 1,940 $ 1,745
Restricted cash (note 2) 1,619 --
Contracts held for sale (note 3) 165,582 68,271
Servicing fees receivable 11,148 5,425
Residual interest in securitizations (note 4) 217,848 124,616
Furniture and equipment, net (note 8) 4,272 3,128
Taxes receivable (note 12) -- 1,528
Deferred financing costs (note 13) 2,817 1,840
Investment in unconsolidated affiliates (note 9) 4,145 3,892
Related party receivables (note 9) 3,268 7,295
Other assets (notes 9 and 10) 19,323 8,155
--------- ---------
$ 431,962 $ 225,895
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 9,267 $ 10,426
Warehouse lines of credit (note 13) 151,857 61,666
Taxes payable (note 12) 1,821 --
Deferred tax liability (note 12) 27,247 13,143
Capital lease obligations (note 11) 2,132 1,492
Notes payable (note 13) 2,557 1,506
Residual financing (note 13) 33,000 --
Subordinated debt (note 13) 65,000 40,000
Related party debt (note 9) 20,000 15,055
--------- ---------
312,881 143,288
Shareholders' Equity (notes 10 and 13)
Preferred stock, $1 par value; authorized
5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares; 3,415,000
shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 15,658,501 and 15,210,042
shares issued and outstanding at December 31,
1998 and December 31, 1997, respectively 52,533 42,262
Notes receivable from exercise of options -- (500)
Retained earnings 66,548 40,845
--------- ---------
119,081 82,607
--------- ---------
Commitments and contingencies (notes 3,4,6,11
12,13,and 14) $ 431,962 $ 225,895
========= =========
See accompanying notes to consolidated financial statements
F-2
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Gain on sale of contracts, net (notes 3, 4 and 5) $ 58,306 $ 35,045 $ 20,565
Interest income (note 6) 41,841 23,526 19,980
Servicing fees 25,156 14,487 7,893
Other (note 9) 977 2,193 --
-------- -------- --------
126,280 75,251 48,438
-------- -------- --------
Expenses:
Employee costs 28,812 15,875 8,921
General and administrative (note 9) 20,618 14,147 7,247
Interest 22,019 9,185 5,780
Marketing 6,891 1,849 1,679
Occupancy 2,267 1,404 769
Depreciation and amortization 1,255 757 275
Related party consulting fees (note 9) 98 75 75
-------- -------- --------
81,960 43,292 24,746
-------- -------- --------
Income before income taxes 44,320 31,959 23,692
Income taxes (note 12) 18,617 13,427 9,595
-------- -------- --------
Net income $ 25,703 $ 18,532 $ 14,097
======== ======== ========
Earnings per share (note 1):
Basic $ 1.67 $ 1.29 $ 1.05
Diluted $ 1.50 $ 1.17 $ 0.93
Number of shares used in computing
earnings per share (note 1):
Basic 15,412 14,332 13,489
Diluted 17,500 16,053 15,330
See accompanying notes to consolidated financial statements
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Series A
Preferred Stock Common Stock Notes Receivable
------------------ -------------------- From Exercise Retained
Shares Amount Shares Amount of Options Earnings Total
------ -------- ------ -------- ---------------- -------- --------
Balance at December 31, 1995 -- $ -- 13,299 $ 33,265 $ -- $ 8,216 $ 41,481
Common stock issued upon exercise
of warrants (note 10) -- -- 86 259 -- -- 259
Common stock issued upon exercise
of options (note 10) -- -- 395 1,121 -- -- 1,121
Net income -- -- -- -- -- 14,097 14,097
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1996 -- $ -- 13,780 $ 34,645 $ -- $ 22,313 $ 56,958
Common stock issued upon exercise
of warrants (note 10) -- -- 14 42 -- -- 42
Common stock issued upon exercise
of options (note 10) -- -- 937 2,464 (500) -- 1,964
Common stock issued upon
conversion of debt (note 13) -- -- 480 3,000 -- -- 3,000
Income tax benefit from
exercise of options (note 12) -- -- -- 2,111 -- -- 2,111
Net income -- -- -- -- -- 18,532 18,532
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1997 -- $ -- 15,211 $ 42,262 $ (500) $ 40,845 $ 82,607
Common stock issued upon exercise
of options (note 10) -- -- 5 43 500 -- 543
Common stock issued (note 9) -- -- 443 5,000 -- -- 5,000
Valuation of warrants issued (note 13) -- -- -- 5,228 -- -- 5,228
Net income -- -- -- -- -- 25,703 25,703
------ -------- ------ -------- -------- -------- --------
Balance at December 31, 1998 -- $ -- 15,659 $ 52,533 $ -- $ 66,548 $119,081
====== ======== ====== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
F-4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 25,703 $ 18,532 $ 14,097
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,255 757 275
Amortization of NIRs 35,540 13,310 6,119
Amortization of deferred financing costs 356 268 157
Provision for credit losses 3,544 4,088 2,756
Provision for loss on NIRs 7,762 -- --
NIR gains recognized (52,990) (34,767) (18,665)
Loss on sale of fixed asset -- 13 --
Gain on sale of subsidiary (56) -- --
(Gain) loss on investment in unconsolidated affiliates (187) (912) 595
Gain on redemption of related party preferred stock -- (145) --
Changes in operating assets and liabilities:
Restricted cash (1,619) -- --
Purchases of contracts held for sale (1,076,457) (632,096) (351,350)
Liquidation of contracts held for sale 975,602 581,394 346,486
Servicing fees receivable (5,723) (2,338) (1,631)
Initial deposits to spread accounts (45,623) (20,064) (12,270)
Deposits to spread accounts and overcollateralization
accounts (53,996) (31,689) (18,790)
Release of cash from spread accounts 16,075 15,846 17,941
Deferred tax liability 14,104 6,116 5,384
Other assets (7,163) (2,146) (2,053)
Accounts payable and accrued expenses (962) 8,269 355
Warehouse lines of credit 90,191 48,401 5,765
Taxes payable/receivable 3,509 1,032 (3,523)
----------- ----------- -----------
Net cash used in operating activities (71,135) (26,131) (8,352)
Cash flows from investing activities:
Proceeds from sale of subordinated certificates -- -- 2,022
Related party receivables (3,239) (9,987) (1,308)
Repayment of related party receivables 7,266 4,000 --
Purchase of related party preferred stock -- (14,500) --
Proceeds from sale of related party preferred stock -- 14,645 --
Investment in unconsolidated affiliate (65) (716) (4,277)
Purchases of furniture and equipment (1,308) (1,032) (358)
Payments received on subordinated certificates -- -- 152
Net cash from sale of subsidiary 382 -- --
Purchase of subsidiary, net of cash acquired -- 92 --
----------- ----------- -----------
Net cash provided by (used in) investing activities 3,036 (7,498) (3,769)
Cash flows from financing activities:
Increase in residual financing 33,000 -- --
Issuance of related party debt 5,000 54,500 --
Issuance of subordinated debt 25,000 20,000 --
Issuance of notes payable 2,461 -- --
Repayment of capital lease obligations (553) (166) --
Repayment of notes payable (824) (10) --
Repayment of related party debt -- (39,945) --
Payment of financing costs (1,333) (1,165) --
Issuance of common stock 5,000 -- --
Exercise of options and warrants 543 2,006 1,380
----------- ----------- -----------
Net cash provided by financing activities 68,294 35,220 1,380
----------- ----------- -----------
Increase (decrease) in cash 195 1,591 (10,741)
Cash at beginning of year 1,745 154 10,895
----------- ----------- -----------
Cash at end of year $ 1,940 $ 1,745 $ 154
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 21,542 $ 8,476 $ 5,214
Income taxes $ 1,013 $ 6,204 $ 6,679
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock upon conversion of debt $ -- $ 3,000 $ --
Note receivable from exercise of options $ -- $ 500 $ --
Income tax benefit from exercise of options $ -- $ 2,111 $ --
Furniture and equipment acquired through capital leases $ 1,193 $ 1,658 $ --
Issuance of common stock warrants $ 5,228 $ -- $ --
Purchase of CPS Leasing, Inc.
Assets acquired $ -- $ 2,718 $ --
Liabilities assumed -- (2,638) --
----------- ----------- -----------
Cash paid to acquire business -- 80 --
Less: cash acquired -- (172) --
----------- ----------- -----------
Net cash received upon acquisition $ -- $ (92) $ --
=========== =========== ===========
Sale of PIC Leasing, Inc.
Net assets sold $ 706 $ -- $ --
Net assets retained (155) -- --
Gain on sale of subsidiary 56 -- --
----------- ----------- -----------
Cash received from sale of subsidiary 607 -- --
Less: cash relinquished upon disposition (225) -- --
----------- ----------- -----------
Net cash received from sale of subsidiary $ 382 $ -- $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on March 8, 1991. CPS and its subsidiaries
(collectively, the "Company") engage primarily in the business of purchasing, selling and servicing retail automobile installment
sale contracts ("Contracts") originated by dealers located throughout the United States. The Company specializes in Contracts
with obligors who generally would not be expected to qualify for traditional financing, such as that provided by commercial banks
or automobile manufacturers' captive finance companies. The Company's headquarters and principal collection facilities are
located in Irvine, California and a satellite collection facility is located in Chesapeake, Virginia. The Company has purchased
Contracts from dealers in California since its inception. During the year ended December 31, 1998, Contract purchases relating to
obligors who resided in California totaled 16.7% of all Contract purchases. Moreover, at December 31, 1998, obligors who
resided in California made up 20.0% of the servicing portfolio of Contracts serviced by the Company. A significant adverse
change in the economic climate in California or other states could result in fewer Contracts available for sale and potentially less
revenue.
Principles of Consolidation
The consolidated financial statements include the accounts of Consumer Portfolio Services, Inc. and its wholly-owned
subsidiaries, CPS Marketing, Inc., Alton Receivables Corp. ("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding Corp.
("CPSFC") and CPS Warehouse Corp. ("CPSWC"). Alton, CPSRC, CPSFC and CPSWC are limited purpose corporations formed
to accommodate the structures under which the Company purchases and sells its Contracts. CPS Marketing, Inc. employs
marketing representatives who solicit business from dealers. The consolidated financial statements also include the accounts of
Samco Acceptance Corp., LINC Acceptance Company, LLC, and CPS Leasing, Inc., which are 80% owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates
that are not majority owned are reported using the equity method. The excess of the cost of the stock over the Company's share of
the net assets at the acquisition date ("goodwill") is being amortized over a period of up to fifteen years.
Contracts Held for Sale
Contracts held for sale include automobile installment sales contracts on which interest is precomputed and added to the face
of the loan. The interest on such contracts is included in unearned financed charges. Unearned financed charges are amortized
using the interest method over the remaining period to contractual maturity. Contracts held for sale are stated at the lower of cost
or market value. Market value is determined by purchase commitments from investors and prevailing market prices. Gains and
losses are recorded as appropriate when Contracts are sold. The Company considers a transfer of Contracts where the Company
surrenders control over the Contracts to be a sale to the extent that consideration other than beneficial interests in the transferred
Contracts is received in exchange for the Contracts.
Allowance for Credit Losses
The Company estimates an allowance for credit losses, which management believes provides adequately for known and
inherent losses that may develop in the Contracts held for sale. Provision for losses are charged to gain on sale of Contracts.
Charge-offs, net of recoveries, are charged to the allowance. Management evaluates the adequacy of the allowance by examining
current delinquencies, the characteristics of the portfolio, the value of underlying collateral and general economic conditions and
trends.
Contract Acquisition Fees and Discounts
Upon purchase of a Contract from a dealer, the Company generally charges the dealer an acquisition fee or purchases the
Contract at a discount from its face value. The acquisition fees and discounts associated with Contract purchases are
F-6
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
deferred until the Contracts are sold, at which time the deferred acquisition fees or discounts are recognized as a component of the
gain on sale.
Investments
The Company determines the appropriate classification of its investments in debt securities at the time of purchase or creation.
Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component
of shareholders' equity as accumulated other comprehensive income.
The amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of
discounts, over the estimated life of the security. Such amortization and interest earned on the debt securities are included in
interest income.
Residual Interest in Securitizations and Gain on Sale of Contracts
The Company purchases Contracts with the primary intention of reselling them in securitization transactions as asset-backed
securities. The securitizations are generally structured as follows: First, the Company sells a portfolio of Contracts to a wholly
owned subsidiary ("SPS"), which has been established for the limited purpose of buying and reselling the Company's Contracts.
The SPS then transfers the same Contracts to either a grantor trust or an owner trust (the "Trust"). The Trust in turn issues interest-
bearing asset-backed securities (the "Certificates"), generally in an amount equal to the aggregate principal balance of the
Contracts. The Company typically sells these Contracts to the Trust at face value and without recourse, except that representations
and warranties similar to those provided by the Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Certificates issued by the Trust; the proceeds from the sale of the Certificates are then used to purchase the
Contracts from the Company. The Company purchases a financial guaranty insurance policy, guaranteeing timely payment of
principal and interest on the senior Certificates, from an insurance company (the "Certificate Insurer"). In addition, the Company
provides a credit enhancement for the benefit of the Certificate Insurer and the investors in the form of an initial cash deposit to an
account ("Spread Account") held by the Trust. The agreements governing the securitization transactions (collectively referred to
as the "Servicing Agreements") require that the initial deposits to the Spread Accounts be supplemented by a portion of collections
from the Contracts until the Spread Accounts reach specified levels, and then maintained at those levels. The specified levels are
generally computed as a percentage of the principal amount remaining unpaid under the related Certificates. The specified levels
at which the Spread Accounts are to be maintained will vary depending on the performance of the portfolios of Contracts held by
the Trusts and on other conditions, and may also be varied by agreement among the Company, the SPS, the Certificate Insurer and
the trustee. Such levels have increased and decreased from time to time based on performance of the portfolios, and have also
been varied by agreement. The specified levels applicable to the Company's sold pools increased materially in 1998 and have
recently been decreased. See note 16 - "Liquidity".
At the closing of each securitization, the Company removes from its consolidated balance sheet the Contracts held for sale and
adds to its consolidated balance sheet (i) the cash received and (ii) the estimated fair value of the ownership interest that the
Company retains in Contracts sold in securitization. That retained interest (the "Residual") consists of (a) the cash held in the
Spread Account and (b) the net interest receivables ("NIRs"). NIRs represent the estimated discounted cash flows to be received
from the Trust in the future, net of principal and interest payable with respect to the Certificates, and certain expenses. The excess
of the cash received and the assets retained by the Company over the carrying value of the Contracts sold, less transaction costs,
equals the net gain on sale of Contracts recorded by the Company.
The Company allocates its basis in the Contracts between the Certificates and the Residuals retained based on the relative fair
values of those portions on the date of the sale. The Company recognizes gains or losses attributable to the change in the fair value
of the Residuals, which are recorded at estimated fair value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of interests such as the
F-7
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Residuals, and accordingly, the Company determines the estimated fair value of the Residuals by discounting the amount and
timing of anticipated cash flows released from the Spread Account (the cash out method), using a discount rate that the Company
believes is appropriate for the risks involved. For that valuation, the Company has used an effective discount rate of approximately
14% per annum.
The Company receives periodic base servicing fees for the servicing and collection of the Contracts. In addition, the Company is
entitled to the cash flows from the Residuals that represent collections on the Contracts in excess of the amounts required to pay
principal and interest on the Certificates, the base servicing fees, and certain other fees (such as trustee and custodial fees). At the
end of each collection period, the aggregate cash collections from the Contracts are allocated first to the base servicing fees and
certain other fees such as trustee and custodial fees for the period, then to the Certificateholders for interest at the pass-through
rate on the Certificates plus principal as defined in the Servicing Agreements. If the amount of cash required for the above
allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related Spread
Account, the excess is released to the Company or in certain cases is transferred to other Spread Accounts that may be below their
required levels. Pursuant to certain Servicing Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create excess collateral (over-collateralization or OC account). If the Spread Account
balance is not at the required credit enhancement level, then the excess cash collected is retained in the Spread Account until the
specified level is achieved. The cash in the Spread Accounts is restricted from use by the Company. Cash held in the various
Spread Accounts is invested in high quality, liquid investment securities, as specified in the Servicing Agreements.Spread
Account balances are held by the Trusts on behalf of the Company as the owner of the Residuals. Such balances are generally
defined as as percentages of the principal amount remaining unpaid on the balance.
The annual percentage rate ("APR") payable on the Contracts is significantly greater than the pass through rate on the
Certificates. Accordingly, the Residuals described above are a significant asset of the Company. In determining the value of the
Residuals described above, the Company must estimate the future rates of prepayments, delinquencies, defaults and default loss
severity as they affect the amount and timing of the estimated cash flows. The Company estimates prepayments by evaluating
historical prepayment performance of comparable Contracts and the effects of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company estimates defaults and default loss severity using
available historical loss data for comparable Contracts and the specific characteristics of the Contracts purchased by the Company.
In valuing the residuals, the Company estimates that losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company would recognize additional revenue from the Residuals if the actual performance of the
Contracts were to be better than the original estimate, or the Company would increase the estimated fair value of the Residuals. If
the actual performance of the Contracts were to be worse than the original estimate, then a downward adjustment to the carrying
value of the Residuals would be required. Due to the inherent uncertainty of the future performance of the underlying Contracts,
the Company during 1998, established a provision for losses on the Residuals.
Servicing
Servicing fees are reported as income when earned. Servicing costs are charged to expense as incurred. Servicing fees receivable
represent fees earned but not yet remitted to the Company by the trustee.
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation. The Company calculates depreciation using the
straight-line method over the estimated useful lives of the assets which range from three to five years. Assets held under capital
leases and leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease
terms.
F-8
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per Share
The following table illustrates the computation of basic and diluted earnings per share:
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(in thousands, except per share data)
Numerator:
----------
Numerator for basic earnings per share --
net income ................................... $25,703 $18,532 $14,097
Interest on borrowings, net of tax effect on
conversion of convertible subordinated debt .... 590 313 170
------- ------- -------
Numerator for diluted earnings per share ....... $26,293 $18,845 $14,267
======= ======= =======
Denominator:
------------
Denominator for basic earnings per share --
weighted average number of common shares
outstanding during the year .................. 15,412 14,332 13,489
Incremental common shares attributable to
exercise of outstanding options and warrants . 881 1,212 1,361
Incremental common shares attributable to
conversion of subordinated debt .............. 1,207 509 480
------- ------- -------
Denominator for diluted earnings per share ..... 17,500 16,053 15,330
======= ======= =======
Basic earnings per share ....................... $ 1.67 $ 1.29 $ 1.05
======= ======= =======
Diluted earnings per share ..................... $ 1.50 $ 1.17 $ 0.93
======= ======= =======
Income Taxes
The Company and its subsidiaries file a consolidated Federal income and combined state franchise tax returns. The Company
utilizes the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock Split
Effective March 7, 1996, all outstanding shares of common stock were split two-for-one. All references in the consolidated
financial statements to number of shares, per share amounts and market prices of the Company's common stock have been
retroactively restated to reflect the increased number of common shares outstanding.
Stock Option Plan
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), the Company accounts for stock-based employee compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company provides the pro forma
net income, pro forma earnings per share, and stock based compensation plan disclosure requirements set forth in SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews identifiable intangibles, goodwill and other long-lived assets for impairment whenever events or
circumstances indicate the carrying amounts may not be recoverable. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of an asset, an impairment loss is recognized.
F-9
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment Reporting
The Company adopted, effective December 31, 1997, Statement of Financial Accounting Standards No. 131, "Diclosures about
Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting
financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reporting.
Operations are managed and financial performance is evaluated on a Company wide basis by chief decision makers.
Accordingly, all of the Company's operations are considered by management to be aggregated in one reportable operating
segment.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in foreign operation, an unrecognized firm commitment, an available for sale security, or a foreign-currency-
denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is in the process of assessing the effect
of implementing SFAS No. 133, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In October 1998, the FASB issued Statement of Financial Accouting Standards No. 134 ("SFAS No. 134"), "Accounting for
Mortgage-Backed Securities after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS
No. 134 amends SFAS No. 65 to require that, after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities, classify, in accordance with the provisions of SFAS No. 115, the resulting mortgage-backed
securities or other retained interests, based on its ability and intent to sell or hold those investments. However, a mortgage banking
enterprise must classify as held for trading any retained mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter beginning after December 15, 1998. Management does
not anticipate the adoption of this statement will have a material affect on the Company's financial condition and results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of income and expenses during the reported periods. Specifically, a number of estimates were
made in connection with determining an appropriate allowance for credit losses, valuing the Residuals and computing the related
gain on sale on the transactions that created the Residuals. Actual results could differ from those estimates depending on the future
performance of the related Contracts.
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year's presentation.
F-10
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) RESTRICTED CASH
Restricted cash in the amount of $1.6 million is required as part of the agreement related to a $33.3 million revolving line of
credit established by the Company in April 1998 (see note 13). The agreement requires the Company to post a cash reserve equal
to the greater of $1.0 million or six months of interest based on the outstanding balance of the line at the end of the month.
Borrowings under the revolving line bear interest at LIBOR + 4% (9.54% at December 31, 1998).
(3) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
December 31,
-------------------------
1998 1997
--------- ---------
(in thousands)
Gross receivable balance .............. $ 183,876 $ 81,645
Unearned finance charges .............. (10,949) (10,078)
Deferred acquisition fees and discounts (4,594) (1,092)
Allowance for credit losses ........... (2,751) (2,204)
--------- ---------
$ 165,582 $ 68,271
========= =========
The following table presents the activity in the allowance for credit losses:
Year ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Balance, beginning of year ....... $ 2,204 $ 723 $ 330
Provisions ....................... 3,544 4,088 2,756
Charge-offs ...................... (2,535) (2,935) (2,755)
Allowance allocated to repossessed
inventory ...................... (1,349) (261) --
Recoveries ....................... 887 589 392
------- ------- -------
Balance, end of year .......... $ 2,751 $ 2,204 $ 723
======= ======= =======
The Company is required to represent and warrant certain matters with respect to the Contracts sold to investors, which
generally duplicate the substance of the representations and warranties made by the dealers in connection with the Company's
purchase of the Contracts. In the event of a breach by the Company of any representation or warranty, the Company is obligated to
repurchase the Contracts from the investors at a price equal to the investors' purchase price less the related credit enhancement and
any principal payments received from the obligor. In most cases, the Company would then be entitled under the terms of its
agreements with dealers to require the selling dealer to repurchase the Contracts at the Company's purchase price less any
principal payments received from the obligor.
As of December 31, 1998 and 1997, the Company had commitments to purchase $2.3 million and $3.8 million, respectively, of
Contracts from Dealers in the ordinary course of business.
F-11
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in securitizations:
December 31,
----------------------
1998 1997
-------- --------
(in thousands)
Cash, commercial paper, US government
securities and other qualifying
investments (Spread Account) ........ $130,394 $ 68,513
NIRs .................................. 54,800 45,112
OC accounts ........................... 31,836 9,621
Funds held by investor ................ 480 579
Investment in subordinated certificates 338 791
-------- --------
$217,848 $124,616
======== ========
The following table presents the activity of the NIRs :
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Balance, beginning of year .. $ 45,112 $ 23,655 $ 11,109
NIR gains recognized (note 5) 52,990 34,767 18,665
Amortization of NIRs (note 6) (35,540) (13,310) (6,119)
Provision for loss on NIRs .. (7,762) -- --
-------- -------- --------
Balance, end of year ........ $ 54,800 $ 45,112 $ 23,655
======== ======== ========
The following table presents the estimated remaining undiscounted credit losses included in the fair value estimate of the
Residuals as a percentage of the Company's servicing portfolio subject to recourse provisions:
December 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
Undiscounted estimated credit losses ... $ 169,110 $ 90,814 $ 45,881
Servicing subject to recourse provisions $1,362,801 $ 830,918 $ 483,106
========== ========== ==========
Undiscounted estimated credit losses
as percentage of servicing subject to
recourse provisions ................... 12.41% 10.93% 9.50%
========== ========== ==========
F-12
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) GAIN ON SALE OF CONTRACTS
The following table presents the components of the net gain on sale of Contracts:
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
NIR gains recognized ........ $ 52,990 $ 34,767 $ 18,665
Deferred acquisition fees
and discounts ............. 23,330 8,925 6,890
Provision for loss on NIRs .. (7,762) -- --
Expenses related to sales ... (6,708) (4,559) (2,234)
Provision for credit losses . (3,544) (4,088) (2,756)
-------- -------- --------
$ 58,306 $ 35,045 $ 20,565
======== ======== ========
(6) INTEREST INCOME
The following table presents the components of interest income:
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Interest on Contracts held for sale $ 43,493 $ 14,279 $ 9,981
Residual interest income .......... 33,888 22,557 16,118
Amortization of NIRs .............. (35,540) (13,310) (6,119)
-------- -------- --------
$ 41,841 $ 23,526 $ 19,980
======== ======== ========
(7) SERVICING
The following table presents the components of the Company's servicing portfolio:
December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
Contracts held for sale ................. $ 176,108 $ 71,829 $ 22,827
Servicing subject to recourse provisions:
Whole loan portfolios .............. 1,463 4,839 11,212
Alton Receivables Corp. ............ 259 3,073 10,241
CPS Receivables Corp. .............. 1,361,079 823,006 461,653
---------- ---------- ----------
$1,538,909 $ 902,747 $ 505,933
========== ========== ==========
(8) FURNITURE AND EQUIPMENT
The following table presents the components of furniture and equipment:
December 31,
---------------------
1998 1997
------- -------
(in thousands)
Furniture and fixtures ....................... $ 2,973 $ 1,869
Computer equipment ........................... 2,365 1,895
Leasing assets ............................... 882 916
Leasehold improvements ....................... 644 127
Other fixed assets ........................... 34 55
------- -------
6,898 4,862
Less accumulated depreciation and amortization (2,626) (1,734)
------- -------
$ 4,272 $ 3,128
======= =======
F-13
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) RELATED PARTY TRANSACTIONS
Investment in Unconsolidated Affiliates
Investment in unconsolidated affiliates primarily consists of a 38% interest in NAB Asset Corporation ("NAB") that was
acquired by the Company on June 6, 1996, for approximately $4.3 million. At the time of the acquisition, NAB had approximately
$3.5 million in cash and no significant operations. The Company's investment in NAB exceeded the Company's share of the net
assets of NAB at the acquisition date by approximately $1.4 million. This amount, which is included in other assets in the
accompanying balance sheet, has been recorded by the Company as goodwill. Based on the closing price on the Nasdaq, the
market value of the investment in NAB was approximately $2.9 million and $4.0 million at December 31, 1998 and 1997,
respectively. Charles E. Bradley, Sr., Chairman of the Company's Board of Directors and principal shareholder and Charles E.
Bradley, Jr., President, Chief Executive Officer and a member of the Company's Board of Directors are both on the Board of
Directors of NAB. Included in general and administrative expenses for the year ended December 31, 1996, is $595,352, which
represents the Company's share of NAB's loss from June 6, through December 31, 1996.
Subsequent to the Company's investment in NAB, NAB purchased Mortgage Portfolio Services, Inc. ("MPS") from the
Company for $300,000. MPS, formed by the Company in April 1996, is a mortgage broker-dealer based in Texas. In July 1996,
NAB formed CARSUSA, Inc. ("CARSUSA"), which purchased, and now owns and operates, a Mitsubishi automobile dealership
in Southern California. On June 27, 1997, NAB sold CARSUSA to Charles E. Bradley, Sr. and Charles E. Bradley, Jr., for $1.5
million. Included in other income for the years ended December 31, 1998 and 1997, is $51,593 and $848,920, respectively, which
represents the Company's share of NAB's net income.
Related Party Receivables
The following table presents the components of related party receivables:
December 31,
------------------
Related Party 1998 1997
------------- ------ ------
(in thousands)
NAB Asset Corporation $2,100 $5,602
CARSUSA, Inc. 904 1,351
Service and Management Cooperative, Inc. 139 128
Loan to Subsidiary Officer 125 --
Global Equipment Leasing, LLC -- 114
Stanwich Partners, Inc. -- 100
------ ------
$3,268 $7,295
====== ======
Included in the receivable from CARSUSA at December 31, 1998 and 1997, is $329,500 and $790,000, respectively, related to a
flooring line of credit provided to CARSUSA. The remainder relates to amounts owed by CARSUSA for other borrowings.
During fiscal 1998 and 1997, respectively, the Company sold 51 and 107 automobiles to CARSUSA and received proceeds of
$432,790 and $749,800, respectively. Additionally, the Company purchased 296 and 183 Contracts from CARSUSA, with an
aggregate principal balance of approximately $4.2 million and $2.4 million, respectively.
Included in the receivable from NAB at December 31, 1997, is $5.5 million arising from the issuance of two promissory notes
totaling $9.5 million, bearing interest at 13% annually. On December 31, 1997, one of the promissory notes for $4.0 million was
sold to Stanwich Financial Services Corp. ("SFSC") for $4.0 million, the proceeds of which were received on December 31, 1997.
Charles E. Bradley, Sr., Charles E. Bradley, Jr., and John G. Poole, who are officers and directors of the Company, collectively
own 92.5% of the common stock of Stanwich Holdings, Inc. ("Stanwich Holdings"), and Mr. Bradley, Sr., is the president and a
director of Stanwich Holdings. SFSC is a wholly-owned subsidiary of Stanwich Holdings. During 1998, NAB repaid
approximately $3.4 million of the $5.5 million promissory note, leaving a balance of approximately $2.1 million at December 31,
1998. The remaining unpaid balance of the note is due April 30, 1999.
F-14
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 1998, the Company issued an additional promissory note to NAB for $3.0 million, bearing interest at 14% annually.
During 1998, the note was repaid in full.
On March 2, 1998, NAB acquired Stanwich Holdings. At that time the Company received a note from NAB for $530,835 in
exchange for an option it had held to acquire 100% of the outstanding common stock of Stanwich Holdings. In June 1998, NAB
rescinded the transaction to acquire Stanwich Holdings, with an effective date of March 2, 1998.
At December 31, 1998 and 1997, respectively, $139,229 and $128,421 is due from Service and Management Cooperative, Inc.
These amounts represent liabilities incurred by Service and Management Cooperative, Inc., which were paid for by the Company.
Certain officers of the Company's subsidiary Samco were officers of Service and Management Cooperative, Inc.
In July 1998, the president of Samco issued to the Company a promissory note in the amount of $125,000. The loan bears
interest at the rate of 10% per annum and is due July 2001.
At December 31, 1997, $114,275 is due from Global Equipment Leasing, LLC. These amounts represent payments by the
Company's subsidiary CPS Leasing, Inc., of certain debt obligations of Global Equipment Leasing, LLC., which is 50% owned by
CPS Leasing, Inc. In January 1998, the amount due from Global Equipment Leasing, LLC, was repaid in full.
The amount due from Stanwich Partners, Inc. ("SPI") at December 31, 1997, is related to investment banking services
performed by the Company in connection with the Company's January 2, 1997 acquisition of CPS Leasing, Inc. The Chairman of
the Board of Directors of the Company is a principal shareholder of SPI.
The Company is a party to a consulting agreement with SPI that calls for monthly payments of $6,250 through December 31,
1999. Included in the accompanying consolidated statements of income for the year ended December 31, 1998, 1997 and 1996, is
$75,000, $75,000 and $75,000, respectively, of consulting expense related to this consulting agreement.
In November 1998, the Company issued $25.0 million of subordinated promissory notes due November 30, 2003, to an affiliate
of Levine Leichtman Capital Partners, Inc. ("LLCP") (see note 13). As part of the transaction, the Company entered into a
consulting agreement with LLCP, calling for monthly consulting fees of $22,917 through November 2003. Included in the
accompanying consolidated statements of income for the year ended December 31, 1998, are $22,917 of consulting fees related to
this consulting agreement.
Related Party Debt
In May 1997, the Company entered into two transactions with a related party: (i) the Company purchased $14.5 million of
preferred stock of Stanwich Holdings with dividends cumulative at the rate of 9% per annum and redeemable at an aggregate price
of $14.6 million, plus accrued dividends, and (ii) the Company borrowed $14.5 million with an interest rate of 8% per annum
under a 60-day related party loan from SFSC. In August 1997, the Company received $14.9 million in redemption of its preferred
stock of Stanwich Holdings and repaid the 60-day related party loan in its entirety. In August 1997, the Company entered into a
line of credit agreement with SFSC ("Stanwich Line"), to supplement its working capital resources. Under the Stanwich Line,
SFSC agreed to lend up to $25.0 million to the Company from time to time upon request, through December 19, 1997. Any
amount outstanding at December 31, 1997 would be due at that time. Borrowings under the Stanwich Line bear interest at the rate
of 10% per annum, and the Company paid a $250,000 (one percent) commitment fee to SFSC in connection with opening the line
of credit. The Company drew the full amount of the line at its inception, none of which remained outstanding at December 31,
1997.
The Company has also received long-term financing from SFSC. In June 1997 the Company borrowed $15.0 million on an
unsecured and subordinated basis from SFSC. This loan ("RPL") is due 2004, and has a fixed rate of interest of 9% per
F-15
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
annum, payable monthly beginning July 1997. The Company may pre-pay the RPL without penalty at any time after three years.
At maturity or repayment of the RPL, the holder thereof will have an option to convert 20% of the principal amount into common
stock of the Company, at a conversion rate of $11.86 per share. The balance of the RPL at December 31, 1998 and 1997, was
$15.0 million.
During 1998, the Company borrowed an additional $4.0 million on an unsecured basis from SFSC. This loan ("RPL2") is due
2004, has a fixed rate of interest of 12.5% per annum payable monthly beginning December 1998. The Company may pre-pay the
RPL2, without penalty, anytime after June 12, 2000. At maturity or repayment of the RPL2, the holder thereof will have the
option to convert the entire principal balance of the note, or a portion thereof, into common stock of the Company, at a conversion
rate of $3.00 per share. The balance of the RPL2 at December 31, 1998, was $4.0 million.
During 1998, the Company borrowed $1.0 million on an unsecured basis from John G. Poole, a director of the Company. The
terms of this note ("RPL3") are the same as RPL2. The balance of the RPL3 at December 31, 1998, was $1.0 million.
Related Party Stock Sale
In July 1998, the Company sold 443,459 shares of common stock in a private placement to SFSC for $5.0 million. As of
December 31, 1998, the above shares of common stock had not been registered for public sale.
(10) SHAREHOLDERS' EQUITY
Common Stock
Holders of the common stock are entitled to such dividends as the Company's Board of Directors, in its discretion, may declare
out of funds available, subject to the terms of any outstanding shares of preferred stock and other restrictions. In the event of
liquidation of the Company, holders of common stock are entitled to receive, pro rata, all of the assets of the Company available
for distribution, after payment of any liquidation preference to the holders of outstanding shares of preferred stock. Holders of the
shares of common stock have no conversion or preemptive or other subscription rights and there are no redemption or sinking
fund provisions applicable to the common stock.
The Company is required to comply with various operating and financial covenants defined in the agreements governing the
warehouse lines, residual financing, subordinated debt, and related party debt. The covenants restrict the payment of certain
distributions, including dividends.
Options and Warrants
In 1991, the Company adopted and gained sole shareholder approval of the 1991 Stock Option Plan (the "1991 Plan") pursuant
to which the Company's Board of Directors may grant stock options to officers and key employees. The Plan, as amended,
authorizes grants of options to purchase up to 2,700,000 shares of authorized but unissued common stock. Stock options are
granted with an exercise price equal to the stock's fair market value at the date of grant. Stock options have terms that range from
7 to 10 years and vest over a range of 0 to 7 years. In addition to the 1991 Plan, in fiscal 1995, the Company granted 60,000
options to certain directors of the Company that vest over three years and expire nine years from the grant date.
In July 1997, the Company adopted and gained shareholder approval of the 1997 Long-Term Incentive Plan (the "1997 Plan")
pursuant to which the Company's Board of Directors may grant stock options, restricted stock and stock appreciation rights to
employees, directors or employees of entities in which the Company has a controlling or significant equity interest. Options that
have been granted under the 1997 Plan have in all cases been granted at an exercise price equal to the stock's fair market value at
the date of the grant, with terms of 10 years and vesting over 5 years. The 1997
F-16
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Plan provides that an aggregate maximum of 1,500,000 shares of the Company's common shares may be subject to awards under
the 1997 Plan.
In October 1998, the Company's Board of Directors approved a plan to cancel and reissue certain stock options previously
granted to key employees of the Company. All options granted prior to October 22, 1998, with an option price greater than $3.25,
were repriced to $3.25. In conjunction with the repricing, a one year period of non-exercisability was placed on all repriced
options, which expires October 21, 1999.
At December 31, 1998, there were 341,000 additional shares available for grant under the 1991 Plan and 1997 Plan. Of the
options outstanding at December 31, 1998, 1997 and 1996, 194,040, 584,920 and 1,319,420, respectively, were exercisable with
weighted-average exercise prices of $2.68, $6.77 and $4.02, respectively. The per share weighted-average fair value of stock
options granted during the years ended December 31, 1998, 1997 and 1996, was $1.87, $5.79, and $4.99, respectively, at the date
of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Year ended December 31,
---------------------------------
1998 1997 1996
----- ----- -----
Expected life (years) ...... 6.41 6.50 5.86
Risk-free interest rate .... 4.95% 6.48% 6.23%
Volatility ................. 20.00% 52.04% 46.20%
Expected dividend yield .... -- -- --
The Company applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation", the Company's net income and net earnings per share would have been reduced to the pro forma
amounts indicated below.
Year ended December 31,
----------------------------------
1998 1997 1996
--------- -------- -------
(in thousands, except per share data)
Net income
As reported....................... $25,703 $18,532 $14,097
Pro forma......................... $24,639 $18,182 $13,550
Net earnings per share - basic
As reported....................... $ 1.67 $ 1.29 $ 1.05
Pro forma......................... $ 1.60 $ 1.27 $ 1.00
Net earnings per share - diluted
As reported....................... $ 1.50 $ 1.17 $ 0.93
Pro forma......................... $ 1.48 $ 1.17 $ 0.90
Pro forma net income and net earnings per share reflect only options granted in the year ended December 31, 1998, 1997, and
1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above because compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to April 1, 1995 is not considered.
F-17
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock options activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
(in thousands, except per share data)
Balance at December 31, 1995.......................... 2,161 $ 3.56
Granted.......................................... 513 9.60
Exercised........................................ 395 2.82
Canceled......................................... 125 5.23
----- -------
Balance at December 31, 1996.......................... 2,154 5.04
Granted.......................................... 321 9.76
Exercised........................................ 937 2.64
Canceled......................................... 145 11.69
----- -------
Balance at December 31, 1997.......................... 1,393 7.05
Granted.......................................... 3,515 5.42
Exercised........................................ 5 8.50
Canceled......................................... 2,412 8.64
----- -------
Balance at December 31, 1998.......................... 2,491 $ 3.22
===== =======
At December 31, 1998, the range of exercise prices, the number, weighted- average exercise price and weighted-average
remaining term of options outstanding and the number and weighted-average price of options currently exercisable are as follows:
Weighted- Weighted Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Term Price Exercisable Price
------------------------ ----------- --------- -------- ----------- ---------
(in thousands, except per share data)
$2.50 - $2.88............... 224 3.99 $2.64 192 $2.62
$3.00 - $3.00............... 47 8.16 $3.00 -- $ --
$3.25 - $3.25............... 2,194 7.87 $3.25 -- $ --
$4.13 - $4.56............... 24 9.86 $4.45 -- $ --
$7.75 - $8.50............... 2 8.05 $8.30 2 $8.30
In connection with the Company's initial public offering, the Company sold to the underwriter of the offering, for an aggregate
price of $120, warrants to purchase up to 240,000 shares of the Company's common stock at an exercise price of $3.00 per share.
The warrants were exercisable during the four year period commencing one year from the date of the offering. The shares
represented by the warrants have been registered for public sale. During the year ended December 31, 1997 and 1996, the
underwriter exercised 14,000 and 86,000 warrants, respectively. At December 31, 1997 all warrants had been exercised.
On November 17, 1998, in conjunction with issuance of the $25.0 million subordinated promissory note from an affiliate of
LLCP, the Company issued warrants to purchase up to 3,450,000 of common stock at $3.00 per share, exercisable through
November 30, 2005. The value of the warrants, $3.0 million, is included in other assets as deferred interest expense to be
amortized over the expected life of the related debt, five years. As of December 31, 1998, the warrants had not been registered for
public sale. However, the holder of the warrants has the right to require the Company register the warrants for public sale in the
future.
Also in November 1998, the Company entered into an agreement with the Certificate Insurer of its asset-backed securities. The
agreement commits the Certificate Insurer to provide insurance for the securitization of $560.0 million in asset-backed securities,
of which $250.0 million remained at December 31, 1998. The agreement provides for a 3% initial Spread Account deposit. As
consideration for the agreement, the Company issued warrants to purchase up to 2,525,114 shares of common stock at $3.00 per
share. The warrants are fully exercisable on the date of grant and expire in November 2003. The value of the warrants, $2.2
million, is included in other assets as deferred securitization expense to be amortized over five years. As of December 31, 1998,
the warrants had not been registered for public sale. However, the holder of the warrants has the right to require the Company
register the warrants for public sale in the future.
F-18
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain computer equipment under non-cancelable operating and capital leases, which
expire through 2008. Future minimum lease payments at December 31, 1998, under these leases are as follows:
Capital Operating
------- ---------
(in thousands)
1999 ........................... $ 858 $ 3,113
2000 ........................... 678 3,001
2001 ........................... 579 2,452
2002 ........................... 400 2,376
2003 ........................... 53 2,394
Thereafter ..................... -- 11,935
------- -------
Total minimum lease payments ... 2,568 $25,271
=======
Less: amount representing
interest ..................... 436
-------
Present value of net minimum
lease payments ............... $ 2,132
=======
Included in furniture and equipment in the accompanying consolidated balance sheets are the following assets held under capital
leases at December 31, 1998:
Computer equipment .................. $ 811
Furniture and fixtures .............. 2,044
---------
2,855
Less: accumulated depreciation ...... 669
---------
$ 2,186
=========
Rent expense for the years then ended December 31, 1998, 1997 and 1996, was $1,973,304, $1,036,677 and $463,592,
respectively. The Company's facility lease contains certain rental concessions and escalating rental payments, which are
recognized as adjustments to rental expense and are amortized on a straight-line basis over the term of the lease.
In November 1998, the Company entered into a sublease agreement for the space which served as the Company's former
headquarters in Irvine, California. The sublease agreement extends beyond the term of the lease and provides for the tenant to pay
a base rent in excess of the lease payment required by the Company, plus all common area maintenance charges and property
taxes. During 1998, the Company received $64,289 of sublease income, which is included in occupancy expenses. Future
minimum sublease payments totaled $1,511,858 at December 31, 1998.
Litigation
The Company is party to litigation in the ordinary course of business, generally involving actions against automobile
purchasers to collect amounts due on purchased Contracts or to recover vehicles. In one such case, relating to the Chapter 13
bankruptcy of obligors Madeline and Darryl Brownlee, of Chicago, Illinois, the obligors counterclaimed against the Company on
June 30, 1997 in the bankruptcy court for the Northern District of Illinois. The obligors seek class-action treatment of their
allegation that the cost of an extended service contract on the automobile they purchased was inadequately disclosed by the
automobile dealer, Joe Cotton Ford of Carol Stream, Illinois. The disclosure allegedly violated the federal Truth in Lending Act
and Illinois consumer protection statutes. The plaintiffs amended their complaint in September 1998, dropping all Truth in
Lending allegations against the Company. The court in February 1999 dismissed all remaining claims against the Company. The
case remains pending against the dealer, and there is a remote chance that a possible appeal could result in a reinstatement of
claims against the Company.
In another proceeding, arising out of efforts to collect a deficiency balance from Joseph Barrios of Chicago, Illinois, the debtor
has brought suit against the Company alleging defects in the notice given upon repossession of the vehicle. This
F-19
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
lawsuit was filed on February 18, 1998 in the circuit court of Cook County, Illinois. A settlement of this litigation has been
reached on a class basis, which does not involve material expense.
It is management's opinion that all litigation of which it is aware, including the matters discussed above, will not have a material
adverse effect on the Company's consolidated financial position, results of operations or liquidity.
(12) INCOME TAXES
Income taxes consist of the following:
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Current
Federal ......................... $ 3,318 $ 4,278 $ 3,060
State ........................... 1,195 922 1,151
------- ------- -------
4,513 5,200 4,211
Deferred
Federal ......................... 10,451 4,505 4,565
State ........................... 3,653 1,611 819
------- ------- -------
14,104 6,116 5,384
Income tax benefit from exercise of options
Credited to shareholders'
equity ........................... -- 2,111 --
------- ------- -------
Income taxes ................ $18,617 $13,427 $ 9,595
======= ======= =======
The Company's effective tax expense for the years ended December 31, 1998, 1997 and 1996, differs from the amount
determined by applying the statutory federal rate of 35% to income before income taxes as follows:
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Expense at federal tax rate ............... $ 15,512 $ 11,186 $ 8,292
California franchise tax, net of
federal income tax benefit .............. 3,151 1,672 1,280
State tax benefit from exercise of options,
net of federal income tax benefit,
credited to shareholders' equity ........ -- 586 --
Other ..................................... (46) (17) 23
-------- -------- --------
$ 18,617 $ 13,427 $ 9,595
======== ======== ========
The tax affected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 1998 and
1997, are as follows:
December 31,
--------------------
1998 1997
------- -------
(in thousands)
Deferred Tax Assets:
Accrued liabilities ......... $ 1,296 $ 559
Furniture and equipment ..... 212 27
Provision for credit losses.. -- 1,106
State taxes ................. 403 1,851
Other ....................... -- 289
------- -------
1,911 3,832
Deferred Tax Liabilities:
NIRs ........................ 21,054 16,409
Provision for credit losses.. 7,511 --
Equity investments .......... 593 566
------- -------
29,158 16,975
------- -------
Net deferred tax liability... $27,247 $13,143
======= =======
F-20
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In determining the possible future realization of deferred tax assets, future taxable income from the following sources is taken
into account: (a) the reversal of taxable temporary differences, and (b) future operations exclusive of reversing temporary
differences.
The Company believes that the deferred tax asset will more likely than not be realized due to the reversal of the deferred tax
liability and expected future taxable income.
The Company files its tax returns on a fiscal March 31, year end. During 1998, the Company's federal income tax return for the
tax year ended March 31, 1995, was audited by the Internal Revenue Service. As a result of the audit, the Company was required
to pay approximately $150,000 in payroll taxes and interest. The audit was concluded and closed during 1998.
(13) DEBT
In June 1995, the Company entered into two warehouse line of credit agreements (collectively the "Redwood Line"). The
Redwood Line provided the Company with an interim financing facility to hold Contracts for sale prior to being sold. The primary
agreement provided for loans by Redwood Receivables Corporation ("Redwood") to the Company, funded by commercial paper
issued by Redwood and secured by Contracts pledged periodically by the Company. The Redwood Line provided for a maximum
of $100.0 million of advances to the Company, with interest at a variable rate indexed to prevailing commercial paper rates. The
second agreement was a standby line of credit with General Electric Capital Corporation ("GECC"), also with a $100.0 million
maximum, which the Company would have been entitled to use only if and to the extent that Redwood did not provide funding as
described above. The GECC line was secured by Contracts and substantially all the other assets of the Company. Both agreements
expired November 30, 1998.
In November 1998, the Company entered into a new warehouse line of credit agreement with GECC directly ("the GECC
Line"). The GECC Line provides for warehouse facility advances up to a maximum of $100.0 million at a variable interest rate of
LIBOR + 3.75% (8.87% at December 31, 1998). The GECC Line expires November 30, 1999.
The Company is charged a non-utilization fee of .25% per annum on the unused portion of the GECC Line. The balance
outstanding at December 31, 1998 and 1997 under the GECC and Redwood warehouse lines of credit was $21.7 million and $30.8
million, respectively.
In November 1997, the Company entered into a warehouse line of credit agreement with First Union Capital Markets ("First
Union Line"). The First Union Line provides for a maximum of $150.0 million of advances to the Company, with interest at a
variable rate (5.05% at December 31, 1998) indexed to prevailing commercial paper rates. In July 1998, the advance amount was
increased to $200.0 million. In conjunction with the increase in maximum advance amount under the agreement, the expiration
date was changed to July 31, 1999, and is renewable for one year with the mutual consent of the Company and First Union Capital
Markets. The balance outstanding under the First Union Line at December 31, 1998 and 1997 was $130.2 million and $30.9
million, respectively.
When the Company wishes to securitize Contracts, a majority of the proceeds received from investors is paid to the providers
of the warehouse lines, simultaneously with their release of the pledged Contracts for transfer to a pass-through securitization
trust.
In December 1996, the Company entered into an overdraft financing facility, with a bank, that provides for maximum
borrowings of $2.0 million. Interest is charged on the outstanding balance at the bank's reference rate (7.75% at December 31,
1998) plus 1.75%. During 1997, the overdraft facility was increased to $4.0 million. There were no borrowings outstanding under
this facility at December 31, 1998. The facility expires on June 1, 1999.
In April 1998, the Company established a $33.3 million revolving credit line (the "Residual Line") with State Street Bank and
Trust Company, Prudential Insurance and an affiliate of Prudential. Borrowings under the Residual Line bear
F-21
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest at LIBOR + 4.0% (9.54% at December 31, 1998), and are secured by all the Company's assets, including its residual
interest in securitizations. The Residual Line is a revolving facility for one year, after which it converts into a loan with a
maximum term of four years. At December 31, 1998, the balance outstanding under the Residual Line was $33.0 million.
In November 1998, the Company issued $25.0 million of subordinated promissory notes due November 30, 2003, to an affiliate
of Levine Leichtman Capital Partners, Inc. ("LLCP"), and received the proceeds (net of $1.3 million of capitalized issuance costs),
of approximately $23.7 million. The Company also issued warrants to purchase up to 3,450,000 shares of common stock at $3.00
per share, exercisable through November 30, 2005 (see note 10). The debt bears interest at 13.5% per annum, and may not be
prepaid without penalty prior to November 1, 2002. Simultaneously with the consummation of that transaction, certain affiliates of
the Company, who had lent the Company an aggregate of $5.0 million on a short-term basis in August and September 1998,
agreed to subordinate their indebtedness to the indebtedness in favor of LLCP, to extend the maturity of their debt until June 2004,
and to reduce their interest rate from 15% to 12.5%. Such affiliates received in return the option to convert such debt into an
aggregate of 1,666,667 shares of common stock at the rate of $3.00 per share through maturity at June 30, 2004. Additionally,
SFSC also agreed to subordinate $6.0 million, or 40%, of its RPL in favor of LLCP.
On April 15, 1997, the Company issued $20.0 million in subordinated participating equity notes ("PENs") due April 15, 2004.
The PENs are unsecured general obligations of the Company. Interest on the PENs is payable on the fifteenth of each month,
commencing May 15, 1997, at an interest rate of 10.5% per annum. In connection with the issuance of the PENs, the Company
incurred and capitalized issuance costs of $1.2 million. The Company recognizes interest and amortization expense related to the
PENs using the effective interest method over the expected redemption period. The PENs are subordinated to certain existing and
future indebtedness of the Company as defined in the indenture agreement. The Company may at its option elect to redeem the
PENs from the registered holders, in whole but not in part, at any time on or after April 15, 2000, at 100% of their principal
amount, subject to limited conversion rights, plus accrued interest to and including the date of redemption. At maturity, upon the
exercise by the Company of an optional redemption, or upon the occurrence of a "Special Redemption Event," each holder will
have the right to convert into common stock of the Company ("Common Stock"), 25% of the aggregate principal amount of the
PENs held by such holder at the conversion price of $10.15 per share of Common Stock. "Special Redemption Events" are certain
events related to a change in control of the Company.
On December 20, 1995, the Company issued $20.0 million in rising interest subordinated redeemable securities due January 1,
2006 (the "Notes"). The Notes are unsecured general obligations of the Company. Interest on the Notes is payable on the first day
of each month, commencing February 1, 1996, at an interest rate of 10.0% per annum. The interest rate increases 0.25% on each
January 1 for the first nine years and 0.50% in the last year. In connection with the issuance of the Notes, the Company incurred
and capitalized issuance costs of $1.1 million. The Company recognizes interest and amortization expense related to the Notes
using the effective interest method over the expected redemption period. The Notes are subordinated to certain existing and future
indebtedness of the Company as defined in the indenture agreement. The Company is required to redeem, subject to certain
adjustments, $1.0 million of the aggregate principal amount of the Notes through the operation of a sinking fund on each of
January 1, 2000, 2001, 2002, 2003, 2004 and 2005. The Notes are not redeemable at the option of the Company prior to January 1,
1998. The Company may at its option elect to redeem the Notes from the registered holders of the Notes, in whole or in part, at
any time, on or after January 1, 1998, and prior to January 1, 1999, at 102% of their principal amount, on or after January 1, 1999,
and prior to January 1, 2000, at 101% of their principal amount, and on or after January 1, 2000, at 100% of their principal
amount, in each case plus accrued interest to and including the date of redemption.
During the year ended December 31, 1997 the Company acquired CPS Leasing, Inc. At December 31, 1998 and 1997, CPS
Leasing, Inc. had borrowings to banks of $2.6 million and $1.5 million, respectively
On November 16, 1993, the Company issued a $3.0 million five year convertible subordinated note ("Note 1") to an institutional
investor in conjunction with an agreement by that investor to commit to purchase an additional $50.0 million
F-22
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the Company's Contracts. Interest accrued at 9.5% and was payable semi-annually. On January 17, 1997, the holder converted
Note 1 into 480,000 shares of the Company's common stock.
The GECC Line, First Union Line, Residual Line, PENs, Notes, LLCP notes, and the overdraft financing facility contain various
restrictive and financial covenants. With respect to the Residual Line, certain of the pools' performance resulted in the right for the
lender of that facility to accelerate the repayment of the outstanding borrowings. On a monthly basis to date and as of December
31, 1998, the lender has waived their right to accelerate repayment. With respect to the LLCP notes, as of December 31, 1998, the
Company was in violation of certain covenants. As of April 15, 1999, the holder of such notes has waived such violations. With
respect to all other borrowings listed above, the Company is in compliance with all related financial covenants as of December 31,
1998.
(14) EMPLOYEE BENEFITS
The Company sponsors a pretax savings and profit sharing plan (the "401(k) Plan") qualifed under section 401(k) of the Internal
Revenue Code. Under the 401(k) Plan, eligible employees are able to contribute up to 15% of their compensation (subject to
stricter limitation in the case of highly compensated employees). The Company matches 100% of employees' contributions up to
$600 per employee per calendar year. The Company's contributions to the 401(k) Plan were $250,428, $115,684, and $63,801 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and assumptions used to estimate the fair value of the
Company's financial instruments. Much of the information used to determine fair value is highly subjective. When applicable,
readily available market information has been utilized. However, for a significant portion of the Company's financial instruments,
active market values do not exist. Therefore, considerable judgments were required in estimating fair value for certain items. The
subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is estimated as of December 31, 1998 and 1997, the
amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. The
estimated fair values of financial assets and liabilities at December 31, 1998 and 1997, were as follows:
December 31,
--------------------------------------------------
1998 1997
---------------------- ----------------------
Carrying Carrying
Value or Value or
Notional Fair Notional Fair
Financial Instrument Amount Value Amount Value
-------------------- -------- -------- -------- --------
(in thousands)
Cash ............................... $ 1,940 $ 1,940 $ 1,745 $ 1,745
Restricted cash .................... 1,619 1,619 -- --
Contracts held for sale ............ 165,582 169,958 68,271 70,900
Residual interest in securitizations 217,848 217,848 124,616 124,616
Related party receivables .......... 3,268 3,268 7,295 7,295
Commitments ........................ 2,313 61 3,774 145
Warehouse lines of credit .......... 151,857 151,857 61,666 61,666
Notes payable ...................... 2,557 2,557 1,506 1,506
Residual financing ................. 33,000 33,000 -- --
Subordinated debt .................. 65,000 65,000 40,000 40,000
Related party debt ................. 20,000 20,000 15,055 15,055
Cash and Restricted Cash
The carrying value equals fair value.
F-23
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contracts Held for Sale
The fair value of the Company's contracts held for sale is determined by purchase commitments from investors and prevailing
market rates.
Residual Interest in Securitizations
The fair value is estimated by discounting future cash flows using credit and discount rates that the Company believes reflect the
estimated credit, interest rate and prepayment risks associated with similar types of instruments.
Related Party Receivables
The carrying value approximates fair value because the related interest rates are estimated to reflect current conditions for
similar types of investments.
Commitments
The fair value of commitments to purchase contracts from Dealers is determined by purchase commitments from investors and
prevailing market rates.
Warehouse Line of Credit
The carrying value approximates fair value because the warehouse line of credit is short-term in nature and the related interest
rates are estimated to reflect current market conditions for similar types of instruments.
Notes Payable, Residual Financing, Subordinated and Related Party Debt
The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions
for similar types of instruments.
(16) LIQUIDITY
The Company's business requires substantial cash to support its operating activities. The Company's primary sources of cash
from operating activities are amounts borrowed under its various warehouse lines, servicing fees on portfolios of Contracts
previously sold, proceeds from the sales of Contracts, customer payments on Contracts held for sale, interest earned on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary uses of cash are the purchases of Contracts,
repayment of amounts borrowed under its various warehouse lines, operating expenses such as employee, interest, and occupancy
expenses, the establishment of and further contributions to Spread Accounts and income taxes. As a result, the Company is
dependent on its warehouse lines of credit and its residual financing facility in order to finance its continued operations. If the
Company's principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of
borrowing capacity would have a material adverse effect on the Company's results of operations unless the Company found a
suitable alternative source.
The Servicing Agreements call for the requisite levels of the various Spread Accounts to increase if the related receivables
experience delinquencies, repossessions or net losses in excess of certain predetermined levels. At December 31, 1998, 18 of the
Company's 22 securitized pools were at higher than original requisite levels due to the delinquency, repossession or net loss
performance of 13 of the 22 securitized pools. Such Spread Account balances therefore included approximately $24.3 million
more than would have been required at the original requisite levels. The higher requisite Spread Account levels ranged from 30%
to 100% of the related outstanding balance of the securitized pools. In April 1999, the Company entered into an amendment with
the Certificate Insurer of the Company's asset-backed securities to cap the amount of cash retained in the Spread Accounts at 21%
of the outstanding securities balance for 19 of the Company's 22 securitized pools. The effectiveness of the amendment is
contingent upon approval of certain subordinated
F-24
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certificateholders. This new cap on the Spread Accounts described above is expected to provide cash flows to the Company
during 1999. The amendment is subject to certain performance measures that may result in an increase in the cap from 21% to
25%. There can be no assurance that such cash flows will occur. In addition to requiring higher Spread Account levels, the
Servicing Agreements provide the Certificate Insurer with certain other rights and remedies, which have been waived on a
monthly basis by the Certificate Insurer.
On April 15, 1999, the Company issued $5.0 million of subordinated promissory notes to LLCP and received proceeds (net of
$250,000 of capitalized issuance costs) of approximately $4.75 million. The debt includes certain covenants one of which is the
infusion of $15.0 million of debt during 1999 by SFSC. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of the Company. Additionally, the $5.0 million has
been personally guaranteed by the chairman of the Company's board of directors and the president of the Company.
The Company did not sell any Contracts in the first quarter of 1999, and is currently evaluating alternatives for selling its
Contracts during the second quarter of 1999. Alternatives being considered by the Company include various securitization
structures, unsecuritized sale of Contracts, or perhaps, some combination of both alternatives. The Company has received a letter
of intent from an investor to purchase up to $300.0 million of the Company's Contracts on an unsecured basis in the second
quarter. There can be no assurance that such a sale will take place.
In the event the Company incurs a net loss in two consecutive quarters it would be in default of its agreements for the Residual
Line. Unless waived by the lender, the default could result in acceleration of the Residual Line and a cross default on the
Warehouse Lines. The lender would receive any releases from Spread Accounts to retire outstanding principal and interest. The
Company believes that the lender would waive the default. In the event the lender does not waive the default, the Company
believes that cash flows from operations would be sufficient to fund its obligations as they become due and payable. There can be
no assurance, however, that the lender would waive the default or that other cash flows will be sufficient to fund the Company's
operations.
(17) SUBSEQUENT EVENTS
In an effort to conserve capital, the Company intends to dispose of and/or terminate the operations of three of its subsidiaries;
Samco, LINC and CPS Leasing, Inc. During the first quarter of 1999, all operations of Samco were terminated and all personnel
were laid off. The Company is utilizing the building and equipment that is owned and/or leased as an asset recovery facility.
On April 15, 1999, the Company issued $5.0 million of subordinated promissory notes bearing interest at 14.50% per annum, to
LLCP and received proceeds (net of $250,000 of capitalized issuance costs) of approximately $4.75 million. The Company also
issued warrants to purchase 1,335,000 shares of the Company's common stock at $0.01 per share to LLCP. The warrants are
subject to shareholder approval and if approved, will be exerciseable through April 2009. As part of the purchase agreement, the
interest rate on the previous LLCP notes will increase to 14.50% and the 3,450,000 warrants to purchase shares of the Company's
common stock at $3.00 per share were reduced to 3,115,000 at a price of $0.01 per share.
F-25
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) SELECTED QUARTERLY DATA (UNAUDITED)
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(in thousands, except per share data)
1998
Revenues .............. $24,782 $29,724 $34,577 $37,197
Income before income taxes 9,658 10,240 10,744 13,678
Net income ............ 5,603 5,925 6,238 7,937
Earnings per share:
Basic ............... $ 0.37 $ 0.39 $ 0.40 $ 0.51
Diluted ............. $ 0.34 $ 0.36 $ 0.38 $ 0.44
1997
Revenues .............. $15,230 $17,542 $20,231 $22,248
Income before income taxes 7,143 7,549 8,309 8,958
Net income ............ 4,145 4,386 4,816 5,185
Earnings per share:
Basic ............... $ 0.29 $ 0.31 $ 0.34 $ 0.36
Diluted ............. $ 0.27 $ 0.28 $ 0.30 $ 0.32
1996
Revenues .............. $ 9,699 $11,763 $12,910 $14,066
Income before income taxes 5,101 5,517 6,451 6,623
Net income ............ 3,051 3,271 3,834 3,941
Earnings per share:
Basic ............... $ 0.23 $ 0.24 $ 0.28 $ 0.29
Diluted ............. $ 0.20 $ 0.22 $ 0.25 $ 0.26
F-26
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation (incorporated by reference to exhibit
filed with registrant's report on Form 10-KSB dated December 31, 1995)
3.2 Amended and Restated Bylaws. (incorporated by reference to exhibit filed
with registrant's report on Form 10-K dated December 31, 1997)
4.Indenture re Rising Interest Subordinated Redeemable Securities
("RISRs") (incorporated by reference to exhibit filed with registrant's
report on Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRs (incorporated by reference to
exhibit filed with registrant's report on Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")
(incorporated by reference to exhibit filed with registrant's
registration statement on Form S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (incorporated by reference
to exhibit filed with registrant's registration statement on Form S-3,
no. 333-21289)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder
(incorporated by reference to exhibit filed with registrant's report on
Form 10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (incorporated by reference to exhibit
filed with registrant's report on Form 10-K dated December 31, 1997)
10.3 Purchase Agreement relating to PENs. (incorporated by reference to
exhibit filed with registrant's registration statement on Form S-3 no.
333-21289)
10.4 Lease Agreement, First Amendment to Lease, Assignment and Assumption of
Lease (incorporated by reference to exhibit filed with registrant's
registration statement on Form S-1, no. 33-49770)
10.5 Amendment #2 to Lease Agreement, First Amendment to Lease and Assignment
and Assumption of Lease. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB, dated March 31, 1995)
10.6 Lease Agreement re Chesapeake Collection Facility. (incorporated by
reference to exhibit filed with registrant's report on Form 10-K dated
December 31, 1996)
10.7 Consulting Agreement. (incorporated by reference to exhibit filed with
registrant's report on Form 10-KSB dated December 31, 1995)
10.8 Agreement to Build and Lease Headquarters Building. (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q dated
September 30, 1997)
10.9 Lease of Headquarters Building. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
10.10 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement re Redwood Warehouse Line. (incorporated by reference to
exhibit filed with registrant's report on Form 10-KSB dated December 31,
1995)
10.11 The Receivables Funding and Servicing Agreement re Redwood Warehouse
Line. (incorporated by reference to exhibit filed with registrant's
report on Form 10-KSB dated December 31, 1995)
10.12 Partially Convertible Subordinated Note. (incorporated by reference to
exhibit filed with registrant's report on Form 10-Q dated September 30,
1997)
10.13 Registration Rights Agreement. (incorporated by reference to exhibit
filed with registrant's report on Form 10-Q dated September 30, 1997)
10.14 Receivables Funding and Servicing Agreement relating to First Union
Warehouse Line (incorporated by reference to exhibit filed with
registrant's report on Form 10-K dated December 31, 1997)
10.14a Amendment dated July 17, 1998 to the Receivables Funding and Servicing
Agreement relating to First Union Warehouse Line (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.15 Receivables Transfer Agreement relating to First Union Warehouse Line
(incorporated by reference to exhibit filed with registrant's report on
Form 10-K dated December 31, 1997)
10.16 Residual Interest in Securitizations Revolving Credit and Term Loan
Agreement dated as of April 30, 1998, between registrant and State Street
Bank and Trust Company (incorporated by reference to exhibit filed with
registrant's report on 10-Q filed 5/15/98)
10.16a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement (filed herewith)
10.17 Pledge and Security Agreement dated as of April 30, 1998, between the
Company and State Street Bank and Trust Company (incorporated by
reference to exhibit filed with registrant's report on Form 10-Q filed
May 15, 1998)
10.18 Revolving Credit and Term Note dated April 30, 1998, (the "State Street
Note") (incorporated by reference to exhibit filed with registrant's
report on Form 10-Q filed May 15, 1998)
10.19 Subscription Agreement regarding shares issued in July 1998 (incorporated
by reference to exhibit filed with registrant's report on Form 10-Q filed
August 14, 1998)
10.20 Registration Rights Agreement regarding shares issued in July 1998
(incorporated by reference to exhibit filed with registrant's report on
Form 10-Q filed August 14, 1998)
10.21 Line of Credit Note Issued to Stanwich Financial Services Corp. (the "
1998 Stanwich Note") (incorporated by reference to exhibit filed with
registrant's report on Form 10-K filed March 3, 1998)
10.22 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement (filed herewith)
10.23 FSA Warrant Agreement dated November 30, 1998 (filed herewith)
10.24 Securities Purchase Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the statement on Schedule 13D filed with
respect to the registrant on November 25, 1988, by Levine Leichtman
Capital Partners II L.P. and others (the "LLCP report")
10.25 Senior Subordinated Primary Note dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.26 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998 (incorporated by reference to exhibit filed with the
LLCP report)
10.27 Investor Rights Agreement dated November 17, 1998 (incorporated by
reference to exhibit filed with the LLCP report)
10.28 Registration Rights Agreement dated as of November 17, 1998 (incorporated
by reference to exhibit filed with the LLCP report)
10.29 Subordination Agreement dated as of November 17, 1998 re: Stanwich Note
and Poole Note (filed herewith)
10.30 Consolidated Registration Rights Agreement dated November 17, 1998 re:
1997 Stanwich Notes (filed herewith)
23.1 Consent of independent auditors. (filed herewith)
27 Financial Data Schedule. (filed herewith)
99.1 Cautionary Statement.*
----------
* To be filed by amendment
EXHIBIT 10.16a
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT TO RESIDUAL INTEREST IN SECURITIZATIONS REVOLVING CREDIT
AND TERM LOAN AGREEMENT (this "Second Amendment") is dated as of November 17, 1998, by and among Consumer
Portfolio Services, Inc., a California corporation (the "Company"), and State Street Bank and Trust Company as agent and lender
("State Street"), The Structured Finance High Yield Fund, LLC, as lender and The Prudential Insurance Company of America, as
lender. Said lenders are sometimes herein collectively referred to as the "Lenders" and each individually a "Lender". State Street
in its capacity as agent for the Lenders hereunder is sometimes herein referred to as the "Agent". This Second Amendment (i)
amends certain provisions of that certain Residual Interest in Securitizations Revolving Credit and Term Loan Agreement dated as
of April 30, 1998 by and among the Company, State Street, for itself and as Agent, and the Lenders from time to time party
thereto (as amended by a letter agreement dated November 2, 1998 relating to the so-called "Bridge Loan" from Levine, and as
further amended by this Second Amendment, the "Loan Agreement") and (ii) ratifies and confirms that certain Pledge and
Security Agreement dated as of April 30, 1998 by and among the Company, State Street, for itself and as Agent, and the Lenders
(as amended by and through to the date of the First Amendment, the "Pledge and Security Agreement"), together with all other
Loan Documents heretofore executed in connection with the Loan Agreement. Certain capitalized terms relating to the
transactions contemplated by this Second Amendment are defined in section 1(h) below. Other capitalized terms used herein and
not otherwise defined shall have the same meanings herein as in the Loan Agreement.
PREAMBLE
The Company has advised the Agent and the Lenders that it desires to enter into a Securities Purchase Agreement dated as
of the date hereof (the "Levine Subordinated Agreement") with Levine Leichtman Capital Partners II, L.P., a California limited
partnership ("Levine") and incur Subordinated Debt thereunder in a principal amount of up to $25,000,000 (the "Levine
Subordinated Debt"), subject to the terms and conditions (including the subordination provisions) hereof and of the Levine
Subordinated Agreement. The Company's execution of the Levine Subordinated Agreement and incurrence of the Levine
Subordinated Debt requires the consent of the Lenders pursuant to certain provisions of the Loan Agreement. The Company has
requested, and the Agent and the Lenders have agreed, subject to the terms and conditions set forth herein, that the Loan
Agreement and the other Loan Documents be amended to the extent necessary to permit the Company to execute the Levine
Subordinated Agreement and incur the Levine Subordinated Debt in accordance with the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company, the Agent, and the Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
(a) Amendment to Section 4. Section 4 (Conditions Precedent to Closing Date and all Subsequent Loans; Conditions to
Lending) is hereby amended by adding the following subsection 4.11 thereto:
"4.11 Levine Subordinated Agreement. The Company and Levine
shall have executed the Levine Subordinated Agreement on terms
(including subordination terms) satisfactory in the sole discretion of
the Lenders.
(b) Amendment to Section 5. Section 5 (Affirmative Covenants) of the Loan Agreement is hereby amended by adding the
following subsection 5.13 thereto:
"5.13 Notice of Default Under Levine Subordinated Documents. The
Company shall immediately notify the Agent and the Lenders of its
receipt of any notice of a default or event or default under the Levine
Subordinated Agreement."
(c) Amendment to Subsection 6.1 of the Loan Agreement. Subsection 6.1 of the Loan Agreement is hereby amended by
adding the following subsection (k) thereto:
"(k) Indebtedness of the Company under the Levine Subordinated Debt in a
maximum principal amount at any one time outstanding not to exceed
$25,000,000."
(d) Amendment to Subsection 6.5. Subsection 6.5 of the Loan Agreement is hereby amended by deleting such subsection
in its entirety, and inserting in lieu thereof the following:
"6.5 Restricted Payments. The Company will not, and will not permit any
Subsidiary to, directly or indirectly declare, order, pay or make any
Restricted Payment or set aside any sum or property therefor if at the
time of such proposed action or immediately after giving effect thereto,
any Default or Event of Default exists, and unless expressly permitted
by this subsection 6.5.
As used herein, the term "Restricted Payments" means (i) any
dividend or other distribution, direct or indirect, on or on account of
any shares of any class of stock of the Company now or hereafter
outstanding (other than dividends payable exclusively in shares of the
Company's preferred stock); (ii) any redemption, purchase or other
acquisition, direct or indirect, of any shares of any class of stock of
the Company now or hereafter outstanding or of any warrants or rights to
purchase any such stock (including, without limitation, the repurchase
of any such stock or warrant or any refund of the purchase price thereof
in connection with the exercise by the holder thereof of any right of
rescission or similar remedies with respect thereto) provided, that
payment of the Warrant Purchase Price (as defined in the Levine
Subordinated Documents) by Levine in accordance with the provisions of
section 2.2 of the Levine Warrant shall not constitute a Restricted
17
Payment; and (iii) any payment in respect of Subordinated Debt
(including, without limitation, the Levine Subordinated Documents).
Subject to the foregoing, the Company may: (a) make Restricted
Payments in the amount of scheduled (but not accelerated) payments due
the Subordinated Lenders under the Subordinated Agreements, (b) make
scheduled (but not accelerated) monthly payments of interest to Levine
in respect of the Levine Subordinated Debt,(c) make payment in an amount
not to exceed $10,000,000 from proceeds of the key man life insurance
policy obtained by the Company pursuant to section 8.8 of the Levine
Subordinated Agreement, provided that proceeds are applied by Levine in
reduction of the outstanding balance of principal of and accrued but
unpaid interest on the Levine Note, (d) make scheduled (but not
accelerated) "Extension Payments" under and as defined in section
8.21(b) of the Levine Subordinated Agreement, (e) make a payment in an
amount not to exceed $3,000,000 to fund the escrow account provided for
in section 5(a) of the Levine Note or in section 8.21 of the Levine
Subordinated Agreement, provided, that such escrow funds shall not be
paid over to Levine prior to payment in full of all obligations of the
Company to the Lenders under this Agreement, (f) make scheduled (but not
accelerated) payments in an aggregate amount not to exceed $275,000 to
pay the "consulting fee" referred to in section 1.4 of the Investor
Rights Agreement, together with payments to reimburse Levine for
reasonable out-of-pocket expenses incurred in connection with Levine's
representative serving on the Company's Board of Directors or any
committee thereof, (g) make payments of fees and expenses payable
pursuant to section 12.15 of the Levine Subordinated Agreement or
section 14 of the Levine Note and (h) make payments (not to exceed
$700,000) of the "closing fee" under section 6.8 of the Levine
Subordinated Agreement.
Notwithstanding anything to the contrary in the Levine
Subordinated Debt Documents, the Company agrees that, except as
expressly set forth above, it will not at any time make any payment of
any kind or nature (or set aside any sums therefor), in respect of the
Levine Subordinated Debt. For the avoidance of doubt, the Company shall
not make any voluntary or involuntary prepayments of the Indebtedness
under the Levine Subordinated Documents except (i) from proceeds of the
key man life insurance policy in accordance with clause (c) above and
the other provisions of this subsection 6.5, and (ii) simultaneously
with the final repayment in full in cash of all obligations of the
Company to the Lenders under the Loan Agreement and the other Loan
Documents, with proceeds of loans under the New Senior Credit Facility
(as such term is defined in the Levine Subordinated Agreement)."
The provisions of this subsection 6.5 are solely for the purpose of defining the relative rights of the Agent and the Lenders
on the one hand, and the holders of Subordinated Debt on the other hand, and none of such provisions shall impair, as between the
Company and any holder of the Subordinated Debt, the obligations of the Company, which are unconditional and absolute, to pay
to such holder all of the Subordinated Debt in accordance with the terms thereof, subject in each instance to the rights of the Agent
3
and the Lenders under the provisions of this Agreement and under the subordination provisions of such Subordinated Debt.
(e) Additional Amendments to Section 6. (i) Section 6 (Negative Covenants) of the Loan Agreement is hereby amended by
adding the following subsection 6.17 thereto:
"6.17 Amendment to Levine Subordinated Documents. The Company
will not amend, modify or change (or consent to any such amendment,
modification or change) in any of the provisions of the Levine
Subordinated Documents if such amendment would: (i) increase the
principal amount of any Levine Subordinated Debt, (ii) increase the rate
of interest accruing on the Levine Subordinated Debt, (iii) change in
any manner the dates upon which any principal or interest payments on
the Levine Subordinated Debt are due, (iv) grant any lien or other
encumbrance on its assets to secure the Levine Subordinated Debt, or (v)
change in any manner, or add, any affirmative or negative covenants,
events of default, redemption provisions or subordination provisions of
any Levine Subordinated Debt that would adversely affect the rights of
the Lenders or otherwise have a material adverse effect on the Company.
Solely with respect to the Levine Subordinated Debt, the provisions of
this subsection 6.17 shall supersede the provisions of subsection 6.11
above."
(ii) Section 6.6 (Capital Expenditures) is hereby amended by
replacing the number "$3,000,000" appearing therein with the number "$3,250,000" solely for the fiscal year of the Company
ending December 31, 1998. The $3,000,000 limitation on Capital Expenditures shall be reinstated commencing with the fiscal
year of the Company beginning January 1, 1999, and shall be effective for each fiscal year thereafter during the term of this
Agreement.
(f) Amendment to Subsection 3.30. Subsection 3.30 of the Loan Agreement (Year 2000) is hereby amended by adding the
following at the end of such subsection:
"The Company shall be "Year 2000 Compliant" by December 31, 1999
and at all times thereafter. As used herein, the term "Year 2000
Compliant" means that all software utilized by and material to the
business operations and financial condition of the Company are able to
interpret and manipulate data on and involving all calender dates
correctly and without causing any abnormal ending scenario, including in
relation to dates ending in and after the year 2000."
(g) Amendment to Subsection 8.1. Subsection 8.1 (Events of Default; Acceleration) of the Loan Agreement is hereby
amended by adding the following clause (m) thereto:
"(m) If there shall occur any default or event of default under and as
from time to time defined in the Levine Subordinated Documents."
4
(h) Amendments to Section 9. Section 9 of the Loan Agreement is hereby amended by adding the following definitions
alphabetically therein:
"Investor Rights Agreement: shall have the meaning set forth in
the definition of Levine Subordinated Documents.
Levine: means Levine Leichtman Capital Partners II, L.P., a
California limited partnership.
Levine Note: shall have the same meaning set forth in the
definition of Levine Subordinated Documents.
Levine Subordinated Debt: shall mean all Indebtedness of the
Company to Levine under the Levine Note (as originally executed) in a
principal amount not to exceed $25,000,000.
Levine Subordinated Agreement: shall mean that certain
Securities Purchase Agreement dated as of the date hereof by and between
the Company and Levine, as originally executed.
Levine Subordinated Documents: shall mean, collectively, the
Levine Subordinated Agreement, the Senior Subordinated Primary Note of
the Company in favor of Levine in the principal amount of $25,000,000
(the "Levine Note"), the Investor Rights Agreement (the "Investor Rights
Agreement"), and all other agreements, documents, certificates and
instruments executed and delivered in connection with the Levine
Subordinated Agreement, in each instance as originally executed."
In addition, the definition of "Subordinated Debt" appearing in section 9 of the Loan Agreement is amended so as to expressly
include all Indebtedness of the Company under the Levine Subordinated Documents.
2. Confirmation of Representations, Warranties, Exhibits and Schedules to the Loan Agreement.
The Company, by execution of this Second Amendment, certifies to the Agent and each of the Lenders that, after giving
effect to the substitution of the Schedules to the Loan Agreement referred to in the last sentence of this section 2, each of the
representations and warranties set forth in the Loan Agreement, the Security Documents and the other Loan Documents is true and
correct as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date, as if fully
set forth in this Second Amendment and that, as of the date hereof, no Default or Event of Default has occurred and is continuing
under the Loan Agreement, any Security Documents, any other Loan Document or any Eligible Securitization Transaction
Document. The Company acknowledges and agrees that this Second Amendment shall become a part of the Loan Agreement and
shall be a Loan Document. In connection with the execution of this Second Amendment, the Company has delivered to the Agent
certain revised Schedules to the Loan Agreement. The Company hereby requests and authorizes the Agent to substitute such
revised Schedules for the corresponding Schedules currently attached to the Loan Agreement.
5
3. Conditions Precedent and (in the case of clause (c) below only) Subsequent.
Prior to or concurrently with the execution by the Agent and the Lenders of this Second Amendment, and as a condition to
the effectiveness hereof and of the Lenders to make Loans for the account of the Company on and after the date hereof:
(a) The Company shall have delivered to the Agent and each of the Lenders copies of the fully executed Levine
Subordinated Documents, together with such schedules and other information delivered in connection therewith as may be
designated by the Lenders;
(b) This Agreement and all other agreements, instruments and certificates reasonably required by the Lenders in connection
herewith and therewith shall have been executed and delivered by each of the parties thereto;
(c) The Company shall pay all fees and expenses (including attorney's fees) incurred by the Agent in connection with the
Loan Agreement and the negotiation, structuring and documentation of the transactions contemplated by this Agreement and the
Levine Subordinated Agreement immediately upon receipt of a bill therefor; and
(d) The Company shall have paid to the Agent (for the ratable benefit of the Lenders, a closing fee in the amount of
$200,000 (the "Closing Fee"). The Closing Fee shall be fully earned on the Closing Date, and will not be refunded to the
Borrower, in whole in or part, under any circumstances.
4. Conditions to Lending; Compliance with Loan Documents, etc.
The Company hereby represents and warrants to the Agent and the Lenders that all of the conditions precedent to lending
specified in Section 4 of the Loan Agreement have been and continue to be satisfied as of the date hereof. Without limiting the
generality of the foregoing, the Company hereby confirms that (a) the Company is in compliance with all of the terms and
provisions set forth in the Loan Agreement, the Security Documents each of the other Loan Documents, as amended hereby, and
each of the Eligible Securitization Transaction Documents, on its part to be observed or performed on or prior to the date hereof;
(b) without limiting the foregoing, no Default or Event of Default has occurred and is continuing; and (c) since December 31,
1997 there has been no material adverse change in the assets or liabilities or in the financial or other condition of the Company,
except as disclosed in the Company's periodic filings with the SEC.
5. No Novation; Effect; Ratification and Acknowledgment of Security Documents; Counterparts; Governing Law.
Except to the extent specifically amended hereby, the Loan Agreement, the Notes, each of the Security Documents and all
other Loan Documents shall be unaffected hereby and shall remain in full force and effect. The Company hereby acknowledges,
confirms and ratifies its obligations under the Loan Agreement, the Notes, each of the Security Documents and all other Loan
6
Documents. This Second Amendment may be executed in any number of counterparts, and by the different parties on separate
counterparts, each of which, when so executed and delivered, shall be an original, but all the counterparts shall together constitute
one instrument. This Second Amendment shall be governed by the internal laws of The Commonwealth of Massachusetts (without
reference to conflicts of law principals) and shall be binding upon and inure to the benefit of the parties hereto and the respective
successors and assigns. The Company shall pay all reasonable out-of-pocket expenses of the Agent in connection with the
preparation, execution and delivery of this Second Amendment.
7
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment Agreement as a sealed instrument as
of the date first above written.
CONSUMER PORTFOLIO SERVICES, INC.
By:
(Title)
STATE STREET BANK AND TRUST COMPANY,
INDIVIDUALLY AND AS AGENT
By:
(Title)
THE STRUCTURED FINANCE HIGH YIELD
FUND, LLC
By:
(Title)
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By:
(Title)
8
EXHIBIT 10.22
AMENDED AND RESTATED
MOTOR VEHICLE INSTALLMENT
CONTRACT LOAN AND SECURITY AGREEMENT
Dated as of November 30,1998
by and between
CPS FUNDING CORPORATION
as Borrower
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Lender
1
AMENDED AND RESTATED MOTOR VEHICLE
INSTALLMENT CONTRACT LOAN AND SECURITY AGREEMENT
This Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement ("Agreement") is entered into by
and between CPS Funding Corporation, a California corporation (together with its successors and assigns, "Borrower"), and
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (together with its successors and assigns
hereinafter referred to as "Lender").
RECITALS
WHEREAS, Borrower is a financial organization primarily engaged in the business of acquiring installment sale contracts
for motor vehicles;
WHEREAS, Lender has agreed to provide the loan on the terms and conditions set forth in this Agreement to Borrower;
and
WHEREAS, Borrower and Lender desire to amend and restate the Receivables Funding And Servicing Agreement ("Prior
Agreement") dated as of June 1, 1995 which was entered into by Borrower and Redwood Receivables Corporation and later
assigned by Redwood Receivables Corporation to Lender. Borrower and Lender agree that (1) this Agreement is not a novation,
refinancing or satisfaction of any existing loan under the Prior Agreement, nor is it a release or substitution of collateral
thereunder, (2) the existing loan and security interest continue uninterrupted and are not diminished in any manner by the
execution of this Agreement, and (3) this Agreement modifies the terms and conditions contained in the Prior Agreement to the
terms and conditions contained in this Agreement.
NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Borrower and
Lender agree as follows:
ARTICLE I - DEFINITIONS
Section 1.0 Defined Terms. Whenever used in this Agreement with such upper case letters as are shown below, the
following terms shall have the respective meanings set forth below. When the terms are used in the plural, the plural forms of the
meanings shall apply.
Accounting Period: means a calendar month, beginning with the month during which this Agreement is executed and
ending with the calendar month during which the Indebtedness has been paid in full following termination of this Agreement.
Actual Payment: means, with respect to any Contracts all payments received by, from or for the account of the related
Contract Debtor on such Contract.
Advance: means each of the Loan advances described in Article III of this Agreement.
Affiliate: means CPS and any Person, now or in the future (i) directly or indirectly owned or controlled in whole or in part
by Borrower or CPS, or (ii) under common ownership or control with Borrower. For the purpose of this definition, "control" shall
mean the power to direct, or cause the direction of, management or policies, whether through the ownership of voting securities,
by contract or otherwise. For the purpose of this definition, "owned" shall mean at least 10% ownership.
Average Charged-Off Losses: means the Accounting Period average of the Charged-Off Losses for any three consecutive
Accounting Periods for Pledged Contracts; provided that, until the first three Accounting Periods have expired, the Average
Charged-Off Losses shall be the Accounting Period average of the Charged-Off Losses for the Accounting Periods which have
expired.
1
Bankruptcy Code: means the Bankruptcy Reform Act of 1978, as amended, as the same may be further amended, and any
other applicable state or federal law with respect to bankruptcy liquidation, insolvency or reorganization.
Borrowing Base: As of the date of its computation, an amount equal to the lesser of (a) 88% of the aggregate Gross
Balance of Eligible Contracts minus the Unearned Interest Amount with respect to such Contracts, and (b) 91% of Borrower's
aggregate net investment in Eligible Contracts. For the purpose of this calculation, Borrower's net investment in a Contract shall
be equal to the net amount Borrower paid to purchase the Contract, which shall in no event be more than the Gross Balance minus
the sum of (a) the Unearned Interest Amount, (b) any discounts, (c) any refundable reserves, (d) any boarding fees, and (e) any
other fees or amounts Borrower is entitled to in connection with the purchase of the Contract.
Business Day: means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of
New York are required by law to be closed.
Certificate of Title: means with respect to each Financed Vehicle, the certificate of title (or other evidence of ownership)
issued by the department of motor vehicles, or other appropriate governmental body, of the state in which the Financed Vehicle is
to be registered showing the Contract Debtor as owner, with either notation of Borrower's first lien or such other status indicated
thereon which is necessary to perfect Borrower's security interest in the Financed Vehicle as a first priority interest, and showing
no other actual or possible lien interest in the Financed Vehicle.
Charged-Off Contract: means a Contract for which (i) all or part of more than five (5) Scheduled Payments are due and
unpaid, (ii) the Financed Vehicle has been surrendered, or repossessed, and any proceeds from the sale thereof have been received,
(iii) a settlement has been made for less than the Gross Balance minus the Unearned Interest Amount, or (iv) a Skip Loss
Investigation has been pending for more than one hundred and fifty (150) days.
Charged-Off Losses: means as of the end of an Accounting Period, the Gross Balance minus the Unearned Interest Amount
of Charged-Off Contracts which become Charged-Off Contracts during the Accounting Period minus amounts received by
Borrower during the Accounting Period and applied to Charged-Off Contracts which became Charged-Off Contracts during a
previous Accounting Period, divided by the Gross Balance minus the Unearned Interest Amount of all Contracts owned by
Borrower which are not Charged-Off Contracts; expressed as a percentage.
Closing Date: means the date on which the first Advance is made.
Collateral: means any and all real and personal, tangible and intangible, property in which Lender is granted a security
interest now or hereafter, in this Agreement or otherwise, to secure Borrower's obligations to Lender.
Collection Account: means a bank account in the name of the Lender at a bank designated by the Lender.
Collections: means, with respect to any Receivable, all cash collections and other Proceeds of such Receivable (including
late charges, fees and interest arising thereon and all recoveries with respect to Receivables that have been written off as
uncollectible).
Commitment Termination Date: means the earlier of (a) the date so designated pursuant to Article 15 as a result of an
Event of Default, and (b) the Final Maturity Date.
Contract: means an installment or conditional sale contract, with any amendments, owned or acquired by Borrower
pursuant to which a Contract Debtor has: (i) purchased a new or used Motor Vehicle, (ii) granted a security interest in the Motor
Vehicle to secure the Contract Debtor's payment obligations, and (iii) agreed to pay the unpaid purchase price and a finance
charge in periodic installments no less frequently than monthly.
2
Contract Debtor: means the Person that has executed a Contract as a purchaser, and any guarantor, co-signer or other
Person obligated to make payments under the Contract.
Contract Debtor Documents: means, with respect to each Contract Debtor:
(a) the original Certificate of Title or equivalent title
documents issued by the relevant state motor vehicle authority, if
applicable;
(b) the original executed Contract;
(c) hereafter, on new Financed Vehicles a copy of the Dealer
Invoice and invoices for any additional equipment included in the
Contract;
(d) a copy of the original credit application;
(e) copies of, but with respect to portfolio purchase of
Contracts, only if such are available to Borrower from the seller of the
portfolio purchase Contracts:
(i) the credit bureau reports,
(ii) the completed credit investigation form,
(iii) the completed verification of employment and
income forms, and
(iv) the Contract Debtor's references;
(f) verification of Required Contract Debtor Insurance showing
Borrower as loss payee, additional insured, or lienholder at the time of
Borrower's purchase of the Contract, but with respect to portfolio
purchases of Contracts, only if such are available to Borrower from the
seller of the Contracts;
(g) a certificate for each type of Optional Contract Debtor
Insurance purchased by the Contract Debtor; and
(h) Borrower's loan process or "deal structure" sheet.
Contract Delivery Documents: means the original Certificate of Title, if available, or a copy of the application for the
Certificate of Title, and the original executed Contract with original Contract Debtor and Dealer signatures.
Contract Rights: means with respect to Pledged Contracts, (i) Borrower's interest in the Financed Vehicle; (ii) all rights of
Borrower regarding the Contract and Financed Vehicle, including, but not limited to, rights to electronic funds transfers and rights
under all dealer agreements and purchase agreements pursuant to which the Contract was acquired by Borrower; (iii) all rights of
Borrower with respect to Optional Contract Debtor Insurance, Required Contract Debtor Insurance, VSI Insurance and any other
policies of fire, theft or comprehensive insurance, collision insurance, public liability insurance or property damage insurance
maintained with respect to the Financed Vehicle, the Contract, or the Contract Debtor; (iv) all rights of Borrower, if any, to
prepaid dealer rate participation in connection with the Contract; (v) Remittances; and (vi) all rights of Borrower to the originals
of all books, records (including electronic data), reports, files and documents relating to the Contracts, including, but not limited
to, Contract Debtor Documents, financial statements of Contract Debtors, and all payment reports or records relating to the
Contracts.
Contract Rights Payors: means Persons, other than Contract Debtors, against whom Contract Rights can be asserted.
CPS: means Consumer Portfolio Services, Inc., a California corporation.
3
Credit and Collection Policies: means the credit, collection, customer relations and service policies of CPS and Borrower
in effect as of the date hereof, as set forth in writing and delivered to Lender, and, as such policies may hereafter be amended,
modified or supplemented from time to time with the written consent of Lender.
Dealer: means the seller of the Financed Vehicle to the Contract Debtor.
Dealer Invoice: means as to new Financed Vehicles, the Invoice prepared by the manufacturer showing the net cost; and, as
to used Financed Vehicles, the NADA Used Car Guide trade-in value, or for the West Coast, the Kelley Wholesale Blue Book
Wholesale Value, or for the Northeast, the Black Book Average Value.
Delinquency Measurement: means as of the end of an Accounting Period, the sum of the Gross Balance of all Delinquency
Measurement Contracts for which at least two (2) due Scheduled Payments are less than ninety percent (90%) paid, divided by the
monetary sum of all Scheduled Payments, whether or not due which have not been paid in full for all Delinquency Measurement
Contracts, expressed as a percentage.
Delinquency Measurement Contracts: means all Pledged Contracts which are not Charged-Off Contracts, not paid in full or
for which the Motor Vehicle has been secured in a repossession.
Eligible Contract: means each Contract which is listed on a List of Contracts delivered to Lender at the same time, and
which in Lender's sole determination satisfies each of the following requirements (at the time of delivery and thereafter except to
the extent expressly stated below to apply only at delivery or only thereafter):
(A) All of the representations and warranties in Section 10.0 are true with respect to, and all conditions precedent in
Section 9.1 have been and continue to be met with respect to, the Contract, Financed Vehicle, Contract Debtor, Required Contract
Debtor Insurance, and Optional Contract Debtor Insurance.
(B) The first Scheduled Payment is due within forty five (45) days after the date of the Contract and the Contract Date is
within one (1) day of the delivery of the Financed Vehicle.
(C) The Contract has a fixed APR and the Finance Charge was computed using a fixed rate.
(D) The initial term of the Contract does not exceed sixty (60) months (except for the Super Alpha program Contracts) and
the Schedule of Payments has equal monthly payments except for the final payment which may be less than the other equal
payments, the payment obligation is in Dollars, and at the time the Contract was delivered to the Lender, there were at least twenty
(20) remaining Scheduled Payments.
(E) The Contract is for the absolute sale of the Financed Vehicle to the Contract Debtor, and the Financed Vehicle is not on
approval or subject to any agreement between the Contract Debtor and the Dealer for the repurchase or return of the Financed
Vehicle.
(F) The Contract does not present a credit, collateral or documentation risk which is material and unacceptable to the
Lender.
(G) The Dealer has been paid all amounts due for the purchase of the Contract from the Dealer.
(H) The Contract Debtor is an Eligible Contract Debtor.
(I) The Contract contains the original signature of the Contract Debtor and the Dealer.
4
(J) The Contract is the only unsatisfied original executed Contract for the purchase of the Financed Vehicle and accurately
reflects all of the actual terms and conditions of the Contract Debtor's purchase of the Financed Vehicle.
(K) Neither Borrower nor an Affiliate has made any agreement with the Contract Debtor to reduce the amount owed on the
Contract.
(L) Neither Borrower nor an Affiliate is required to perform any additional service for, or perform or incur any additional
obligation to, the Contract Debtor in order for Borrower to enforce the Contract.
(M) The Contract, at the time Borrower purchased it, materially complied with the Credit and Collection Policies; or the
Lender approved any material deviation from the Credit and Collection Policies for that Contract in writing.
(N) The Contract Debtor's obligations under the Contract are secured by a validly perfected first priority security interest in
the Financed Vehicle in favor of Borrower or Lender as secured party.
(O) The Contract has not been, nor is it designated to be, terminated, satisfied, canceled, subordinated or rescinded in
whole or in part; nor has the Financed Vehicle been released, or designated for release, from the security interest granted by the
Contract; and all of the holder's obligations under the Contract have been performed except those which arise subsequent to the
delivery to Lender.
(P) No provision of the Contract has been waived, extended, altered or modified in any respect except in accordance with
the Credit and Collection Policies.
(Q) The day of the month that Scheduled Payments are due has not been changed from the original Schedule of Payments
except for no more than one change which did not change the due date in a manner such that there was more than a thirty (30) day
period for which no Scheduled Payment was due.
(R) No claims of rescission, setoff, counterclaim, defense or other material disputes have been asserted with respect to the
Contract or Financed Vehicle.
(S) There are no unsatisfied liens or claims for taxes, labor, materials, fines, confiscation, or replevin relating to the
Contract or Financed Vehicle. There is no unsatisfied claim against the Contract Debtor based on the operation or use of the
Financed Vehicle. All taxes due for the purchase, use and ownership of the Financed Vehicle have been paid. All taxes due on the
transfer of the Contract to Borrower and Lender have been paid.
(T) The Contract requires Required Contract Debtor Insurance and Borrower or CPS is a loss payee or insured under the
Required Contract Debtor Insurance.
(U) The Company has not repossessed the Vehicle or commenced a replevin action or other lawsuit against the Contract
Debtor or Financed Vehicle.
(V) The model year of the Financed Vehicle is not more than seven (7) years earlier than the model year in effect at the
time the Contract is delivered to Lender.
(W) The obligation of the original Contract Debtor has not been released or assumed by another Person unless the release
or assumption was properly documented and the Lender consents in writing to it for purposes of the Contract being an Eligible
Contract.
(X) The Contract Debtor Documents exist.
5
(Y) Not more than two (2) Scheduled Payments are due and unpaid in whole or in part.
(Z) The cash down payment has been paid in full by the Contract Debtor and not loaned to the Contract Debtor by
Borrower or an Affiliate, and any trade-in has been delivered to the Dealer with an endorsed Certificate of Title.
(AA) The Contract was purchased from a Dealer in the ordinary course of the Dealer's business within 60 days after the
Contract Date.
(BB) The first or second Scheduled Payments are not paid more than forty-five (45) days past the scheduled due date.
(CC) The Amount Financed does not exceed one hundred fifty percent (150%) of the net cost or value if applicable, shown
on the Dealer Invoice.
(DD) The Amount Financed on the Contract Date does not exceed $30,000 and the Vehicle has no more than 85,000 miles
on its odometer on the Contract Date.
(EE) Not more than 360 days have elapsed since the date the Contract was pledged to Lender hereunder.
(FF) On or before the date which is 120 days after the Contract Date, the original Certificate of Title or equivalent title
documents issued by the relevant state motor vehicle authority, if applicable, shall have been delivered to the Lender.
(GG) The inclusion of the Contract as an Eligible Contract will not cause (1) the average of the down payment ratios
(down payment as % of the sales price of the Financed Vehicle) for the Pledged Contracts to be less than10%, (2) the average of
the income ratios (Scheduled Payment as % of the Contract Debtor's monthly income) for the Pledged Contracts to exceed 20%,
(3) the average of the debt ratios (total monthly debt, including the Contract, as a % of the Contract Debtor's monthly income) for
the Pledged Contracts to exceed 45%, or (4) the number of Pledged Contracts approved under Borrower's Delta program plus the
number of Pledged Contracts approved under Borrower's First Time Buyer program to exceed 15 % of the total number of
Pledged Contracts.
Event of Default: has the meaning provided in Section 15.0 of this Agreement.
Final Maturity Date: means December 31, 1998 unless Borrower activates Article IV in the CPS Secured Guaranty
Agreement before December 31, 1998 in which case the Final Maturity Date means November 30, 1999.
Financed Vehicle: means the new or used Motor Vehicle purchased by a Contract Debtor pursuant to a Contract, or any
substituted vehicle which is properly documented and approved by Lender.
Governmental Authority: means the United States of America, any state, local or other political subdivision thereof and
any entity exercising executive, legislative, judicial, regulatory or administrative functions thereof or pertaining thereto.
Gross Balance: means, with respect to any Contract, an amount equal to the number of remaining Scheduled Payments
multiplied by the amount of each Scheduled Payment minus any Prepayments or other payments applied to reduce the unpaid
principal balance of such Contract.
Indebtedness: means the Loan and all other amounts, including but not limited to interest, that Borrower owes Lender in
connection with this Agreement.
6
Interest Coverage: means the sum of Borrower's year-to-date pre-tax income plus Borrower's year to date interest expense,
compared to Borrower's year-do-date interest expense.
LIBOR Rate: means the average of the "three month" London Interbank Offered Rates ("LIBOR") published in the Money
Rates column of the Wall Street Journal during the calendar month immediately preceding the calendar month for which interest is
being calculated, or published in such other publication as Lender may designate.
List of Contracts: means the list delivered to Lender by Borrower with each Contract or group of Contracts which: (i)
identifies each Contract being delivered by account number, the name of the Contract Debtor, the Gross Balance, and the year,
make, model, and VIN of the Financed Vehicle, and (ii) shows the total number of Contracts and the total of the Gross Balances.
Loan: means the outstanding principal amount of the Advances, plus all other amounts advanced, expended or applied by
Lender under this Agreement to or for the benefit of Borrower or to perform or enforce Borrower's covenants in this Agreement.
Loan Availability: means the amount by which the Borrowing Base exceeds the Loan.
Loan Documents: means this Agreement, the Note, and the Supplemental Documentation.
Lockbox: means the arrangement established by the Lender at a bank or financial institution for the receipt and
identification of Remittances.
Motor Vehicle: means a passenger motor vehicle, van, or light duty truck which is not manufactured for a particular
commercial purpose and which can be registered for use on public highways and is not a "grey market" vehicle.
Non-Utilization Fee: means the fee calculated by multiplying the Non-Utilization Rate times the amount by which
$100,000,000 (one hundred million and no/100) exceeds the average balance of the Loan for the appropriate Accounting Period. If
the Loan balance for any day is less than zero, such Loan balance shall be assumed to be positive for purposes of the average
balance calculation.
Non-Utilization Rate: means a monthly percentage rate equal to .02083% or an annual percentage rate equal to one quarter
of one percent (.25%).
Note: means the promissory note issued by Borrower to Lender substantially in the form of Exhibit A hereto.
Optional Contract Debtor Insurance: any insurance, other than Required Contract Debtor Insurance which insures a
Financed Vehicle or a Contract Debtor's obligations under a Contract, including but not limited to credit life, credit health, credit
disability, unemployment insurance; and any service contract, mechanical breakdown coverage, warranty, or extended warranty
for a Financed Vehicle.
Person: means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party, or government (including, any instrumentality or division thereof).
Pledged Contract: means any Contract owned on the Closing Date or in the future by Borrower unless it has been, to the
extent allowed by this Agreement, pledged to a Person other than Lender or sold.
Pre-Default Event: means an event which with the passage of time, the giving of notice, or both, would constitute an Event
of Default if Lender gave any notice required by this Agreement for the event to be an Event of Default, or if the event continued
past the end of any period specifically allowed by this Agreement for the event to continue before it becomes an Event of Default.
7
Prepayment: means, with respect to a Contract on any day of determination, the amount, if any, by which the Actual
Payment exceeds the Scheduled Payment.
Proceeds: means, with respect to any Collateral, whatever is receivable or received when such Collateral is sold, collected,
exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes all rights to payment,
including returned premiums, with respect to any insurance relating to such Collateral.
Records: means all Contracts and other documents, books, records and other information (including, without limitation,
computer programs, tapes, disks, data processing software and related property and rights) prepared and maintained by Borrower
with respect to Receivables and the related Contract Debtors.
Remittances: means all payments made with respect to Pledged Contracts, including, but not limited to, Scheduled
Payments, full and partial prepayments, liquidation proceeds, insurance proceeds and refunds, late charges, fees (including but not
limited to NSF fees and extension fees), and payments from Contract Rights Payors.
Required Contract Debtor Insurance: means insurance for physical damage to, and theft or loss of, the Financed Vehicle,
having a deductible no higher than $500 and providing coverage at least equal to the actual cash value of the Financed Vehicle.
Rolling Average Delinquency: means the average of the Delinquency Measurements for any three consecutive Accounting
Periods for Pledged Contracts; provided that, until the first three Accounting Periods have expired, the Rolling Average
Delinquency shall be the average of the Delinquency Measurements for the Accounting Periods which have expired.
Schedule of Payments: means the schedule of payments disclosed on a Contract.
Scheduled Payment: means the periodic installment payment amount disclosed in the Schedule of Payments for the
Contract.
Skip Loss Investigation: means an investigation initiated by Borrower of the whereabouts of a Financed Vehicle or a
Contract Debtor.
Statement of Borrowing Base: means a statement issued by lender which contains the amount of the Borrowing Base, the
amount of the Loan or Indebtedness, and either the amount available for Advances or the amount by which the Loan or
Indebtedness exceeds the Borrowing Base.
Supplemental Documentation: means all agreements, instruments, documents, certificates of title, financing statements,
notices of assignment, Lists of Contracts, chattel mortgages, powers of attorney, subordination agreements, and other written
matter necessary or reasonably requested by Lender to perfect and maintain perfected Lender's security interest in the Collateral or
to consummate the transactions contemplated by this Agreement.
UCC: means the Uniform Commercial Code of the applicable state.
Unearned Interest Amount: means, with respect to any Contract, the aggregate amount of the unearned interest on such
Contract calculated in accordance with the constant yield method, as shown on the books of the Borrower.
Year 2000 Compliant: means:
(A) The operating systems for Borrower's computers, all software applications that run on Borrower's computers, all
Borrower's facilities, machinery and equipment and Borrower's products and services (collectively, "Products and Services)
accurately process, provide and or receive date/time data
8
(including without limitation events and data in the twentieth and twenty-first centuries and the years 1999 and 2000) including
leap year calculations, and
(B) Neither the performance nor the functionality of Borrower, nor Borrower's supply of Products and Services will be
affected adversely by dates/times prior to, on, after, or spanning January 1, 2000. In particular, but without limitations, the design
and performance of the Products and Services shall include, without limitations, proper date/time data century recognition, proper
recognition of April 9, 1999, September 9, 1999, December 31, 1999, January 1, 2000, January 3, 2000, January 10, 2000, January
31, 2000, February 29, 2000, March 31, 2000, October 31, 2000, January 1, 2001 and December 31, 2001, and proper recognition
of Leap Years calculation, proper same century and multi-century formulae and date/time values before, on, after, and spanning
January 1, 2000, and date/time data interface values that properly reflect the century, 1999 and 2000; and
(C) No value for date/time will cause any error, interpretation, or decreased performance in or for such Products and
Services; and
(D) All manipulations of date and time related data (including but not limited to, calculating, comparing, sequencing,
processing, and outputting) will produce correct results for all valid dates and times, including when used in combination with
other products, services, and/or items; and
(E) Date /time elements in interfaces and data storage will specify the century and date/time data so as to eliminate date
ambiguity without human intervention, including Leap Year calculations/date, where any date is represented without a century,
the correct century will be unambiguous for all manipulations involving that element; and
(F) Authorizations codes, passwords, and purge functions shall operate normally and in the same manner in which they
function with respect to expiration dates and CPU serial numbers; and
(G) Neither Borrower's supply of Products and Services, Borrower's business, Borrower's operations nor Borrower's
financial condition will be interrupted, delayed, decreased, or otherwise adversely affected by dates prior too, on, after, or
spanning January 1, 2000."
Section 1.1 Other Terms: All terms not defined in this Agreement shall, unless the context indicates otherwise, have the
meanings provided in the UCC to the extent the same are defined therein.
Section 1.2 Accounting Terms. Any accounting terms used in this Agreement which are not specifically defined shall have
the meanings customarily given them in accordance with generally accepted accounting principles.
ARTICLE II - LOAN; GENERAL TERMS
Section 2.0 Revolving Credit; Loan Amount. Subject to all of the terms and conditions of this Agreement, the Lender
agrees to loan funds to Borrower against Eligible Contracts from time to time in a series of Advances during the term of this
Agreement. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth in
this Agreement, provided that the Loan shall not at any time exceed the lesser of the Borrowing Base or $100,000,000. Borrower's
obligation to pay the Loan is evidenced by this Agreement and the Note. Borrower is obligated to pay Lender as provided in this
Agreement whether or not Borrower has executed a promissory note. Any promissory note executed by Borrower is adequate, but
not required, proof of the Indebtedness when so used by Lender. The actual amount Borrower is obligated to pay Lender shall be
determined by this Agreement and the records of Lender, regardless of the terms of any promissory note. Any promissory notes
executed in connection with the Indebtedness need not be amended to reflect changes made to this Agreement. The records of
Lender shall, absent manifest error, be conclusive evidence at any time as to the amount of the Loan, the interest due thereon, and
all other amounts owed in connection with this Agreement.
9
Section 2.1 Loan Purpose. Borrower shall use the Advances for the legal and proper corporate working capital needs of
Borrower.
Section 2.2 Single Loan. All Advances by Lender to Borrower shall constitute one loan and all indebtedness and
obligations of Borrower to Lender under the Loan Documents shall constitute an obligation secured by Lender's security interest
in all of the Collateral.
Section 2.3 General Interest Rate. Except as modified by Sections 2.5 and 15.1, the Loan shall bear interest, calculated
daily on the basis of a 365-day year, at a per annum rate equal to three and one-half percent (3.50%) plus the LIBOR Rate.
Section 2.4 Loan Term; Right to Terminate. Unless sooner terminated as hereinafter provided, this Agreement shall expire
on the Commitment Termination Date. The prepayment in full of all Advances is a termination of this Agreement. In addition, if
an Event of Default has occurred, Lender may without prior notice to Borrower, immediately terminate this Agreement.
Notwithstanding termination of this Agreement, the Indebtedness shall be payable in accordance with this Agreement, and all
rights and remedies granted to Lender hereunder or pursuant to applicable law shall continue until all obligations of Borrower to
Lender have been fully paid and performed.
Section 2.5 Maximum Lawful Rate.
(A) Interest Rate. Notwithstanding any provision in this Agreement, or in any other document, if at any time before the
payment in full of the Indebtedness, any of the rates of interest specified in this Agreement (the "Stated Rates") exceeds the
highest rate of interest permissible under any law which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as the Maximum Lawful Rate would be so
exceeded, the rate of interest payable shall be equal to the Maximum Lawful Rate; provided, however, that if at any time
thereafter the Stated Rates shall be less than the Maximum Lawful Rate, then, subject to (B) below, Borrower shall continue to
pay interest at the Maximum Lawful Rate until such time as the total interest received by Lender is equal to the total interest
which Lender would have received had the Stated Rates been (but for the operation of this Section 2.5(A)) the interest rates
payable; thereafter, the interest rates payable shall be the Stated Rates unless and until any of the Stated Rates shall again exceed
the Maximum Lawful Rate, in which event this Section 2.5(A) shall again apply. In the event interest payable hereunder is
calculated at the Maximum Lawful Rate, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate
divided by the number of days in the year in which such calculation is made.
(B) Amount of Interest. In no event shall the total interest contracted for, charged, received or owed pursuant to the terms
of this Agreement exceed the amount which Lender may lawfully receive. In the event that a court of competent jurisdiction,
notwithstanding the provisions of this Section 2.5, shall make a final determination that Lender has received, charged, collected,
or contracted for interest hereunder in excess of the amount which Lender could lawfully have, Lender shall, to the extent
permitted by law, promptly apply such excess first to any interest due (calculated at the Maximum Lawful Rate if applicable) and
not yet paid, then to the prepayment of principal, and any excess remaining thereafter and after application to any other amounts
Borrower owes Lender shall be refunded to Borrower. In determining whether the interest exceeds the Maximum Lawful Rate or
the maximum amount which Lender could lawfully have received, the total amount of interest shall, to the extent allowed by law,
be spread over the term of the Loan. Any provisions of this Agreement regarding the time during which interest accrues on
Advances are only elements of the formula for calculating interest on the total Loan and are not intended to cause interest to be
applied to specific Advances for usury determination purposes.
ARTICLE III - LOAN DISBURSEMENTS
Section 3.0 Loan - Borrowing Base. Provided that (i) there does not then exist an Event of Default or a Pre-Default Event,
and (ii) Lender has not taken over all or some of the administration of the Contracts, Lender shall, upon written request of
Borrower and subject to all of the terms and conditions of this Agreement, make Advances to Borrower pursuant to Section 3.2.
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Section 3.1 Eligible Contracts. No less frequently than every other Business Day, Borrower shall deliver to Lender all
Eligible Contracts which Borrower owns and has not previously delivered to Lender. Along with the Contracts Borrower shall
also deliver a List of Contracts. An Eligible Contract shall be included in the Borrowing Base only when and for so long as, in
Lender's sole determination, each of the requirements in the definition of Eligible Contracts continues to be satisfied. If a Contract
is determined by Lender to be, or is treated by Lender as, an Eligible Contract, Lender reserves the right to change its
determination or treatment and to remove the Contract from the Borrowing Base if it later determines that the Contract is not or
was not an Eligible Contract. A determination by Lender that a Contract is an Eligible Contract is not a waiver by Lender of, or an
admission by Lender of the truth of, any of Borrower's representations and warranties in this Agreement. If Lender intentionally
includes a Contract in the Borrowing Base even though the Contract does not satisfy all of the requirements for being an Eligible
Contract, Lender does not waive the right to exclude any similar Contract delivered to Lender before or after the included
Contract.
Section 3.2 Procedure for Borrowing.
(A) The first Advance shall not exceed the Borrowing Base. Subsequent Advances shall not be made more frequently than
every other business day. Each subsequent Advance shall not exceed the Loan Availability determined at Lender's election either
as of the day of the Advance request , the end of the most recent Accounting Period for which Lender has received the monthly
reports required by Section 5.1 (C), or, as of such other date thereafter designated by Lender. Lender is not obligated to make an
Advance if the amount available or requested is less than One Hundred Thousand Dollars ($100,000.00). Lender is not obligated
to make an Advance unless Borrower provides Lender with sufficient information to calculate the Loan Availability. Lenders use
of the information provided by Borrower to determine the amount available for Advances is not an admission by Lender as to the
accuracy of the information, and Lender reserves the right to verify the information and redetermine the amount available for
Advances.
(B) Lender shall disburse each Advance requested by Borrower within one (1) Business Day after receipt of Borrower's
written request for the Advance. Lender shall disburse each Advance requested by Borrower by wire transfer to Borrower.
Section 4.0 Payments by Borrower.
ARTICLE IV - LOANS: PAYMENTS
(A) All payments by Borrower to Lender shall be in a form payable to Lender and shall be sent to: GE Capital, 540 W.
Northwest Highway, Barrington, Illinois 60010 Attention: Manager - Asset Based Financing, or shall be sent to such other
location that Lender notifies Borrower to send payments. Borrower shall make all payments to Lender by either an electronic fund
transfer method acceptable to Lender or ACH (Automated Clearing House).
(B) Whenever Lender shall notify Borrower, with a Statement of Borrowing Base or otherwise, that the Loan exceeds the
Borrowing Base, Borrower shall within one (1) Business Day after receipt of such notice, either pay down the Loan by the amount
of such excess, or, if Lender consents, deliver additional Eligible Contracts to Lender which are sufficient to increase the
Borrowing Base above the Loan.
(C) On the Commitment Termination Date, Borrower shall pay to Lender the entire Indebtedness. If there is an Event of
Default, Borrower shall pay the entire Indebtedness on demand if the Indebtedness is accelerated pursuant to Section 15.2.
(D) Interest shall accrue on the Loan daily and be paid from the Remittances as provided in Section 4.2. If at the end of an
Accounting Period there is more than one Business Day of accrued unpaid interest, Borrower shall pay the more-than-one-day
accrued interest to Lender within one (1) Business Day after the end of the Accounting Period. Accrued interest shall not be added
to the Loan balance and bear interest, unless the
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interest is past due and paid with an Advance requested by Borrower and approved by Lender; provided that, such an approval by
Lender shall not constitute a waiver of the Event of Default consisting of the failure to pay the interest except to the extent
provided in Section 16.9.
(E) The payment of all elements of the Indebtedness not covered by the foregoing Subsections (B), (C), or (D) shall be
payable by Borrower to Lender as and when provided in the Loan Documents, and, if not specified, then on demand.
(F) Borrower has the right to prepay the Loan in full or in part at any time without penalty.
(G) The Non-Utilization Fee shall be payable monthly in arrears within fifteen (15) days after the end of an Accounting
Period for which a Non-Utilization Fee is due.
(H) Borrower shall immediately pay to Lender the balance of any Advance for any Pledged Contract upon the sale or other
disposition of such Pledged Contract.
(I) Borrower shall have paid Lender a line fee of $250,000 on or before November 30, 1998.
Section 4.1 Contract Payments. Borrower shall direct all Contract Debtors for Pledged Contracts to make, when paying by
mail, all payments directly to the Lockbox. Borrower shall direct all Persons, other than Contract Debtors, who make payments to
Borrower relating to Pledged Contracts, including but not limited to Contract Rights Payors, to make payment directly to the
Lockbox. In the event Borrower receives any Remittances, Borrower shall, as soon as possible but no later than the next Business
Day following receipt, deposit the remittances in kind in the Collection Account. Borrower shall hold Remittances in trust for
Lender until delivery to Lender or deposit in the Collection Account. Borrower shall pay all expenses associated with the
Lockbox.
Section 4.2 Application of Payments. All Remittances received by Lender or the Collection Account shall be applied by
Lender to the Indebtedness within two (2) Business Days after the Remittance has been credited to the Collection Account. No
Remittance other than cash shall be treated as a final payment to Lender unless and until such item has actually been collected by
the Collection Account and such collection has been finally credited to the Collection Account; provided, further, that if a
Remittance applied to the Indebtedness is charged back to the Collection Account, Lender can retroactively remove the
application of the Remittance to the Indebtedness and accrue any interest not accrued because of the application of the Remittance
to the Indebtedness. Each Remittance applied by Lender to the Indebtedness shall be applied by Lender first to accrued interest
and, if sufficient to pay accrued interest, any excess shall be applied then to the Loan, and, if sufficient to pay the accrued interest
and the Loan, any excess shall then be applied to the remaining elements of the Indebtedness, if any, or, if not, Lender shall, if
there is no Event of Default or Pre-Default Event, remit the same to Borrower within two Business Days; provided that, Lender
reserves the right to use a different order of application if there is an Event of Default or Pre-Default Event or Lender has given
prior written notice to Borrower of a different order. All Remittances received by the Collection Account or Lender may be
applied to the Indebtedness even though no portion of the Indebtedness is otherwise then due and even though Lender has not sent
Borrower a demand, notice or request for payment of the Indebtedness. Payments shall be deemed to be due by Borrower when
received by Lender unless they are due sooner by the terms of the Loan Documents.
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ARTICLE V - CONTRACT ADMINISTRATION
Section 5.0 Lender Administration
(A) Lender shall have no liability to Borrower with respect to Remittances received by Lender, the Lockbox, or the
Collection Account, other than to: (i) apply the Remittances pursuant to Section 4.2 of this Agreement; (ii) ensure that there is a
provision in Lenders Agreement with the Lockbox Bank which requires the bank to routinely provide Borrower with a report of
Remittances received by the Lockbox which itemizes the Remittances by Contract to the extent the Remittances contain sufficient
identifying information; and (iii) upon termination of this Agreement and Borrowers satisfaction of all of its obligations under this
Agreement, to assign the Lockbox and its contents to Borrower. Lender shall have no liability to Borrower with respect to any
interest or other earnings which are earned, or could have been earned, on the Remittances while they are in the Lockbox, the
Collection Account, or otherwise.
(B) Borrower shall transfer to Lender the U.S. Postal Service post office boxes used by Borrower for the receipt of
Remittances processed by Borrower's service centers. Immediately after the U.S. Postal Service has recorded the post office boxes
in the name of Lender, (i) the post office boxes shall be the Lockbox, and (ii) Lender shall designate Borrower (or employees of
Borrower specified by Borrower) to the U.S. Postal Service as an authorized retriever of mail from the post office boxes subject to
Lender's right to cancel such authorization. Lender shall not exercise its rights to cancel Borrower's authorization to retrieve mail
from the Lockbox before Lender has the right (as described in Section 5.1(E)) to take over all or part of the administration that
Borrower is required by this Agreement to perform. Until Lender exercises its right to take over all or part of the administration,
Lender shall maintain a Collection Account near each of Borrower's service centers identified in Section 5.1(B).
Section 5.1 Borrower Administration
(A) Borrower shall perform all aspects of servicing, administering, collecting, liquidating, accounting for and managing
(collectively, administering, administer, or administration) the Pledged Contracts it customarily performs and all aspects that are
customarily performed by financial institutions in the administration of their motor vehicle installment contracts. Borrower shall
provide such administration in a reasonable and prudent way that does not, in Lenders determination, adversely affect the value of
the Collateral to Lender. Borrower shall provide such administration with at least the same standard of care used by large financial
institutions in the administration of motor vehicle installment contracts. Lender shall be the sole determine as to whether such
standard of care has been met. The administration provided by Borrower shall include but not be limited to all servicing currently
provided by Borrower, and Financed Vehicle titling and lien perfection, customer service, insurance claim tracking and collection,
insurance maintenance, Contract enforcement, Contract billing, payment processing, portfolio and Contract accounting, portfolio
management, delinquency collection, repossession, foreclosure, resale, and maintaining current Contract Debtor and Financed
Vehicle location information (name, address and phone number). Borrower shall maintain current, accurate, and complete records
of activity and comments regarding collection, insurance, payments, and other material events. The records regarding collection,
history, payments, Contract accounting, customer service notes, Contract Debtor names and addresses and Gross Balance shall be
computerized. Borrower shall require Contract Debtors to maintain Required Contract Debtor Insurance in accordance with
Borrowers existing procedures. Borrower shall administer and otherwise deal with the Contracts in compliance with all applicable
laws. Borrower shall conduct foreclosure sales in a commercially reasonable manner and take the steps necessary to preserve the
deficiency liability of the Contract Debtors.
(B) Borrower shall administer the Pledged Contracts at its existing service centers in Irvine, California, and Chesapeake,
Virginia or at such other locations that Borrower provides prior notice of to Lender and Lender approves for Contract
administration.
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(C) Borrower shall furnish to Lender such reports in such form that Lender determines are necessary for it to track and
monitor the Pledged Contracts, Remittances, Financed Vehicles, and insurance. Such reports shall include but not be limited to:
REPORT FREQUENCY
------- ---------
Cash Report Daily
Discount Report Summary Monthly
Trial Balance of Contracts Monthly
Gross Delinquency Summary Report Monthly
Loans Paid Off This Month Report Monthly
Loans Charged-Off This Month Report Monthly
Delinquency Detail Report Monthly
The daily reports shall be provided to Lender no later than the next Business Day after the day covered by the report. The monthly
reports shall be provided to Lender no later than fifteen (15) Business Days after the end of the month. Borrower shall deliver with
the monthly reports a certificate of the chief financial officer of Borrower, in the form of Exhibit E and a covenant compliance
certificate, certifying as to the completeness and accuracy of the reports provided pursuant to this Section 5.1(C). Borrower shall
deliver to Lender, no later than the fifteenth (15th) Business Day following each Accounting Period, an up-to-date master file
back-up tape in a form usable by Lenders computer of all Pledged Contract information for the Accounting Period relating to the
Contract files which Borrower has placed on electronic media, including but not limited to, payment histories, contract
accounting, Gross Balance, and Contract Debtor names and addresses.
(D) Notwithstanding anything herein to the contrary, (i) Borrower shall remain liable under all Contracts, and any other
contracts and agreements with Contact Rights Payors or otherwise included in or related to the Collateral, to the extent set forth
therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (ii)
the exercise by Lender of any rights under any of the Loan Documents shall not release Borrower from any of its duties or
obligations under the Contracts, or the other contracts and agreements; and (iii) Lender shall not have any obligation or liability
under the Contracts, or the other contracts and agreements, nor shall Lender be obligated to perform any of the obligations or
duties of Borrower thereunder or take any action to collect or enforce any rights thereunder.
(E) Borrower shall administer the Contracts at its own expense. In the event there is an Event of Default or a Pre-Default
Event, Lender may in Lenders or Borrowers name, take over all or part of the administration that Borrower is required by this
Agreement to perform. If Lender takes over all or part of the administration, Borrower shall pay to Lender on demand all out-of-
pocket costs incurred by Lender in the performance of Borrowers administration obligations, and Borrower shall pay Lender for
the administration performed by Lender an administration fee (exclusive of out-of-pocket costs) established by Lender consistent
with generally prevailing fees charged by servicers of Contracts of similar credit quality, and until so paid such costs and fee shall
be part of the Loan.
Section 5.2 Servicing Agreements. Borrower shall not enter into any agreements for the servicing (including origination or
administration) of the Pledged Contracts other than servicing agreements with CPS which Lender has approved. Borrower shall
not make any changes to servicing agreements approved by Lender unless Lender approves the changes. Borrower hereby assigns
to Lender all of Borrower's rights regarding Pledged Contracts under servicing agreements for the Pledged Contracts. Borrower
can continue to exercise such rights until an Event of Default, at which time they may only be exercised by Lender or with
Lender's approval. Lender assumes no liabilities to Borrower or others with regard to the servicing agreements.
ARTICLE VI - COLLATERAL: GENERAL TERMS
Section 6.0 Security Interest. To secure the prompt performance and payment in full when due, whether at stated maturity,
by acceleration or otherwise of the Indebtedness and all of Borrower's existing and future obligations to Lender whether arising
under or related to this Agreement or otherwise, Borrower hereby
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grants to Lender a continuing security interest in, and lien upon, all of Borrower's right, title and interest, whether now owned or
existing or hereafter arising or acquired and regardless of where located in, and to, the following:
Contracts; Contract Debtor Documents; Contract Rights; payments from Contract Debtor bank accounts; chattel paper;
leases; installment sale contracts; installment loan contracts; payments from chattel paper obligors; security deposits; motor
vehicles (including but not limited to cars, trucks and motorcycles); certificates of title; contract purchase discounts; accounts;
general intangibles; security interests, collateral securing chattel paper; dealer agreements; dealer reserves and rate participation;
rights of Borrower related to chattel paper, installment contracts, motor vehicles, and collateral securing chattel paper; documents;
instruments; deposit accounts; electronic funds transfers; equipment; inventory; parts and accessories for motor vehicles;
payments from account debtor bank accounts; reserve accounts; insurance policies, and benefits and rights under insurance
policies, which Borrower is solely or jointly the owner of, insured under, the lienholder or loss payee under, or the beneficiary of;
and all payments and property of any kind, now or at any time or times hereafter, in the possession or under the control of Lender,
or a bailee of Lender;
accessions to, substitutions for and all replacements, products and proceeds of, any of the foregoing property;
books and records (including, without limitation, financial statements, accounting records, customer lists, credit files,
computer programs, print-outs and other computer materials and records) of Borrower pertaining to any of the foregoing property;
and
Borrower's rights under servicing agreements for the Pledged Contracts.
Section 6.1 Disclosure of Security Interest. Borrower shall make appropriate entries upon its financial statements and its
books and records disclosing Lenders security interest in the Collateral. Borrower shall inform Lender of any potentially
materially adverse information it receives concerning the Collateral or Lenders rights in the Collateral.
Section 6.2 Additional Acts. Borrower shall perform all other acts requested by Lender for the purpose of perfecting,
protecting, maintaining and enforcing Lenders security interest in the Collateral and the priority of such security interest.
Borrower agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is
sufficient as a financing statement. Borrower, upon request of Lender shall either pay and or reimburse Lender for all costs, filing
fees, and taxes associated with the perfection of Lenders security interest.
Section 6.3 Inspection and Access. Lender and its agents shall have the rights, at any time, to (i) during Borrowers usual
business hours, inspect the Collateral and the premises upon which any of the Collateral is located; (ii) during Borrowers usual
business hours, inspect, audit and make copies or extracts from any of Borrowers records, computer systems, files, and books of
account; (iii) during Borrowers usual business hours, monitor Borrowers performance of its obligations with respect to this
Agreement; (iv) obtain information about Borrowers affairs and finances from any Person; and (v) verify, in Lenders name or in
the name of Borrower, the validity, amount, quality, quantity, value and condition of, or any other matter relating to, the Collateral
including but not limited to verifying Contract information with Contract Debtors. Borrower shall, upon Lenders request from
time to time, instruct its vendors, banking and other financial institutions and its accountants to make available to Lender and
discuss with Lender such information and records as Lender may request. Borrower authorizes Lender, if requested by a Person
other than a credit reporting agency and without request if the Person is a credit-reporting agency, to provide that Person with
information about the Indebtedness, Collateral and Borrowers performance of this Agreement. As long as there is a Pre-Default
Event, and after an Event of Default has occurred, all costs, fees and expenses thereafter incurred by Lender, or for which Lender
becomes obligated, in connection with any inspection, audit, monitoring, or verification shall be payable to Lender by Borrower
on demand by Lender and until paid shall be part of the Loan. If Borrower maintains or stores any data with respect to Collateral
on a computer system, Borrower shall upon request of Lender, at Lenders option, provide Lender with on-line access or deliver to
Lender duplicate copies of the requested data in machine readable form acceptable to Lender along with a printout or other hard
copy of such data. Borrower shall, on request of Lender, provide to Lender (at the location designated by Lender) the Contract
Debtor Documents.
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Section 6.4 Right to Notify and Endorse. Borrower hereby irrevocably authorizes Lender to, at any time and in the name of
Lender or Borrower, notify any or all Contract Debtors and Contract Rights Payors that Lender has a security interest in Contracts,
Contract Rights, and other items of Collateral. Any such notice shall, at Lenders election, be signed by Borrower and may be sent
on Borrowers stationery.
Section 6.5 Lender Appointed Attorney-in-Fact. Borrower hereby irrevocable appoints Lender (and all Persons designated
by Lender for that purpose) as Borrowers true and lawful attorney-in-fact to act in Borrowers place in Borrowers or Lenders name
(i) to endorse Borrowers name on any Remittance; (ii) to sign Borrowers name on any assignment or termination of a security
interest in a Financed Vehicle, on any application for a Certificate of Title for a Financed Vehicle, or on any UCC financing
statement related to Collateral, and on any other public records regarding the Collateral; and (iii) to send requests for verification
to Contract Debtors. Borrower ratifies and approves all acts of Lender as Borrowers attorney-in-fact. Lender shall not, when
acting as attorney-in-fact, be liable for any acts or omissions as or for any error of judgment or mistake of fact or law, except for
actions taken in bad faith. This power, being coupled with an interest, is irrevocable until all payment and performance obligations
of Borrower to Lender have been fully satisfied. Borrower shall upon request of Lender execute powers of attorney to separately
evidence the foregoing powers granted to Lender. As long as there is a Pre-Default Event, and after an Event of Default has
occurred, all costs, fees and expense thereafter incurred by Lender, or for which Lender becomes obligated, in connection with
exercising any of the foreign powers shall be payable to Lender by Borrower on demand by Lender and until paid shall be part of
the Loan.
Section 6.6 Change of Collateral, Location, Office or Structure. Borrower shall keep the Collateral, other than Collateral
delivered to Lender and Financed Vehicles, at Borrower address in Section 16.1 or, subject to Section 5.1(B), one of its service
centers, and Borrower shall maintain Borrower address in Section 16.1 or, subject to Section 5.1(B), one of its service centers, as
its principal place of business and chief executive office, unless Borrower gives Lender at least sixty (60) days' prior written notice
of a change and before the change takes whatever action Lender requires to maintain the priority and perfection of its security
interest in, and access to, the Collateral. Borrower shall not change its name, trade name, identity, corporate structure, or service
center locations unless Borrower gives Lender at least sixty (60) days' prior written notice of a change and before the change takes
whatever action Lender requires to maintain the priority and perfection of its security interest in, and access to the Collateral.
Section 6.7 Lenders Payment of Claims Asserted against Borrower. Lender may, at any time, in its sole discretion and
without obligation to do so and without waiving or releasing any obligation, liability or duty of Borrower under the Loan
Documents or any Event of Default, pay, acquire or accept an assignment of any security interest, lien, claim or encumbrance
asserted by any Person against the Collateral; provided that Lender shall first give Borrower written notice of its intent to do the
same, and Borrower does not, within five (5) days of such notice, pay such claim and/or obtain to Lenders reasonable satisfaction
the release of the security interest, liens, claims or encumbrances to which such notice relates. All sums paid by Lender in respect
thereof and all costs, fees and expenses, including reasonable attorneys fees, court costs, expenses and other charges relating
thereto, which are incurred by Lender on account thereof, shall be payable by Borrower to Lender on demand by Lender and until
paid shall be part of the Loan.
Section 6.8 Termination of Security Interest. Lenders security interest in the Collateral shall continue until performance
and payment in full of all of Borrowers obligations to Lender in accordance with the terms of agreements creating such
obligations; and if, at any time, all or part of a payment or transfer made by Borrower or any other Person and applied by Lender
to Borrowers obligations to Lender is rescinded or otherwise must be returned by Lender for any reason whatsoever (including,
without limitation, the insolvency, bankruptcy or reorganization of Borrower or such other Person), the security interest granted
hereunder or under any other present or future agreement between Borrower and Lender, and all rights of Lender, shall be
reinstated as to the obligations which were satisfied by the payment or transfer rescinded or returned, all as though such payment
or transfer had not been made, and Borrower shall take the action requested by Lender to re-perfect all terminated security
interests and to reinstate all satisfied obligations. Lender shall release its security interest in Contracts which are sold or pledged to
other Persons in accordance with Section 14.8.
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Section 6.9 Return of Contract Delivery Documents. Lender shall return to Borrower within three (3) Business Days of
Borrowers request any Contract Delivery Document originals for Contracts paid in full. In addition, provided that there is no
Event of Default or Pre-Default Event and the removal of the Contract will not result in the Loan exceeding the Borrowing Base,
Lender shall return Contract Delivery Document originals for other Contracts requested by Borrower for the time and to the extent
necessary for Borrower to make corrections or to enforce the Contracts or the obligations of the Contracts Rights Payors.
Whenever Borrower is in possession or control of Contract Delivery Documents for Contracts not paid in full, Borrower shall hold
them in trust for Lender.
ARTICLE VII - COLLATERAL: CONTRACTS
Section 7.0 Notice Regarding Contracts.
(A) In the event any amounts due and owing in excess of Five Thousand Dollars ($5,000) on a Pledged Contract become
disputed between the Contract Debtor and Borrower, or in the event a Contract Debtor for a Pledged Contract asserts a claim,
offset, or defense, or in the event a Person other than Borrower or a Contract Debtor makes a claim of ownership or other interest
in a Financed Vehicle or Contract, then Borrower shall provide Lender with written notice thereof within twenty (20) Business
Days of learning of the same, explaining in detail the nature of the matter and the amount in controversy. Borrower shall
promptly, but in no event later than forty (40) Business Days after learning thereof, inform Lender of all material adverse
information relating to the financial condition of any Contract Debtor, or the value of any Pledged Contract or Financed Vehicle.
(B) After an Eligible Contract is included in the Borrowing Base, in the event that Borrower becomes aware that one of the
requirements in the definition of Eligible Contracts or one of the conditions in Section 9.1 are no longer being satisfied with
respect to the Contract, Borrower shall provide Lender with written notice thereof within twenty (20) Business Days of Borrower
becoming aware, explaining in detail the timing and reasons why the requirement or condition is not satisfied.
(C) Upon request of Lender, Borrower shall to the extent authorized by law obtain current credit bureau reports on
Contract Debtors.
ARTICLE VIII - COLLATERAL: REMITTANCES AND INSURANCE
Section 8.0 Assignment of Lien in Financed Vehicles. In addition to the security interest granted in Section 6.0, Borrower
hereby assigns absolutely to Lender Borrowers rights of foreclosure as lienholder of the Financed Vehicles for Contracts delivered
to Lender. This assignment is solely for the purpose of Lender foreclosing on the liens following an Event of Default. Until an
Event of Default, Borrower has the right to foreclose on a Financed Vehicle. In the event Lender exercises the right to foreclose,
Lender shall be the owner of the foreclosure sale proceeds and shall apply them to the Indebtedness.
Section 8.1 Absolute Assignment of Remittances. In addition to the security interest granted in Section 6.0, Borrower
hereby absolutely assigns to Lender Borrowers interest in and right to all Remittances arising on or after the date of this
Agreement, and such Remittances shall be the property solely of Lender.
Section 8.2 Insurance. In addition to the security interest granted in Section 6.0, Borrower hereby assigns absolutely to
Lender Borrowers right to refunds and benefits under Required Contract Debtor Insurance, and Optional Contract Debtor
Insurance. In the event Lender uses this assignment to collect insurance benefits or refunds, Lender shall be the owner of the
benefits and refunds and shall apply them to the Indebtedness.
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ARTICLE IX - CONDITIONS TO LENDING
Section 9.0 Conditions Precedent to Effectiveness of Agreement. The effectiveness of this Agreement is subject to the
condition precedent that Lender shall have received on or before November 30, 1998 the following, in form and substance
satisfactory to Lender:
(A) With respect to Borrower:
(i) the certificate or articles of incorporation of Borrower
certified, as of a date no more than ten (10) days prior to November 30,
1998, by the Secretary of State of its state of incorporation;
(ii) a good standing certificate, dated no more than ten (10)
days prior to November 30, 1998, from the respective Secretary of State
of its state of incorporation and each state in which Borrower is
required to qualify, or represents that it is qualified, to do business;
(iii) a certificate of the Secretary or Assistant Secretary of
Borrower certifying as of November 30, 1998: (a) the names and true
signatures of the officers authorized on its behalf to sign this
Agreement, (b) a copy of Borrower's by-laws, and (c) a copy of the
resolutions of the board of directors of Borrower approving this
Agreement, the Related Documents to which it is a party and the
transactions contemplated hereby and thereby;
(B) an Officer's Certificate in the form of Exhibit B hereto; and
(C) the Note shall have been duly executed in the form of Exhibit A and delivered by Borrower to Lender and shall be in
full force and effect.
(D) Any necessary third party (including any Governmental Authority) consents to the closing of the transactions
contemplated by this Agreement on behalf of Borrower hereby, in form and substance satisfactory to the Lender;
(E) INTENTIONALLY LEFT BLANK
(F) An opinion of Borrowers counsel dated as of the Closing Date in the form of Exhibit C;
(G) A copy of a letter delivered by Borrower to its independent accountants instructing them to disclose to Lender any and
all financial statements and other information of any kind relating to Borrowers business, financial condition and other affairs that
Lender may request;
(H) An assignment of Borrower's rights to the payments from Contract Debtor bank accounts;
(I) An executed certificate in the form of Exhibit D and in the form of Exhibit E attached hereto executed by the Chief
Financial Officer of Borrower;
(J) Landlord lien waivers in the form of Exhibit F attached hereto which shall be provided to Lender within sixty (60) days
following the date of this Agreement;
(K) Evidence that properly executed financing statements for the Collateral in the form of Exhibit G have been filed with
all appropriate filing officers;
(L) An assignment of Insurance Interests in the form of Exhibit H duly executed by Borrower;
(M) An executed power of attorney in the form of Exhibit I attached hereto; and
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(N) Such other approvals, consents, opinions, documents and instruments, as Lender may reasonably request.
(O) CPS shall have unconditionally guarantied the obligations of Borrower to Lender and not be in default of its guaranty
agreement.
Section 9.1 Conditions to Each Advance. Notwithstanding any other provision of this Agreement and without affecting in
any manner the rights of Lender hereunder, Lender shall not be obligated to make any Advances (including the initial Advance)
unless at the time of the Advance, all of the following conditions shall, in Lenders sole determination, be satisfied:
(A) For each Eligible Contract, Borrower shall have included the Eligible Contract on a List of Contracts delivered to
Lender and shall have delivered to Lender the Contract Delivery Documents; except that, if the Contract date is less than one
hundred twenty (120) days before the date the Contract is delivered to Lender and a Certificate of Title has not been issued and
Borrower has provided Lender with adequate proof that a Certificate of Title has been applied for, then the Certificate of Title
must be delivered to Lender within one hundred twenty (120) days of the Contract date;
(B) All of the representations and warranties of Borrower in all of the Loan Documents shall be true and correct on and as
of the date of such Advance as though they were made on and as of such date and Borrower shall have performed all of its
obligations contained in the Loan Documents required to be performed as of such date;
(C) The making of the advance will not constitute an Event of Default or Pre-Default Event;
(D) There shall have been no material adverse change in the condition (financial or otherwise), business, operations, results
of operations or properties of Borrower since the preceding Advance;
(E) INTENTIONALLY LEFT BLANK;
(F) No claim has been asserted or proceeding commenced challenging this Agreement or Lenders rights under this
Agreement, and no claim has been asserted which if true would be a breach of a representation and warranty in the Loan
Documents;
(G) No vendor or creditor of Borrower has provided adverse credit information about Borrower to Lender;
(H) No event of Default shall have occurred, and no Pre-Default Event shall have occurred and still be in existence;
(I) Lender has a first priority perfected security interest in the Collateral except to the extent otherwise allowed by this
Agreement or Lender in writing;
(J) An event has not occurred which entitles Lender pursuant to Section 5.1(E) to take over administration of the Contracts;
(K) Lenders most recent inspection of the Collateral or Borrowers records or operations has been satisfactory to Lender;
(L) The Commitment Termination Date shall not have occurred;
(M) Before and after giving effect to such borrowing and to the application of proceeds therefrom, there exists Loan
Availability;
(N) Each Pledged Contract submitted by Borrower for computation of the Borrowing Base is an Eligible Contract;
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(O) Borrower shall have provided such additional information and documentation as Lender may reasonably request; and
(P) None of the actions taken or documents executed to satisfy the conditions in Section 9.0 have been revoked, rescinded,
terminated, or canceled without Lenders prior consent.
The acceptance by Borrower of each Advance shall be deemed to constitute a representation and warranty by Borrower that, to the
best of Borrower's knowledge and belief, the conditions in this Section are satisfied.
ARTICLE X - REPRESENTATIONS AND WARRANTIES OF BORROWER
Section 10.0 Representations of Borrower. Borrower hereby makes the following representations and warranties. The
representations and warranties are made as of the execution and delivery of the Agreement, and each time Borrower delivers
Contracts to Lender or requests an Advance the representations and warranties are deemed to be made again at that time. Lenders
knowledge of any breach of the representations and warranties contained herein shall not void any of the representations or
warranties or affect Lenders rights with respect to the breach.
(A) Organization, Good Standing, Name, and Location. Borrower is duly organized and is validly existing as a corporation
in good standing under the laws of the State of California, with power and authority to own its properties and to conduct its
business, and, at all relevant times, has the power, authority and legal right to acquire, own, and pledge the Pledged Contracts.
Borrower has, and is in good standing under, and is in compliance with, all governmental approvals, licenses, permits, certificates,
inspections, consents and franchises necessary to conduct its business, to enter into and perform this Agreement, and to own and
operate its business. Principal place of Borrower's business and chief executive office is set forth in Section 16.1.
(B) Due Qualifications. Borrower has, and is in good standing under, all licenses, permits, and approvals in all jurisdictions
which are required for Borrowers initial acquisition of the Pledged Contracts and for Borrowers performance of this Agreement.
(C) Power and Authority. Borrower has the power and authority to execute this Agreement and carry out its terms, and the
execution and performance of the Agreement have been duly authorized by all necessary corporate action; and the execution,
delivery and performance of the Agreement has been duly authorized by Borrower by all necessary corporation action. The
execution and performance of this Agreement by Borrower does not require the consent or approval of any Person.
(D) Valid and Binding Obligations. The Agreement constitutes a valid loan obligation of Borrower and a valid granting of
a security interest in the Collateral to Lender, enforceable against creditors of and purchasers from Borrower; and is a legal, valid
and binding obligation of Borrower enforceable in accordance with its terms. Borrower's use of the Advances is a legal and proper
corporate use. Borrower has not used Advances to give any preference to any creditor or to make a fraudulent transfer.
(E) No Violation. The execution and performance of this Agreement by Borrower does not conflict with, result in any
breach of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of
Borrower, or any indenture, instrument, agreement, law, or court order by which it is bound; nor does it result in the creation or
imposition of any lien upon any of Borrower's properties.
(F) No Proceedings. There are no proceedings or investigations pending, or threatened, before any court, regulatory body,
administrative agency, or other governmental instrumentality having jurisdiction over Borrower or its properties, which (i) assert
the invalidity of the Agreement, (ii) seek to prevent the consummation of any of the transactions contemplated by the Agreement,
(iii) seek any determination or ruling that, if determined adversely to Borrower, would materially and adversely affect the
performance by Borrower of its respective obligations under, or the validity or enforceability of, the Agreement.
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(G) Collateral. Borrower has good, indefeasible, sole and marketable ownership of the Collateral, and the Collateral is,
except for those liens to be released by existing lenders in satisfaction of Section 9.1 and those liens expressly allowed or created
by this Agreement, free and clear of all liens, claims, charges, defenses, counterclaims, offsets, encumbrances and security
interests of any kind or nature whatsoever. The security interests granted to Lender pursuant hereto are perfected first priority
security interests (other than those expressly allowed or created by this Agreement) in and to the Collateral, assuming delivery to
Lender of any Collateral as to which possession is the only method of perfecting a security interest and assuming the filing of a
UCC financing statement with the collateral description with the office of Secretary of State of California; and no claim of
ownership or other interest has been asserted which would be a breach of this Section 10.0(g).
(H) Taxes. All required federal, state and local tax returns of Borrower have been accurately prepared and duly and timely
filed (within the initial or extended time period allowed therefor) and all federal, state and local taxes required to be paid with
respect to the periods covered by such returns have been paid. Borrower has not been delinquent in the payment of any tax,
assessment or other governmental charge which could adversely affect in any way the Collateral.
(I) Brokers. No person has, or as a result of the transactions contemplated hereby will have by reason of any Borrower
conduct or any agreement to which Borrower is a party, any right, interest or claim against Borrower, Lender or the Collateral for
any commission, fee or other compensation as a finder or broker or in any similar capacity.
(J) Status and Condition. Borrower is solvent, in stable financial condition with a positive net worth and is able to and does
pay its liabilities as they mature. This transaction will not leave Borrower with remaining assets which are unreasonably small
compared to its ongoing operations. Borrower is in compliance with Section 13.6. Borrower has capital sufficient to carry on its
business and transactions as now carried on and as planned for the future, including but not limited to the transactions
contemplated by this Agreement. No action, investigation, audit, claim or proceeding is now pending or threatened against
Borrower before any court, board, commission, agency or instrumentality of any Federal, state or local government or of any
agency or any subdivision thereof, or before any arbitrator or panel of arbitrators, nor to the knowledge of Borrower, does a state
of facts exist which might give rise to such proceedings, with respect to any matter which if adversely determined could affect the
Collateral, impair the ability of Borrower to perform its obligations in the Loan Documents, Lender's rights under the Loan
Documents, or materially and adversely affect the financial condition or business of Borrower. Borrower is not a party to any
labor dispute or any labor contract. Borrower is not, and has not received any notice alleging that it is, in violation of any statute,
regulation, rule or ordinance of any governmental entity, including, without limitation, the United States of America, any state,
city, town, municipality, county or of any other jurisdiction, or of any agency thereof. Borrower is not in default with respect to
any indenture, loan agreement, mortgage, lease, deed or other similar agreement relating to the borrowing of monies, or any
contract or other instrument relating to the transactions contemplated by this Agreement or which is material to its business,
prospects, operations or financial condition.
(K) Disclosure. There is no fact known to Borrower which Borrower has not disclosed to Lender in writing with respect to
the Collateral or the assets, liabilities, financial condition or activities of Borrower or its Affiliates which would or may be likely
to have a material adverse effect upon the Collateral or Borrower's ability to perform its obligations under the Agreement. All
information and documents prepared by Borrower and provided to Lender at any time are true and accurate at the time of delivery.
Borrower has no knowledge that any information or documents, not prepared by Borrower but delivered by Borrower to Lender
were not true and accurate at the time of delivery.
(L) Articles of Incorporation and Certificates of Good Standing. The Articles of Incorporation of Borrower received by
Lender pursuant to Section 9.0 have not been modified. Borrower has not taken or allowed any action which would result in it not
being in good standing. Borrower has not received notice of any actual or threatened action to revoke its articles of incorporation
or good standing.
(M) Financial Statements. All financial statements of Borrower or Affiliates delivered to Lender fairly present the assets,
liabilities and financial condition and income as of the dates thereof. There are no material omissions from the financial statements
and there has been no adverse change in the assets, liabilities or
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financial condition since the date of the most recently delivered financial statements. There exists no equity or long-term
investments in, or outstanding advances to, or guaranties of, any Person except such equity, investment, advances or guaranties
disclosed in the financial statements. The financial statements accurately disclose all transactions with Affiliates.
(N) Conditions. Each time Borrower requests an Advance, the Conditions in Section 9.1 have been met.
(O) Characteristics of Contracts. Each Pledged Contract delivered to Lender as an Eligible Contract meets all of the
requirements listed in the definition of Eligible Contract, except that Borrower makes no representation or warranty as to whether
(i) the Contract meets such requirements to Lender's satisfaction, or (ii) the Contract presents a credit, collateral, or documentation
risk unacceptable to Lender. No selection procedures adverse to Lender have been utilized in selecting the Eligible Contracts
delivered to Lender.
ARTICLE XI - REPRESENTATIONS AND WARRANTIES OF LENDER
Section 11.0 Representations of Lender. Lender hereby makes the following representations and warranties:
(A) Due Organization. Lender is a corporation, duly organized, validly existing and in good standing under the laws of the
State of New York, and has the power to own its assets and to transact the business in which it is presently engaged with regard to
this Agreement;
(B) Requisite Power. Lender has the power to execute, deliver and perform this Agreement, and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement; and
(C) Binding Agreement. This Agreement has been duly executed and delivered by Lender and constitutes the legal, valid
and binding obligation of Lender, enforceable in accordance with its terms.
ARTICLE XII - INDEMNITIES OF BORROWER
Section 12.0 Indemnity. Borrower shall indemnify and hold Lender harmless from any and all losses, claims, damages,
costs, good faith settlements, expenses, taxes, reasonable attorneys' fees or other liabilities, including but not limited to costs of
investigation, litigation fees and expenses, and costs in successfully asserting the right to indemnification hereunder (collectively,
"Lossee") incurred by Lender at any time and pertaining to (i) facts which are, or allegations which if true would be, a breach of
any representation, warranty, obligation, agreement or covenant of Borrower contained in the Loan Documents, or (ii) Lender
entering into the Loan Documents or making Advances or handling Remittances or administering Pledged Contracts, (iii) an
Event of Default or a Pre-Default Event, or (iv) activities, operations or conduct of Borrower or its Affiliates.
ARTICLE XIII - AFFIRMATIVE COVENANTS
The following covenants shall remain in effect until the full payment and performance of all of the obligations of Borrower
to Lender:
Section 13.0 Financing Statements. At the request of Lender, Borrower shall execute such financing statements as Lender
determines may be required by law to perfect, maintain and protect the interest of Lender in the Collateral and in the proceeds
thereof.
Section 13.1 Books and Records. Borrower shall maintain accurate and complete books and records with respect to the
Collateral and Borrower's business. All accounting books and records shall be maintained in accordance with generally accepted
accounting principles consistently applied.
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Section 13.2 Payment of Fees and Expenses. Borrower shall pay to Lender, on demand, any and all fees, costs or expenses
which Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower, or any
other Person on behalf of Borrower, by Lender of Advances pursuant to this Agreement and (ii) the return of payments deposited
for collection by Lender, including but not limited to payments by Borrower and payments by Contract Debtors.
Section 13.3 Continuity of Business and Compliance With Agreement. Borrower shall continue in business in a prudent,
reasonable and lawful manner with all necessary licenses, permits, and qualifications necessary to perform this Agreement.
Borrower shall regularly and properly train its employees to comply with all applicable laws governing the administration and
purchase of Contracts. Borrower shall take the steps necessary for the representations and warranties in Article X to be true at all
times. In the event that Borrower learns that a representation and warranty in Article X is no longer true, it shall notify Lender
within twenty (20) Business Days after learning thereof.
Section 13.4 Financial Statements and Access to Records. Borrower shall provide Lender with quarterly consolidated
audited or unaudited financial statements of Borrower and its consolidated Subsidiaries within 45 days of the end of each of
Borrower's fiscal quarters, and with audited consolidated annual financial statements within one hundred and twenty (120) days of
Borrower's fiscal year-end audited by an independent certified public accounting firm acceptable to Lender. Upon request of
Lender, Borrower shall provide Lender with unaudited (or audited if Borrower so chooses) monthly financial statements.
Borrower shall deliver to Lender with each financial statement a certificate by the chief financial officer of Borrower verifying the
accuracy and completeness of such statement.
Section 13.5 Subsequent Actions. At the request of Lender, Borrower shall execute and deliver to Lender after execution of
this Agreement such documents or take such action as Lender deems necessary to carry out the Agreement.
Section 13.6 Financial Condition. Borrower shall notify Lender in writing, promptly upon its learning thereof of any
material adverse change in the financial condition of Borrower. Section 13.7 Litigation Matters. Borrower shall notify Lender in
writing, promptly upon its learning thereof, of any litigation, arbitration or administrative proceeding which may materially and
adversely affect the operations, financial condition or business of Borrower or its ability to perform this Agreement or which in
any way involve Lender's security interest in the Collateral or other rights under the Loan Documents.
Section 13.8 Value of Collateral. If in Lender's judgment the Collateral has materially decreased in value, other than the
ordinary depreciation of Financed Vehicles, Borrower shall either provide enough additional Collateral to satisfy Lender or
Borrower shall reduce the Loan by an amount sufficient to satisfy Lender.
Section 13.9 Payment of Obligations. Borrower shall pay and perform, as and when due, all of its obligations, including,
without limitation, all of its obligations to Lender.
Section 13.10 Insurance. Borrower shall maintain customary amounts of insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers' compensation, and liability arising from the collection of
Contracts and sale of motor vehicles. Borrower shall pay all insurance premiums payable for such coverage and shall upon request
of Lender deliver a copy of the policies of such insurance to Lender, together with evidence of payment of all premiums therefor.
Section 13.11 Certificates of Title. Borrower shall promptly apply for and obtain Certificates of Title for all Financed
Vehicles. Borrower shall promptly deliver to Lender all Certificates of Title it receives for Financed Vehicles for Pledged
Contracts.
Section 13.12 Interest Rate Spread. If at any time the differential between Borrower's gross yield (including the impact of
any discount retained by Borrower) on Borrower's portfolio of Contracts and the
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applicable rate of interest hereunder is less than seven and one-half (7.5%), Lender may in its sole discretion cease making
Advances to Borrower hereunder.
Section 13.13 Year 2000 Compliance. On and after March 31, 1999, Borrower shall be Year 2000 Compliant.
ARTICLE XIV - NEGATIVE COVENANTS
Borrower covenants and agrees that hereafter, without Lender's prior written consent, which Lender may or may not give,
in its sole discretion, until all of Borrower's obligations to Lender with respect to this Agreement are performed and paid in full:
Section 14.0 Mergers, Etc. Borrower shall not merge with, consolidate with, acquire or otherwise combine with any
Person, transfer any division or segment of its operations to any Person or form any subsidiary.
Section 14.1 Investments. Borrower shall not make any investment in any Person through the direct or indirect holding of
securities or otherwise.
Section 14.2 Dividends. Borrower shall not declare or pay dividends except in accordance with all applicable laws and in
no event to any Person other than CPS.
Section 14.3 Loans and Advances. Except for routine and customary salary advances, Borrower shall not make any
unsecured loans or other advances of money to officers, directors, employees, stockholders or Affiliates in excess of Twenty
Thousand Dollars ($20,000.00) in the aggregate. Borrower shall not incur any long term or working capital debt (other than the
Indebtedness) secured by Contracts.
Section 14.4 INTENTIONALLY LEFT BLANK
Section 14.5 Transactions with Affiliate. Borrower shall not enter into, or be a party to, any transaction with any Affiliate,
or stockholder of Borrower, except, consistent with Borrower's practice before entering into this Agreement, in the ordinary
course of, and pursuant to the reasonable requirements of, Borrower's business and upon fair and reasonable terms which are fully
disclosed to Lender and are no less favorable to Lender than would obtain in a comparable arm's length transaction with a Person
not an Affiliate or stockholder of Borrower.
Section 14.6 Adverse Transactions. Borrower shall not enter into any transaction which adversely affects the Collateral or
Borrower's ability to perform this Agreement or Lender's rights under the Loan Documents; or permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or nature with respect to any Pledged Contract,
including any of the terms thereof or the amounts due thereunder except for customary payment extensions of Pledged Contracts
done in accordance with Borrower's policies and routines in existence on the Closing Date, no more frequently than once every
twelve (12) months for a period of no more than three (3) months.
Section 14.7 Guaranties. Borrower shall not guaranty or otherwise in any way, become liable with respect to the
obligations or liabilities of any other Person except (i) the Affiliates' obligations to Lender and (ii) by customary endorsement of
instruments or items of payment for deposit to the general account of Borrower or for delivery to Lender.
Section 14.8 Collateral. Except as otherwise expressly permitted in the Loan Documents, Borrower shall not convey or
allow any ownership, security, or other, interest in the Collateral other than Borrower's ownership interest and Lender's security
interest. Borrower shall not interfere with or countermand Lender's instructions to any Person to send Remittances to the Lockbox,
the Collection Account or Lender. Borrower can sell or pledge Contracts which are not Eligible Contracts provided that the sale or
loan proceeds are
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delivered to Lender for application to the Indebtedness. Borrower can grant purchase money security interests in its equipment to
Persons other than Lender. Borrower can lease as lessee, equipment it uses.
Section 14.9 INTENTIONALLY LEFT BLANK
ARTICLE XV - EVENTS OF DEFAULT
Section 15.0 Events of Default. An Event of Default means the occurrence or existence of one or more of the following
events or conditions (whatever the reason for the Event of Default and whether voluntary, involuntary or caused by operation of
law) which is not waived in writing by Lender or cured as provided in Section 15.7 to the extent Section 15.7 applies:
(A) A breach by Borrower of any representation, warranty or obligation contained herein or in the other Loan Documents
or in any other agreement with Lender.
(B) A breach by Borrower or an Affiliate of any representation, warranty, or obligation contained in any other agreement
with Lender.
(C) The Collateral or any other of Borrower's or an Affiliate's assets are attached, seized, levied upon or subjected to a writ
or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the
same is not dissolved within thirty (30) days thereafter; and application is made by any Person other than Borrower for the
appointment of a receiver, trustee, or custodian for the Collateral or any other of Borrower's or an Affiliate's assets and the same is
not dismissed within thirty (30) days after the application therefor; or Borrower or an Affiliate shall have concealed, removed or
permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or made or
suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or other similar
law.
(D) An application is made by Borrower or an Affiliate for the appointment of a receiver, trustee or custodian for the
Collateral or any other of Borrower's or an Affiliate's assets; a petition under any section or chapter of the Bankruptcy Code or any
similar federal or state law or regulation shall be filed by Borrower or an Affiliate; Borrower or an Affiliate shall make an
assignment for the benefit of its creditors or any case or proceeding is filed by Borrower, or an Affiliate for its dissolution,
liquidation, or termination; Borrower ceases to conduct its Contract purchase and servicing business.
(E) Borrower is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its
business affairs, or a petition under any section or chapter of the Bankruptcy Code or any similar federal or state law or regulation
is filed against Borrower or an Affiliate, or any case or proceeding is filed against Borrower or an Affiliate for its dissolution or
liquidation, and such injunction, restraint, petition, case or proceeding is not dismissed within thirty (30) days after the entry or
filing thereof.
(F) A notice of lien, levy or assessment, with respect to an obligation of $5,000 or more, is filed of record with respect to
all or any of Borrower's or an Affiliate's assets by the United States, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other governmental agency and it is not released within thirty (30) days after the filing; or if any
taxes or debts become a lien or encumbrance upon the Collateral or any other of Borrower's assets, and the same is not released
within thirty (30) days after the same becomes a lien or encumbrance.
(G) Borrower or an Affiliate becomes insolvent or admits in writing to its inability to pay its debts as they mature.
(H) An event has occurred which entitles Lender pursuant to Section 5.1(E) to take over administration of the Contracts.
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(I) There occurs or exists any situation which leads Lender to believe, in good faith, that Borrower may not, or may be
unable to, pay in the normal course one or more payment obligations to Lender, and Lender has given Borrower at least ten (10)
days' notice thereof.
(J) A financial statement of Borrower or an Affiliate reveals that its financial condition has materially adversely
deteriorated after the execution of this Agreement.
(K) An audited financial statement of Borrower is not unqualified.
(L) The Rolling Average Delinquency exceeds 3.0%.
(M) The Average Charged-Off Losses exceeds 0.55%.
(N) Any other event occurs which will, in Lender's reasonable opinion, have a material adverse effect on the Collateral,
Lender's rights under the Loan Agreements, or on Borrower's financial or business condition, operations or prospects, including,
without limitation, any change in the due diligence procedures used by Borrower to qualify Contract Debtors for Contracts, and
Lender has given Borrower at least ten (10) days' notice thereof.
(O) INTENTIONALLY LEFT BLANK
(P) Borrower or any Affiliate is in default of its obligations under any transaction involving the securitization of Contracts.
(A) INTENTIONALLY LEFT BLANK
(B) A default by CPS of any of its obligations under the Secured Guaranty Agreement pursuant to which CPS, among
other obligations, guarantied the Borrower's payment of the Indebtedness to Lender.
Section 15.1 Default Rate of Interest. Upon and after an Event of Default and subject to Section 2.5, Borrower's obligations
to Lender shall continue to bear interest, calculated daily on the basis of a 365-day year at the per annum rate set forth in Section
2.3, plus additional post-default interest of one percent (1%) per annum until paid in full.
Section 15.2 Lender's Remedies. Whenever a Pre-Default Event exists and whenever Lender is entitled to take over
Contract administration, Lender may without prior notice immediately suspend making Advances. Upon and after an Event of
Default, Lender shall have the following rights and remedies. The rights and remedies shall be cumulative, and none exclusive,
except to the extent required by law. Lender's exercise of any right, remedy, or attorney-in-fact appointment shall not relieve
Borrower of any of its obligations to Lender.
(A) The right, at Lender's discretion and without notice to Borrower, (i) to immediately cease further Advances and/or
terminate this Agreement, and (ii) to declare Borrower's obligations to Lender immediately due and payable, whereupon
Borrower's obligations shall become and be due and payable, without presentment, demand, protest or further notice or process of
any kind, all of which are expressly waived by Borrower. Borrower's obligations to Lender shall be immediately due and payable
without declaration by Lender if the Event of Default consists of a petition filed under the Bankruptcy Code or any similar federal
or state law.
(B) All of the rights and remedies of a secured party under the UCC and other applicable laws, including the right to
appoint a receiver.
(C) The right at any time to (i) enter through self-help and without judicial process, upon the premises of Borrower without
any obligation to pay rent to Borrower or to enter any other place or places where the Collateral is located and kept, and remove
the Collateral or remain on and use the premises for the purpose of collecting or disposing of the Collateral, and (ii) require
Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender.
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(D) The right to sell or otherwise dispose of all or any of the Collateral at public or private sale, as Lender in its sole
discretion may deem advisable, with such notice as may be required by law; and such sales may be adjourned from time to time
with or without notice. Lender shall have the right to conduct such sales on the premises of Borrower without charge for such time
and Collateral as Lender may see fit. Lender is hereby granted a license or other applicable right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or
any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's benefit for this purpose. Lender shall have the right to
sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may
purchase all or any part of the collateral at public, or, if permitted by law, private sale and, in lieu of actual payment of such
purchase price, may set off the amount of such price against Borrower's obligations to Lender. Without excluding other methods
of disposition which may be commercially reasonable, it shall be a commercially reasonable disposition of the Pledged Contracts
and Contract Rights for Lender to collect and enforce the Contracts and Contract Rights in a manner similar to its collection and
enforcement of contracts and Contract Rights for its own account or for the account of other Persons. If any deficiency shall arise
from the disposition of Collateral, Borrower shall remain liable to Lender therefor.
(E) The right at any time and from time to time thereafter, at Lender's sole discretion and without notice to Borrower, (i) to
enforce payment of the Contract Debtor's and Contract Rights Payor's obligations, and to collect and foreclose, by legal
proceedings or otherwise, the Collateral in the name of Lender or Borrower and (ii) to take control, in any manner, of any item of
payment for or proceeds of the Collateral. Lender is not obligated to pursue the Collateral or any other Person in order to enforce
Borrower's obligations to Lender.
(F) The right to take over in Lender's or Borrower's name all or part of the administration of the Contracts.
(G) The right to carry out the actions within the scope of Borrower's appointment of Lender as attorney-in-fact.
(H) The right to offset or apply the funds in the Collection Account.
Section 15.3 Injunctive Relief. Borrower recognizes that if there is an Event of Default then, depending on the nature of the
Event of Default, it may be that no remedy at law will provide complete or adequate relief to Lender, and Lender shall be entitled
to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. The injunctive
relief shall not be a waiver of Lender's rights to other relief and remedies.
Section 15.4 Notice. Any notice required to be given by Lender of a sale, lease, or other disposition of the Collateral which
is given pursuant to Section 16.1 at least five (5) days prior to such proposed action, shall constitute commercially reasonable and
fair notice thereof to Borrower. Notice of less duration shall not be presumed to be commercially unreasonable or unfair.
Section 15.5 Appointment of Lender as Borrower's Lawful Attorney. Borrower irrevocably appoints Lender (and all
persons designated by Lender) as Borrower's true and lawful attorney-in-fact to act in its name, place and stead and at its expense
to: (i) demand payment of the Pledged Contracts, other Collateral consisting of payment obligations and Contract Rights; (ii)
enforce payment of the Pledged Contracts, other Collateral consisting of payment obligations and Contract Rights, by legal
proceedings or otherwise; (iii) exercise all of Borrower's rights and remedies with respect to the collection and enforcement of the
Pledged Contracts, other Collateral consisting of payment obligations, and Contract Rights; (iv) settle, adjust, compromise,
discharge, release, extend or renew the Pledged Contracts, other Collateral consisting of payment obligations, and Contract
Rights; (v) if permitted by applicable law, sell or assign the Collateral upon such terms, for such amounts and at such time or
times as Lender deems advisable; (vi) take control, in any manner, of any item of payment or proceeds with respect to the
Collateral; (vii) prepare, file and sign Borrower's name on any proof of claim in Bankruptcy or similar document against any
Contract Debtor or Contract Rights Payor; (ix) prepare, file and sign Borrower's name on any notice of lien, assignment or
satisfaction of lien or similar document in connection with the
27
Collateral; (x) do all acts and things necessary, in Lender's sole discretion, to exercise Lender's rights granted in or referred to in
Section 15.2 of this Agreement; (xi) endorse the name of Borrower upon any item of payment or proceeds consisting of or relating
to the Collateral and deposit the same in the account of Lender for application to the Indebtedness; (xii) use the information
recorded on or contained in any data processing equipment and computer hardware and software relating to the collateral to which
Borrower has access; (xiii) open Borrower's mail to collect Collateral and direct the Post Office to deliver Borrower's mail to an
address designated by Lender; and (xiv) do all things necessary to carry out and enforce this Agreement which Borrower has
failed to do. Borrower ratifies and approves all acts of Lender as Borrower's attorney-in-fact. Lender shall not, when acting as
attorney-in-fact, be liable for any acts or omissions as or for any error of judgment or mistake of fact or law, except for actions
taken in bad faith. This power, being coupled with an interest, is irrevocable until all payment and performance obligations of
Borrower to Lender have been fully satisfied. Borrower shall upon request of Lender execute powers of attorney to separately
evidence the foregoing powers granted to Lender. All costs, fees and expenses incurred by Lender, or for which Lender becomes
obligated, in connection with exercising any of the foregoing powers shall be payable to Lender by Borrower on demand by
Lender and until paid shall be part of the Loan.
Section 15.6 Lender's Default. In the event of any default of the Loan Documents by Lender or any claim by Borrower
related to the Loan Documents, Borrower's sole and exclusive remedy against Lender shall be a cause of action sounding in
contract with damages limited to actual and direct damages incurred. Lender shall in no event be liable for ordinary negligence,
delay in performance or any consequential, special, punitive, incidental or indirect damages, including without limitation, loss of
profit or goodwill. Lender shall in no event be liable for any loss or damage directly or indirectly resulting from the furnishing of
services or reports under this Agreement. With respect to any goods and services provided by Lender, LENDER MAKES NO
WARRANTIES, whether express or implied, including, without limitation, implied WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. Borrower shall have no cause of action against Lender for a default of the
Loan Documents unless Borrower first notices Lender of the default and allows Lender a reasonable time of at least thirty (30)
Business Days to cure the default and Lender fails to cure the default.
Section 15.7 Borrower's Right to Cure. In the event of an unintentional Pre-Default Event by Borrower with respect to
payment obligations or the delivery of Contract Delivery Documents or Remittances, Borrower shall have three (3) Business Days
to cure the Pre-Default Event before Lender exercises its right to sue Borrower or repossess the Collateral. In the event of any
other type of unintentional default by Borrower (but not including a default by CPS under its Secured Guaranty Agreement with
Lender), Borrower shall have thirty (30) calendar days to cure the default before Lender exercises its right to sue Borrower or
repossess the Collateral. Regardless of whether Borrower cures a default, Lender shall be entitled to indemnification pursuant to
Article XII with respect to any Losses arising from claims asserted against Lender.
ARTICLE XVI - GENERAL TERMS AND CONDITIONS
Section 16.0 This Agreement shall be governed and construed in accordance with the laws of the State of California.
Section 16.1 Notices. Any notice, request, demand, instruction or other communication to be given any party herein in
writing shall be effective upon delivery during regular business hours at the offices of Borrower and Lender hereinafter set forth
or at such other offices that either party notifies the other of in writing. The failure to deliver a copy as set forth below shall not
affect the validity of the notice to Borrower or Lender. Such communications shall be given by telecopy, commercial delivery
service, or sent by certified mail, postage prepaid and return receipt requested, as follows:
If to Borrower:
CPS Funding Corporation
16355 Laguna Canyon Road
Irvine, CA 92718
Electronic FAX (949) 450-3951
28
If to Lender:
Attention: Chief Financial Officer
General Electric Capital Corporation
540 W. Northwest Highway
Barrington, IL 60010
Electronic FAX (847) 277-6997
Attention: Manager, Asset Based Financing
with a copy to:
General Electric Capital Corporation
540 W. Northwest Highway
Barrington, IL 60010
Electronic FAX (847) 277 - 5983
Attention: Counsel - Auto Financial Services
Section 16.2 Headings. Paragraph headings have been inserted in this Agreement as a matter of convenience for reference
only. The paragraph headings shall not be used in the interpretation of this Agreement.
Section 16.3 Severability. If any one or more of the provisions of this Agreement are held to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality or enforceability of any such provision or provision in every
other respect and of the remaining provisions of this Agreement shall not be in any way impaired.
Section 16.4 Offset. Lender has the right to offset, apply, or recoup any obligation of Borrower to Lender, arising under the
Loan Documents or otherwise, against any obligations or payments Lender owes to Borrower, arising under the Loan Documents
or otherwise, or against any property of Borrower held by Lender. Borrower waives any right to offset, apply, or recoup against
any obligation it owes to Lender. Lender is not obligated to collect any of the Contracts or pursue any of the other Collateral or
any of Lender's rights at any time as a condition to payment and performance by Borrower.
Section 16.5 Independent Contractor. Borrower is an independent contractor in all matters relating to this Agreement and
the Collateral and is not an agent or representative of Lender. Borrower has no authority to act on behalf of or bind Lender.
Section 16.6 Expenses. Each party shall bear the expenses of its own performance of this Agreement.
Section 16.7 Modification of Loan Documents; Sale of Interest. This Agreement may not be modified, altered or amended,
except by an agreement in writing and signed by Borrower and Lender. The rights of Lender granted in or referred to in this
Agreement shall apply to any modification of or supplement to the Loan Documents. Borrower may not without Lender's prior
written permission, sell, assign or transfer any of the Loan Documents, or any portion thereof, including, without limitation,
Borrower's rights, title, interests, remedies, powers and duties thereunder. Any sale, assignment, or transfer by Borrower without
Lender's permission shall be void ab initio. Borrower hereby consents to Lender's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of any of the Loan Documents, or of any portion thereof, including, without limitation,
Lender's rights, title, interests, remedies, powers and duties thereunder. The Loan Documents shall be binding upon and inure to
the benefit of the permitted successors and assigns of Borrower and Lender.
Section 16.8. Attorneys' Fees and Lender's Expenses. If, following an Event of Default, Lender shall in good faith employ
counsel for advice or other representation or shall incur other costs and expenses in connection with (A) any litigation, contest,
dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the
Collateral, any of the Loan Documents or any other agreements executed or delivered in connection herewith, (B) any attempt to
enforce, or enforcement of, any rights of Lender against Borrower or any other Person, including, without limitation, Contract
Debtors, that may be
29
obligated to Lender by virtue of any of the Loan Documents, (C) any actual or attempted inspection, verification, protection,
collection, sale, liquidation or other disposition of the Collateral, then, in any such event, the attorneys' fees arising from such
services and all expenses, costs, charges and other fees (including expert's fees) incurred by Lender in any way arising from or
relating to any of the events or actions described in this Section shall be payable to Lender by Borrower on demand by Lender and
until paid shall be part of the Loan.
Section 16.9 Waiver by Lender. Lender's failure, at any time or times hereafter, to require strict performance by Borrower
of any provision of this Agreement or any of the other Loan Documents shall not waive, affect or diminish any right of Lender
thereafter to demand strict performance therewith. Any suspension or waiver by Lender of an Event of Default by Borrower under
the Loan Documents shall not suspend, waive or affect any other Event of Default by Borrower under the Loan Documents,
whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings,
agreements, warranties, covenants and representations of Borrower contained in the Loan Documents and no Event of Default by
Borrower under the Loan Documents shall be deemed to have been suspended or waived by Lender unless such suspension or
waiver is by an instrument in writing signed by a manager of Lender and identifies the matter waived or suspended. Any consent
or approval by Lender pursuant to this Agreement is not a waiver by Lender of, or an admission by Lender of the truth of, any
Borrower's representations and warranties in this Agreement.
Section 16.10 Waivers by Borrower. Except as otherwise provided for in this Agreement, Borrower waives (i) notice and
consummation of presentment, demand, protest, dishonor, intent to accelerate, acceleration, (ii) all rights to notice and a hearing
prior to taking possession or control of, or Lender's replevy, attachment or levy upon, the Collateral; (iii) any bond or security in a
judicial proceeding as a condition to Lender exercising any of Lender's remedies; (iv) the benefit of all valuation, appraisement
and exemption laws, (v) TRIAL BY JURY in any dispute with Lender arising out of or related to any of the Loan Documents, and
(vi) any claim against Lender arising before November 30, 1998. The failure or delay of Lender to strictly enforce the terms of
this Agreement shall not be a waiver of Lender's right to do so.
Section 16.11 Counterparts. This Agreement may be executed in two or more counterparts, with the same effect as if all
parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
Section 16.12 Entire Agreement. This Agreement contains the entire agreement among the parties regarding the loan by
Lender to Borrower based on Contracts and supersedes all prior agreements, whether written or oral, with respect thereto.
Section 16.13 Statements of Account. Each report, billing statement, Statement of Borrowing Base, and payment transcript
which is prepared by Lender shall, except for manifest errors, be deemed final, binding and conclusive upon Borrower in all
respects as to all matters reflected therein, and shall constitute an account stated between Borrower and Lender, unless thereafter
waived in writing by Lender or unless, within thirty (30) days after Borrower's receipt of such document, Borrower delivers to
Lender notice of a written objection thereto specifying the claimed error. In the event of such an error, only those items expressly
objected to in such notice shall be deemed to be disputed by Borrower and Lender's only liability to Borrower shall be to issue a
corrected document.
Section 16.14 Publicity. Borrower authorizes Lender to publicize "tombstone" or similar announcements with respect to
the financing contemplated under this Agreement, and to use Borrower' name and logo in connection therewith
30
Section 16.15 Contract Documents. After Lender reviews a Contract form or any other form used in connection with a
Contract (collectively, the "Form"), Lender may inform Borrower hereto that the Form may not comply with certain laws or that
the Form is not acceptable to Lender as an Eligible Contract form unless certain changes are made. Borrower is responsible for its
use of the Forms and for any changes Borrower makes to the Forms in response to Lender's comments. Lender shall have no
liability to Borrower arising from Borrower's use of, or changes to, any Form regardless of whether Lender approved the Form or
the changes or whether Lender conditioned the use of the Form as an Eligible Contract Form or Lender's comments regarding a
Form, Borrower remain obligated to Lender to conduct its business in a lawful manner, including the use of Forms which comply
with applicable laws.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective
officers thereunto duly authorized as of the date first above written.
CPS FUNDING CORPORATION,
as Borrower
By: ________________________________
Name: _____________________________
Title: _____________________________
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: ________________________________
Name: _____________________________
Title: _____________________________
31
EXHIBIT A
AMENDED AND RESTATED PROMISSORY NOTE
$100,000,000.00 November 30, 1998
FOR VALUE RECEIVED, the undersigned, CPS FUNDING CORPORATION, a California corporation ("Borrower"),
hereby promises to pay to GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), or order, the
principal amount (the "Principal") of up to One Hundred Million Dollars ($100,000,000.00), or such other amount constituting the
Loan made by Lender to Borrower pursuant to the Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement, dated as of November 30, 1998 between Borrower and Lender (the "Agreement"). All terms used in this Note shall
have the meanings given to them in the Agreement if they are defined in the Agreement and not defined in this Note. Borrower
further promises to pay interest ("Interest") on the amount of the Principal outstanding from time to time from the date hereof until
such Principal shall be paid in full, at a rate per annum (calculated on the basis of a year of 365 days for the actual days elapsed)
equal to the applicable rate of interest provided for in the Agreement.
Interest and Principal shall be due and payable at the times provided for in the Agreement. All payments of Principal and
Interest shall be made in lawful money of the United States of America and in immediately available funds to Lender at GE
Capital, 540 W. Northwest Highway, Barrington, IL 60010, Attention: Manager - Asset Based Financing, or such other address as
may be specified by Lender or any other holder of this Note.
This Note is the Note described in, and is subject to the terms and provisions of, the Agreement, as the same may at any
time be amended or modified and in effect.
Upon and after an Event of Default, the outstanding Principal of this Note and any Interest and fees accrued thereon shall,
at the option of the holder of this Note and without demand, notice or legal process of any kind, become immediately due and
payable.
The records of the holder of this Note shall, in the absence of manifest error, be conclusive evidence at any time as to the
amount of the outstanding Principal of this Note and the amount of Interest accrued thereon.
This Note is secured by a security interest in the Collateral, as described in and evidenced by the Agreement. This Note is
enforceable by the holder without first enforcing the security interest and whether or not the security interest exists or is
enforceable.
If any suit or other proceeding shall be instituted to enforce this Note, the holder of the Note shall, in addition to such other
relief as the court may award, be entitled to recover attorneys' fees, expenses and costs of investigation, including, without
limitation, attorneys' fees, costs and expenses of investigation incurred in appellate proceedings or in connection with any case or
proceeding under the Bankruptcy Code or similar law.
No delay or failure on the part of the holder of this Note to exercise any power or right given under this Note shall operate
as a waiver of any right or remedy of the holder; nor shall any right or remedy of the holder hereunder or under any other
applicable law be abridged or modified by any course of conduct.
The undersigned and all endorsers, guarantors, and all persons liable or to become liable on this Note hereby waive
presentment, protest, demand, notice of dishonor, notice of protest, and any and all delays or lack of diligence or collection and
any other notice or further requirement necessary to hold each of them liable for payment. The right to a trial by jury and to plead
any statute of limitations as a defense to any demand on this Note, or any guaranty hereof, or any agreement to pay the same, or
any and all obligations or liabilities arising out
1
of or in connection with this Note is expressly waived by the undersigned, endorsers and guarantors, to the fullest extent permitted
by the law.
No payment of interest hereunder shall exceed the maximum amount payable under applicable law.
This Note may not be modified, amended or terminated, except in a written instrument executed by both Borrower and the
holder of this Note. Borrower agrees that the rights granted to Lender pursuant to this Note shall accrue to any Person who is
lawfully in possession of this Note with an assignment from Lender.
This Note shall be governed by and construed in accordance with the laws of the State of California. This Note amends,
restates and supersedes the prior Notes of Borrower payable to the order of Redwood Receivables Corpration pursuant to the
Receivables Funding and Servicing Agreement, dated as of June 1, 1995, as amended, and is given in substitution therefor and not
in satisfaction of Borrower's obligations thereunder.
IN WITNESS WHEREOF, Borrower has executed and delivered the foregoing Note as of the day and year first above
written.
CPS FUNDING CORPORATION
By: ________________________________
Name: _____________________________
Title: _____________________________
2
EXHIBIT 10.23
WARRANT AGREEMENT
by and between
CONSUMER PORTFOLIO SERVICES, INC.,
the Company,
and
FSA PORTFOLIO MANAGEMENT INC.,
AND ITS SUCCESSORS AND ASSIGNS,
the Purchaser,
Dated as of November 30, 1998
EXECUTION COPY
WARRANT AGREEMENT (this "Agreement"), dated as of November 30, 1998, by and between CONSUMER
PORTFOLIO SERVICES, INC., a California corporation (the "Company"), and FSA PORTFOLIO MANAGEMENT INC., a
Delaware corporation (together with its successors and assigns, the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Purchaser warrants ("Warrants") to purchase shares of Common Stock
(as defined in Section 1) in connection with the agreement of Financial Security Assurance Inc. ("FSA"), an affiliate of FSA
Portfolio Management Inc., (i) to facilitate the obtaining of reinsurance related to securities issued in CPS Auto Securitizations (as
defined herein) and guaranteed by FSA and (ii) to undertake certain actions necessary to permit FSA to issue financial guaranty
insurance policies for the benefit of holders of securities issued in such CPS Auto Securitizations.
NOW, THEREFORE, in consideration of the premises, the agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Conditional Grant. (a) The Purchaser is hereby granted the right to purchase, subject to the terms and conditions
of this Agreement, including, without limitation, the conditions precedent set forth in Section 1(b) below, at any time and from
time to time, during the period from the Issue Date (as defined in Section 1(b) below) until 5:30 p.m., New York time, on the first
Business Day (as defined in this Section 1(a)) on or after the fifth anniversary of the Issue Date (the "Exercise Period"), 2,525,114
shares (the "Warrant Shares") designated pursuant to the Company's Articles of Incorporation, as they may be amended as of the
Issue Date, as voting "Common Stock" without par value, at the initial exercise price per Warrant Share of Three Dollars ($3.00).
The adjusted exercise price shall be the price that shall result from time to time from any and all adjustments of the initial exercise
price in accordance with the provisions of Section 6. "Exercise Price" means the initial exercise price or the adjusted exercise
price, depending upon the context. The number of Warrant Shares issuable upon the exercise of any Warrant remaining
unexercised at any time shall be the number of Warrant Shares that shall result from time to time from any and all adjustments to
the number of Warrant Shares represented by such Warrant in accordance with the provisions of Section 7. "Business Day" means
a day that is not a Saturday or a Sunday or a day on which banking institutions in New York, New York or Irvine, California are
authorized or obligated by law, regulation, executive order or decree to be closed.
(b) The rights of the Purchaser under this Agreement, including, without limitation, the right to receive Warrant
Certificates (as defined in Section 2 below), the right to exercise any Warrants, the right to receive certificates for the Warrant
Shares, the right to have the Company register certain securities, and the right to receive notice of and to participate in certain
meetings, are all contingent upon satisfaction of the following conditions: that FSA shall have issued a financial guaranty
insurance policy for the benefit of holders of at least $300 million of securities issued by one or more entities affiliated with the
company in securitizations of automobile installment receivables, that said policy guarantees the full and timely payment of the
scheduled payments of principal and interest relating to such securities, and that said policy be issued after the date hereof and not
later than December 31, 1998. The date on which such conditions are first satisfied shall be the "Issue Date".
(c) The Company represents that it has disclosed to FSA on Schedule 1 hereto all Common Stock, Serial Preferred Stock,
and any other capital stock of the Company outstanding on the date of this Agreement, and has disclosed to FSA, on at least an
accurate pro forma basis if not in full, any options, interests, participations, or other equivalents (however designated) of or in the
Company, whether voting or nonvoting, including, without limitation, phantom stock, performance stock, Options (as defined in
Section 6.7(b)) Convertible Securities (as defined in Section 6.7(b), and all agreements, instruments, documents, and securities
convertible, exercisable, or exchangeable, in whole or in part, into any one or more of the foregoing that are outstanding on the
date of this Agreement. The Company further represents that the number of Warrant Shares in
1
Section 1(a) is not less than 10% of the Common Stock after full dilution, giving effect to the exercise of all such outstanding
interests and rights. The Company agrees that, in connection with a breach of either of the foregoing representations, the
Purchaser shall have the right, without limitation of any other available rights and remedies, to compel the Company to grant
additional Warrants for additional Warrant Shares in accordance with the essential intent and principles of this Agreement,
including, without limitation, the intent that the Purchaser receive Warrants for 10% of the Common Stock on a fully diluted basis
measured as of the date of this Agreement.
Section 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
Section 3. Exercise of Warrants.
3.1 Method of Exercise. The Warrants are exercisable at the Exercise Price per Warrant Share payable by check or by
surrender of Warrants in lieu of cash as provided in Section 3.2. Upon surrender of a Warrant Certificate, together with the
annexed Form of Election to Purchase duly executed by the registered holder of such Warrant Certificate (the "Holder") or the
Holder's agent or attorney and payment of the Exercise Price for the Warrant Shares purchased, at the Company's principal
executive offices at 16355 Laguna Canyon Road, Irvine, California 92618 or its office or agency maintained for such purpose as
referred to below, the Holder shall be entitled to receive a certificate or certificates for the Warrant Shares so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but
subject to Section 8 as to fractional shares). In the case of the purchase of less than all the Warrant Shares purchasable under any
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Warrant Shares purchasable thereunder. As long as any of the
Warrants remain outstanding, the Company shall maintain an office or agency (which shall initially be the the principal executive
offices of the Company) where the Warrant Certificates may be presented for exercise, registration of transfer, division, or
combination as provided in this Agreement. The Company agrees to maintain, at its aforesaid office or agency, books for the
registration and the registration of transfer of the Warrants.
3.2 Exercise by Surrender of Warrants. In addition to the method of payment set forth in Section 3.1 and in lieu of any cash
payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the
Warrants in whole or in part by surrendering the Warrant Certificate in the manner specified in Section 3.1 in exchange for the
number of Warrant Shares equal to (x) the number of Warrant Shares as to which the Warrants are being exercised multiplied by
(y) a fraction, the numerator of which is the 30-Day Average Market Price (as defined in Section 6.6) of the Common Stock less
the Exercise Price and the denominator of which is such 30-Day Average Market Price.
Section 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for the Warrant Shares
and/or other securities, properties, or rights underlying such Warrants shall be made forthwith (and in any event within five (5)
Business Days thereafter) without charge to the Holder thereof including, without limitation, any tax that may be payable in
respect of the issuance thereof, and such certificates shall (subject to the provisions of Section 5) be issued in the name of, or in
such names as may be directed by, the Holder thereof.
The Warrant Certificates and the certificates representing the Warrant Shares (and/or other securities, cash, rights, or other
property issuable upon the exercise of the Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under
its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then Secretary or Assistant Secretary
of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division,
exchange, substitution, or transfer.
2
Section 5. Securities Act of 1933 Legend. None of the Warrants, the Warrant Shares, nor any of the other securities that
may become issuable upon exercise of the Warrants or upon conversion of the Warrant Shares have been registered under the
Securities Act of 1933, as amended (the "Securities Act"). Upon exercise of the Warrants, in part or in whole, unless the Warrant
Shares previously have been registered pursuant to the Securities Act, pursuant to Section 11 or 12 hereof or otherwise, the
certificates representing the Warrant Shares and any other securities issued upon exercise of the Warrants or upon conversion of
the Warrant Shares shall bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT AND SUCH STATE LAWS."
Section 6. Adjustments to Exercise Price and Number of Warrant Shares.
6.1 Subdivision and Combination. If the Company shall at any time (i) subdivide the outstanding shares of Common Stock
into a larger number of shares, (ii) combine the outstanding shares of Common Stock into a smaller number of shares, (iii) declare
a dividend on the outstanding shares of Common Stock payable in shares of Common Stock or (iv) issue by reclassification of its
Common Stock any shares of its Capital Stock (as defined in this Section 7.1), then the Exercise Price in effect immediately after
the record date for such dividend or distribution or the effective date of such subdivision, combination, or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately before such dividend,
distribution, subdivision, combination, or reclassification, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately after such dividend, distribution, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event specified above shall occur. "Capital Stock" means the Common Stock, the Serial
Preferred Stock, and any other capital stock of the Company authorized from time to time, and any other shares, options, interests,
participations, or other equivalents (however designated) of or in the Company, whether voting or nonvoting, including, without
limitation, common stock, preferred stock, phantom stock, performance stock, Options (as defined in Section 6.7(b)) Convertible
Securities (as defined in Section 6.7(b)), and all agreements, instruments, documents, and securities convertible, exercisable, or
exchangeable, in whole or in part, into any one or more of the foregoing.
6.2 Adjustment in Number of Warrant Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of
Section 6.1, the number of Warrant Shares issuable upon the exercise of each remaining unexercised Warrant shall be adjusted to
the nearest full Warrant Share by multiplying the number of Warrant Shares issuable upon exercise of such Warrant immediately
prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding
immediately after such dividend, distribution, subdivision, combination, or reclassification, and of which the denominator shall be
the number of shares of Common Stock outstanding immediately before such dividend, distribution, subdivision, combination, or
reclassification. Such adjustment shall be made successively whenever any event specified above shall occur.
6.3 Definition of Common Stock. "Common Stock" means (i) any class of stock designated as "Common Stock" in the
Articles of Incorporation of the Company, as they may be amended as of the Issue Date, or (ii) any other class of stock resulting
from one or more changes or reclassifications of such designated Common Stock consisting solely of changes in par value, or
from par value to no par value, or from no par value to par value. In the event that the Company shall after the date of this
Agreement issue Common Stock ("New Common Stock") with any rights that are different from the rights evidenced by the
shares of Common Stock outstanding as of the date of this Agreement ("Existing Common Stock"), the Holder, at its option, may
receive upon exercise of any Warrant, Warrant Shares consisting of either shares of Existing Common Stock or shares of New
Common Stock or any combination of shares of Existing Common Stock and New Common Stock. This Section 6.3 shall apply to
successive issuances of any such New Common Stock.
3
6.4 Merger or Consolidation. If the Company after the Issue Date (i) shall consolidate with or merge into any other person
and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) shall permit any other person to
consolidate with or merge into the Company and the Company shall be the continuing or surviving person but, in connection with
such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other
person or cash or rights or any other property, (iii) shall transfer all or substantially all of its properties or assets to any other
person, or (iv) shall effect a capital reorganization or reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common Stock for which adjustments to the Exercise Price are
provided in this Section 6), or (v) shall effect a spin-off of assets, securities (other than Common Stock), or other property to
holders of its Common Stock, then, and in the case of each such transaction, proper provision shall be made so that, upon the basis
and the terms and in the manner provided in this Agreement and the Warrants, the Holders of the Warrants, upon the exercise
thereof at any time after the consummation of such transaction, shall be entitled to receive (at the Exercise Price in effect at the
time of such consummation for all Warrant Shares immediately prior to such consummation), in lieu of or, in the case of an event
described clause (v) above, in addition to the Warrant Shares or other securities issuable upon such exercise prior to such
consummation, the highest amount of securities, cash, rights, or other property to which such Holders would actually have been
entitled as stockholders upon such consummation if such Holders had exercised the rights represented by the Warrants
immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the
adjustments provided for in this Section 6.
6.5 Assumption of Obligations. Notwithstanding anything contained in the Warrants to the contrary, the Company will not
effect any of the transactions described in clauses (i) through (v) of Section 6.4 unless, prior to the consummation thereof, each
person (other than the Company) that may be required to deliver any stock, securities, cash, rights, or other property upon the
exercise of the Warrants as provided herein shall assume, by written instrument delivered to and reasonably satisfactory to the
Holders of the Warrants, (a) the obligations of the Company under this Agreement and the Warrants (and if the Company shall
survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from,
any continuing obligations of the Company under this Agreement and the Warrants) and (b) the obligation to deliver to such
Holders such stock, securities, cash, rights, or property as, in accordance with the foregoing provisions of this Section 6, such
Holders may be entitled to receive, and such person shall have similarly delivered to such Holders an opinion of counsel for such
person, which counsel shall be reasonably satisfactory to such Holders, stating that this Agreement and the Warrants shall
thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this Section
6) shall be applicable to the stock, securities, cash, rights, or property that such person may be required to deliver upon any
exercise of the Warrants or the exercise of any rights pursuant hereto.
6.6 Dividends and Other Distributions. If, at any time or from time to time after the date of this Agreement, the Company
shall issue or distribute to the holders of shares of Common Stock evidences of its indebtedness, any other securities of the
Company, or any cash, rights, property, or other assets (excluding pursuant to a subdivision, combination, or reclassification, or
dividend or distribution payable in shares of Common Stock, provision for which is made in Section 6.1, and excluding Regular
Cash Dividends (as defined in this Section 6.6)) (any such non-excluded event being herein called a "Special Dividend"), the
Exercise Price shall be adjusted by multiplying the then current Exercise Price by a fraction (i) the numerator of which shall be (a)
the 30-Day Average Market Price (as defined in this Section 6.6) of the Common Stock, less (b) the Fair Market Value (as defined
in this Section 6.6) of the evidences of indebtedness, other securities, cash, rights, property, or other assets issued or distributed in
such Special Dividend applicable to one share of Common Stock and (ii) the denominator of which shall be such 30-Day Average
Market Price. An adjustment made pursuant to this Section 6.6 shall become effective immediately after the record date of any
such Special Dividend. "30-Day Average Market Price" means, with respect to any security, the average for the thirty consecutive
trading days on the New York Stock Exchange immediately preceding the record date (or, if such calculation is being made
pursuant to Section 6.7(a) or 6.7(b), at the time specified in such Section) of the daily closing price of such security as reported by
the national securities exchange upon which such security is then listed or if not listed on any such exchange, the average of the
closing prices as reported by the Nasdaq National Market, or if not then listed on the Nasdaq
4
National Market, the average of the highest reported bid and lowest reported asked prices in the over-the-counter market as
reported by the National Association of Securities Dealers Inc. Automated Quotation System or its successor or such other
generally accepted source of publicly reported bid quotations; provided, that if such thirty-trading-day period would include any
days of trading in such security on an ex-dividend basis, the 30-Day Average Market Price shall be determined on the basis of
only the portion of such thirty-trading-day period preceding the period of ex-dividend trading or, if no portion of such thirty-
trading-day period precedes ex-dividend trading, then the 30-Day Average Market Price shall be determined on the basis of the
ten consecutive trading days on the New York Stock Exchange immediately preceding such ex-dividend trading; provided,
further, that if such security is not then publicly traded on the basis of any of the foregoing listings or quotations, the 30-Day
Average Market Price shall be the Fair Market Price. "Fair Market Price" means, with respect to any security, the fair market price
of such security as determined in good faith by the Company's Board of Directors, subject to Section 6.8. "Fair Market Value"
means, with respect to any evidences of indebtedness, other securities, cash, rights, property, or other assets, the fair market value
of such property or assets as determined in good faith by the Company's Board of Directors, subject to Section 6.8. "Regular Cash
Dividend" means, for the purposes of this Section 6.6, any cash dividend declared or paid after the date of this Agreement of
which the Purchaser has received at least 30 days' advance notice so long as the sum of (a) such cash dividend plus (b) the
aggregate amount of all Restricted Payments (as defined in this Section 6.6) made during the period after December 31, 1996
would not exceed the sum of (x) $7,500,000 plus (y) 50% of the Consolidated Net Income for the period commencing December
31, 1996 and ending on the date of payment of such cash dividend, treated as one accounting period. "Restricted Payments" means
any payment of or in respect of (i) any dividend, either in cash or property, on any shares of the Company's Capital Stock
(excluding pursuant to a subdivision, combination, or reclassification, or dividend or distribution payable in shares of Common
Stock provision for which is made in Section 6.1) or (ii) any purchase, redemption, or retirement of any shares of the Company's
Capital Stock or any warrants, rights, or options to purchase or acquire any shares of the Company's Capital Stock or (iii) any
other payment or distribution, either directly or indirectly through any subsidiary, in respect of the Company's Capital Stock.
6.7 Certain Issuances. (a) If at any time on or after the date of this Agreement the Company issues or sells any shares of
Capital Stock (x) including any Capital Stock issuable pursuant to Options (as defined in, and subject to the further provisions of,
Section 6.7(b)) or Convertible Securities (as defined in, and subject to the further provisions of, Section 6.7(b)) outstanding on or
before the Issue Date but (y) excluding all Warrant Shares, at a per unit or share price less than the Exercise Price or less than the
30-Day Average Market Price of Common Stock immediately before the time such Capital Stock (the "Additional Capital Stock")
is issued or sold, then the Exercise Price will be, in the case of Capital Stock issued at a price less than the Exercise Price, reduced
to the lower of the prices calculated by the following clauses (i) and (ii) and, in the case of Capital Stock issued at a price less than
such 30-Day Average Market Price but above the Exercise Price, reduced to the price calculated by the following clause (ii):
(i) dividing (A) the sum of (I) the total number of shares of
Capital Stock outstanding immediately before such issuance or sale of
Additional Capital Stock multiplied by the then current Exercise Price
plus (II) the aggregate cash consideration, if any, received by the
Company upon such issuance or sale, by (B) the total number of shares of
Capital Stock outstanding immediately after such issuance or sale (as
calculated on a fully-diluted basis); and
(ii) multiplying the then current Exercise Price by a fraction,
(A) the numerator of which is calculated by dividing (I) the sum of (x)
the total number of shares of Capital Stock outstanding immediately
before such issuance or sale of Additional Capital Stock multiplied by
the then current 30-Day Average Market Price of the Common Stock plus
(y) the aggregate consideration, if any, received by the Company upon
such issuance or sale, by (II) the total number of shares of Capital
Stock outstanding immediately after such issuance or sale (as calculated
on a fully-diluted basis), and (B) the denominator of which is the
30-Day Average Market Price before such issuance or sale;
for purposes of this Section 6.7(a), in each case where the 30-Day Average Market Price is to be computed with respect to the
time before any Additional Capital Stock is issued or sold, the date as of which the 30-Day Average Market Price will be
computed will be the earlier of the date upon which the Company enters into a firm contract
5
for the issuance of such Additional Capital Stock and the date upon which the Company issues such Additional Capital Stock.
(b) If at any time on or after the date of this Agreement the Company issues, sells, grants, or assumes, or shall fix a record
date for the determination of holders of any class of securities (other than the Warrant Certificates) to receive, any Options or
Convertible Securities, then, and in each case, the maximum number of shares of Additional Capital Stock (and set forth in the
instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or, in the case of Convertible Securities or Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be the shares of Additional Capital Stock issued as of the time of such
issue, sale, grant, or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date
(or, if the related Capital Stock trades on an ex-dividend basis, on the date immediately before the commencement of ex-dividend
trading); provided, that such shares of Additional Capital Stock shall never be deemed to have been issued for the purposes of this
Section 6.7 unless the per unit or share price of such shares (including the consideration for such Options or Convertible
Securities) is less than the Exercise Price or less than the 30-Day Average Market Price of Common Stock immediately before the
time such Options or Convertible Securities are issued, sold, granted, or assumed, or such a record date is fixed; and provided,
further, that in any such case in which shares of Additional Capital Stock are deemed to be issued:
(i) no further adjustment of the Exercise Price shall be made
upon the subsequent issue or sale of shares of Capital Stock or
Convertible Securities upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of
shares of Additional Capital Stock issuable, upon the exercise,
conversion, or exchange thereof (by change of rate or otherwise), the
Exercise Price computed upon the original issue, sale, grant, or
assumption thereof, and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such Options, or
the rights of conversion or exchange under such Convertible Securities,
that are outstanding at such time;
(iii) upon the expiration of any such Options that have not been
exercised (or the purchase by the Company and cancellation or retirement
of any such Options that have not been exercised) or the expiration of
any rights of conversion or exchange under any such Convertible
Securities that have not been exercised (or purchase by the Company and
cancellation or retirement of any such Convertible Securities the rights
of conversion or exchange under which have not been exercised), the
Exercise Price computed upon the original issue, sale, grant, or
assumption thereof, and any subsequent adjustments based thereon, shall,
upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(A) in the case of Options for Capital Stock, the only
shares of Additional Capital Stock issued or sold were the
shares of Additional Capital Stock, if any, actually issued or
sold upon the exercise of such Options and the consideration
received therefor was the consideration actually received by the
Company for the issue, sale, grant, or assumption of all such
Options, whether or not actually exercised, plus the
consideration actually received by the Company upon the issue or
sale of such shares of Additional Capital Stock with respect to
which such Options were actually exercised;
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued or sold
upon the exercise of such Options were issued at the time of the
issue, sale, grant, or assumption of such Options, and the
consideration received by the Company for the shares of
Additional Capital Stock deemed to have then been issued was the
consideration actually received by the Company for the issue,
sale, grant, or assumption of all such Options, whether or not
actually exercised, plus the consideration received by the
Company upon the issue
6
or sale of such Convertible Securities with respect to which
such Options were actually exercised; and
(C) in the case of Convertible Securities, the only
shares of Additional Capital Stock issued or sold were the
shares of Additional Capital Stock, if any, actually issued or
sold upon the conversion or exchange of such Convertible
Securities and the only consideration received therefor was the
consideration actually received by the Company for the issue or
sale of such Convertible Securities that were actually converted
or exchanged, plus the additional consideration actually
received by the Company upon such conversion or exchange.
No readjustment pursuant to paragraphs (A) through (C) above shall have
effect of increasing the Exercise Price by an amount in excess of the
amount of the adjustment thereof originally made in respect of the
issue, sale, grant, or assumption of such Options or Convertible
Securities. In the case of any Options that expire by their terms not
more than 30 days after the date of issue, sale, grant, or assumption
thereof, all adjustments pursuant to this Section 6.7(b)(iii) shall be
postponed until the expiration or exercise of all such Options,
whereupon such adjustment shall be made in the manner provided for such
Options above.
"Convertible Securities" means any evidences of indebtedness or other securities directly or indirectly convertible into or
exchangeable for shares of Additional Capital Stock. "Options" means options, warrants, stock purchase rights, or stock
appreciation rights for or related to shares of Additional Capital Stock or Convertible Securities.
(c) Subject to Section 1(c) only, no adjustment to the Exercise Price or to the number of Warrant Shares shall take place as
a result solely of either (i) exercise of Options or Convertible Securities that are referred to on Schedule 1 hereto or (ii) issuance of
Options or Convertible Securities (or the issuance of Capital Stock upon the exercise or conversion of such Options or Convertible
Securities) under an employee benefit plan, so long as such plan is approved or ratified by action of the Company's shareholders
and such Options or Convertible Securities are granted with an exercise or conversion price at or above market value (as
reasonably determined under the terms of such plan) at the time of such grant.
6.8 Other Dilutive Events; Holders' Objection to Valuation. If any event shall occur as to which the other provisions of this
Section 6 are not strictly applicable, but as to which the failure to make any adjustment would not fairly protect the purchase rights
represented by this Agreement and the Warrants in accordance with the essential intent and principles hereof or if any adjustment
is made based in any respect upon a determination of Fair Market Price or Fair Market Value and any Holders object to the Board
of Directors' determination of Fair Market Price or Fair Market Value then, in each such case, the Holders of Warrants
representing a majority may appoint a firm of independent public accountants of recognized national standing reasonably
acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential
intent and principles established herein, or the further adjustment, if any, on the basis of a corrected determination of Fair Market
Price or Fair Market Value, necessary properly to preserve the purchase rights represented by this Agreement and the Warrants.
The opinion of such accounting firm shall be conclusive and binding on the Company and the Holders. The Company and the
Holders shall equally bear the expenses of the accounting firm appointed pursuant to this Section.
6.9 Notice of Adjustment Events. Whenever the Company contemplates the occurrence of an event that would give rise to
adjustments under this Section 6, the Company shall mail to each Holder, at least thirty (30) days prior to the record date with
respect to such event or, if no record date shall be established, at least thirty (30) days prior to such event, a notice specifying (i)
the nature of the contemplated event, (ii) the date as of which any such record is to be taken for the purpose of such event, (iii) the
date on which such event is expected to become effective, and (iv) the time, if any is to be fixed, when the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for securities, cash, rights, or other property
deliverable in connection with such event.
6.10 Notice of Adjustments. Whenever the Exercise Price or the kind of securities, cash, rights, or other property issuable
upon exercise of the Warrants, or both, shall be adjusted pursuant to this Section 6, the
7
Company shall prepare a certificate signed by its President or a Vice President and by its Chief Financial Officer, Secretary, or
Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the basis on which the Company made any
determination hereunder), and the Exercise Price and the kind of securities, cash, rights, or other property issuable upon exercise
of the Warrants after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail
postage prepaid) to each Holder promptly after each adjustment. The Company shall keep copies of all such certificates at the
principal executive offices of the Company referred to in Section 3.1, or the office or agency designated by the Company pursuant
to Section 3.1, and cause the same to be available for inspection at such location during normal business hours by any Holder or
any prospective purchaser of a Warrant designated by the Holder thereof.
6.11 Preservation of Rights. The Company will not, by amendment of its Certificate of Incorporation or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issuance or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this Agreement or the Warrants or the rights
represented thereby, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the Holders of the Warrants against dilution or other
impairment in accordance with the essential intent and principles of this Agreement.
6.12 When No Adjustment Required. No adjustment in the Exercise Price shall be required unless such adjustment would
require an increase or decrease of at least $0.001 per share of Common Stock; provided, however that any and all adjustments
that, by reason of this Section 6.12, are not required to be made shall be carried forward and taken into account in any subsequent
adjustment; provided, further, however, that adjustments shall be required and made in accordance with the provisions of this
Section 6 (other than this Section 6.12) not later than such time as may be required in order to preserve the tax-free nature of a
distribution to the Holders of the Warrants. Anything in this Section 6 to the contrary notwithstanding, the Company shall be
entitled to make such reductions in the Exercise Price, in addition to those required by this Section 6, as it in its discretion shall
deem to be advisable in order that any stock dividend, subdivision of shares, or distribution of rights to purchase stock or
securities convertible or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable.
Section 7. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense,
upon the surrender thereof by the registered Holder at the principal executive offices of the Company referred to in Section 3.1 or
the office or agency designated by the Company pursuant to Section 3.1, for a new Warrant Certificate or Warrant Certificates of
like tenor and date representing in the aggregate the right to purchase the same number of Warrant Shares in such denominations
as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
Section 8. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of any Warrant. As to any fraction of a Warrant Share or fraction of other
securities, properties, or rights that the Holder would otherwise be entitled to purchase upon exercise of any Warrant, the
Company shall pay a cash adjustment in an amount equal to the fractional interest multiplied by the difference of (x) the 30-Day
Average Market Price, on the date of exercise, of the Common Stock or other securities that the Holder would be entitled to
purchase or, if such 30-Day Average Market Price cannot be determined, the Fair Market Price, on the date of exercise, of the
Common Stock or such other securities and the Fair Market Value of any other property or rights to which the Holder would be
entitled upon such exercise and (y) the Exercise Price.
Section 9. Transfer. Subject to compliance with all applicable securities laws, transfer of any Warrant and all rights
hereunder relating to such Warrant, in whole or in part, shall be registered on the books of
8
the Company to be maintained for such purpose, upon (i) surrender of a Warrant Certificate at the principal executive offices of
the Company referred to in Section 3.1 or the office or agency designated by the Company pursuant to Section 3.1, together with a
written Assignment of such Warrant, substantially in the form of Exhibit B hereto, duly executed by the Holder or its agent or
attorney, and (ii) if required, payment of funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon
such surrender and, if required, such payment, the Company shall cancel such surrendered Warrant Certificate and shall execute
and deliver one or more new Warrant Certificates of like tenor in the name of the assignee or assignees and in the denominations
specified in such Assignment, and shall issue to the assignor a new Warrant Certificate evidencing the portion of such Warrant, if
any, not so assigned.
Section 10. [intentionally omitted.]
Section 11. Registration Rights.
11.1 Demand Registration. (a) Request for Registration. At any time and from time to time on or after the first anniversary
of the date of this Agreement, the Demanding Holders (as defined in this Section 11.1(a)) may make a written request for
registration under the Securities Act of all or part of their Registrable Securities (as defined in this Section 11.1(a)) (a "Demand
Registration"). Such request for a Demand Registration must specify the number of shares of Registrable Securities proposed to be
sold and must also specify the intended method of disposition thereof. Upon any such request, the Demanding Holders shall be
entitled to have their Registrable Securities included in the Demand Registration, subject to Section 11.1(d). The Company shall
not be obligated to effect more than two Demand Registrations with respect to the Registrable Securities under this Section
11.1(a). "Demanding Holders" means a majority of the holders of Registrable Securities. "Registrable Securities" means the
Warrant Shares (issuable but unissued Warrant Shares shall be considered held by the Holder of Warrants representing the right to
receive such Warrant Shares) and any securities issued or issuable upon any subdivision, combination, or reclassification thereof,
any dividend or distribution thereon, or any merger or consolidation with respect to the Company.
(b) Effective Registration. Except in the case of a withdrawal governed by the last sentence of Section 11.1(e), a
registration will not count as a Demand Registration until it has become effective and the Company has complied with its
obligations under this Agreement with respect thereto; provided, however, that, after it has been declared effective, if the offering
of Registrable Securities pursuant to a Demand Registration is interfered with by any stop order, injunction, or other order or
requirement of the Securities and Exchange Commission (the "Commission") or any other governmental agency or court, such
Demand Registration will be deemed not to have become effective during the period of such interference.
(c) Underwritten Offering. If the Demanding Holders so elect, the offering of such Registrable Securities pursuant to such
Demand Registration shall be in the form of an underwritten offering. The Demanding Holders shall select one or more firms of
investment bankers to act as the managing Underwriter or Underwriters in connection with such offering and shall select any
additional managers to be used in connection with the offering.
(d) Reduction of Offering. If the managing Underwriter or Underwriters for a Demand Registration that is to be an
underwritten offering advises the Company and the Demanding Holders, in writing, that the dollar amount or number of shares of
Registrable Securities that the Demanding Holders desire to sell, taken together with all other shares of Common Stock or
securities that the Company or any other shareholders of the Company desire to sell, exceeds the maximum dollar amount or
number that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution
method, or the probability of success of such offering (the "Maximum Number of Shares"), then the Company shall include in
such registration: (i) first, the Registrable Securities as to which Demand Registration has been requested by the Demanding
Holders (pro rata in accordance with the number of shares of Registrable Securities that such Demanding Holder has requested be
included in such registration) that can be sold without exceeding the Maximum Number of Shares and (ii) second, to the extent the
Maximum Number of Shares has not been reached under the foregoing clause (i), the
9
shares of Common Stock or other securities, if any, that the Company is obligated (pursuant to agreements other than this
Agreement) or desires to register, that can be sold without exceeding the Maximum Number of Shares.
(e) Withdrawal. If the Demanding Holders or any of them disapprove of the terms of any underwriting or are not entitled to
include all of their Registrable Securities in any offering, such Demanding Holders may elect to withdraw from such offering by
giving written notice to the Company and the Underwriter of their request to withdraw prior to the effectiveness of the registration
statement. If the Demanding Holders or any of them withdraw from a proposed offering relating to a Demand Registration and,
solely as a result of such withdrawal the registration statement is withdrawn prior to being declared effective, such registration
shall count as a Demand Registration provided for in Section 11.1(a), unless the withdrawing Demanding Holders pay their pro
rata share (based upon the number of shares to be included in such registration statement) of the expenses incurred in connection
with such registration statement.
11.2 Piggyback Registration. (a) Piggy-Back Rights. If at any time the Company proposes to file a registration statement
under the 1933 Act with respect to an offering of equity securities, or securities convertible or exchangeable into equity securities,
by the Company for its own account or by shareholders of the Company for their account (or by the Company and by shareholders
of the Company) other than a registration statement (i) on Form S-4 or S-8 (or any substitute or successor form that may be
adopted by the Commission), (ii) filed in connection with any employee stock option or other benefit plan, (iii) for an exchange
offer or offering of securities solely to the Company's existing shareholders, or (iv) for a dividend reinvestment plan, then the
Company shall (x) give written notice of such proposed filing to the holders of Registrable Securities as soon as practicable but in
no event less than 30 days before the anticipated filing date, which notice shall describe the amount and type of securities to be
included in such offering, the intended method(s) of distribution, and the name of the proposed managing Underwriter or
Underwriters, if any, of the offering; and (y) offer to holders of Registrable Securities in such notice the opportunity to register
such number of shares of Registrable Securities as such holders may request in writing within 15 days following receipt of such
notice (a "Piggy-Back Registration"). The Company shall cause such Registrable Securities to be included in such registration and
shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as
any similar securities of the Company and to permit the sale or other disposition of such Registrable Securities in accordance with
the intended method of distribution thereof.
(b) Reduction of Offering.
(i) If the managing Underwriter or Underwriters for a Piggy-Back
Registration that is to be an underwritten offering of shares for the
Company's account advises the Company and the holders of Registrable
Securities in writing that the dollar amount or number of shares of
Common Stock that the Company desires to sell, taken together with the
Registrable Securities as to which registration has been requested
pursuant to the piggy-back registration rights under the Stanwich
Registration Rights Agreement (as defined in this Section 11.2(b)) or
the LLCP Registration Agreement (as defined in this Section 11.2(b))
that other shareholders or warrantholders of the Company desire to sell,
exceeds the Maximum Number of Shares, then the Company shall include in
such registration: (1) first, the shares of Common Stock or other
securities that the Company desires to sell that can be sold without
exceeding the Maximum Number of Shares, (2) second, to the extent the
Maximum Number of Shares has not been reached under the foregoing clause
(1), the Registrable Securities as to which registration has been
requested hereunder, the shares of Common Stock or other securities, if
10
any, as to which registration has been requested pursuant to the
piggy-back registration rights granted under the Stanwich Registration
Rights Agreement, and the shares of Common Stock or other securities, if
any, as to which registration has been requested pursuant to the
piggy-back registration rights granted under the LLCP Registration
Rights Agreement (pro rata among the holders of such Registrable
Securities and Common Stock or other securities in accordance with the
number of shares held by each such holder, regardless of the number of
shares that such holder has requested be included in such registration)
that can be sold without exceeding the Maximum Number of Shares, and (3)
third, to the extent the Maximum Number of Shares has not been reached
under the foregoing clauses (1) and (2), the shares of Common Stock or
other securities, if any, that other shareholders desire to sell that
can be sold without exceeding the Maximum Number of Shares. "Stanwich
Registration Rights Agreement" means the Consolidated Registration
Rights Agreement entered into before the date of this Agreement by and
between the Company and Stanwich Financial Corp., together with any
persons identified as "Stanwich Parties" therein. "LLCP Registration
Rights Agreement" means the Registration Rights Agreement entered into
before the date of this Agreement by and between the Company and Levine
Leichtman Capital artners II, L.P.
(ii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares
for the account of persons having exercised their demand registration
rights under the Stanwich Registration Rights Agreement or the LLCP
Registration Rights Agreement advises the Company and the holders of
Registrable Securities in writing that the dollar amount or number of
shares of Common Stock that such persons desire to sell, taken together
with the Registrable Securities as to which registration has been
requested hereunder and the shares of Common Stock or other securities,
if any, that the Company desires to sell or that other shareholders of
the Company desire to sell, exceeds the Maximum Number of Shares, then
the Company shall include in such registration: (1) first, the shares of
Common Stock or other securities for the account of persons having
demand registration rights under the Stanwich Registration Rights
Agreement or the LLCP Registration Rights Agreement, as applicable, that
can be sold without exceeding the Maximum Number of Shares, (2) second,
to the extent the Maximum Number of Shares has not been reached under
the foregoing clause (1), the Registrable Securities as to which
registration has been requested pursuant to the piggy-back registration
rights granted hereunder and the shares of Common Stock or other
securities, if any, as to which registration has been requested pursuant
to the piggy-back registration rights granted under the LLCP
Registration Rights Agreement or the Stanwich Registration Rights
Agreement, as applicable (pro rata among such holders in accordance with
the number of shares of Registrable Securities held by each such holder,
regardless of the number of shares of Registrable Securities that such
holder has requested be included in such registration), that can be sold
without exceeding the Maximum Number of Shares, (3) third, to the extent
the Maximum Number of Shares has not been reached under the foregoing
clauses (1) and (2), the shares of Common Stock or other securities, if
any, that the Company is obligated (pursuant to agreements other than
this Agreement, the Stanwich Registration Rights Agreement, and the LLCP
Registration Rights Agreement) or desires to register, that can be sold
without exceeding the Maximum Number of Shares.
(c) Withdrawal. Any holder of Registrable Securities may elect to withdraw such holder's request for inclusion of
Registrable Securities in any Piggy-Back Registration by giving written notice to the Company of such request to withdraw prior
to the effectiveness of the registration statement. The Company may also elect to withdraw a registration statement at any time
prior to the effectiveness of the registration statement. Notwithstanding any such withdrawal, the Company shall pay all expenses
incurred by the holders of Registrable Securities in connection with such Piggy-Back Registration as provided in Section 11.4(b).
11.3 Registration on Form S-3. The holders of Registrable Securities may at any time request in writing that the Company
register the resale of any or all of such Registrable Securities on Form S-3 (or any similar short-form registration that may be
available at such time). Upon receipt of such written request, the Company shall promptly give written notice of the proposed
registration to all other holders of Registrable Securities, and, as soon as practicable thereafter, effect the registration of all or such
portion of such holder's or holders' Registrable Securities as are specified in such request, together with all or such portion of the
Registrable Securities of any other holder or holders joining in such request as are specified in a written request given within 15
days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect
any such registration pursuant to this Section 11.3 if (i) Form S-3 is not available for such offering, (ii) the holders propose to
effect an underwritten offering, (iii) the holders propose to sell Registrable Securities at an anticipated aggregate price to the
public (net of any underwriters' discounts or commissions) of less than $500,000, (iv) the Company shall furnish to the holders a
certificate signed by the Chief Executive Officer of the Company stating that in
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the good faith judgment of the Board, it would be materially detrimental to the Company and its shareholders for such Form S-3
registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after receipt of the request of the holder or holders under this Section
11.3, provided, however, that in the event the Company elects to exercise such right with respect to any registration, it shall not
exercise such right again prior to the date that is nine months after the date on which the registration statement relating to such
deferred registration is filed, (v) the Company has effected eight registrations pursuant to this Section 11.3, or (vi) the Company
has effected two registrations pursuant to this Section 11.3 during the 12-month period prior to the date on which the registration
statement relating to such registration is anticipated to be declared effective. The Company shall use its best efforts to maintain
each registration statement under this Section 11.3 effective for 60 days or until the Registrable Securities covered thereby have
been sold, whichever shall first occur. Registrations effected pursuant to this Section 11.3 shall not be counted as Demand
Registrations effected pursuant to Section 11.1.
11.4 Covenants of the Company with Respect to Registration. In connection with any registration under Section 11.1, 11.2,
or 11.3, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to have any registration statements declared effective at the earliest possible
time, and shall furnish each holder desiring to sell securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all of the costs, fees and expenses in connection with all registration statements filed pursuant
to Sections 11.1, 11.2, and 11.3 including, without limitation, the Company's legal and accounting fees, printing expenses, blue
sky fees, and expenses (including legal fees and disbursements of one counsel for holders of Warrants and/or Warrant Shares in
connection with such registration statements but excluding each such holder's pro rata share of underwriting commissions and
discounts). If the Company shall fail to comply with the provisions of Section 11.4(a), the Company shall, in addition to any other
equitable or other relief available to the holder(s) of Warrants and/or Warrant Shares, extend the Exercise Period of the Warrants
by such number of days as shall equal any delay in excess of 120 days caused by the Company's failure.
(c) The Company shall take all necessary action that may be required in qualifying or registering the securities included in
a registration statement for offering and sale under the securities or blue sky laws of such states as the holder(s) of Warrants
and/or Warrant Shares shall reasonably designate; provided, that the Company shall not be obligated to qualify to do business in
any such jurisdiction or to file any general consent to service of process in any jurisdiction in any action other than one arising out
of the offering or the sale of the Warrants and/or Warrant Shares.
(d) Nothing contained in this Agreement shall be construed as requiring a Holder to exercise any Warrant representing
Warrant Shares to be registered under Section 11.1, 11.2, or 11.3 prior to the closing of the sales pursuant to an offering made by
means of a registration statement referred to in Sections 11.1, 11.2, or 11.3.
(e) In connection with any registration statement filed pursuant to Section 11.1, 11.2, or 11.3, the Company shall furnish to
each holder of Warrants and/or Warrant Shares participating in any underwritten offering and to each underwriter, a signed
counterpart, addressed to such holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing
under the underwriting agreement), and (ii) a "cold comfort" letter, dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement),
signed by the independent public accountants who have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters with respect to such registration statement (and the
prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters
in underwritten public offerings of securities.
(f) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within
fifteen (15) months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the
Securities Act) an earnings statement (which need not be audited) complying
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with Section 11(a) of the Securities Act and covering a period of at least twelve (12) consecutive months beginning after the
effective date of the registration statement.
(g) The Company shall deliver promptly to each holder of Warrants and/or Warrant Shares participating in the offering
requesting the correspondence and memoranda described below, and to the managing underwriters, copies of all correspondence
between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the
Commission or its staff with respect to the registration statement and permit each such holder (at its sole cost and expense other
than that set forth in Section 11.3(b)) and underwriter to do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such holder or underwriter shall reasonably request.
(h) (A) The Company shall indemnify, to the full extent permitted by law, each selling holder of Warrants and/or Warrant
Shares, its officers and directors, and each person who "controls" such seller (within the meaning of Section 15 of the Securities
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) against all losses, claims, damages,
liabilities, and expenses (collectively, "Losses") suffered by or threatened against such seller as a result of any untrue or alleged
untrue statement of a material fact contained in any registration statement or any amendment thereof or any omission or alleged
omission to state therein a material fact required to be stated therein or necessary in order to make the statements made therein not
misleading or any untrue or alleged untrue statement of a material fact contained in any prospectus or preliminary prospectus or
any supplement thereto or any omission or alleged omission to state therein a material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were made, not misleading, except insofar as the
Losses are caused by or contained in any information which such seller furnished in writing to the Company expressly for use
therein. In connection with an underwritten offering, the Company shall indemnify the underwriters thereof, their officers and
directors, and each person who "controls" any of such underwriters (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the selling holders of
Warrants and/or Warrant Shares.
(B) Each selling holder of Warrants and/or Warrant Shares shall indemnify, to the full extent permitted by law, the
Company, its directors and officers and each person who controls the Company (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against Losses resulting from any untrue or alleged untrue statement of a
material fact contained in any registration statement or any amendment thereof or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to make the statements made therein not misleading or
any untrue or alleged untrue statement of a material fact contained in any prospectus or preliminary prospectus or any supplement
thereto or any omission or alleged omission to state therein a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading, if and only to the extent that, such untrue statement
or alleged untrue statement or omission or alleged omission is contained in any information that such seller furnished in writing to
the Company expressly for use in any registration statement or any amendment thereof or in any prospectus or preliminary
prospectus or any supplement thereto.
(C) Any person entitled to indemnification hereunder (the "Indemnitee") shall promptly notify the indemnifying party (the
"Indemnitor") in writing after the Indemnitee receives any written notice of the commencement of any action, suit, proceeding, or
investigation or threat thereof made in writing for which the Indemnitee may claim indemnification or contribution pursuant to
this Agreement. Unless, in the reasonable judgment of the Indemnitee, a conflict of interest exists between the Indemnitee and the
Indemnitor with respect to such claim, the Indemnitee will permit the Indemnitor to assume the defense of such claim with
counsel reasonably satisfactory to the Indemnitee and the Indemnitor will pay all costs and expenses incurred in connection
therewith, including the fees and expenses of counsel. If the Indemnitor is not entitled, or elects not, to assume the defense of a
claim, it need not pay the fees and expenses of more than one counsel with respect to such claim, unless, in an Indemnitee's
reasonable judgment, a conflict of interest may exist between such Indemnitee and any other Indemnitee(s) with respect to such
claim. In such event the Indemnitor shall pay the fees and expenses of such
13
additional counsel as may be necessary, but in no event shall the Company be required to pay the fees or expenses of more than
one counsel in addition to counsel representing the Company. The Indemnitor shall not be subject to any liabilities for any
settlement made without its consent, which consent shall not unreasonably be withheld or delayed. No Indemnitor shall consent to
entry of any judgment or enter into any settlement that does not unconditionally require the claimant or plaintiff to release the
Indemnitee from all liability in respect of such claim or litigation.
(D) If the indemnification provided for in this paragraph (h) is unavailable to an Indemnitee hereunder in respect of any
Losses referred to herein, then the Indemnitor, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or
payable by such Indemnitee as a result of such Losses, in such proportion as appropriately reflects the relative fault of the
Indemnitor(s) and Indemnitee(s) in connection with such Losses, as well as any other relevant equitable considerations. The
relative fault of the Indemnitor(s) and Indemnitee(s) and relevant equitable considerations shall be determined by reference to,
among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnitor(s)
or Indemnitee(s) and their relative intent, knowledge, access to information, and opportunity to correct or prevent such action, and
their benefit therefrom. The amount paid or payable by a party as a result of the Losses referred to above shall include, subject to
the limitations set forth in subparagraph (E), any legal or other fees or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this subparagraph (D) were
determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations
referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(E) Anything to the contrary contained in this paragraph (h) notwithstanding, no selling holder of Warrants and/or Warrant
Shares shall be liable for any indemnification or contribution in excess of the maximum amount received by such holder from any
sale of Warrants and/or Warrant Shares that were actually registered pursuant to Section 11.1 or 11.2, net of any amounts paid by
such holder in connection with such sale in respect of the Exercise Price, underwriting commissions and discounts, or any other
costs related to such sale.
(i) The Company shall promptly notify each holder of Warrants and/or Warrant Shares covered by such registration
statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company's
discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not misleading, and at the request of any such
holder promptly prepare and furnish to such holder and each underwriter, if any, a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not contain such misstatement or omission.
(j) The Company shall enter into an underwriting agreement with the managing underwriters of an underwritten offering
covered by Section 11.1 or Section 11.2. Such agreement shall be reasonably satisfactory in form and substance to the Company,
each holder of Warrants and/or Warrant Shares to be sold thereunder and such managing underwriters, and shall contain such
representations, warranties, and covenants by the Company and such other terms as are customarily contained in agreements of
that type. The holders of Warrants and/or Warrant Shares shall be parties to any underwriting agreement relating to an
underwritten sale of their Warrants and/or Warrant Shares and may, at their option, require that any or all the representations,
warranties, and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of
such holders. Such holders shall not be required to make any representations or warranties to or agreements with the Company or
the underwriters except as they may relate to such holders and their intended methods of distribution.
14
(k) In the event the Company grants to any other holder of the Company's securities at any time registration rights more
favorable than those afforded to the Holders hereunder, then the provisions hereunder shall be deemed amended to include such
more favorable provisions.
Section 12. Other Covenants of the Company. For so long as any Warrants remain outstanding:
12.1 Information. The Company shall furnish to the Purchaser:
(a) within 15 days after the Company is required to file the
same with the Commission, copies of the annual, quarterly and other
reports which the Company may be required to file with the Commission
pursuant to Sections 13(a), 13(c), or 15(d) of the Exchange Act; and
(b) with reasonable promptness, such other information
respecting the business, operations, properties, or condition (financial
or otherwise) or prospects of the Company as the Purchaser may
reasonably request from time to time.
12.2 Rule 144; Rule 144A. (a) The Company will file the reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder and will take such further action as may
reasonably be required from time to time to enable Holders to sell Warrant Shares without registration under the Securities Act
within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the
Company will deliver to such Holder a written statement as to whether it has complied with such requirements.
(b) For so long as any Warrants or Shares are restricted securities within the meaning of Rule 144(a)(3) under the
Securities Act, the Company covenants and agrees that it shall, during any period in which it is not subject to Section 13 or 15(d)
of the Exchange Act, make available to any Holder in connection with the sale by such Holder to any prospective purchaser of
Common Stock from such Holder, in each case upon request, the information specified in, and meeting the requirements of, Rule
144A(d)(4) under the Securities Act.
Section 13. Voting. So long as any holder of Warrants and/or Warrant Shares shall own Warrants exercisable for and/or
Warrant Shares consisting of or convertible into at least five percent (5%) of the outstanding Common Stock of the Company,
such holder of Warrants and/or Warrant Shares shall have the right to send a representative selected by it to each meeting of the
Company's Board of Directors, which representative shall be permitted to attend (but not participate in) such meeting and any
adjournments thereof. The Company shall give to such holder of Warrants and/or Warrant Shares notice of all meetings thereof at
least ten (10) Business Days prior to convening such meeting, which notice shall describe the matters upon which action is to be
taken, or shall provide such notice as is given to members of the Company's Board of Directors. The Company shall provide such
holder with a copy of all resolutions adopted by the Board of Directors by written consent promptly upon execution by the Board
members.
Section 14. Further Assurance. The Company represents and warrants that all corporate action on the part of the Company
necessary for the authorization, execution, delivery, and performance by the Company of this Agreement in accordance with the
provisions hereof has been taken.
Section 15. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the exercise or conversion of the Warrants, such
number of shares of Common Stock or other securities, properties, or rights as shall be issuable upon the exercise or conversion
thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all
shares of Common Stock and other securities issuable upon such exercise and conversion thereof shall be duly and validly issued,
fully paid, nonassessable, and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all Warrant Shares to be listed on all securities exchanges and/or
included in the
15
automated quotation system of the Nasdaq National Market (subject to official notice of issuance) with respect to which the
Common Stock issued to the public may then be so listed and/or quoted.
Section 16. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the
Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the
election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any
time prior to the expiration of the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution payable; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of Capital Stock of the Company or
securities convertible into or exchangeable for shares of Capital Stock
of the Company, or any option, right, or warrant to subscribe therefor;
or
(c) a voluntary or involuntary dissolution, liquidation, or
winding-up of the Company (other than in connection with a consolidation
or merger) or any capital reorganization, recapitalization, or
reclassification or a sale of all or substantially all of its property,
assets, and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall mail to each Holder of a Warrant a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such dividend, distribution, or right, and the amount and
character of such dividend, distribution, or right, or (ii) the date or expected date on which any such reorganization,
reclassification, recapitalization, consolidation, merger, sale, dissolution, liquidation, or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities, cash, rights, or other property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, sale, dissolution, liquidation, or winding-up. Such notice shall be mailed at least thirty (30)
days prior to the date therein specified.
Section 17. Notices. All notices, requests, consents, and other communications hereunder shall be in writing and shall be
deemed to have been duly given or made at the time delivered by hand, if personally delivered; five calendar days after mailing, if
sent by registered or certified mail; when answered back, if telexed; when receipt is acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery (except that a
notice of change of address shall not be deemed to have been given until actually received by the addressee):
(a) If to a registered Holder of any Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the Company's principal executive
offices referred to in Section 3.1 or to such other address as the
Company may designate by notice to the Holders.
Section 18. Supplements and Amendments. The Company and the Purchaser may from time to time supplement or amend
this Agreement without the approval of any Holders (other than the Purchaser) in order to cure any ambiguity, to correct or
supplement any provision contained herein that may be defective or inconsistent with any other provision herein, or to make any
other provision in regard to matters or questions arising hereunder that the Company and the Purchaser may deem necessary or
desirable and that the Company and the Purchaser determine in good faith does not materially and adversely affect the interests of
any other Holder.
16
Section 19. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit
of the Company, the Holders, and their respective permitted successors and assigns hereunder.
Section 20. Governing Law, Submission to Jurisdiction. This Agreement and each Warrant issued hereunder shall be
governed and construed in accordance with the laws of the State of New York applicable to contracts made and performed in the
State of New York without giving effect to the principles of conflicts of law thereof.. If any action or proceeding shall be brought
by the Purchaser or any of the Holders in order to enforce any right or remedy under the Warrants or this Agreement, the
Company hereby consents to, and submits to, the jurisdiction of the courts of the State of New York and of any federal court
sitting in the Borough of Manhattan, City of New York. The Company agrees that process in any such action or proceeding may
be served in the manner provided by New York law for service on foreign persons, as appropriate.
Section 21. Entire Agreement, Modification. This Agreement contains the entire understanding between the parties hereto
with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against
whom enforcement of the modification or amendment is sought.
Section 22. Expiration of this Agreement. This Agreement shall expire 10 years from the Issue Date; provided, however,
that the indemnity and contribution agreements contained in Section 11.3(h) shall continue in full force and effect.
Section 23. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision of this Agreement. Any such provision held to be invalid or unenforceable
shall, to the extent possible, be deemed modified so as to be valid and enforceable and in harmony with the essential intent and
principles of this Agreement.
Section 24. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are
not intended to be, nor should they be construed as, part of this Agreement and shall be given no substantive effect.
Section 25. Benefits of This Agreement. Nothing in this Agreement (except for the indemnity and contribution agreements
contained in Section 11.3(h)) shall be construed to give any person or corporation other than the Company and the Purchaser and
any other holder(s) of the Warrants and/or Warrant Shares any legal or equitable right, remedy, or claim under this Agreement;
and (except for the indemnity and contribution agreements contained in Section 11.3(h)) this Agreement shall be for the sole and
exclusive benefit of the Company, the Purchaser, and any other Holder from time to time of any Warrant or Warrant Shares.
Section 26. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that
will accrue to a party hereto by reason of a failure to perform any of the obligations under this Agreement. Therefore, all parties
hereto shall have the right to specific performance of the obligations of the other parties under this Agreement, and if any party
hereto shall institute an action or proceeding to enforce the provisions hereof, any person (including the Company) against whom
such action or proceeding is brought hereby waives the claim or defense therein that such party has an adequate remedy at law,
and such person shall not urge in any such action or proceeding the claim or defense that such remedy at law exists.
Section 27. Counterparts. This Agreement may be executed in any number of counterparts, including by telecopied
facsimile, and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together
constitute but one and the same instrument.
17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first
above written.
CONSUMER PORTFOLIO SERVICES, INC.
By:_________________________________
Name:
Title:
FSA PORTFOLIO MANAGEMENT INC.
By:_________________________________
Name:
Title:
18
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT AND SUCH STATE LAWS.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ON NOVEMBER __, 2003
WARRANT CERTIFICATE NO. ___
This Warrant Certificate certifies that
_____________________________________, or registered assigns, is the registered holder of a Warrant to purchase initially, at
any time from the date hereof until 5:30 p.m., New York time, on November __, 2003 (the "Expiration Date"), up to __________
fully paid and nonassessable shares of Common Stock, no par value (the "Common Stock") of CONSUMER PORTFOLIO
SERVICES, INC., a California corporation (the "Company"), at the Exercise Price (as defined in the Warrant Agreement, dated as
of November __, 1998, between the Company and FSA Portfolio Management Inc. (the "Warrant Agreement")) upon surrender of
this Warrant Certificate and payment of the Exercise Price at the Company's principal executive offices or another office
maintained by the Company for such purpose in accordance with the Warrant Agreement, but subject to the conditions set forth
herein and in the Warrant Agreement. Payment of the Exercise Price shall be made by certified or official bank check in New
York Clearing House funds payable to the order of the Company or as otherwise set forth in the Warrant Agreement.
Capitalized terms used but not defined in this Warrant Certificate have the meanings given to such terms in the Warrant
Agreement.
NO WARRANT MAY BE EXERCISED AFTER 5:30 P.M., NEW YORK TIME, ON THE EXPIRATION DATE,
AT WHICH TIME ALL WARRANTS EVIDENCED HEREBY, UNLESS EXERCISED PRIOR THERETO, SHALL
THEREAFTER BE VOID.
The warrant evidenced by this Warrant Certificate is part of a duly authorized issue of Warrants issued pursuant to the
Warrant Agreement which, among other things, provides certain rights and procedures related to the Warrants and Warrant
Shares. The Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to
for a description of the rights, limitation of rights, obligations, duties, and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number
of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at
the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or
type of securities issuable upon the exercise of the Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new
Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrant Shares shall be
issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge.
A-1
Upon the exercise of the Warrant evidenced hereby for the purchase of less than all the Warrant Shares purchasable
hereunder, the Company shall cancel this Warrant Certificate upon the surrender hereof and forthwith issue to the holder hereof a
new Warrant Certificate of like tenor representing the balance of the Warrant Shares purchasable hereunder.
The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and
of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the
contrary.
A-2
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal.
Dated as of ________________________
[SEAL]
Attest:
CONSUMER PORTFOLIO SERVICES, INC.
By:_________________________________
Name:
Title:
__________________________________
Name:
Title: Secretary
A-3
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase
__________ shares of Common Stock and herewith tenders in payment for such securities a certified or official bank check
payable in New York Clearing House funds to the order of CONSUMER PORTFOLIO SERVICES, INC. in the amount of
$_____________, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be
registered in the name of _______________________________________________________________ whose address is
to
_______________________________________________________________ and
is
__________________________________________________________
______________________________________________________________.
that such Certificate be delivered
whose
address
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ________
shares of Common Stock all in accordance with the terms of Section 3.2 of the Warrant Agreement, dated as of November __,
1998 between Consumer Portfolio Services, Inc. and FSA Portfolio Management Inc. The undersigned requests that a certificate
for such securities be registered in the name of _________________________________________________ whose address is
to
_______________________________________________________________ and
is
_________________________________________________________
______________________________________________________________.
that such Certificate be delivered
whose
address
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
A-4
EXHIBIT B
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED _____________________________________________ hereby sells, assigns and transfers unto
________________________________________________________________________________
address of transferee)
(Please print name and
this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
B-1
Schedule 1 to Warrant Agreement
Capital Stock
Outstanding common shares 15,658,501
Outstanding preferred shares 0
Convertible Debt
PENs (1997 public subordinated debt) 492,611
Stanwich 1997 quasi-PENs (1997 private 252,951
subordinated debt)
1998 Stanwich/Poole Convertible 1,666,667
Subordinated Notes
Options, Warrants & Rights
Options outstanding under Plans 2,341,400
Non-Plan options (directors) 60,000
Levine Leichtman warrant 3,450,000
----------
TOTAL 23,922,130
==========
S-1
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND SUCH STATE LAWS OR UNDER AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT AND SUCH STATE LAWS.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ON DECEMBER 4, 2003
WARRANT CERTIFICATE NO. 1
This Warrant Certificate certifies that FSA PORTFOLIO MANAGEMENT INC., or registered assigns, is the registered
holder of a Warrant to purchase initially, at any time from the date hereof until 5:30 p.m., New York time, on December 4, 2003
(the "Expiration Date"), up to 2,525,114 (two million, five hundred twenty-five thousand, one hundred fourteen) fully paid and
nonassessable shares of Common Stock, no par value (the "Common Stock") of CONSUMER PORTFOLIO SERVICES, INC., a
California corporation (the "Company"), at the Exercise Price (as defined in the Warrant Agreement, dated as of November 30,
1998, between the Company and FSA Portfolio Management Inc. (the "Warrant Agreement")) upon surrender of this Warrant
Certificate and payment of the Exercise Price at the Company's principal executive offices or another office maintained by the
Company for such purpose in accordance with the Warrant Agreement, but subject to the conditions set forth herein and in the
Warrant Agreement. Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House
funds payable to the order of the Company or as otherwise set forth in the Warrant Agreement.
Capitalized terms used but not defined in this Warrant Certificate have the meanings given to such terms in the Warrant
Agreement.
NO WARRANT MAY BE EXERCISED AFTER 5:30 P.M., NEW YORK TIME, ON THE EXPIRATION DATE,
AT WHICH TIME ALL WARRANTS EVIDENCED HEREBY, UNLESS EXERCISED PRIOR THERETO, SHALL
THEREAFTER BE VOID.
The warrant evidenced by this Warrant Certificate is part of a duly authorized issue of Warrants issued pursuant to the
Warrant Agreement which, among other things, provides certain rights and procedures related to the Warrants and Warrant
Shares. The Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to
for a description of the rights, limitation of rights, obligations, duties, and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number
of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at
the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or
type of securities issuable upon the exercise of the Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new
Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like
1
number of Warrant Shares shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations
provided herein and in the Warrant Agreement, without any charge.
Upon the exercise of the Warrant evidenced hereby for the purchase of less than all the Warrant Shares purchasable
hereunder, the Company shall cancel this Warrant Certificate upon the surrender hereof and forthwith issue to the holder hereof a
new Warrant Certificate of like tenor representing the balance of the Warrant Shares purchasable hereunder.
The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and
of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the
contrary.
2
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal.
Dated as of December 4, 1998
[SEAL]
Attest:
CONSUMER PORTFOLIO SERVICES, INC.
By:_________________________________
Name:
Title:
__________________________________
Name:
Title: Secretary
3
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase
________ shares of Common Stock and herewith tenders in payment for such securities a certified or official bank check payable
in New York Clearing House funds to the order of CONSUMER PORTFOLIO SERVICES, INC. in the amount of
$_____________, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be
registered in the name of _______________________________________________________________ whose address is
to
_______________________________________________________________ and
is
__________________________________________________________
______________________________________________________________.
that such Certificate be delivered
whose
address
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ________
shares of Common Stock all in accordance with the terms of Section 3.2 of the Warrant Agreement, dated as of November 30,
1998 between Consumer Portfolio Services, Inc. and FSA Portfolio Management Inc. The undersigned requests that a certificate
for such securities be registered in the name of _________________________________________________ whose address is
to
_______________________________________________________________ and
is
_________________________________________________________
______________________________________________________________.
that such Certificate be delivered
whose
address
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
4
EXHIBIT B
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED _____________________________________________ hereby sells, assigns and transfers unto
______________________________________________________________________________ (Please print name and address
of transferee)
this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint
________________________________________________ Attorney, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Dated: ________________________
____________________________________
Signature (Signature must conform in
all respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
____________________________________
Signature Guarantee
5
EXHIBIT 10.29
SUBORDINATION AGREEMENT
This Subordination Agreement (this "Agreement") is made as of
this 17th day of November, 1998, by and between Stanwich Financial Services Corp., a Rhode Island corporation ("Stanwich"),
John G. Poole, an individual ("Poole"), Levine Leichtman Capital Partners II, L.P., a California limited partnership ("LLCP"), and
Consumer Portfolio Services, Inc., a California corporation ("CPS").
RECITALS
A. Pursuant to the terms of that certain Debt Restructure
Agreement of even date herewith by and among CPS, Stanwich and Poole (the "Debt Restructure Agreement"), CPS is issuing (i)
a Convertible Subordinated 12.5% Note in the principal amount of $4,000,000 to Stanwich (the "$4 Million Stanwich Note") and
(ii) a Convertible Subordinated 12.5% Note in the principal amount of $1,000,000 to Poole (the "Poole Note").
B. Stanwich is the holder of (i) two Partially Convertible
Subordinated 9% Notes dated June 12, 1997, each in the principal amount of $5,000,000 (the "$5 Million Stanwich Notes"), and
(ii) five Partially Convertible Subordinated 9% Notes dated June 12, 1997, each in the principal amount of $1,000,000 (the "$1
Million Stanwich Notes" and, together with the $4 Million Stanwich Note and the $5 Million Stanwich Notes, the "Stanwich
Notes").
C. Stanwich has pledged both of the $5 Million Stanwich Notes
and one of the $1 Million Stanwich Notes (collectively, the "Pledged Notes") to certain financial institutions pursuant to the terms
of various agreements (as such agreements as in effect on the date hereof, the "Note Pledge Agreements").
D. LLCP and CPS are parties to that certain Securities Purchase
Agreement of even date herewith (the "LLCP Purchase Agreement") pursuant to which CPS has agreed to issue to LLCP, and
LLCP has agreed to purchase from CPS as of the date hereof a Senior Subordinated Primary Note in the principal amount of
$25,000,000.
E. The execution of this Agreement by Stanwich, Poole and CPS is
a condition precedent to the obligation of LLCP to consummate the transactions contemplated by the LLCP Purchase Agreement.
F. In consideration of the substantial direct and indirect
benefits which Stanwich, Poole and CPS will realize from the consummation of the transactions contemplated by the LCCP
Purchase Agreement, Stanwich, Poole and CPS desire to enter into this Agreement and to be bound by the terms and conditions
hereof.
AGREEMENT
In consideration of the mutual covenants and agreements set
forth herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
1.
Amendment of the Stanwich Notes and the Poole Note.
1.1 Amendment of Section 2. Subject to Section 1.4, from and after the date hereof and until the termination of this
Agreement as provided below, Section 2 (SUBORDINATION) of the Stanwich Notes and the Poole Note shall be amended and
restated to read in its entirety as follows:
2. SUBORDINATION.
(a) IN GENERAL. THIS NOTE IS ISSUED SUBJECT TO, AND EACH PERSON
HOLDING THIS NOTE OR ANY INTEREST THEREIN, WHETHER UPON ORIGINAL ISSUE OR
UPON TRANSFER OR ASSIGNMENT HEREOF, SHALL BY ACCEPTANCE HEREOF BE DEEMED
TO HAVE ACCEPTED AND AGREED TO BE BOUND BY THE PROVISIONS THAT THE
INDEBTEDNESS EVIDENCED BY THIS NOTE IS AND SHALL BE SUBORDINATED AND
SUBJECT IN RIGHT OF PAYMENT, TO THE EXTENT AND IN THE MANNER PROVIDED IN
THIS SECTION 2, TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS
AND OF ALL SENIOR SUBORDINATED INDEBTEDNESS.
(b) PERMITTED PAYMENTS. THE MAKER MAY NOT MAKE ANY PAYMENT OF
PRINCIPAL OR PREMIUM ON THIS NOTE, AND THE HOLDER OF THIS NOTE SHALL NOT
BE PERMITTED TO RETAIN ANY PAYMENT OF PRINCIPAL OR PREMIUM, PRIOR TO THE
PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
INDEBTEDNESS. UNTIL ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
INDEBTEDNESS HAVE BEEN PAID IN FULL, THE MAKER SHALL BE PERMITTED TO MAKE
AND THE HOLDER SHALL BE PERMITTED TO RETAIN, SUBJECT TO THE PROVISIONS OF
SECTION 2(c), ONLY PAYMENTS OF INTEREST ON THIS NOTE ("PERMITTED
PAYMENTS"), AND ANY PAYMENTS MADE BY THE MAKER THAT ARE NOT PERMITTED
PAYMENTS WILL BE TURNED OVER BY THE HOLDER OF THIS NOTE (i) FIRST, TO THE
HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY AGENT THEREFOR (A "SENIOR
AGENT") FOR THE BENEFIT OF THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS
AND (ii) TO THE EXTENT THE SENIOR INDEBTEDNESS HAS BEEN PAID IN FULL, TO
THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS OR ANY AGENT
THEREFOR (A "SENIOR SUBORDINATED AGENT") FOR THE BENEFIT OF THE HOLDER OR
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS. UPON PAYMENT IN FULL OF THE
SENIOR INDEBTEDNESS AND THE SENIOR SUBORDINATED INDEBTEDNESS, PAYMENT OF
PRINCIPAL AND INTEREST MAY BE MADE TO THE HOLDER OF THIS NOTE WITHOUT
RESTRICTION HEREUNDER.
-2-
(c)
SUSPENSION OF PAYMENTS; LIMITATION ON REMEDIES.
(i) FROM AND AFTER RECEIPT BY THE MAKER OF A WRITTEN
NOTICE FROM THE HOLDER OR HOLDERS OF NOT LESS THAN FIFTY-ONE
PERCENT (51.0%) IN PRINCIPAL AMOUNT OF THE OUTSTANDING SENIOR
INDEBTEDNESS OR ANY SENIOR AGENT (A "DEFAULT NOTICE") STATING
THAT A DEFAULT HAS OCCURRED IN THE PAYMENT OF ANY OBLIGATION ON
ANY SENIOR INDEBTEDNESS WHEN DUE, WHETHER AT THE STATED MATURITY
OF ANY SUCH PAYMENT OR BY DECLARATION OF ACCELERATION, CALL FOR
REDEMPTION, MANDATORY REPURCHASE, PAYMENT OR PREPAYMENT OR
OTHERWISE (A "PAYMENT DEFAULT"), AND UNTIL THE DATE ON WHICH SUCH
PAYMENT DEFAULT IS CURED OR WAIVED IN WRITING BY THE HOLDERS OF
THE SENIOR INDEBTEDNESS WHO DELIVERED THE DEFAULT NOTICE, THE
MAKER SHALL NOT MAKE, AND THE HOLDER SHALL NOT BE PERMITTED TO
RECEIVE OR RETAIN, ANY PAYMENT OF INTEREST ON THIS NOTE.
(ii) FROM AND AFTER RECEIPT BY THE MAKER OF WRITTEN NOTICE
FROM LLCP STATING THAT A DEFAULT OR EVENT OF DEFAULT HAS OCCURRED
UNDER THE LLCP PURCHASE AGREEMENT AND STATING THAT LLCP IS
ELECTING TO INVOKE THE PROVISIONS OF THIS SECTION 2(c)(ii), AND
UNTIL THE DATE ON WHICH SUCH DEFAULT OR EVENT OF DEFAULT IS CURED
OR WAIVED IN WRITING BY LLCP, THE MAKER MAY NOT MAKE, AND THE
HOLDER SHALL NOT BE PERMITTED TO RECEIVE OR RETAIN, ANY PAYMENT
OF INTEREST ON THIS NOTE.
(iii) THE HOLDER OF THIS NOTE MAY NOT ACCELERATE THE
MATURITY OF THIS NOTE, OR PURSUE ANY OTHER REMEDY PROVIDED IN
SECTION 11 PRIOR TO THE PAYMENT IN FULL OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS; PROVIDED,
HOWEVER, THAT THIS CLAUSE (iii) SHALL NOT LIMIT THE AUTOMATIC
ACCELERATION OF THIS NOTE UPON THE OCCURRENCE OF ANY EVENT OF
DEFAULT SPECIFIED IN SECTIONS 10(f) OR 10(g) OF THIS NOTE .
(iv) IN THE EVENT THE MAKER IS PROHIBITED FROM MAKING ANY
PAYMENT OF INTEREST UNDER THIS SECTION 2(c), THE AMOUNT OF SUCH
PAYMENT SHALL BE ADDED TO THE PRINCIPAL AMOUNT OF THIS NOTE AS OF
THE DATE ON WHICH SUCH PAYMENT WOULD OTHERWISE HAVE BEEN DUE AND
SUCH ADDITIONAL PRINCIPAL AMOUNT SHALL BE DUE AND PAYABLE AT
MATURITY, EXCEPT TO THE EXTENT LLCP MAY OTHERWISE AGREE IN
WRITING.
(d) DISTRIBUTIONS IN BANKRUPTCY. UPON A PAYMENT OR DISTRIBUTION
TO CREDITORS OF THE MAKER IN A LIQUIDATION, DISSOLUTION, OR WINDING UP OF
THE MAKER OR IN A BANKRUPTCY, REORGANIZATION, INSOLVENCY, RECEIVERSHIP OR
SIMILAR PROCEEDING RELATING TO THE MAKER OR ITS PROPERTIES OR AN
ASSIGNMENT FOR THE BENEFIT OF CREDITORS OR ANY MARSHALING OF THE MAKER'S
ASSETS AND LIABILITIES:
(i) THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS SHALL BE
ENTITLED TO RECEIVE PAYMENT OF THE FULL AMOUNT OF THE SENIOR
INDEBTEDNESS AND, AFTER SUCH PAYMENT IN FULL OF THE SENIOR
INDEBTEDNESS, THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS SHALL BE ENTITLED TO RECEIVE PAYMENT OF THE FULL
AMOUNT OF THE SENIOR SUBORDINATED INDEBTEDNESS BEFORE THE HOLDER
IS ENTITLED TO RECEIVE ANY PAYMENT ON ACCOUNT OF THE PRINCIPAL
OF, PREMIUM, IF ANY, OR INTEREST ON THIS NOTE; AND
(ii) ANY PAYMENT BY, OR DISTRIBUTION OF ASSETS OF, THE
MAKER OF ANY KIND OR CHARACTER, WHETHER IN CASH, PROPERTY OR
SECURITIES (OTHER THAN SECURITIES OF THE MAKER AS REORGANIZED OR
READJUSTED OR SECURITIES OF THE MAKER OR ANY OTHER CORPORATION
PROVIDED FOR BY A PLAN OF REORGANIZATION OR READJUSTMENT THE
PAYMENT OF WHICH IS SUBORDINATE, AT LEAST TO THE EXTENT PROVIDED
IN THIS SECTION 2 WITH RESPECT TO THIS NOTE, TO THE PAYMENT OF
ALL SENIOR INDEBTEDNESS AND ALL SENIOR SUBORDINATED
-3-
INDEBTEDNESS, PROVIDED THAT THE RIGHTS OF THE HOLDERS OF SENIOR
INDEBTEDNESS AND THE HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS
ARE NOT IMPAIRED BY SUCH REORGANIZATION OR READJUSTMENT) TO WHICH
THE HOLDER WOULD BE ENTITLED EXCEPT FOR THE PROVISIONS OF THIS
SECTION 2 SHALL BE PAID OR DELIVERED BY THE PERSON MAKING SUCH
PAYMENT OR DISTRIBUTION, WHETHER A TRUSTEE IN BANKRUPTCY, A
RECEIVER OR LIQUIDATING TRUSTEE OR OTHERWISE, (i) FIRST, DIRECTLY
TO THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY SENIOR
AGENT, RATABLY ACCORDING TO THE AGGREGATE AMOUNTS REMAINING
UNPAID ON ACCOUNT OF THE SENIOR INDEBTEDNESS HELD OR REPRESENTED
BY EACH, TO THE EXTENT NECESSARY TO MAKE PAYMENT IN FULL OF ALL
SENIOR INDEBTEDNESS REMAINING UNPAID AFTER GIVING EFFECT TO ANY
CONCURRENT PAYMENT OR DISTRIBUTION TO THE HOLDER OR HOLDERS OF
SENIOR INDEBTEDNESS, BEFORE ANY PAYMENT OR DISTRIBUTION IS MADE
TO THE HOLDER OR HOLDERS OF ANY SENIOR SUBORDINATED INDEBTEDNESS
OR ANY SENIOR SUBORDINATED AGENT OR TO THE HOLDER, AND (II)
THEREAFTER DIRECTLY TO THE HOLDER OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS OR ANY SENIOR SUBORDINATED AGENT,
RATABLY ACCORDING TO THE AGGREGATE AMOUNTS REMAINING UNPAID ON
ACCOUNT OF THE SENIOR SUBORDINATED INDEBTEDNESS HELD OR
REPRESENTED BY EACH, TO THE EXTENT NECESSARY TO MAKE PAYMENT IN
FULL OF ALL SENIOR SUBORDINATED INDEBTEDNESS REMAINING UNPAID
AFTER GIVING EFFECT TO ANY CONCURRENT PAYMENT OR DISTRIBUTION TO
THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS, BEFORE
ANY PAYMENT OR DISTRIBUTION IS MADE TO THE HOLDER; AND
(iii) IN THE EVENT, NOTWITHSTANDING THE FOREGOING, ANY
PAYMENT BY, OR DISTRIBUTION OF ASSETS OF, THE MAKER OF ANY KIND
OR CHARACTER, WHETHER IN CASH, PROPERTY OR SECURITIES (OTHER THAN
SECURITIES OF THE MAKER AS REORGANIZED OR READJUSTED OR
SECURITIES OF THE MAKER OR ANY OTHER CORPORATION PROVIDED FOR BY
A PLAN OF REORGANIZATION OR READJUSTMENT THE PAYMENT OF WHICH IS
SUBORDINATE, AT LEAST TO THE EXTENT PROVIDED IN THIS SECTION 2
WITH RESPECT TO THIS NOTE, TO THE PAYMENT OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS, PROVIDED
THAT THE RIGHTS OF THE HOLDERS OF SENIOR INDEBTEDNESS AND THE
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS ARE NOT IMPAIRED BY
SUCH REORGANIZATION OR READJUSTMENT) SHALL BE RECEIVED BY THE
HOLDER OF THIS NOTE BEFORE ALL SENIOR INDEBTEDNESS AND ALL SENIOR
SUBORDINATED INDEBTEDNESS IS PAID IN FULL, SUCH PAYMENT OR
DISTRIBUTION SHALL BE PAID OVER (i) FIRST, TO THE HOLDER OR
HOLDERS OF SUCH SENIOR INDEBTEDNESS OR ANY SENIOR AGENT, AND (ii)
THEREAFTER TO THE HOLDERS OF SUCH SENIOR SUBORDINATED
INDEBTEDNESS OR ANY SENIOR SUBORDINATED AGENT RATABLY AS
AFORESAID, FOR APPLICATION TO THE PAYMENT OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS REMAINING
UNPAID, AS THE CASE MAY BE, UNTIL ALL SUCH SENIOR INDEBTEDNESS
AND ALL SUCH SENIOR SUBORDINATED INDEBTEDNESS SHALL HAVE BEEN
PAID IN FULL, AFTER GIVING EFFECT TO ANY CONCURRENT PAYMENT OR
DISTRIBUTION TO THE HOLDERS OF SUCH SENIOR INDEBTEDNESS AND THE
HOLDERS OF SUCH SENIOR SUBORDINATED INDEBTEDNESS.
(e) EXCLUSIVE POWERS. THE HOLDERS OF SENIOR INDEBTEDNESS AND THE
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS, ON THE ONE HAND, AND THE
HOLDER, ON THE OTHER HAND, ARE ENTITLED TO EXERCISE CERTAIN RIGHTS AND
POWERS WITH RESPECT TO THE MAKER FROM TIME TO TIME, WHETHER BEFORE OR
AFTER AN OCCURRENCE OF AN EVENT OF DEFAULT, AND THE EXERCISE OF ANY SUCH
RIGHT OR POWER BY ONE CREDITOR MAY PRECLUDE THE EXERCISE OF A SIMILAR
RIGHT OR POWER BY ONE OR MORE OTHER CREDITORS (ANY SUCH RIGHT OR POWER
BEING HEREIN CALLED AN "EXCLUSIVE POWER"). TO THE EXTENT THAT ANY HOLDER
OR HOLDERS OF SENIOR INDEBTEDNESS OR ANY SENIOR AGENT OR ANY HOLDER OR
HOLDERS OF SENIOR SUBORDINATED INDEBTEDNESS OR ANY SENIOR SUBORDINATED
AGENT ACTUALLY EXERCISES ANY EXCLUSIVE POWER, THEN THE HOLDER OF THIS
NOTE AGREES TO REFRAIN FROM EXERCISING ANY SUBSTANTIALLY SIMILAR
EXCLUSIVE POWER TO THE EXTENT NECESSARY TO PERMIT THE HOLDER OR HOLDERS
OF SENIOR INDEBTEDNESS OR THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS, OR ANY OF THEM, TO BENEFIT FROM THEIR ACTIONS.
-4-
(f) MODIFICATION OF SENIOR DEBT OR SENIOR SUBORDINATED DEBT. NO
AMENDMENT, MODIFICATION, EXTENSION, REPLACEMENT, RESTATEMENT OR
SUBSTITUTION OF ANY SENIOR INDEBTEDNESS OR OF ANY SENIOR SUBORDINATED
INDEBTEDNESS, OR OF ANY AGREEMENT OR NOTE NOW OR HEREAFTER IN EFFECT
PERTAINING TO SUCH SENIOR INDEBTEDNESS OR SENIOR SUBORDINATED
INDEBTEDNESS, SHALL NULLIFY, IMPAIR, LIMIT, ALTER OR MODIFY THE
PROVISIONS OF THIS SECTION 2.
(g) EXPENSES INCLUDED IN SENIOR INDEBTEDNESS AND SENIOR
SUBORDINATED INDEBTEDNESS. FOR PURPOSES OF THIS SECTION 2, SENIOR
INDEBTEDNESS SHALL INCLUDE ALL FEES, EXPENSES AND COSTS INCURRED BY OR ON
BEHALF OF THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR THE SENIOR
AGENT IN CONNECTION WITH SUCH SENIOR INDEBTEDNESS, AND SENIOR
SUBORDINATED INDEBTEDNESS SHALL INCLUDE ALL FEES, EXPENSES AND COSTS
INCURRED BY OR ON BEHALF OF THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS OR THE SENIOR SUBORDINATED AGENT IN CONNECTION WITH SUCH
SENIOR SUBORDINATED INDEBTEDNESS.
(h) NOTICE TO SENIOR DEBT AND TO SENIOR SUBORDINATED DEBT.
NOTICES TO HOLDERS OF SENIOR INDEBTEDNESS SHALL BE MADE TO EACH HOLDER OF
SENIOR INDEBTEDNESS OR, IF THE HOLDERS OF SENIOR INDEBTEDNESS HAVE
APPOINTED A SENIOR AGENT, THEN TO SUCH SENIOR AGENT, AND SHALL BE MADE IN
THE MANNER SPECIFIED IN THE DOCUMENT EVIDENCING SUCH HOLDER'S SENIOR
INDEBTEDNESS IF SUCH A MANNER IS SO SPECIFIED THEREIN. NOTICES TO HOLDERS
OF SENIOR SUBORDINATED INDEBTEDNESS SHALL BE MADE TO EACH HOLDER OF
SENIOR SUBORDINATED INDEBTEDNESS OR, IF THE HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS HAVE APPOINTED A SENIOR SUBORDINATED AGENT,
THEN TO SUCH SENIOR SUBORDINATED AGENT, AND SHALL BE MADE IN THE MANNER
SPECIFIED IN THE DOCUMENT EVIDENCING SUCH HOLDER'S SENIOR SUBORDINATED
INDEBTEDNESS IF SUCH A MANNER IS SO SPECIFIED THEREIN.
(i) SUBROGATION. SUBJECT TO THE PAYMENT IN FULL OF ALL SENIOR
INDEBTEDNESS AND ALL SENIOR SUBORDINATED INDEBTEDNESS, THE HOLDER SHALL
BE SUBROGATED TO THE RIGHTS OF THE HOLDER OR HOLDERS OF SENIOR
INDEBTEDNESS AND THE HOLDER OR HOLDERS OF SENIOR SUBORDINATED
INDEBTEDNESS TO RECEIVE PAYMENTS OR DISTRIBUTIONS OF CASH, PROPERTY OR
SECURITIES OF THE MAKER APPLICABLE TO SUCH SENIOR INDEBTEDNESS OR SENIOR
SUBORDINATED INDEBTEDNESS, AS THE CASE MAY BE, UNTIL ALL AMOUNTS OWING ON
THIS NOTE SHALL BE PAID IN FULL, AND, AS BETWEEN THE MAKER, ITS CREDITORS
OTHER THAN HOLDERS OF SENIOR INDEBTEDNESS OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS AND THE HOLDER, NO SUCH PAYMENT OR DISTRIBUTION
MADE TO THE HOLDER OR HOLDERS OF SENIOR INDEBTEDNESS OR THE HOLDERS OF
SENIOR SUBORDINATED INDEBTEDNESS BY VIRTUE OF THIS SECTION 2 WHICH
OTHERWISE WOULD HAVE BEEN MADE TO THE HOLDER SHALL BE DEEMED TO BE A
PAYMENT BY THE MAKER ON ACCOUNT OF ANY SENIOR INDEBTEDNESS OR ANY SENIOR
SUBORDINATED INDEBTEDNESS, IT BEING UNDERSTOOD THAT THE PROVISIONS OF
THIS SECTION 2 ARE AND ARE INTENDED SOLELY FOR THE PURPOSE OF DEFINING
THE RELATIVE RIGHTS OF THE HOLDER, ON THE ONE HAND, AND THE HOLDER OR
HOLDERS OF SENIOR INDEBTEDNESS AND THE HOLDER OR HOLDERS OF SENIOR
SUBORDINATED INDEBTEDNESS, ON THE OTHER HAND.
(j) OBLIGATIONS OF THE MAKER UNCONDITIONAL. NOTHING CONTAINED IN
THIS SECTION 2 OR ELSEWHERE IN THIS NOTE IS INTENDED TO OR SHALL IMPAIR,
AS BETWEEN THE MAKER, ITS CREDITORS OTHER THAN THE HOLDERS OF SENIOR
INDEBTEDNESS OR OF SENIOR SUBORDINATED INDEBTEDNESS AND THE HOLDER, THE
OBLIGATIONS OF THE MAKER, WHICH ARE ABSOLUTE AND UNCONDITIONAL, TO PAY TO
THE HOLDER THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THIS NOTE
AS AND WHEN THE SAME SHALL BECOME DUE AND PAYABLE IN ACCORDANCE WITH ITS
TERMS HEREOF, OR IS INTENDED TO OR SHALL AFFECT THE RELATIVE RIGHTS OF
THE HOLDER, ON THE ONE HAND, AND CREDITORS OF THE MAKER OTHER THAN THE
HOLDERS OF SENIOR INDEBTEDNESS AND SENIOR SUBORDINATED INDEBTEDNESS, ON
THE OTHER HAND.
UPON ANY PAYMENT OR DISTRIBUTION OF ASSETS OF THE MAKER REFERRED
TO IN THIS SECTION 2, THE HOLDER OF THIS NOTE SHALL BE ENTITLED TO RELY
UPON ANY ORDER OR DECREE MADE BY ANY COURT OF COMPETENT JURISDICTION IN
WHICH ANY SUCH DISSOLUTION, WINDING UP, LIQUIDATION OR REORGANIZATION
PROCEEDING AFFECTING THE AFFAIRS OF THE MAKER IS PENDING OR UPON A
CERTIFICATE OF THE TRUSTEE IN
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BANKRUPTCY, RECEIVER, ASSIGNEE FOR THE BENEFIT OF CREDITORS,
LIQUIDATING TRUSTEE OR AGENT OR OTHER PERSON MAKING ANY PAYMENT OR
DISTRIBUTION, DELIVERED TO THE HOLDER OF THIS NOTE, FOR THE PURPOSE OF
ASCERTAINING THE PERSONS ENTITLED TO PARTICIPATE IN SUCH PAYMENT OR
DISTRIBUTION, THE HOLDERS OF THE SENIOR INDEBTEDNESS, SENIOR
SUBORDINATED INDEBTEDNESS AND OTHER INDEBTEDNESS OF THE MAKER, THE
AMOUNT THEREOF OR PAYABLE THEREON, THE AMOUNT PAID OR DISTRIBUTED
THEREON AND ALL OTHER FACTS PERTINENT THERETO OR TO THIS SECTION 2.
1.2 Amendment of Section 12. From and after the date hereof and until the termination of this Agreement as provided
below, the following definitions shall be added to Section 12 of the Stanwich Notes and the Poole Note:
"LLCP" MEANS LEVINE LEICHTMAN CAPITAL PARTNERS II, L.P., A CALIFORNIA
LIMITED PARTNERSHIP.
"LLCP PURCHASE AGREEMENT" MEANS THAT CERTAIN SECURITIES PURCHASE
AGREEMENT DATED NOVEMBER 16, 1998 BY AND AMONG THE MAKER AND LLCP.
"SENIOR SUBORDINATED INDEBTEDNESS" HAS THE MEANING GIVEN TO SUCH TERM IN
THE LLCP PURCHASE AGREEMENT.
1.3 Legends. Subject to Section 1.4, the following legend shall be placed on the Stanwich Notes and the Poole Note:
THE PROVISIONS OF THIS NOTE HAVE BEEN AMENDED AS PROVIDED IN A
SUBORDINATION AGREEMENT DATED NOVEMBER 16, 1998 AMONG THE MAKER, THE
ORIGINAL HOLDER OF THIS NOTE AND CERTAIN OTHER PARTIES. A COPY OF SUCH
SUBORDINATION AGREEMENT MAY BE OBTAINED FROM THE PRINCIPAL EXECUTIVE
OFFICE OF THE MAKER.
CPS shall not effect any transfer of the Stanwich Note or the Poole Note or any portion of either of them prior to the termination
of this Agreement unless the foregoing legend is imprinted thereon. Upon the termination of this Agreement, CPS shall, upon
request and against delivery of the legended note for cancellation, issue a new note without the foregoing legend for any Stanwich
Note or for the Poole Note.
1.4 The Pledged Notes. The foregoing provisions of this Section 1 notwithstanding, the Pledged Notes shall not be amended
as provided herein so long as they remain subject to the Note Pledge Agreements as in effect on the date hereof. Neither Stanwich
nor Poole may amend any Note Pledge Agreement without the prior written consent of LLCP. Upon the release of any Pledged
Note from the pledge created pursuant to any Pledge Agreement, such Pledged Note shall thereupon immediately be deemed
amended as provided in this Agreement without any further action of any kind by any party. Without limiting the foregoing, upon
the release of any Pledged Note from pledge, such Pledged Note shall be legended as required by Section 1.4 within two business
days of such release.
Termination. This Agreement shall terminate and be of no further force
2.
or effect upon the first to occur of (i) the payment in full of all "Obligations to Purchaser" as such term is defined in the LLCP
Purchase Agreement or (ii) the issuance to LLCP of the New Senior Credit Facility Note (as such term is defined in the LLCP
Purchase Agreement). Upon termination of this Agreement, the terms and provisions of the Stanwich Notes and the Poole Note
shall no longer be amended as provided herein and shall continue in effect without any modification resulting from this
Agreement.
3.
Miscellaneous.
3.1 Successors and Assigns. This Agreement shall be binding on and inure to the benefit of the respective successors, legal
representatives and assigns of the parties to this Agreement. No party to this Agreement may assign its right or obligations
hereunder without the prior written consent of the other parties.
-6-
3.2 Notices. All notices, requests, demands and other communications which are required or may be given under this
Agreement shall be in writing and shall be deemed to have been duly given if transmitted by telecopier with receipt
acknowledged, or upon delivery, if delivered personally or by recognized commercial courier with receipt acknowledged, or upon
the expiration of 72 hours after mailing, if mailed by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to LLCP:
c/o Levine Leichtman Capital Partners, Inc.
335 North Maple Drive, Suite 240
Beverly Hills, California 90210
Attention: Arthur E. Levine, President
(310) 275-5335
Telephone:
(310) 275-1441
Facsimile:
If to Stanwich:
c/o Stanwich Partners, Inc.
Stamford, CT 06902
One Stamford Landing
62 Southfield Avenue
Attention: President
Telephone:
Facsimile:
(203) 325-0551
(203) 967-3923
If to Poole:
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Telephone:
Facsimile:
(203) 325-0551
(203) 967-3923
If to CPS:
Consumer Portfolio Services, Inc.
16355 Laguna Canyon Road
Irvine, CA 92618
Attention:
Charles E. Bradley, Jr., President
and Chief Executive Officer
(949) 753-6800
(949) 753-6805
Telephone:
Facsimile:
or at such other address or addresses as LLCP, Stanwich, Poole, or CPS, as the case may be, may specify by written notice given
in accordance with this Section.
3.3 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
3.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original, but all
of which together shall constitute one instrument.
3.5 Descriptive Headings, Construction and Interpretation. The descriptive headings of the several paragraphs of this
Agreement are for convenience of reference only and do not constitute a part of this Agreement and are not to be considered in
construing or interpreting this Agreement. All section, preamble, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions
of this Agreement, and all provisions of this Agreement shall be construed in accordance with their fair meaning, and not strictly
for or against any party.
-7-
3.6 Waivers and Amendments. Neither this Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally or by course of dealing, except by a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
3.7 Remedies. In the event that Stanwich, Poole, or CPS fails to observe or perform any covenant or agreement to be
observed or performed under this Agreement, LLCP may proceed to protect and enforce its rights by suit in equity or action at
law, whether for specific performance of any term contained in this Agreement or for an injunction against the breach of any such
term or in aid of the exercise of any power granted in this Agreement or to enforce any other legal or equitable right, or to take any
one or more of such actions. Stanwich, Poole and CPS severally agree to pay all fees, costs, and expenses, including without
limitation, fees and expenses of attorneys, accountants and other experts, and all fees, costs and expenses of appeals, incurred by
LLCP in connection with the enforcement of this Agreement against it or him, as the case may be or the collection or any sums
due hereunder, whether or not suit is commenced. None of the rights, powers or remedies conferred under this Agreement shall be
mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to any other right, power or remedy
whether conferred by this Agreement or now or hereafter available at law, in equity, by statute or otherwise.
3.8 Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the
rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the
State of California applicable to contracts made and performed in such state, without regard to principles thereof regarding
conflicts of laws.
4. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
COMMERCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS
TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, AND
UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO, THIS AGREEMENT AND/OR ANY RELATED AGREEMENT OR THE TRANSACTIONS
COMPLETED HEREBY OR THEREBY.
-8-
IN WITNESS WHEREOF, the parties have caused this Subordination Agreement to be executed and delivered by their
duly authorized representatives as of the date first above written.
CONSUMER PORTFOLIO SERVICES,
INC., a California corporation
LEVINE LEICHTMAN CAPITAL
PARTNERS, INC., a California
corporation
By:_______________________________
CAPITAL PARTNERS II, L.P.,
Charles E. Bradley, Jr.,
President and Chief Executive Officer a California limited partnership
on behalf of LEVINE LEICHTMAN
By:_______________________________
Jeffrey P. Fritz,
Senior Vice President and Chief
Financial Officer
By:_________________________________
Lauren B. Leichtman,
Chief Executive Officer
STANWICH FINANCIAL SERVICES
CORP., a Rhode Island Corporation
____________________________________
JOHN G. POOLE
By:______________________________
Charles E. Bradley, Sr., President
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EXHIBIT 10.30
CONSOLIDATED REGISTRATION RIGHTS AGREEMENT
THIS CONSOLIDATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of November
17, 1998 by and between Consumer Portfolio Services, Inc., a California corporation (the "Company"), and the following parties
(collectively, the "Stanwich Parties"): Stanwich Financial Corp, a Rhode Island corporation ("Stanwich"), and John G. Poole
("Poole").
RECITALS
A. Stanwich is the holder of seven Partially Convertible Subordinated 9% Notes, each dated June 12, 1997 and issued by
the Company to Stanwich, in the following principal amounts (collectively, the "1997 Stanwich Notes"): two such notes for
$5,000,000 each, and five such notes for $1,000,000 each. Each of the 1997 Stanwich Notes contains provisions granting to the
holder thereof the right to convert 20% of the principal thereof into shares of Common Stock at the rate of $11.86 per shares,
subject to adjustment as provided therein.
B. Stanwich is the holder of 443,450 shares of Common Stock, which it subscribed for and purchased from the Company
on or about July 21, 1998 (the "1998 Issued Shares").
C. The Company and the Stanwich Parties are parties to a certain Debt Restructure Agreement of even date herewith (the
"Restructure Agreement") pursuant to which, simultaneously herewith, the Company has (i) issued to Stanwich a certain
Convertible Subordinated 12.5% Note dated the date hereof in the principal amount of $4,000,000 (the "1998 Stanwich Note")
and (ii) issued to Poole a certain Convertible Subordinated 12.5% Note dated the date hereof in the principal amount of
$1,000,000 (the "Poole Note"). The principal of each of the 1998 Stanwich and the Poole Note is convertible into shares of
Common Stock at the rate of $3.00 per share, subject to adjustment as provided therein.
D. The Company is obligated to enter into this Agreement under the terms of the Restructure Agreement.
E. In consideration of the substantial direct and indirect benefits which the Company will realize from the consummation
of the transactions contemplated by the Restructure Agreement, the Company desires to enter into this Agreement and to be bound
by the terms and conditions hereof.
AGREEMENT
In consideration of the mutual covenants and agreements set forth herein, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings specified below:
"Business Day" shall mean any day that is not a Saturday, Sunday or other day on which banks in the State of California
are authorized or required to close.
"Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering
the 1933 Act.
"Common Stock" shall mean the common stock, no par value, of the Company.
"Company" shall have the meaning set forth in the preamble of this Agreement.
"Conversion Right" means, with respect to each of the Notes, the right to convert the principal thereof into shares of
Common Stock, as provided therein.
"Demanding Holders" shall mean Stanwich or, if Stanwich does not hold a majority of the Registrable Securities at any
time, the holders of a majority of Registrable Securities.
"Demand Registration" shall have the meaning specified in Section 2.1(a).
"FSA Registration Rights Agreement" shall have the meaning given to such term in the LLCP Registration Rights
Agreement.
"Indemnified Party" shall have the meaning specified in Section 4.3.
"Indemnifying Party" shall have the meaning specified in Section 4.3.
"Inspectors" shall have the meaning specified in Section 3.1(h).
"LLCP" shall mean Levine Leichtman Capital Partners II, L.P., a California limited partnership.
"LLCP Registration Rights Agreement" shall mean that certain Registration Rights Agreement of even date herewith
between the Company and LLCP.
"Maximum Numbers of Shares" shall have the meaning specified in Section 2.1(d).
"1998 Issued Shares" shall have the meaning set forth in the recitals to this Agreement.
"1998 Stanwich Note" shall have the meaning set forth in the recitals to this Agreement.
"1997 Stanwich Notes" shall have the meaning set forth in the recitals to this Agreement.
"1933 Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Notes" shall mean, collectively, the 1997 Stanwich Notes, the 1998 Notes and the Poole Note.
"Piggy-Back Registration" shall have the meaning specified in Section 2.2(a).
"Poole" shall have the meaning set forth in the recitals to this Agreement.
"Poole Note" shall have the meaning set forth in the recitals to this Agreement.
"Register", "registered" and "registration" shall mean a registration effected by preparing and filing a registration statement
or similar document in compliance with the 1933 Act, and the applicable rules and regulations thereunder, and such registration
statement becoming effective.
"Registrable Securities" shall mean, collectively, the Shares and any securities issued or issuable upon any stock dividend,
stock split, recapitalization, merger, consolidation or similar event with respect to the Shares. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when (i) a registration statement covering such securities shall
have become effective under the 1933 Act and such securities shall have been sold pursuant to such registration statement, (ii)
such securities shall have been distributed to the public pursuant to Rule 144 or Rule 144A (or any successor provisions) under the
1933 Act, or (iii) such securities shall have ceased to be outstanding.
"Restructure Agreement" shall have the meaning set forth in the recitals to this Agreement.
2
"SFSC Warrant" shall have the meaning given to such term in that certain Securities Option Agreement of even date
herewith among LLCP, Stanwich and the Company.
"Shares" shall mean, collectively, (i) the 1998 Issued Shares, (ii) the shares of Common Stock issued or issuable upon
exercise of any and all of the Conversion Rights and (iii) the shares of Common Stock issued or issuable pursuant to the SFSC
Warrant. As used in this Agreement, the holder of any Conversion Right or of the SFSC Warrant or any portion thereof shall be
deemed to be the holder of the shares of Common Stock issuable upon exercise thereof and, to the extent such shares constitute
Registrable Securities, such holder shall be deemed to be the holder of such Registrable Securities.
"Stanwich" shall have the meaning set forth in the recitals to this Agreement.
"Stanwich Parties" shall have the meaning set forth in the recitals to this Agreement.
"Underwriter" shall mean a securities dealer who purchases any Registrable Securities as principal in an underwritten
offering and not as part of such dealer's market-making activities.
As used herein, the plural or singular include each other, and pronouns in any gender are to be construed as masculine,
feminine or neuter, as the context requires.
2.
REGISTRATION RIGHTS.
2.1 Demand Registration.
(a) Request for Registration. At any time and from time to time
on or after the first anniversary of the date of this Agreement, the Demanding Holders may make a written request for registration
under the 1933 Act of all or part of their Registrable Securities (a "Demand Registration"). Such request for a Demand
Registration must specify the number of shares of Registrable Securities proposed to be sold and must also specify the intended
method of disposition thereof. Upon any such request, the Demanding Holders shall be entitled to have their Registrable Securities
included in the Demand Registration, subject to Section 2.1(d) and the proviso set forth in Section 3.1(a). The Company shall not
be obligated to effect more than two Demand Registrations with respect to the Shares under this Section 2.1(a).
(b) Effective Registration. Except in the case of a withdrawal
governed by the last sentence of Section 2.1(e), a registration will not count as a Demand Registration until it has become
effective and the Company has complied with its obligations under this Agreement with respect thereto; provided, however, that,
after it has been declared effective, if the offering of Registrable Securities pursuant to a Demand Registration is interfered with
by any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court, such
Demand Registration will be deemed not to have become effective during the period of such interference.
(c) Underwritten Offering. If the Demanding Holders so elect,
the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering.
The Demanding Holders shall select one or more firms of investment bankers to act as the managing Underwriter or Underwriters
in connection with such offering and shall select any additional managers to be used in connection with the offering.
(d) Reduction of Offering. If the managing Underwriter or
Underwriters for a Demand Registration that is to be an underwritten offering advises the Company and the Demanding Holders,
in writing, that the dollar amount or number of shares of Registrable Securities which the Demanding Holders desire to sell, taken
together with all other shares of Common Stock or securities which the Company desires to sell and the shares of Common Stock,
if any, as to which registration has been requested pursuant to the piggy-back registration rights under the LLCP Registration
Rights Agreement and the FSA Registration Rights Agreement or which other shareholders of the Company desire to sell, exceeds
the maximum dollar amount or number that can be sold in such offering without adversely affecting the proposed offering
3
price, the timing, the distribution method or the probability of success of such offering (the "Maximum Number of Shares"), then
the Company shall include in such registration: (i) first, the Registrable Securities as to which Demand Registration has been
requested by the Demanding Holders (pro rata in accordance with the number of shares of Registrable Securities held by each
Demanding Holder, regardless of the number of shares of Registrable Securities which such Demanding Holder has requested be
included in such registration) that can be sold without exceeding the Maximum Number of Shares, (ii) second, to the extent the
Maximum Number of Shares has not been reached under the foregoing clause (i), the shares of Common Stock for the account of
other persons that the Company is obligated to register pursuant to the LLCP Registration Rights Agreement and the FSA
Registration Rights Agreement (to be allocated among the persons requesting inclusion in such registration pursuant to such
agreements pro rata in accordance with the number of shares of Common Stock with respect to which such person has the right to
request such inclusion under such agreements, regardless of the number of shares which such person has actually requested be
included in such registration) that can be sold without exceeding the Maximum Number of Shares, (iii) third, to the extent the
Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), the shares of Common Stock that the
Company desires to sell that can be sold without exceeding the Maximum Number of Shares and (iii) fourth, to the extent the
Maximum Number of Shares has not been reached under the foregoing clauses (i), (ii) and (iii), the shares of Common Stock that
other shareholders desire to sell that can be sold without exceeding the Maximum Number of Shares.
(e) Withdrawal. If the Demanding Holders or any of them
disapprove of the terms of any underwriting or are not entitled to include all of their Registrable Securities in any offering, such
Demanding Holders may elect to withdraw from such offering by giving written notice to the Company and the Underwriter of
their request to withdraw prior to the effectiveness of the registration statement. If the Demanding Holders or any of them
withdraw from a proposed offering relating to a Demand Registration and, solely as a result of such withdrawal the registration
statement is withdrawn prior to being declared effective, such registration shall count as a Demand Registration provided for in
Section 2.1(a) unless the withdrawing Demanding Holders pay their pro rata share (based upon the number of shares to be
included in such registration statement) of the expenses incurred in connection with such registration statement.
2.2 Piggy-Back Registration.
(a) Piggy-Back Rights. If at any time the Company proposes to
file a registration statement under the 1933 Act with respect to an offering of equity securities, or securities convertible or
exchangeable into equity securities, by the Company for its own account or by shareholders of the Company for their account (or
by the Company and by shareholders of the Company) other than a registration statement (i) on Form S-4 or S-8 (or any substitute
or successor form that may be adopted by the Commission), (ii) filed in connection with any employee stock option or other
benefit plan, (iii) for an exchange offer or offering of securities solely to the Company's existing shareholders, or (iv) for a
dividend reinvestment plan, then the Company shall (x) give written notice of such proposed filing to the holders of Registrable
Securities as soon as practicable but in no event less than 30 days before the anticipated filing date, which notice shall describe the
amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed
managing Underwriter or Underwriters, if any, of the offering; and (y) offer to the holders of Registrable Securities in such notice
the opportunity to register such number of shares of Registrable Securities as such holders may request in writing within 15 days
following receipt of such notice (a "Piggy-Back Registration"). The Company shall cause such Registrable Securities to be
included in such registration and shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed
underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration to be included on
the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such
Registrable Securities in accordance with the intended method of distribution thereof.
(b) Reduction of Offering.
(i) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the Company's account advises the Company and the
holders of Registrable Securities in writing that the dollar amount or number of shares of Common Stock which the Company
desires to sell, taken together with the Registrable Securities as to which registration has been requested hereunder and the shares
of Common Stock, if any, as to which registration has been requested pursuant to the piggy-back registration rights under the FSA
Registration Rights Agreement or the LLCP Registration Rights Agreement or which other shareholders of the Company desire to
sell, exceeds the Maximum Number of Shares, then the Company shall include in such registration: (i) first, the shares of
Common Stock or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of
Shares, (ii) second, to the extent the Maximum Number of Shares has not been reached under the foregoing clause (i), the
Registrable Securities as to which registration has been requested hereunder and the shares of Common Stock, if
4
any, as to which registration has been requested pursuant to the piggy-back registration rights granted under the FSA Registration
Rights Agreement and the LLCP Registration Rights Agreement (to be allocated among the persons requesting inclusion in such
registration pursuant to such agreements pro rata in accordance with the number of shares of Common Stock with respect to which
such person has the right to request such inclusion under such agreements, regardless of the number of shares which such person
has actually requested be included in such registration) that can be sold without exceeding the Maximum Number of Shares and
(iii) third, to the extent the Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), the shares of
Common Stock that other shareholders desire to sell that can be sold without exceeding the Maximum Number of Shares.
(ii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the account of persons having demand registration
rights under the LLCP Registration Rights Agreement account advises the Company and the holders of Registrable Securities in
writing that the dollar amount or number of shares of Common Stock which such persons desire to sell, taken together with the
Registrable Securities as to which registration has been requested hereunder, the shares of Common Stock, if any, as to which
registration has been requested pursuant to the piggy-back registration rights under the FSA Registration Rights Agreement and
the shares of Common Stock, if any, which the Company desires to sell or which other shareholders of the Company desire to sell,
exceeds the Maximum Number of Shares, then the Company shall include in such registration: (i) first, the shares of Common
Stock for the account of persons having demand registration rights under the LLCP Registration Rights Agreement that can be
sold without exceeding the Maximum Number of Shares, (ii) second, to the extent the Maximum Number of Shares has not been
reached under the foregoing clause (i), the Registrable Securities as to which registration has been requested by the holders of
Registrable Securities hereunder and the shares of Common Stock, if any, as to which registration has been requested pursuant to
the piggy-back registration rights granted under the FSA Registration Rights Agreement (to be allocated among the persons
requesting inclusion in such registration pursuant to such agreements pro rata in accordance with the number of shares of
Common Stock with respect to which such person has the right to request such inclusion under such agreements, regardless of the
number of shares which such person has actually requested be included in such registration) that can be sold without exceeding
the Maximum Number of Shares, (iii) third, to the extent the Maximum Number of Shares has not been reached under the
foregoing clauses (i) and (ii), the shares of Common Stock, if any, that the Company desires to sell that can be sold without
exceeding the Maximum Number of Shares and (iv) fourth, to the extent the Maximum Number of Shares has not been reached
under the foregoing clauses (i), (ii) and (iii), the shares of Common Stock, if any, which other shareholders desire to sell that can
be sold without exceeding the Maximum Number of Shares.
(iii) If the managing Underwriter or Underwriters for a
Piggy-Back Registration that is to be an underwritten offering of shares for the account of persons having demand registration
rights under the FSA Registration Rights Agreement account advises the Company and the holders of Registrable Securities in
writing that the dollar amount or number of shares of Common Stock which such persons desire to sell, taken together with the
Registrable Securities as to which registration has been requested hereunder, the shares of Common Stock, if any, as to which
registration has been requested pursuant to the piggy-back registration rights under the LLCP Registration Rights Agreement and
the shares of Common Stock, if any, which the Company or other shareholders of the Company desire to sell, exceeds the
Maximum Number of Shares, then the Company shall include in such registration: (i) first, the shares of Common Stock for the
account of persons having demand registration rights under the FSA Registration Rights Agreement that can be sold without
exceeding the Maximum Number of Shares, (ii) second, to the extent the Maximum Number of Shares has not been reached under
the foregoing clause (i), the Registrable Securities as to which registration has been requested by the holders of Registrable
Securities hereunder and the shares of Common Stock, if any, as to which registration has been requested pursuant to the piggy-
back registration rights granted under the LLCP Registration Rights Agreement (to be allocated among the persons requesting
inclusion in such registration pursuant to such agreements pro rata in accordance with the number of shares of Common Stock
with respect to which such person has the right to request such inclusion under such agreements,
5
regardless of the number of shares which such person has actually requested be included in such registration) that can be sold
without exceeding the Maximum Number of Shares, (iii) third, to the extent the Maximum Number of Shares has not been
reached under the foregoing clauses (i) and (ii), the shares of Common Stock, if any, that the Company desires to sell that can be
sold without exceeding the Maximum Number of Shares and (iv) fourth, to the extent the Maximum Number of Shares has not
been reached under the foregoing clauses (i), (ii) and (iii), the shares of Common Stock, if any, which other shareholders desire to
sell that can be sold without exceeding the Maximum Number of Shares.
(c) Withdrawal. Any holder of Registrable Securities may elect
to withdraw such holder's request for inclusion of Registrable Securities in any Piggy-Back Registration by giving written notice
to the Company of such request to withdraw prior to the effectiveness of the registration statement. The Company may also elect
to withdraw a registration statement at any time prior to the effectiveness of the registration statement. Notwithstanding any such
withdrawal, the Company shall pay all expenses incurred by the holders of Registrable Securities in connection with such Piggy-
Back Registration as provided in Section 3.3.
2.3 Registrations on Form S-3. The holders of Registrable Securities may at any time request in writing that the Company
register the resale of any or all of such Registrable Securities on Form S-3 (or any similar short-form registration which may be
available at such time). Upon receipt of such written request, the Company will promptly give written notice of the proposed
registration to all other holders of Registrable Securities, and, as soon as practicable thereafter, effect the registration of all or such
portion of such holder's or holders' Registrable Securities as are specified in such request, together with all or such portion of the
Registrable Securities of any other holder or holders joining in such request as are specified in a written request given within 15
days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect
any such registration pursuant to this Section 2.3 if (i) Form S-3 is not available for such offering; (ii) the holders propose to effect
an underwritten offering, (iii) the holders propose to sell Registrable Securities at an anticipated aggregate price to the public (net
of any underwriters' discounts or commissions) of less than $500,000, (iv) the Company shall furnish to the holders a certificate
signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board, it would be materially
detrimental to the Company and its shareholders for such Form S-3 registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 60 days after
receipt of the request of the holder or holders under this Section 2.3, provided, however, that in the event the Company elects to
exercise such right with respect to any registration, it shall not have the right to exercise such right again prior to the date which is
ten months after the date on which the registration statement relating to such deferred registration is declared effective, (v) the
Company has effected eight registrations pursuant to this Section 2.3 or (vi) the Company has effected two registrations pursuant
to this Section 2.3 during the 12 month period prior to the date on which the registration statement relating to such registration is
anticipated to be declared effective. The Company shall use its best efforts to maintain each registration statement under this
Section 2.3 effective for 60 days or until the Registrable Securities covered thereby have been sold, whichever shall first occur.
Registrations effected pursuant to this Section 2.3 shall not be counted as Demand Registrations effected pursuant to Section 2.1.
2.4 Purchase (and Exercise) of the SFSC Warrant by the Underwriters. Notwithstanding any other provision of this
Agreement to the contrary, in connection with any Demand Registration or Piggy-Back Registration which is to be an
underwritten offering, to the extent all or any portion of the Registrable Securities to be included in such registration consist of
shares of Common Stock issuable upon exercise of the SFSC Warrant or any portion thereof, the holders of such Registrable
Securities may require that the Underwriter or Underwriters purchase (and exercise) the SFSC Warrant or any portion thereof
rather than require the holders of the Registrable Securities to exercise the SFSC Warrant or portion thereof in connection with
such registration unless the Underwriters inform such holders that such a purchase and exercise of the SFSC Warrant will
materially and adversely affect the proposed offering. The Company shall take all such action and provide all such assistance as
may be reasonably requested by the holders of Registrable Securities to facilitate any such purchase (and exercise) of the SFSC
Warrant agreed to by the Underwriter or Underwriters, including, without limitation, issuing the Common Stock issuable upon the
exercise of the SFSC Warrant or any portion thereof to be issued within such time period as will permit the Underwriters to make
and complete the distribution contemplated by the underwriting.
3.
REGISTRATION PROCEDURES.
6
3.1 Filings; Information. If and whenever the Company is required to effect the registration of any Registrable Securities
under the 1933 Act pursuant to Section 2, the Company shall use its best efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition thereof as expeditiously as practicable, and in
connection with any such request:
(a) Filing Registration Statement. The Company shall, as
expeditiously as possible, prepare and file, within 60 days after receipt of a request for a Demand Registration pursuant to Section
2.1, with the Commission a registration statement on any form for which the Company then qualifies or which counsel for the
Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered
thereunder in accordance with the intended method of distribution thereof, and shall use its best efforts to cause such registration
statement to become and remain effective for the period required by Section 3.1(c); provided, however, that the Company shall
have the right to defer such registration for up to 60 days if the Company shall furnish to the holders a certificate signed by the
Chief Executive Officer of the Company stating that, in the good faith judgment of the Board, it would be materially detrimental
to the Company and its shareholders for such registration statement to be effected at such time; provided further, that in the event
the Company elects to exercise such right with respect to any registration, it shall not have the right to exercise such right again
prior to the date which is 12 months after the date on which the registration statement relating to such deferred registration is
declared effective.
(b) Copies. The Company shall, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish without charge to the holders of Registrable Securities
included in such registration, and such holders' legal counsel, copies of such registration statement as proposed to be filed, each
amendment and supplement to such registration statement (in each case including all exhibits thereto and documents incorporated
by reference therein), the prospectus included in such registration statement (including each preliminary prospectus), and such
other documents as the holders of Registrable Securities included in such registration or legal counsel for any such holder may
request in order to facilitate the disposition of the Registrable Securities owned by such holders.
(c) Amendments and Supplements. The Company shall prepare and
file with the Commission such amendments, including post-effective amendments, and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and in
compliance with the provisions of the 1933 Act until all Registrable Securities and other securities covered by such registration
statement have been disposed of in accordance with the intended methods of disposition set forth in such registration statement
(which period shall not exceed the sum of 120 days plus any period during which any such disposition is interfered with by any
stop order, injunction or other order or requirement of the Commission or any governmental agency or court) or such securities
have been withdrawn.
(d) Notification. After the filing of the registration
statement, the Company shall promptly, and in no event more than two Business Days, notify the holders of Registrable Securities
included in such registration statement, and confirm such advice in writing, (i) when such registration statement becomes
effective, (ii) when any post-effective amendment to such registration statement becomes effective, (iii) of any stop order issued
or threatened by the Commission (and the Company shall take all actions required to prevent the entry of such stop order or to
remove it if entered) and (iv) of any request by the Commission for any amendment or supplement to such registration statement
or any prospectus relating thereto or for additional information or of the occurrence of an event requiring the preparation of a
supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the securities covered by such
registration statement, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not misleading and promptly make available to the
holders of Registrable Securities included in such registration statement any such supplement or amendment; except that before
filing with the Commission a registration statement or prospectus or any amendment or supplement thereto, including documents
incorporated by reference, the Company shall furnish to the holders of Registrable Securities included in such registration
statement and to the legal counsel for any such holders, copies of all such documents proposed to be filed sufficiently in advance
of filing to provide such holders and legal counsel with a reasonable opportunity to review such documents and comment thereon,
and the Company shall not file any registration statement or prospectus or amendment or supplement
7
thereto, including documents incorporated by reference to which such holders or legal counsel, shall object on a timely basis in
light of the requirements of the 1933 Act or any other applicable laws and regulations.
(e) State Securities Laws Compliance. The Company shall use its
best efforts to (i) register or qualify the Registrable Securities covered by the registration statement under such securities or blue
sky laws of such jurisdictions in the United States as the holders of Registrable Securities included in such registration statement
(in light of their intended plan of distribution) may request and (ii) cause such Registrable Securities covered by the registration
statement to be registered with or approved by such other governmental agencies or authorities in the United States as may be
necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be necessary
or advisable to enable the holders of Registrable Securities included in such registration statement to consummate the disposition
of such Registrable Securities in such jurisdictions; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (e), or
subject itself to taxation in any such jurisdiction.
(f) Agreements for Disposition. The Company shall enter into
customary agreements (including, if applicable, an underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. The representations, warranties
and covenants of the Company in any underwriting agreement which are made to or for the benefit of any Underwriters shall also
be made to and for the benefit of the holders of Registrable Securities included in such registration statement. No holder of
Registrable Securities included in such registration statement shall be required to make any representations or warranties in the
underwriting agreement except, if applicable, with respect to such holder's organization, good standing, authority, title to
Registrable Securities, lack of conflict of such sale with such holder's material agreements and organizational documents, and with
respect to written information relating to such holder that such holder has furnished in writing expressly for inclusion in such
registration statement.
(g) Cooperation. The Chief Executive Officer, the President of
the Company, the Chief Financial Officer of the Company, any Senior Vice President of the Company and any other members of
the management of the Company shall cooperate fully in any offering of Registrable Securities hereunder, which cooperation shall
include, without limitation, the preparation of the registration statement with respect to such offering and all other offering
materials and related documents, and participation in meetings with Underwriters, attorneys, accountants and potential investors.
(h) Records. The Company shall make available for inspection by
the holders of Registrable Securities included in such registration statement, any Underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other professional retained by any holder of Registrable
Securities included in such registration statement or any Underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, as shall be necessary to enable them to exercise their due diligence responsibility, and
cause the Company's officers, directors and employees to supply all information requested by any of them in connection with such
registration statement.
(i) Opinions and Comfort Letters. The Company shall furnish to
each holder of Registrable Securities included in any registration statement a signed counterpart, addressed to such holder, of (i)
any opinion of counsel to the Company delivered to any Underwriter and (ii) any comfort letter from the Company's independent
public accountants delivered to any Underwriter. In the event no legal opinion is delivered to any Underwriter, the Company shall
furnish to each holder of Registrable Securities included in such registration statement, at any time that such holder elects to use a
prospectus, an opinion of counsel to the Company to the effect that the registration statement containing such prospectus has been
declared effective and that no stop order is in effect.
(j) Earnings Statement. The Company shall comply with all
applicable rules and regulations of the Commission and the 1933 Act, and make available to its shareholders, as soon as
practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158
thereunder.
8
(k) Listing. The Company shall use its best efforts to cause all
Registrable Securities included in any registration to be listed on such exchanges or otherwise designated for trading in the same
manner as similar securities issued by the Company are then listed or designated or, if no such similar securities are then listed or
designated, in a manner satisfactory to the holders of a majority of the Registrable Securities included in such registration.
3.2 Obligation to Suspend Distribution. Upon receipt of any notice from the Company of the happening of any event of the
kind described in Section 3.1(d)(iv), each holder of Registrable Securities included in any registration shall immediately
discontinue disposition of such Registrable Securities pursuant to the registration statement covering such Registrable Securities
until such holder receives the supplemented or amended prospectus contemplated by Section 3.1(d)(iv), and, if so directed by the
Company, each such holder will deliver to the Company all copies, other than permanent file copies then in such holder's
possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice.
3.3 Registration Expenses. The Company shall pay all expenses incurred in connection with any Demand Registration
pursuant to Section 2.1 and any Piggy-Back Registration pursuant to Section 2.2, and all expenses incurred in performing or
complying with the Company's obligations under this Section 3, whether or not the registration statement becomes effective, in
each case including, but not limited to: (i) all registration and filing fees; (ii) fees and expenses of compliance with securities or
blue sky laws (including fees and disbursements of counsel in connection with blue sky qualifications of the Registrable
Securities); (iii) printing expenses; (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of
its officers and employees); (v) the fees and expenses incurred in connection with the listing of the Registrable Securities as
required by Section 3.1(k); (vi) National Association of Securities Dealers, Inc. fees; (vii) fees and disbursements of counsel for
the Company and fees and expenses for independent certified public accountants retained by the Company (including the expenses
or costs associated with the delivery of any opinions or comfort letters requested pursuant to Section 3.1(i); (viii) the fees and
expenses of any special experts retained by the Company in connection with such registration; (ix) one-half of the cost for selling
stockholder errors and omissions insurance for the benefit of the holders of Registrable Securities included in such registration
which the holders of a majority of such Registrable Securities may elect to purchase (with the other one-half of such cost to be
paid by the holders of Registrable Securities included in such registration, pro rata in accordance with the number of shares
included in such registration), and (x) all fees and expenses incurred by the holders of Registrable Securities included in such
registration statement in connection with its participation in such registration, including, without limitation, the fees and expenses
of such holders' legal counsel, accountants and other experts. The Company shall have no obligation to pay any underwriting fees,
discounts or selling commissions attributable to the Registrable Securities being sold by holders of Registrable Securities, which
expenses shall be borne by such holders.
3.4 Information. The holders of Registrable Securities shall provide such information as reasonably requested by the
Company in connection with the preparation of any registration statement, including amendments and supplements thereto, in
order to effect the registration of any Registrable Securities under the 1933 Act pursuant to Sections 2.
4.
INDEMNIFICATION AND CONTRIBUTION.
4.1 Indemnification by the Company. The Company agrees to indemnify and hold harmless (i) each of the Stanwich Parties
and each holder of Registrable Securities and (ii) the respective officers, employees, affiliates, directors, partners, members and
agents of, and each person, if any, who controls, Stanwich or any holder of Registrable Securities within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act (each, a "Stanwich Indemnified Party"), from and against any loss, claim,
damage or liability and any action in respect thereof to which any Stanwich Indemnified Party may become subject under the
1933 Act or the 1934 Act or any other statute or common law, insofar as such loss, claim, damage, liability or action arises out of,
or is based upon, (a) any untrue statement or alleged untrue statement of a material fact made in connection with the sale of
Registrable Securities or shares of Common Stock, whether or not such statement is contained or incorporated by reference in any
registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus, (b) any omission or alleged omission to state a
material fact required to be stated in any registration statement or prospectus or necessary to make the statements therein not
misleading, or (c) any violation by the
9
Company of any Federal, state or common law, rule or regulation applicable to the Company and relating to action required of or
inaction by the Company in connection with such registration. The Company also shall promptly, but in no event more than ten
Business Days after request for payment, pay directly or reimburse each Stanwich Indemnified Party for any legal and other
expenses incurred by such Stanwich Indemnified Party in investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action. The Company also shall indemnify any Underwriter of the Registrable Securities, their officers,
affiliates, directors, partners, members and agents and each person who controls such Underwriters on substantially the same basis
as that of the indemnification provided above in this Section 4.1.
The indemnity agreement contained in this Section 4.1 shall not apply to amounts paid in settlement of any such loss,
claim, damage or liability or any action in respect thereof if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be liable to any holder of Registrable Securities
included in any registration for any loss, claim, damage, liability or any action in respect thereof to the extent that it arises solely
from or is based solely upon and is in conformity with information related to such holder furnished in writing by such holder
expressly for use in connection with such registration, nor shall the Company be liable to any holder of Registrable Securities
included in any registration for any loss, claim, damage or liability or any action in respect thereof to the extent it arises solely
from or is based solely upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration
statement or prospectus relating to the Registrable Securities delivered in writing by such holder after the Company had provided
written notice to such holder that such registration statement or prospectus contained such untrue statement or alleged untrue
statement of a material fact, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading after the Company had provided written notice to such holder that such
registration statement or prospectus contained such omission or alleged omission.
4.2 Indemnification by Holders of Registrable Securities. Each holder of Registrable Securities shall indemnify and hold
harmless the Company, its officers, directors, partners, members and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity
from the Company to such holder, but solely with reference to information related to such holder furnished in writing by such
holder expressly for use in any registration statement or prospectus relating to Registrable Securities of such holder included in
any registration, or any amendment or supplement thereto, or any preliminary prospectus. Each holder of Registrable Securities
included in any registration hereunder shall also indemnify and hold harmless any Underwriter of such holder's Registrable
Securities, their officers, directors, partners, members and agents and each person who controls such Underwriters on substantially
the same basis as that of the indemnification of the Company provided in this Section 4.2; provided, however, that in no event
shall any indemnity obligation under this Section 4.2 exceed the dollar amount of the net proceeds (after payment of any
underwriting fees, discounts or commissions) actually received by such holder from the sale of Registrable Securities which gave
rise to such indemnification obligation under such registration statement or prospectus.
4.3 Conduct of Indemnification Proceedings. Promptly after receipt by any person of any notice of any loss, claim, damage
or liability or any action in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2, such person (the
"Indemnified Party") shall, if a claim in respect thereof is to be made against any other person for indemnification hereunder,
notify such other person (the "Indemnifying Party") in writing of the loss, claim damage, liability or action; provided, however,
that the failure by the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any
liability which the Indemnifying Party may have to such Indemnified Party hereunder, except to the extent the Indemnifying Party
is actually prejudiced by such failure. If the Indemnified Party is seeking indemnification with respect to any claim or action
brought against the Indemnified Party, then the Indemnifying Party shall be entitled to participate in such claim or action, and, to
the extent that it wishes, jointly with all other Indemnifying Parties, to assume the defense thereof with counsel satisfactory to the
Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such
claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided,
however, that in any action in which both the Indemnified Party and the Indemnifying Party are named as defendants, the
Indemnified Party shall have the right to employ separate counsel (but no more than one such separate counsel) to represent the
Indemnified Party and its controlling persons
10
who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party
against the Indemnifying Party, with the fees and expenses of such counsel to be paid by such Indemnifying Party if, based upon
the written opinion of counsel of such Indemnified Party, representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, consent to entry of judgment or effect any settlement of any claim or pending or threatened
proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such judgment or settlement includes an unconditional release of such Indemnified
Party from all liability arising out of such claim or proceeding.
4.4 Contribution. If the indemnification provided for in the foregoing Sections 4.1, 4.2 and 4.3 is unavailable to any
Indemnified Party in respect of any loss, claim, damage, liability or action referred to herein, then each such Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the
Indemnified Parties and the Indemnifying Parties in connection with the actions or omissions which resulted in such loss, claim,
damage, liability or action, as well as any other relevant equitable considerations. The relative fault of any Indemnified Party and
any Indemnifying Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Indemnified
Party or such Indemnifying Party and the parties' relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined
by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to
in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of any loss, claim,
damage, liability or action referred to in the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this Section 4.4, no holder of Registrable Securities shall be
required to contribute any amount in excess of the dollar amount of the net proceeds (after payment of any underwriting fees,
discounts or commissions) actually received by such holder from the sale of Registrable Securities which gave rise to such
contribution obligation. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act)
shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
50
UNDERWRITING AND DISTRIBUTION.
5.1 Rule 144. The Company covenants that it shall file any reports required to be filed by it under the 1933 Act and the
1934 Act and shall take such further action as the holders of Registrable Securities may reasonably request, all to the extent
required from time to time to enable such holders to sell Registrable Securities without registration under the 1933 Act within the
limitation of the exemptions provided by Rule 144 or Rule 144A under the 1933 Act, as such Rules may be amended from time to
time, or any similar Rule or regulation hereafter adopted by the Commission.
5.2 Restrictions on Sale by the Company and Others. The Company agrees (i) not to effect any sale or distribution of any
securities similar to those being registered in accordance with Section 2.1, or any securities convertible into or exchangeable or
exercisable for such securities, during the 90 days prior to, and during the 120-day period beginning on, the effective date of any
Demand Registration (except as part of such Demand Registration to the extent permitted by Section 2.1(d)); and (ii) that any
agreement entered into after the date hereof pursuant to which the Company issues or agrees to issue any privately placed
securities shall contain a provision under which holders of such securities agree not to effect any sale or distribution of any such
securities during the periods described in (i) above, in each case including a sale pursuant to Rule 144 or 144A under the 1933 Act
(except as part of any such registration, if permitted); provided, however, that the provisions of this Section 5.2 shall not prevent
the conversion or exchange of any securities pursuant to their terms into or for other securities and shall not prevent the issuance
of securities by the Company under any employee benefit, stock option or stock subscription plans.
11
60
MISCELLANEOUS.
6.1 Other Registration Rights. The Company represents and warrants that, except as provided in the LLCP Registration
Rights Agreement, no person has any right to require the Company to register any shares of the Company's capital stock for sale
or to include shares of the Company's capital stock in any registration filed by the Company for the sale of shares of capital stock
for its own account or for the account of any other person. From and after the date of this Agreement, the Company shall not,
without the prior written consent of the holders of a majority of the Registrable Securities, (i) enter into any agreement granting
any demand registration right (i.e., the right to require the Company to register the sale of any shares of the Company's capital
stock) other than demand registration rights under the FSA Registration Rights Agreement, (ii) enter into any agreement granting
any piggy-back registration right (i.e., the right to require the Company to register the sale of any shares of the Company's capital
stock in any registration filed by the Company for the sale of shares of capital stock for its own account or for the account of any
other person) which is inconsistent with, equal to (except pursuant to the FSA Registration Rights Agreement) or superior to any
registration rights granted to hereunder, or (iii) amend the LLCP Registration Rights Agreement (or enter into or amend the FSA
Registration Rights Agreement at any time) so as to cause the registration rights granted therein to be inconsistent with, equal to or
superior to the rights granted to the holders of Registrable Securities hereunder or to otherwise adversely affect the registration
rights granted to the holders of Registrable Securities hereunder.
6.2 Successors and Assigns. The rights and obligations of the Stanwich Parties under this Agreement shall be freely
assignable in whole or in part. Each such assignee, by accepting such assignment of the rights of the assignor hereunder shall be
deemed to have agreed to and be bound by the obligations of the assignor hereunder. The rights and obligations of the Company
hereunder may not be assigned.
6.3 Notices. All notices, requests, demands and other communications which are required or may be given under this
Agreement shall be in writing and shall be deemed to have been duly given if transmitted by telecopier with receipt
acknowledged, or upon delivery, if delivered personally or by recognized commercial courier with receipt acknowledged, or upon
the expiration of 72 hours after mailing, if mailed by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Stanwich:
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Attention: President
Telephone: (203) 325-0551
(203) 967-3923
Facsimile:
If to Poole:
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Telephone: (203) 325-0551
(203) 967-3923
Facsimile:
If to any assignee of either of the Stanwich Parties:
Company.
At such assignee's address as shown on the books of the
12
If to the Company:
Consumer Portfolio Services, Inc.
16355 Laguna Canyon Road
Irvine, CA 92618
Attention: Charles E. Bradley, Jr., President
and Chief Executive Officer
Telephone: (949) 753-6800
Facsimile: (949) 753-6805
or at such other address or addresses as Stanwich, Poole, such assignee or the Company, as the case may be, may specify by
written notice given in accordance with this Section.
6.4 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
6.5 Counterpart. This Agreement may be executed in two or more counterparts, each of which shall be an original, but all
of which together shall constitute one instrument.
6.6 Descriptive Headings, Construction and Interpretation. The descriptive headings of the several paragraphs of this
Agreement are for convenience of reference only and do not constitute a part of this Agreement and are not to be considered in
construing or interpreting this Agreement. All section, preamble, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions
of this Agreement, and all provisions of this Agreement shall be construed in accordance with their fair meaning, and not strictly
for or against any party.
6.7 Waivers and Amendments. Neither this Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally or by course of dealing, except by a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
6.8 Remedies. In the event that the Company fails to observe or perform any covenant or agreement to be observed or
performed under this Agreement, either of the Stanwich Parties or any other holder of Registrable Securities may proceed to
protect and enforce its rights by suit in equity or action at law, whether for specific performance of any term contained in this
Agreement or for an injunction against the breach of any such term or in aid of the exercise of any power granted in this
Agreement or to enforce any other legal or equitable right, or to take any one or more of such actions. The Company agrees to pay
all fees, costs, and expenses, including without limitation, fees and expenses of attorneys, accountants and other experts, and all
fees, costs and expenses of appeals, incurred by either of the Stanwich Parties or any other holder of Registrable Securities in
connection with the enforcement of this Agreement or the collection or any sums due hereunder, whether or not suit is
commenced. None of the rights, powers or remedies conferred under this Agreement shall be mutually exclusive, and each such
right, power or remedy shall be cumulative and in addition to any other right, power or remedy whether conferred by this
Agreement or now or hereafter available at law, in equity, by statute or otherwise.
6.9 Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the
rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the
State of California applicable to contracts made and performed in such state, without regard to principles thereof regarding
conflicts of laws.
6.10 Termination of Prior Registration Rights Agreements. This Agreement supersedes and replaces the Old Registration
Rights (as such term is defined in the Restructure Agreement) relating to or covering the Shares.
70 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
COMMERCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
13
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS
TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, AND
UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO, THIS AGREEMENT, THE PURCHASE AGREEMENT AND/OR ANY RELATED AGREEMENT
OR THE TRANSACTIONS COMPLETED HEREBY OR THEREBY.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
14
IN WITNESS WHEREOF, the parties have caused this Consolidated Registration Rights Agreement to be executed and
delivered by their duly authorized representatives as of the date first above written.
THE COMPANY:
STANWICH:
CONSUMER PORTFOLIO SERVICES,
INC., a California corporation
a Rhode Island Corporation
STANWICH FINANCIAL SERVICES CORP.,
By:_______________________________
Charles E. Bradley, Jr.,
President President and Chief
Executive Officer
By:_________________________________
Charles E. Bradley, Sr.
POOLE:
By:_______________________________
Jeffrey P. Fritz,
Senior Vice President and Chief
Financial Officer
John G. Poole
____________________________________
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Consumer Portfolio Services, Inc.:
We consent to incorporation by reference in the registration statements (Nos. 33-77314, 333-00880) on Form S-3 and the
registration statements (Nos. 33-78680 and 33-80327) on Form S-8 of Consumer Portfolio Services, Inc. of our report dated
March 3, 1999, except as to notes 13, 16 and 17 to the consolidated financial statements, which are as of April 15, 1999 relating
to the consolidated balance sheets of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period
ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Consumer Portfolio
Services, Inc.
KPMG LLP
Orange County, California
April 15, 1999