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, 1999
[ ] 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 March 28, 2000 (based on the $1.875 per share closing price on the Nasdaq Stock Market on that
date) of the voting stock beneficially held by non-affiliates of the registrant was $25,788,048. The number of shares of the
registrant's Common Stock outstanding on March 28, 2000, was 20,211,001.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for its 2000 annual meeting of shareholders is incorporated by reference into Part III of this
report.
PART I
ITEM 1. BUSINESS
General
Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries, the "Company") is a consumer finance company
specializing in the business of purchasing, selling and servicing retail automobile installment contracts ("Contracts") originated by
licensed motor vehicle dealers ("Dealers") in the sale of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides indirect financing to Dealer customers with limited credit histories, low incomes or past credit
problems ("Sub-Prime Customers"). The Company serves as an alternative source of financing for Dealers, allowing sales to
customers who otherwise might not be able to obtain financing. The Company does not lend money directly to consumers. Rather,
it purchases installment Contracts from Dealers.
CPS was incorporated and began its operations in 1991. From inception through December 31, 1999 the Company has purchased
approximately $2.8 billion of Contracts, and as of December 31, 1999, had an outstanding servicing portfolio of approximately
$821.0 million. The Company makes the decision to purchase Contracts exclusively from its headquarters location. It obtains the
funds for such purchases by reselling such Contracts on a daily basis to unaffiliated parties. The Company services the Contracts
from two regional centers, one in its California headquarters, and the other in Virginia.
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 sustains a higher level of credit losses than
traditional automobile financing sources since the Company provides financing in a relatively high risk market.
Marketing
The Company directs its marketing efforts to Dealers, rather than to consumers. As of December 31, 1999, the Company was a
party to its standard form dealer agreements ("Dealer Agreements") with 3,489 Dealers. Approximately 95% 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, 1999, approximately 85% of the Contracts purchased by the Company consisted of financing for used cars and the
remaining 15% for new cars, as compared to 92% new and 8% used in the year ended December 31, 1998.
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, 1999, the Company had 42 representatives, 39 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
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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.
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, 1999, 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, 1999 and December 31, 1998:
Contracts Purchased During The Year Ended
-------------------------------------------------------------------
December 31, 1999 December 31, 1998
---------------------------- ----------------------------
Number Percent Number Percent
------ ------- ------ -------
California 4,446 15.2% 13,960 16.7%
Texas 2,383 8.2% 5,193 6.2%
Pennsylvania 2,336 8.0% 4,239 5.1%
North Carolina 2,298 7.9% 5,304 6.3%
Alabama 1,942 6.6% 4,707 5.6%
Michigan 1,915 6.6% 4,119 4.9%
Florida 1,856 6.3% 5,832 7.0%
Louisiana 1,728 5.9% 4,355 5.2%
Hawaii 1,037 3.5% 1,585 1.9%
New York 928 3.2% 2,690 3.2%
South Carolina 884 3.0% 2,152 2.6%
Washington 771 2.6% 1,436 1.7%
Maryland 733 2.5% 1,859 2.2%
Illinois 615 2.1% 3,808 4.6%
Ohio 629 2.1% 1,768 2.1%
Other States 4,766 16.3% 20,560 24.7%
======== ========
Total 29,267 83,567
======== ========
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 on 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
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the Dealer and the customer, the Dealer sells the Contract to the Company. The Company currently sells all Contracts that it
purchases, and plans to hold Contracts for its own account in the future. In either case, the customer then receives monthly billing
statements.
The Company purchases Contracts from Dealers at a price generally equal to the total amount financed under the Contracts,
reduced by 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. For the years ended December 31, 1999, 1998 and 1997, the
average amount charged per Contract purchased was $336, $418 and $438, respectively, or 2.32%, 3.24% 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 1999 and 1998, respectively, the Company purchased 2,161 and 1,583 of
these Contracts, representing approximately 7.4% and 1.9% of all Contracts purchased. The average fee paid to Dealers on these
Contracts was $568 and $531, respectively.
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.
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's 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.
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Credit Scoring. Since November 1996 the Company has used 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 customer's 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 improving its allocation of credit evaluation resources, and managing the risk inherent in the sub-prime market.
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, 1999 was approximately $14,513 with an average original term of approximately 61 months and an average down
payment of 13.2%. Based on information contained in customer applications, for this twelve-month period, the retail purchase
price of the related automobiles averaged $14,716 (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 years, and the Company's
average customer at the time of purchase was approximately 37 years old, with approximately $35,009 in average annual
household income and an average of 4.9 years' history with his or her current employer.
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
5
with the customer to obtain timely payments; repossessing and liquidating 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 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 automobile auctions, which are attended
principally by 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, 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
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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.
Credit Experience
The Company's financial results are dependent on the performance of the Contracts in which it retains an ownership interest. The
tables below document the delinquency, repossession and net credit loss experience of all Contracts that the Company was
servicing as of the respective dates shown.
DELINQUENCY EXPERIENCE (1)
December 31, 1999 December 31, 1998 December 31, 1997
----------------------- ----------------------- -----------------------
Number Number Number
Of of Of
Contracts Amount Contracts Amount Contracts Amount
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Gross servicing portfolio (1) ...................... 92,388 $ 868,797 141,396 $1,674,417 83,414 $1,031,573
Period of delinquency (2)
31-60 days ......................................... 2,781 26,204 4,202 48,324 3,092 36,609
61-90 days ......................................... 1,130 11,226 1,869 22,335 1,243 15,303
91+ days ........................................... 652 6,997 1,694 20,096 1,393 17,869
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies(2) ............................. 4,563 44,427 7,765 90,755 5,728 69,781
Amount in repossession (3) ......................... 3,424 28,896 2,961 32,772 1,977 24,463
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies and amount in repossession (2) . 7,987 $ 73,323 10,726 $ 123,527 7,705 $ 94,244
========== ========== ========== ========== ========== ==========
Delinquencies as a percent of gross
servicing portfolio ................................ 4.9% 5.1% 5.5% 5.4% 6.9% 6.8%
Total delinquencies and amount in repossession as a
percent of gross servicing portfolio ............... 8.7% 8.4% 7.6% 7.4% 9.2% 9.1%
(1)
(2)
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.
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)
1999 1998 1997
------------ ------------ ------------
Average servicing portfolio outstanding .......... $ 1,223,238 $ 1,300,519 $ 703,100
Net charge-offs as a percent of
average servicing portfolio (2) (3) .............. 9.2% 6.5% 5.9%
(1)
(2)
(3)
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 serviced by the Company.
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).
The increase in net charge-offs as a percent of the average servicing
portfolio is due to the decrease in the servicing portfolio combined
with an increase in total charge-offs for the year ended December 31,
1999, compared to the prior year. The increase in charge-offs is due to
the seasoning of those Contracts securitized during 1998.
Flow Purchase Program
From May 1999 through the date of this report, the Company has purchased Contracts only for immediate and outright resale to
non-affiliated third parties. The Company sells such Contracts for a mark-up above what the Company pays the Dealer. In such
sales, the Company makes certain representations and warranties to the purchasers, normal in the industry, which relate primarily
to the legality of the sale of the underlying motor vehicle and to the validity of the security interest that is being conveyed to the
purchaser. These representations and warranties are generally similar to the representations and warranties given by the
originating Dealer to the Company. In the event of a breach of such representations or warranties, the Company may incur
liabilities in favor of the purchaser(s) of the Contracts and there can be no assurance that the Company would be able to recover,
in turn, against the originating Dealer(s).
Liquidation of Non-securitized Portfolio
From June 1994 through November 1998, substantially all Contracts that the Company purchased were sold in securitization
transactions, as described below. In March 1999 the Company learned that it would not be able to close a securitization
transaction for an indefinite period. The Company's "warehouse" lines of credit, under which the Company had drawn funds to
acquire Contracts, by their terms set a limit on how long any Contract could be considered eligible collateral thereunder. Because
the Company was unable to sell Contracts in a securitization transaction, those time limits were exceeded, and the Company fell
into default on those lines of credit. In order to repay the outstanding indebtedness the Company embarked on a program of selling
outright, to non-affiliated third parties, substantially all of such Contracts. A total of approximately $318.0 million of Contracts
were sold from June 1999 through September 1999, yielding sufficient proceeds to repay all of the warehouse indebtedness. All of
such sales were at prices less than the Company's acquisition cost of such Contracts; accordingly, the Company recorded a net loss
in the approximate aggregate amount of $15.2 million on such sales. The Company has no intention or expectation of again selling
quantities of Contracts at less than their acquisition cost.
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Securitization and Sale of Contracts
The Company currently purchases Contracts for immediate and outright resale to non-affiliated third parties. In the past the
Company purchased Contracts with the intention and expectation of reselling them in securitization transactions. The Company
intends to again sell Contracts in securitization transactions, although there can be no assurance that such future transactions will
occur.
In a securitization sale, 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 in a securitization transaction, the Company retains the obligation to service the
Contracts, and receives a monthly fee for doing so. Among other services performed, 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
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 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
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 would be entitled to require the Company to repurchase the Contract relating to such financed vehicle.
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
securitization trusts. The Company does not service Contracts that were acquired in its flow purchase program or that were sold in
its Contract liquidation program. 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 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 trust's security interest in the financed vehicles.
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
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fee and certain other fees, the 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 purchase 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 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 or if the vehicle has been in
repossession inventory for more than 90 days. 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 holders of interests in the trust ("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 Investors bear 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 insurer of certain of the trust's obligations in the event of certain defaults by the
Company and under certain other circumstances. As of December 31, 1999, 7 of the Company's 22 securitized pools had incurred
cumulative losses exceeding certain predetermined levels, which in turn has given the certificate insurer the right to terminate the
Servicing Agreements with respect to all of the pools. To date, the certificate 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.
10
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 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 past or future 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 a 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
11
December 1998, the Company ceased further investments in Samco, and Samco 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.
In May 1996, CPS formed LINC Acceptance Corp. ("LINC"), an 80 percent-owned subsidiary based in Norwalk, Connecticut.
LINC offered the Company's sub-prime auto finance products to credit unions, banks and savings institutions ("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.
During the second quarter of 1999, the Company ceased to provide additional funding to LINC in conjunction with the Company's
plan to reduce the level of Contract purchases and thus to decrease its capital requirements. LINC thereupon ceased its operations.
In November 1999 three former employees of LINC filed an involuntary Chapter 7 (liquidation) bankruptcy petition against
LINC. See "Legal Proceedings." See "Management's Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Employees
As of December 31, 1999, the Company had 523 full-time and 3 part-time employees, of whom 10 are senior management
personnel, 298 are collections personnel, 97 are Contract origination personnel, 47 are marketing personnel (41 of whom are
marketing representatives), 57 are operations and systems personnel, and 37 are administrative 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 $411,703 per year, increasing to
$504,545 over a ten-year term.
ITEM 3. LEGAL PROCEEDINGS
On May 18, 1999, Kevin Gilmore commenced a lawsuit against the Company in the Superior Court of California, San Francisco
County. The lawsuit alleges certain defects in repossession notices used by the Company in the State of California, and seeks
injunctive relief, including "restitution" of an unspecified amount. Similar cases have been filed against most of the major firms
financing motor vehicle purchases in California. Trial in the matter is set for May 2000. The Company plans to contest vigorously
this litigation.
12
On October 29, 1999, three ex-employees of LINC filed an involuntary petition under Chapter 7 of the Bankruptcy Code, naming
LINC as the debtor, and seeking its liquidation. The petition was filed in the U.S. Bankruptcy Court for the District of
Connecticut. Among the allegations made by the petitioners, which may be considered to be asserted against the Company, is that
LINC is entitled to a retained interest in the Contracts sold by LINC in securitizations, and thus to a share of the distributions from
the securitized pools. The Company intends to contest vigorously this matter.
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, beyond reserves already taken.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers follows:
Charles E. Bradley, Jr., 40, 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.
William L. Brummund, Jr., 47, 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, 55, 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, 56, 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, 43, 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.
13
Mark A. Creatura, 40, 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, 57, has been Senior Vice President - Risk Management since May 1999, and was Senior Vice President-
Collections from January 1998 until May 1999. 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.
Kris I. Thomsen, 42, has been Senior Vice President - Systems since June 1999. Previously, Ms. Thomsen had been Vice
President-Systems since the Company's inception in March 1991.
James L. Stock, 34, has been Senior Vice President - Chief Financial Officer of the Company since January 2000. Prior to being
named the Chief Financial Officer, Mr. Stock was the Vice President and Corporate Controller of the Company. From August
1993 to December 1994, Mr. Stock was the assistant controller of Fluid Recycling Services, an industrial fluids management
company based in Santa Ana, California. From July 1990 to August 1993, Mr. Stock was a senior associate with Coopers &
Lybrand.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PART II
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 sales prices reported by Nasdaq for the Common Stock for the periods shown.
High Low
------ -----
January 1-March 31, 1998 ...................... 12.750 8.375
April 1-June 30, 1998 ......................... 15.375 9.875
July 1-September 30, 1998 ..................... 13.500 1.813
October 1-December 31, 1998 ................... 5.750 2.000
January 1-March 31, 1999 ...................... 5.250 2.813
April 1-June 30, 1999 ......................... 4.313 1.031
July 1-September 30, 1999 ..................... 1.813 0.938
October 1-December 31, 1999 ................... 1.875 0.438
As of March 23, 2000, there were 76 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.
14
ITEM 6. SELECTED FINANCIAL DATA
Nine-month
Period Ended
Year ended December 31, December 31,
--------------------------------------------------------- -------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Gain (loss) on sale of Contracts, net ... $(14,844) $ 58,306 $ 35,045 $ 20,565 $ 10,721
Interest income ......................... 3,032 41,841 23,526 19,980 9,220
Servicing fees .......................... 27,761 25,156 14,487 7,893 3,485
Total revenue ........................... 14,805 126,280 75,251 48,438 23,426
Operating expenses ...................... 86,968 81,960 43,292 24,746 10,769
Net income (loss) ....................... (44,532) 25,703 18,532 14,097 7,575
Basic earnings (loss) per share (1) ..... (2.38) 1.67 1.29 1.05 0.65
Diluted net earnings (loss) per share (1) (2.38) 1.50 1.17 0.93 0.52
December 31,
---------------------------------------------------------------- March 31,
1999 1998 1997 1996 1995 1995
-------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Contracts held for sale ............ $ 2,421 $165,582 $ 68,271 $ 21,657 $ 19,549 $ 21,896
Residual interest in securitizations 172,530 217,848 124,616 43,597 30,477 23,201
Total assets ....................... 223,565 431,962 225,895 101,946 77,878 57,975
Total liabilities .................. 139,128 312,881 143,288 44,989 36,397 30,981
Total shareholders' equity ......... 84,437 119,081 82,607 56,957 41,481 26,994
(1)
All prior periods have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
15
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. and its subsidiaries (collectively, the "Company") primarily engage in the business of
purchasing, selling and servicing retail automobile installment sale contracts ("Contracts") originated by automobile dealers
("Dealers") located throughout the United States. In the past, the Company has purchased contracts in as many as 44 different
states. At various times in 1999, the Company suspended its solicitation of Contract purchases in as many as 20 states, and as of
the date of this report is active in 29 states. There can be no assurance as to resumption of Contract purchasing activities in other
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 historically has generated 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.
During the year ended December 31, 1999, and through the date of this report, the Company did not sell any Contracts in
securitization transactions, and therefore recognized no gains on sale. All sales of Contracts were on a servicing released basis
either in the form of bulk sales of Contracts being held by the Company for sale, or as part of a pass through agreement with a
third party for which the Company earned a fee on a per Contract basis. The net loss on sale of Contracts for the year ended
December 31, 1999, was $14.8 million compared to net gains of $58.3 million and $35.0 million for the years ended December
31, 1998 and 1997, respectively. Revenues from interest and servicing fees for the year ended December 31, 1999, were $3.0
million and $27.8 million, respectively. Such revenues for the year ended December 31, 1998, were $41.8 million and $25.2
million, respectively, and for the year ended December 31, 1997, such revenues were $23.5 million and $14.5 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 significant in the past and will continue to be significant
should the Company sell loans in securitization transactions in the future. Net cash provided by operating activities for the year
ended December 31, 1999, was approximately $170,000, compared to net cash used in operating activities for the years ended
December 31, 1998 and 1997, of $71.1 million and $26.1 million, respectively. See "Liquidity and Capital Resources."
The Company has purchased Contracts with the primary intention of reselling them in securitization transactions as asset-backed
securities. From late May 1999 to the present, the Company has purchased Contracts on a flow basis for third parties; that is, the
Company purchases a Contract from a Dealer, and sells the Contract the next day to the third party for the same price the
Company paid. The Company also receives from the third party a fee for its services. The Company retains no interest in such
Contracts, and neither services such Contracts nor earns a servicing fee.
Although the Company has not been able to sell Contracts in a securitization transaction since December 1998, it does plan to
securitize in the future, as to which there can be no assurance. The Company's securitization structure has been 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 a
principal amount equal to the aggregate
16
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. Effective November 3, 1999, as applied to monthly measurement dates from September
1999 onward, the specified levels have 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 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; 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
specified levels. Pursuant to certain Servicing Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to
17
create over-collateralization, that is, to reduce the aggregate principal balance of outstanding Certificates below the aggregate
principal amount of the related automotive receivables. 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.
The annual percentage rate payable on the Contracts is significantly greater than the rates 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. 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 range from 14% to 16.5% cumulatively over the lives of the related
Contracts.
In future periods, the Company could recognize additional revenue from the Residuals if the actual performance of the Contracts
were to be better than originally estimated, or the Company could 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
has established a provision for future losses on the Residuals.
From March 1999 to the present, the Company has been unable to complete a securitization transaction, due to unavailability of
sufficient capital. The above description is included because the Residuals created in past securitizations continue to represent the
Company's largest asset, and because the Company plans again to purchase Contracts for sale in securitization transactions, when
necessary pre-conditions (including availability of capital) are fulfilled.
During the year ended December 31, 1999, the Company has changed its basic system of doing business. Previously, the
Company would acquire Contracts for its own account, borrowing from 88% to 97% of the principal balance of such Contracts
under "warehouse" lines of credit. Periodically (approximately once every quarter) the Company would then sell most or all of the
recently acquired Contracts in a securitization transaction as described above. In such a sale, the Company would retain (1) a
residual ownership interest in the Contracts sold, (2) the obligation to service the Contracts sold, and (3) the right to receive
servicing fees. At the end of March 1999, the Company learned that it would be unable to sell Contracts in securitization
transactions for an indeterminate period. Accordingly, the Company commenced purchasing Contracts for immediate re-sale to a
third party, which third party purchases the Contracts in turn on a daily basis. In this arrangement, the Company retains no
residual interest in the Contracts, has no servicing obligation, and receives no servicing fee. For its services in acquiring Contracts
for purchase, the Company receives a per-Contract fee from the third party.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue. During the year ended December 31, 1999, revenue decreased $111.5 million, or 88.3%, compared to the year ended
December 31, 1998. Gain on sale of Contracts, net, decreased by $73.2 million, or 125.5%, from a $58.3 million gain on sale for
the year ended December 31, 1998, to a $14.8 million loss for the year ended December 31, 1999. The change in gain on sale from
positive to negative is due to the Company selling Contracts only on a servicing released basis and thus not recording any
18
NIR gains during the year, as well as to selling Contracts at a loss. During the year ended December 31, 1999, the Company sold
$318.0 million of Contracts on a servicing released basis, that is, with no residual interest retained, with no servicing obligation,
and with no right to receive a servicing fee. Those sales resulted in a net loss of approximately $15.2 million. Expenses of
approximately $1.1 million were incurred related to previous securitization transactions, including the amortization of a warrant
issued to the Certificate Insurer in November 1998. In addition, the Company sold $241.2 million of Contracts on a flow through
basis and received $6.2 million of fees which have been included as a component of gain on sale of Contracts, net. For the years
ended December 31, 1999 and 1998, $5.3 million and $3.5 million, respectively, of provision for losses on Contracts held for sale
was charged against gain on sale. The increase in the provision for losses on Contracts held for sale is primarily due to the
Company's inability to securitize Contracts during 1999. As a result, Contracts were held for sale for longer periods of time prior
to being sold on a servicing released basis, thus requiring additional loss reserves.
Interest income decreased by $38.8 million, or 92.8%, representing 20.5% of total revenues for the year ended December 31,
1999. The decrease is primarily due to decreases in Contracts held for sale and NIRs during 1999. Beginning in May 1999, the
Company began to purchase Contracts on a flow through basis and thus did not hold any additional Contracts for sale since that
time. Additionally, the Company completed the final sale of Contracts on a servicing released basis, other than those sold on a
flow through basis, on September 1, 1999, leaving approximately $4.6 million of Contracts held for sale at the end of September
and decreasing to $2.4 million by year end. Such a reduction in Contract purchases is expected to cause a reduction in revenues
(both interest and gain on sale) in future periods.
Servicing fees increased by $2.6 million, or 10.4%, and represented 187.5% of total revenue. Servicing fees are composed of base
fees, which are payable at the rate of 2% per annum on the principal balance of the outstanding Contracts in the related trusts, plus
any other fees collected by the Company, such as late fees and returned check fees. The increase in servicing fees is primarily due
to an increase in the fees other than base fees collected during 1999 During the year ended December 31, 1999, the Company
collected $4.9 million of other servicing fees, an increase of 39.7% over other servicing fees collected in the prior year.
Expenses. During the year ended December 31, 1999, operating expenses increased $5.0 million, or 6.1%, compared to the year
ended December 31, 1998. Employee costs increased by $1.0 million, or 3.5%, and represented 34.3% of total operating expenses.
The increase is due to increases in salaries and wage rates. General and administrative expenses decreased by $1.0 million, or
4.9% and represented 22.5% of total operating expenses. The decrease in general and administrative expenses is primarily due to
the decrease in costs associated with purchasing loans such as credit reports. During the year ended December 31, 1999, the
Company purchased $424.7 million of Contracts compared to $1,076.5 million of Contracts purchased in the prior year.
Interest expense increased $5.4 million, or 24.5%, and represented 31.5% of total operating expenses. The increase is due in part
to the interest paid on $25.0 million in subordinated debt securities issued by the Company in November 1998, and $6.5 million of
additional subordinated debt securities issued during the year ended December 31, 1999. In addition, the interest rate on the $25.0
million of subordinated debt issued in November 1998, was increased from 13.5% in 1998 to 14.5% in April of 1999. 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 decreased by $1.5 million or 21.3%, and represented 6.2% of total expenses. The decrease is primarily due to
the decrease in Contracts purchased during the year ended December 31, 1999. 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 $526,000 or 23.2%, and represented 3.2% of total expenses. Depreciation and amortization
expenses increased by $340,000 or 27.1%, and represented 1.8% of total
19
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.
The results for the years ended December 31, 1999, and 1998, include a net operating loss of approximately $150,000 and $1.1
million, respectively, from the Company's subsidiary Samco. For the year ended December 31, 1997, Samco had net earnings of
$1.2 million. During the first quarter of 1999, Samco ceased its operations.
The results for the year ended December 31, 1999, include a net operating loss of $830,380 from the Company's subsidiary LINC.
For the years ended December 31, 1998, and 1997, LINC had net operating losses of $565,333, and $533,222, respectively.
During the second quarter of 1999, LINC ceased its operations.
The results for the years ended December 31, 1999 and 1998, include net earnings of $35,131 and $298,000, respectively, from
the Company's subsidiary CPS Leasing, Inc. For the year ended December 31, 1997, CPS Leasing had a net operating loss of
$88,000. The Company intends to sell CPS Leasing, Inc., during 2000.
The results for the year ended December 31, 1999, include a net operating loss of $2.5 million from the Company's investment in
38% of NAB Asset Corp. The results for the years the years ended December 31, 1998 and 1997, include $52,000 and $849,000,
respectively, in net earnings from the Company's investment in NAB Asset Corp.
The Company's effective tax rate was 38.3% and 42.0%, for the years ended December 31, 1999 and 1998, respectively.
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 that 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 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 77.9%, 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 not exceed $200.0 million per quarter.
Such a reduction in Contract purchases is expected to cause a reduction in revenues (both interest and gain on sale) in future
periods.
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
20
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. 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 Capital
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 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 results for the year ended December 31, 1998, include a net operating loss of $1.1 million from the Company's subsidiary
Samco. For the year ended December 31, 1997, Samco had net earnings of $1.2 million.
The results for the years ended December 31, 1998, and 1997 include net operating losses of $565,333, and $533,222, respectively
from the Company's subsidiary LINC.
The results for the year ended December 31, 1998, include net earnings of $298,000 from the Company's subsidiary CPS Leasing,
Inc. For the year ended December 31, 1997, CPS Leasing, Inc., had a net operating loss of $88,000.
The results for the years ended December 31, 1998 and 1997, include $52,000 and $849,000, respectively, in net earnings 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.
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 have been proceeds from the sales of Contracts, amounts borrowed under its various warehouse lines,
servicing fees on portfolios of Contracts previously sold, proceeds from the sales of Contracts, customer payments of principal
and interest on Contracts held for sale, fees for origination of Contracts, and releases of cash from Spread Accounts. The
Company's primary uses of cash have been the purchases of Contracts, repayment of amounts borrowed under its warehouse lines
and otherwise, 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 has been dependent on its warehouse lines of credit
to purchase Contracts, and on the availability of capital from outside sources in order to finance its continued operations, and to
fund the portion of Contract purchase prices not borrowed under warehouse lines of credit. The Company is not presently party to
any warehouse line of credit, and did not receive any material releases of cash from Spread Accounts from June 1998 through
October 1999. The inability to borrow and the lack of cash releases resulted in a liquidity deficiency, which has been
progressively alleviated since the recommencement of releases of cash from Spread Accounts began in November 1999.
The Company has maintained its Contract purchasing program in the absence of any warehouse line of credit by entering into
flow purchase arrangements. Flow purchases allow the Company to purchase Contracts while maintaining only an immaterial
level of Contracts held for sale. The Company's revenues from flow purchase of Contracts, however, are materially less than may
be received by holding Contracts to maturity or by selling Contracts in securitization transactions.
Net cash provided by operating activities was $170,000 during the year ended December 31, 1999, compared to net cash used in
operating activities of $71.1 million for the year ended December 31, 1998. Net cash released from trusts was $9.7 million,
compared to net cash deposited into Trusts of $83.5 million for the year ended December 31, 1998.
During the year ended December 31, 1999, the Company did not complete a securitization transaction, and therefore, did not use
any cash for initial deposits to Spread Accounts, compared to $45.6 million used during the year ended December 31, 1998. Cash
used for subsequent deposits to Spread Accounts for the year ended December 31, 1999, was $18.4 million, a decrease of $35.7
million, or 66.1%, from cash used for subsequent deposits to Spread Accounts in the year ended December 31, 1998. Cash
released from Spread Accounts for the year ended December 31, 1999, was $28.0 million, an increase of $11.9 million, or 73.9%,
from cash released from Spread Accounts in the year ended December 31, 1998. 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.
Beginning in June 1998, the Company's liquidity was adversely affected by the absence of releases from Spread Accounts. Such
releases did not occur because a number of the Trusts had incurred cumulative net losses as a percentage of the original Contract
balance or average delinquency ratios in excess of the predetermined levels specified in the respective Servicing Agreements.
Accordingly, pursuant to the Servicing Agreements, the specified levels applicable to the Company's Spread Accounts were
increased, in most cases to an unlimited amount. Due to cross collateralization provisions of the Servicing Agreements, the
specified levels have been increased on 16 of the Company's 18 remaining Trusts. Until the November 1999 effectiveness of an
amendment to the Servicing Agreement, described below, no material releases from any of the Spread Accounts were available to
the Company. Upon effectiveness of that amendment, the requisite Spread Account levels in general have been set at 21% of the
outstanding principal balance of the Certificates issued by the related Trusts, with higher percentages applicable to those Trusts
that have amortized to the point that "floor" or minimum levels of credit enhancement are applicable.
22
In addition to requiring higher Spread Account levels, the Servicing Agreements provide the Certificate Insurer with certain other
rights and remedies, some of which have been waived on a monthly basis by the Certificate Insurer with respect to all of the
Trusts. Increased specified levels for the Spread Accounts have been in effect from time to time in the past. As a result of the
increased Spread Account specified levels and cross collateralization provisions, excess cash flows that would otherwise have
been released to the Company instead were retained in the Spread Accounts to bring the balance of those Spread Accounts up to
higher levels. As a result of the increased specified levels applicable to the Spread Accounts, approximately $39.1 million of cash
that would otherwise have been available to the Company had been delayed and retained in the Spread Accounts as of December
31, 1999. A portion of such cash was subsequently released to the Company, as discussed below.
23
Since late May 1999, the Company has purchased Contracts from Dealers without use of warehouse lines of credit, in "flow
purchase" arrangements with third parties. Under the flow purchase arrangements, the Company purchases Contracts from Dealers
and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of Contracts for the Company's own account, has materially
reduced the Company's cash requirements. The Company's plan for meeting its liquidity needs is (1) to increase the quantity of
Contracts that it purchases and sells on a flow basis, thus increasing the fees that it receives in connection with such purchases and
sales, and (2) to continue to receive releases of cash from its Spread Accounts, pursuant to the Amendment, which became
effective on November 3, 1999. There can be no assurance that this plan will be successful.
During the second and third quarters of 1999, the Company sold, on a servicing released basis, $318.0 million of its Contracts held
for sale. The remaining Contracts held for sale represent Contracts that did not meet the criteria for the various sales occurring in
the second and third quarters. The Company's ability to increase the quantity of Contracts that it purchases and sells on a flow
basis will be subject to general competitive conditions and other factors. Although the Company has continued to increase the
amount of Contracts purchased and sold on a flow basis, there can be no assurance that the current level of flow production can be
maintained or increased.
Obtaining releases of cash from the Spread Accounts is dependent on collections from the related Trusts generating sufficient cash
in excess of the amended specified levels. There can be no assurance that collections from the related Trusts will generate cash in
excess of the amended specified levels.
CAPITAL RESOURCES
The acquisition of Contracts for subsequent sale in securitization transactions, and the need to fund Spread Accounts when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on the
rate of the Company's Contract purchases (other than flow purchases), the required level of initial credit enhancement in
securitizations, and the extent to which the Spread Accounts either release cash to the Company or capture cash from collections
on sold Contracts.
In the past, the Company funded the increase in its servicing portfolio through off balance sheet securitization transactions, as
discussed above, and funded 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, 1999, the Company did not complete a securitization transaction,
issued $5.0 million of subordinated debt, sold $318.0 million of Contracts on a servicing released basis, and received $1.5 million
in loans from affiliated parties.
24
The table below documents the Company's history of Contract securitizations, comprising sales to 25 securitization trusts.
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."
25
(2)
(3)
(4)
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.
These Trusts are structured as "owner trusts" rather than as "grantor
trusts".
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+.
As noted above, the absence of any significant releases of cash from Spread Accounts since June 1998 had materially impaired the
Company's ability to meet such capital requirements. To reduce its capital requirements and to meet those requirements, the
Company in November 1998 began 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 and April 1999 issued $25.0 million and $5.0 million, respectively,
of subordinated promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital Partners, L.P. ("LLCP"). The
LLCP Notes are due in 2004, and bear interest at the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company issued warrants to purchase up to 4,450,000
shares of common stock at $0.01 per share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May 1999,
respectively. The effective cost of this new capital represents a material increase in the cost of capital to the Company. As part of
the agreements for issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to purchase an additional
$15.0 million of notes (at least $7.5 million by July 31, 1999, and the remainder by August 31, 1999), and the Company agreed to
sell such notes. The chairman and the president of the Company are the principal shareholders of SFSC, and the Company's
chairman is the chief executive officer of SFSC. The terms of these transactions were subsequently modified, in March 2000, as
discussed below.
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 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. Of the $560.0
million committed, $310.0 million was used in the Company's December 1998 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 2,525,114 shares of the Company's common stock at $3.00 per share, exercisable through the fifth anniversary of the
warrants' issuance. The exercise price of the warrants is subject to certain anti-dilution adjustments.
The amendment agreement mentioned above (the "Amendment") fixes the amount of cash to be retained in the Spread Accounts
for 16 of the Company's 18 remaining securitization Trusts. The amended level is 21% of the outstanding principal balance of the
Certificates issued by such Trusts, computed on a pool by pool basis. The 21% level is subject to adjustment to reflect over
collateralization. Older Trusts may require more than 21% if the Certificate balance has amortized to such a level that "floor" or
minimum levels of credit enhancement are applicable.
In the event of certain defaults by the Company, the specified level applicable to such Spread Accounts could increase to an
unlimited amount, but such defaults are narrowly defined, and the Company does not anticipate suffering such defaults. The
Amendment by its terms is applicable from September 1999 onward, and on November 3, 1999, the necessary signatures and
conditions were satisfied to make the Amendment effective. The Company on November 4, 1999, received its first material
release of cash from the securitized portfolio pursuant to the terms of the Amendment. The releases of cash are expected to
continue and to vary in amount from month to month. There can be no assurance that such releases of cash will continue in the
future.
As a 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 November 1998. In the first quarter of 1999, the Company purchased $158.2 million of Contracts. During
the second quarter of 1999, the Company purchased $59.3 million of Contracts, of which $34.0 million was on a flow basis, as
discussed below. During the third quarter of 1999, the Company purchased $89.6 million of Contracts, all of which was on a flow
basis. During the fourth quarter of 1999, the Company purchased $117.6 million of Contracts, all of which was on a flow basis.
The Company expects to purchase Contracts only on a flow basis in the future until the Company is able to identify appropriate
sources of capital to acquire and hold Contracts for the Company's own account. The reduction in the amount of Contracts
purchased for the Company's own account has materially reduced the Company's capital requirements.
Over the three-year period ended December 31, 1999, 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), $21.5 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 beginning 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
26
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 entered into the Senior
Secured Line, described above. 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. The
$25.0 million of subordinated notes issued in November 1998 carried interest at 13.50% per annum, are due November 2003, and
were issued together with warrants that would have allowed the investor to purchase up to an aggregate of 3,450,000 shares of the
Company's common stock at $3.00 per share. As renegotiated in November 1998, the $5.0 million of related party loans are
subordinated both to the Company's general and secured creditors and also to the LLCP Notes, bear interest at 12.50% per annum,
are due June 2004, and are convertible into an aggregate of 1,666,667 shares of the Company's common stock at $3.00 per share.
A related party also purchased $5.0 million of Company's common stock in July 1998, at $11.275 per share.
The cost of capital increased further in 1999. To meet a portion of its capital requirements, the Company on April 15, 1999, issued
an additional $5.0 million in subordinated notes to LLCP (the "New LLCP Notes"). The New LLCP Notes bear interest at 14.5%
per annum and include new 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 million 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. 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.
During 1999, the Company defaulted on certain lending agreements, as a result of which, the related lenders required the balances
to be paid in full. Such agreements are discussed below:
In November 1998, the Company entered into a warehouse line of credit agreement with General Electric Capital Corporation (the
"GECC Line"). The GECC Line provided for warehouse facility advances up to a maximum of $100 million at a variable interest
rate of LIBOR + 3.75%. The GECC Line by its terms was to expire November 30, 1999. During 1999, the Company defaulted on
the GECC Line agreements and was required to repay all balances owed. During August 1999, all amounts owed under the GECC
Line were repaid and the agreement was terminated.
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 provided for a maximum of $150.0 million of advances to the Company, with interest at a
variable rate 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, renewable for one year with the mutual consent of the Company and First Union Capital Markets. During 1999, the
Company defaulted on the First Union Line agreement and was required to repay the balance outstanding in its entirety. In June
1999, the balance of the First Union Line was repaid in its entirety and the related agreement was terminated.
In December 1996, the Company entered into an overdraft financing facility, with a bank, that provided for maximum borrowings
of $2.0 million. Interest was charged on the outstanding balance at the bank's reference rate 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.
During 1999, the Company defaulted under the overdraft facility and was required to repay the outstanding balance in its entirety.
In November 1999, the remaining balance outstanding under the overdraft facility was repaid in its entirety and the related
agreement was terminated.
In April 1998, the Company established a $33.3 million line of credit (the "Senior Secured Line") with State Street Bank and Trust
Company, Prudential Insurance and an affiliate of Prudential. Borrowings under the Senior Secured Line accrued interest at
LIBOR + 4.0%, and were secured by all of the Company's assets, including its residual interest in securitizations. The lenders
under the Senior Secured Line declared a default in August 1999, and in November 1999 reached an agreement with the Company
under which such lenders agreed to refrain from exercising their remedies occasioned by such default, and under which the
Company and such lenders agreed to a repayment schedule with respect to all indebtedness under the senior secured loan. As part
of the agreement to restructure the repayment schedule of the senior secured loan, the interest rate was increased from LIBOR +
4% to LIBOR + 5%. In March 2000, the Company repaid all amounts owed under the Residual Line.
As of December 31, 1999, the Company's subordinated debt exceeded its consolidated net worth, which excess was an event of
default under the indentures governing the RISRS and PENs. The event of default was cured on March 15, 2000, by the issuance
of senior secured debt in exchange for outstanding subordinated debt.
In August and September 1999, the Company issued to SFSC $1.5 million of related party subordinated debt bearing interest at
14.5% per annum, representing a portion of the commitment of SFSC to purchase subordinated notes. As part of that agreement,
the Company also agreed to issue SFSC warrants to purchase up to 207,000 shares of the Company's common stock at a price of
$0.01 per share. Such warrants have been neither issued nor exercised. The Company's agreement to issue such warrants was
modified in the March 2000 debt restructuring described below.
In March 2000, the Company issued $16.0 million of new senior secured debt to LLCP, and used the proceeds to repay in full all
amounts outstanding under the Senior Secured Line. The new indebtedness bears interest at 12.5% per annum, and matures in
June 2001. The interest rate and maturity of the previously outstanding $30.0 million of indebtedness to LLCP are unchanged, at
14.5% and November 2003, respectively. As additional terms of the restructuring agreement, all prior defaults under the
Company's existing agreements with LLCP were waived or cured, all of the Company's indebtedness to LLCP became senior
secured debt (rather than subordinated debt), LLCP received 103,500 shares of Company common stock, and the Company agreed
with SFSC to reduce by 50% the 207,000 warrants that had been contemplated in connection with SFSC's August and September
1999 investments in the Company.
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 unavailability of
warehouse lines of credit which the Company plans to use to accumulate Contracts for
27
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 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
The Company did not experience any significant problems associated with the Year 2000. All major applications have continued
to function properly with minimal adjustments being made overall.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, fluctuations in interest rates affect 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.
28
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, 1999, and 1998 .................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997 .... F-3
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1999, 1998, and 1997 ...................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 .... F-5
Notes to Consolidated Financial Statements for the years ended December 31, 1999, 1998,
and 1997 .................................................................................. F-7
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 2000 (the "2000 Proxy Statement"). The 2000 Proxy Statement will be filed not later
than April 29, 2000. 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 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the 2000 Proxy Statement.
29
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(1)
3.2 Amended and Restated Bylaws(2)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS")(3)
4.2 First Supplemental Indenture re RISRS(3)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")(4)
4.4 Form of First Supplemental Indenture re PENs(4)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder(5)
10.2 1997 Long-Term Incentive Stock Plan(5)
10.3 Lease Agreement re Chesapeake Collection Facility(6)
10.4 Lease of Headquarters Building(7)
10.5 Partially Convertible Subordinated Note(7)
10.6 Registration Rights Agreement(7)
10.7 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(8)
10.7a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement(9)
10.7b Amendment and Forbearance Agreement(10)
10.8 Pledge and Security Agreement dated as of April 30, 1998, between
the Company and State Street Bank and Trust Company(8)
10.9 Revolving Credit and Term Note dated April 30, 1998(8)
10.10 Subscription Agreement regarding shares issued in July 1998(11)
10.11 Registration Rights Agreement regarding shares issued in July 1998(11)
10.12 Amended and Restated Motor Vehicle Installment Contract Loan and
Security Agreement(9)
10.13 FSA Warrant Agreement dated November 30, 1998(9)
30
10.14 Securities Purchase Agreement dated November 17, 1998(12)
10.14a First Amendment dated as of April 15, 1999, to Securities Purchase
Agreement dated as of November 17, 1998, between the Company and
Levine Leichtman Capital Partners II, L.P. ("LLCP"), (said
Securities Purchase Agreement, as amended, is referred to below as
the "Amended SPA")(13)
10.14b Amended and Restated Securities Purchase Agreement dated as of
March 15, 2000, between the LLCP and the Company(14)
10.15 Senior Subordinated Primary Note dated November 17, 1998(12)
10.15a Senior Subordinated Primary Note in the principal amount of
$25,000,000, as amended and restated pursuant to the Amended SPA(13)
10.16 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998(12)
10.16a Primary Warrant to Purchase 3,115,000 Shares of Common Stock, as
amended and restated pursuant to the Amended SPA(13)
10.17 Investor Rights Agreement dated November 17, 1998(12)
10.17a First Amendment to Investors Rights Agreement, dated as of April
15, 1999(13)
10.18 Waiver Agreement dated as of March 15, 2000, between LLCP and the
Company(14)
10.19 Amended and Restated Investor Rights Agreement dated as of March
15, 2000(14)
10.20 Registration Rights Agreement dated as of November 17, 1998(12)
10.20a First Amendment to Registration Rights Agreement, dated as of April
15, 1999(13)
10.20b Amended and Restated Registration Rights Agreement dated as of
March 15, 2000, between LLCP and the Company(14)
10.21 Subordination Agreement dated as of November 17, 1998 re: Stanwich
Note and Poole Note(9)
10.22 Investment Agreement and Continuing Guaranty, dated as of April 15,
1999(13)
10.23 Termination and Settlement Agreement with Respect to Investment
Agreement and Continuing Guaranty dated as of March 15, 2000(14)
10.24 Consolidated Registration Rights Agreement dated November 17, 1998
re: 1997 Stanwich Notes(9)
10.25 Securities Purchase Agreement dated as of April 15, 1999, between
the Company and LLCP(13)
10.26 Senior Subordinated Note in the principal amount of $5,000,000(13)
10.27 Amended and Restated Secured Senior Note Due 2003 in the principal
amount of $30,000,000(14)
10.28 Secured Senior Note Due 2001 in the principal amount of $16,000,000(14)
10.29 Warrant to Purchase 1,335,000 Shares of Common Stock(13)
10.30 FSA Letter Agreement dated November 17, 1998(9)
10.31 Agreement dated May 29, 1999 for Sale of Contracts on a Flow Basis(15)
10.32 Amendment to Master Spread Account Agreement (filed herewith)
21.1 Subsidiaries of the Company(9)
23.1 Consent of independent auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
31
Each exhibit marked above with a number enclosed in parentheses is incorporated in this report by reference. The reference is to
the report filed by or with respect to Consumer Portfolio Services, Inc. as specified below:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Form 10-KSB dated December 31, 1995
Form 10-K dated December 31, 1997
Form 8-K filed December 26, 1995
Form S-3, no. 333-21289
Form 10-KSB dated March 31, 1994
Form 10-K dated December 31, 1996
Form 10-Q dated September 30, 1997
Form 10-Q dated March 31, 1998
Form 10-K dated December 31, 1998
Form 10-Q dated September 30, 1999
Form 10-Q dated June 30, 1998
Schedule 13D filed November 25, 1988
Schedule 13D filed on April 21, 1999
Schedule 13D filed on March 24, 2000
Form 10-Q dated June 30, 1999
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1999, the Company filed no reports on Form 8-K.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)
March 30, 2000
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. March 30, 2000
Charles E. Bradley, Sr.
Chairman of the Board
By: /s/ Charles E. Bradley, Jr. March 30, 2000
Charles E. Bradley, Jr., Director,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William B. Roberts March 30, 2000
William B. Roberts, Director
By: /s/ John G. Poole March 30, 2000
John G. Poole, Director
By: /s/ Thomas L. Chrystie March 30, 2000
Thomas L. Chrystie, Director
By: /s/ Robert A. Simms March 30, 2000
Robert A. Simms, Director
By: /s/ James L. Stock March 30, 2000
James L. Stock,
Chief Financial Officer
(Principal Financial and Accounting Officer)
33
CONSUMER PORTFOLIO SERVICES, INC.
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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each
of the years in the three year period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Orange County, California
March 30, 2000
KPMG LLP
F-1
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, December 31,
------------ ------------
1999 1998
-------- --------
ASSETS
Cash $ 1,640 $ 1,940
Restricted cash (note 2) 1,684 1,619
Contracts held for sale (note 3) 2,421 165,582
Servicing fees receivable 9,919 11,148
Residual interest in securitizations (note 4) 172,530 217,848
Furniture and equipment, net (notes 8 and 11) 3,040 4,272
Taxes receivable (note 12) 4,914 --
Deferred financing costs (note 13) 2,488 2,817
Investment in unconsolidated affiliates (note 9) 755 4,145
Related party receivables (note 9) 901 3,268
Deferred interest expense (notes 10 and 13) 10,720 5,103
Other assets (notes 9 and 10) 12,553 14,220
-------- --------
$223,565 $431,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 13,637 $ 9,267
Warehouse line of credit (note 13) -- 151,857
Taxes payable (note 12) -- 1,821
Deferred tax liability (note 12) 6,318 27,247
Capital lease obligation (note 11) 1,506 2,132
Notes payable (note 13) 4,006 2,557
Senior secured debt (note 13) 23,161 33,000
Subordinated debt (note 13) 69,000 65,000
Related party debt (note 9) 21,500 20,000
-------- --------
139,128 312,881
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; 20,107,501 and 15,658,501 shares
issued and outstanding at December 31, 1999
and December 31, 1998, respectively 62,421 52,533
Retained earnings 22,016 66,548
-------- --------
84,437 119,081
-------- --------
Commitments and contingencies (notes 3,4,7,9,10
11,12,13, and 14) $223,565 $431,962
======== ========
See accompanying notes to consolidated financial statements
F-2
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
Revenues:
Gain (loss) on sale of contracts,
net (notes 3, 4 and 5) $ (14,844) $ 58,306 $ 35,045
Interest income (note 6) 3,032 41,841 23,526
Servicing fees 27,761 25,156 14,487
Other income (loss) (note 9) (1,144) 977 2,193
--------- --------- ---------
14,805 126,280 75,251
--------- --------- ---------
Expenses:
Employee costs 29,820 28,812 15,875
General and administrative (note 9) 19,605 20,618 14,147
Interest 27,405 22,019 9,185
Marketing 5,423 6,891 1,849
Occupancy (note 11) 2,793 2,267 1,404
Depreciation and amortization 1,595 1,255 757
Related party consulting fees (note 9) 327 98 75
--------- --------- ---------
86,968 81,960 43,292
--------- --------- ---------
Income (loss) before income taxes (72,163) 44,320 31,959
Income taxes (benefit) (note 12) (27,631) 18,617 13,427
========= ========= =========
Net income (loss) $ (44,532) $ 25,703 $ 18,532
========= ========= =========
Earnings (loss) per share (note 1):
Basic $ (2.38) $ 1.67 $ 1.29
Diluted $ (2.38) $ 1.50 $ 1.17
Number of shares used in computing earnings
(loss) per share (note 1):
Basic 18,678 15,412 14,332
Diluted 18,678 17,500 16,053
See accompanying notes to consolidated financial statements
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SERIES A NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
---------------- ------------------------- FROM EXERCISE RETAINED
SHARES AMOUNT SHARES AMOUNT OF OPTIONS EARNINGS TOTAL
------ ----- --------- --------- ------------- --------- ---------
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 -- -- 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 (notes 10 and 13) -- -- 5 43 500 -- 543
Common stock issued (note 9) -- -- 443 5,000 -- -- 5,000
Valuation of warrants issued (notes
10 and 13) -- -- -- 5,228 -- -- 5,228
Net income -- -- -- -- -- 25,703 25,703
---- ----- --------- --------- --------- --------- ---------
Balance at December 31, 1998 -- $ -- 15,659 $ 52,533 $ -- $ 66,548 $ 119,081
Common stock issued upon exercise
of warrants (notes 10 and 13) -- -- 4,449 44 -- -- 44
Valuation of warrants issued and
repriced (notes 10 and 13) -- -- -- 9,844 -- -- 9,844
Net loss -- -- -- -- -- (44,532) (44,532)
---- ----- --------- --------- --------- --------- ---------
Balance at December 31, 1999 -- $ -- 20,108 $ 62,421 $ -- $ 22,016 $ 84,437
==== ===== ========= ========= ========= ========= =========
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,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (44,532) $ 25,703 $ 18,532
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,595 1,255 757
Amortization of NIRs (note 4) 35,610 35,540 13,310
Amortization of deferred financing costs 641 356 268
Provision for credit losses 5,323 3,544 4,088
Provision for loss on NIRs (note 4) -- 7,762 --
NIR gains recognized (note 4) -- (52,990) (34,767)
Loss on sale of fixed asset -- -- 13
Gain on sale of subsidiary -- (56) --
Equity in net (income) loss of investment in
unconsolidated affiliates 2,411 (187) (912)
Gain on redemption of related party preferred stock -- -- (145)
Net releases from (deposits into) trusts 9,708 (83,544) (35,907)
Changes in assets and liabilities:
Restricted cash (65) (1,619) --
Purchases of contracts held for sale (424,746) (1,076,457) (632,096)
Liquidation of contracts held for sale 582,584 975,602 581,394
Other assets 6,792 (12,886) (4,484)
Accounts payable and accrued expenses 4,370 (962) 8,269
Warehouse lines of credit (151,857) 90,191 48,401
Deferred tax liability (20,929) 14,104 6,116
Taxes payable/receivable (6,735) 3,509 1,032
----------- ----------- -----------
Net cash provided by (used in) operating activities 170 (71,135) (26,131)
Cash flows from investing activities:
Proceeds from sale of investment in unconsolidated affiliate 979 -- --
Net related party receivables 2,367 4,027 (5,987)
Purchase of related party preferred stock -- -- (14,500)
Proceeds from sale of related party preferred stock -- -- 14,645
Investment in unconsolidated affiliate -- (65) (716)
Purchases of furniture and equipment (33) (1,308) (1,032)
Net cash from sale of subsidiary -- 382 --
Purchase of subsidiary, net of cash acquired -- -- 92
----------- ----------- -----------
Net cash provided by (used in) investing activities 3,313 3,036 (7,498)
Cash flows from financing activities:
Increase in senior secured debt -- 33,000 --
Issuance of related party debt 1,500 5,000 54,500
Issuance of subordinated debt 5,000 25,000 20,000
Issuance of notes payable 2,147 2,461 --
Repayment of senior secured debt (9,839) -- --
Repayment of subordinated debt (1,000) -- --
Repayment of capital lease obligations (626) (553) (166)
Repayment of notes payable (697) (824) (10)
Repayment of related party debt -- -- (39,945)
Payment of financing costs (312) (1,333) (1,165)
Issuance of common stock -- 5,000 --
Exercise of options and warrants 44 543 2,006
----------- ----------- -----------
Net cash provided by (used in) financing activities (3,783) 68,294 35,220
----------- ----------- -----------
(Decrease) increase in cash (300) 195 1,591
Cash at beginning of year 1,940 1,745 154
----------- ----------- -----------
Cash at end of year $ 1,640 $ 1,940 $ 1,745
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 23,872 $ 21,542 $ 8,476
Income taxes $ 62 $ 1,013 $ 6,204
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 and revaluation of common stock warrants $ 9,844 $ 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-6
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.
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 purchase price of such subsidiaries 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.
Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset.
Impairment is measured by discounting operating income at an appropriate discount rate.
Contracts Held for Sale
Contracts held for sale include automobile installment sales contracts on which interest is precomputed and added to the
amount financed. 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
F-7
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Contracts Held to Maturity
Contracts held to maturity are presented at cost and are included in other assets. Payments received on Contracts held to
maturity are restricted to certain securitized pools, and the related Contracts cannot be resold.
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 loss is 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 and the value of the underlying collateral.
Contract Acquisition Fees
Upon purchase of a Contract from a dealer, the Company generally charges the dealer an acquisition fee. The acquisition
fees associated with Contract purchases are deferred until the Contracts are sold, at which time the deferred acquisition fees are
recognized as a component of the gain on sale. The Company also charges an origination fee for those Contracts that are sold on a
flow basis. Those fees are recognized at the time the Contracts are sold and are also 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. 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.
Flow Purchase Program
From May 1999 through the date of this report, the Company has purchased Contracts only for immediate and outright
resale to non-affiliated third parties. The Company sells such Contracts for a mark-up above what the Company pays the Dealer.
In such sales, the Company makes certain representations and warranties to the purchasers, normal in the industry, which relate
primarily to the legality of the sale of the underlying motor vehicle and to the validity of the security interest that is being
conveyed to the purchaser. These representations and warranties are generally similar to the representations and warranties given
by the originating Dealer to the Company. In the event of a breach of such representations or warranties, the Company may incur
liabilities in favor of the purchaser(s) of the Contracts and there can be no assurance that the Company would be able to recover,
in turn, against the originating Dealer(s).
F-8
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Residual Interest in Securitizations and Gain on Sale of Contracts
The Company has purchased Contracts with the primary intention of reselling them in securitization transactions as asset-
backed securities. Although the Company has not been able to sell Contracts in a securitization transaction since December 1998,
it does plan to securitize in the future, as to which there can be no assurance. The Company's securitization structure has been as
follows: 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 a principal 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 "Securitization 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
significantly in 1998. Effective November 3, 1999, as applied to monthly measurement dates from September 1999 onward, the
specified levels have 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 Residuals; accordingly, the Company determines
the estimated fair value of the Residuals by discounting the
F-9
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The annual percentage rate 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. 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 range from 14% to 16.5% 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.
The Certificateholders and the related securitization trusts have no recourse to the Company for failure of the Contract
obligors to make payments on a timely basis. The Company's Residuals are subordinate to the Certificates until the
Certificateholders are fully paid.
F-10
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Servicing
The Company considers the servicing fee received to approximate adequate compensation. As a result, no servicing asset
or liability has been recognized. 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 ranges 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.
Earnings (Loss) per Share
The following table illustrates the computation of basic and diluted earnings per share:
Year ended December 31,
---------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands, except per share data)
Numerator:
Numerator for basic earnings (loss) per share --
net income (loss) $(44,532) $ 25,703 $ 18,532
Interest on borrowings, net of tax effect on conversion of
convertible subordinated debt -- 590 313
-------- -------- --------
Numerator for diluted earnings (loss) per share $(44,532) $ 26,293 $ 18,845
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per share
-- weighted average number of common shares outstanding
during the year 18,678 15,412 14,332
Incremental common shares attributable to exercise of
outstanding options and warrants -- 881 1,212
Incremental common shares attributable to conversion of
subordinated debt -- 1,207 509
-------- -------- --------
Denominator for diluted earnings (loss) per share 18,678 17,500 16,053
======== ======== ========
Basic earnings (loss) per share $ (2.38) $ 1.67 $ 1.29
======== ======== ========
Diluted earnings (loss) per share $ (2.38) $ 1.50 $ 1.17
======== ======== ========
Excluded from the diluted loss per share calculation for the year ended December 31, 1999, were 344,256 shares from
outstanding options and warrants and an additional 2.4 million from incremental shares attributable to the conversion of certain
subordinated debt, as these securities are anti-dilutive.
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
F-11
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 accounts for long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Segment 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 operations, 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, 2000. Management is in the process of assessing the effect
of implementing SFAS No. 133.
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.
F-12
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year's presentation.
(2) RESTRICTED CASH
Restricted cash in the amount of $1.7 million and $1.6 million as of December 31, 1999 and 1998, respectively, is required
as part of the agreement related to a $33.3 million senior secured 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 senior secured line bear interest at LIBOR +
5% (11.46% at December 31, 1999).
(3) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
December 31,
--------------------------
1999 1998
--------- ---------
(in thousands)
Gross receivable balance ........................ $ 3,857 $ 183,876
Unearned finance charges ........................ (136) (10,949)
Deferred acquisition fees and discounts ......... (437) (4,594)
Allowance for credit losses ..................... (863) (2,751)
--------- ---------
Net contracts held for sale .................. $ 2,421 $ 165,582
========= =========
The following table presents the activity in the allowance for credit losses:
Year ended December 31,
-------------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Balance, beginning of year ................. $ 2,751 $ 2,204 $ 723
Provisions ................................. 5,323 3,544 4,088
Charge-offs ................................ (8,478) (2,535) (2,935)
Allowance allocated to repossessed inventory
(217) (1,349) (261)
Recoveries ................................. 1,484 887 589
------- ------- -------
Balance, end of year .................... $ 863 $ 2,751 $ 2,204
======= ======= =======
The Company is required to represent and warrant certain matters with respect to the Contracts used as collateral in
warehouse lines of credit, 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 with respect to a Contract, such Contract would no longer be eligible collateral for purposes of the warehouse line, and
the Company would be required to repay to the warehouse lender the amounts advanced with respect to such Contract. 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, 1999 and 1998, respectively, the Company had commitments to purchase $1.7 million and $2.3
million of Contracts from Dealers in the ordinary course of business.
F-13
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,
-----------------------
1999 1998
-------- --------
(in thousands)
Cash, commercial paper, US government securities and other
qualifying investments (Spread Account) ................. $126,126 $130,394
NIRs ..................................................... 19,190 54,800
OC accounts .............................................. 27,098 31,836
Funds held by investor ................................... -- 480
Investment in subordinated certificates .................. 116 338
-------- --------
$172,530 $217,848
======== ========
The following table presents the activity of the NIRs :
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Balance, beginning of year .................. $ 54,800 $ 45,112 $ 23,655
NIR gains recognized (note 5) ............... -- 52,990 34,767
Amortization of NIRs (note 6) ............... (35,610) (35,540) (13,310)
Provision for loss on NIRs .................. -- (7,762) --
-------- -------- --------
Balance, end of year ........................ $ 19,190 $ 54,800 $ 45,112
======== ======== ========
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,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Undiscounted estimated credit losses ........................... $ 77,480 $ 169,110 $ 90,814
Servicing subject to recourse provisions ....................... $ 813,061 $1,362,801 $ 830,918
========== ========== ==========
Undiscounted estimated credit losses as percentage of servicing
subject to recourse provisions ................................. 9.53% 12.41% 10.93%
========== ========== ==========
(5) GAIN ON SALE OF CONTRACTS
The following table presents the components of the net gain on sale of Contracts:
F-14
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
NIR gains recognized .................. $ -- $ 52,990 $ 34,767
Loss on sale of Contracts ............. (15,831) -- --
Deferred acquisition fees and discounts
7,434 23,330 8,925
Provision for loss on NIRs ............ -- (7,762) --
Expenses related to sales ............. (1,124) (6,708) (4,559)
Provision for credit losses ........... (5,323) (3,544) (4,088)
-------- -------- --------
$(14,844) $ 58,306 $ 35,045
======== ======== ========
(6) INTEREST INCOME
The following table presents the components of interest income:
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Interest on Contracts held for sale ......... $ 27,949 $ 43,493 $ 14,279
Residual interest income .................... 10,693 33,888 22,557
Amortization of NIRs ........................ (35,610) (35,540) (13,310)
-------- -------- --------
$ 3,032 $ 41,841 $ 23,526
======== ======== ========
(7) SERVICING
The following table presents the components of the Company's servicing portfolio:
December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Contracts held for sale ................. $ 4,833 $ 176,108 $ 71,829
Contracts held to maturity .............. 3,085 -- --
Servicing subject to recourse provisions:
Whole loan portfolios ................. -- 1,463 4,839
Alton Receivables Corp. ............... -- 259 3,073
CPS Receivables Corp. ................. 813,061 1,361,079 823,006
---------- ---------- ----------
$ 820,979 $1,538,909 $ 902,747
========== ========== ==========
(8) FURNITURE AND EQUIPMENT
The following table presents the components of furniture and equipment:
December 31,
--------------------
1999 1998
------- -------
(in thousands)
Furniture and fixtures ....................... $ 3,000 $ 2,973
Computer equipment ........................... 2,378 2,365
Leasing assets ............................... 882 882
Leasehold improvements ....................... 637 644
Other fixed assets ........................... 34 34
------- -------
6,931 6,898
Less accumulated depreciation and amortization (3,891) (2,626)
------- -------
$ 3,040 $ 4,272
======= =======
F-15
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 purchase price of its 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 was included
in other assets in the accompanying consolidated balance sheets as goodwill, was being amortized over a period of fifteen years.
During 1999, the Company determined that the value of the goodwill was impaired and wrote off the remaining balance of the
goodwill, which is included in other income (loss) in the accompanying consolidated statement of operations. Based on the
closing price on the Nasdaq, the market value of the investment in NAB was approximately $483,674 and $2.9 million at
December 31, 1999 and 1998, respectively. Charles E. Bradley, Sr., Chairman of the Company's Board of Directors and a
principal shareholder of the Company, and Charles E. Bradley, Jr., President, Chief Executive Officer and a member of the
Company's Board of Directors, are both members of the Board of Directors of NAB.
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, 1999, 1998 and 1997, is a loss of $2.5 million and income of
$51,593 and $848,920, respectively, which represents the Company's share of NAB's net income or loss.
Related Party Receivables
The following table presents the components of related party receivables:
December 31,
---------------------
Related Party 1999 1998
------ ------
(in thousands)
NAB Asset Corporation ............................ $ 86 $2,100
CARSUSA, Inc. .................................... 690 904
Service and Management Cooperative, Inc. ......... -- 139
Loan to Subsidiary Officer ....................... 125 125
------ ------
$ 901 $3,268
====== ======
Included in the receivable from CARSUSA at December 31, 1999 and 1998, is $321,100 and $329,500, respectively,
related to a flooring line of credit provided to CARSUSA. The remainder relates to amounts owed by CARSUSA for other
borrowings.
During fiscal 1999 and 1998, respectively, the Company sold 11 and 51 repossessed automobiles to CARSUSA and
received proceeds of $83,800 and $432,790, respectively. Additionally, the Company purchased 57 and 296 Contracts from
CARSUSA, with an aggregate principal balance of approximately $827,434 and $4.2 million, respectively, in 1999 and 1998.
F-16
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company lent a total of $9.5 million to NAB, represented by two promissory notes for $5.5 million and
$4.0 million, each bearing interest at 13% annually. On December 31, 1997, Stanwich Financial Services Corp. ("SFSC")
purchased the $4.0 million note at par. Charles E. Bradley, Sr., Charles E. Bradley, Jr., and John G. Poole, who are officers and
directors of the Company, collectively own all 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.
NAB repaid approximately $3.4 million of the $5.5 million promissory note during 1998, and the balance during 1999.
In June 1998, the Company issued an additional promissory note to NAB for $3 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, the Company was owed $139,229 by Service and Management Cooperative, Inc. This was written
off in 1999 and is included in other income (loss). 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 borrowed $125,000 from the Company. The loan bears interest at the rate of 10%
per annum and is due July 2001.
The Company was a party to a consulting agreement with Stanwich Partners, Inc., that called for monthly payments of
$6,250 through December 31, 1999. Stanwich Partners, Inc., is an affiliate of Charles E. Bradley, Sr. Included in the
accompanying consolidated statements of operations for each of the years ended December 31, 1999, 1998 and 1997, is $75,000
of consulting expense related to this consulting agreement.
In November 1998, the Company issued $25 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 1999. Included in the
accompanying consolidated statements of operations for the years ended December 31, 1999, and 1998, are $252,083 and
$22,917, respectively, of consulting fees related to this consulting agreement.
Related Party Debt
In June 1997, the Company borrowed $15 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 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, 1999 and 1998, was $15 million.
During 1998, the Company borrowed an additional $4 million on an unsecured basis from SFSC. This loan ("RPL2") is
due 2004, and had a fixed rate of interest of 12.5% per annum
F-17
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payable monthly beginning December 1998. The Company may pre-pay the RPL2, without penalty, at any time 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 per share. The balance of the RPL2 at
December 31, 1999 and 1998 was $4 million.
During 1998, the Company borrowed $1 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, 1999 and 1998 was $1 million.
During 1999, the Company borrowed $1.5 million on an unsecured basis from SFSC. This loan ("RPL4") is due 2004, has
a fixed rate of interest of 14.5% per annum payable monthly beginning October 1999. In conjunction with the issuance of RPL4,
the Company agreed to issue warrants to purchase up to 207,000 shares of the Company's common stock at a price of $0.01 per
share. Such warrants have been neither issued nor exercised. The Company's agreement to issue such warrants was modified in the
March 2000 debt restructuring described below.
In March 2000, the Company issued $16.0 million of new senior secured debt to LLCP, and used the proceeds to repay in
full all amounts outstanding under the Senior Secured Line. The new indebtedness bears interest at 12.5% per annum, and matures
in June 2001. The interest rate and maturity of the previously outstanding $30.0 million of indebtedness to LLCP are unchanged,
at 14.5% and November 2003, respectively. As additional terms of the restructuring agreement, all prior defaults under the
Company's existing agreements with LLCP were waived or cured, all of the Company's indebtedness to LLCP became senior
secured debt (rather than subordinated debt), LLCP received 103,500 shares of Company common stock, and the Company agreed
with SFSC to reduce by 50% the 207,000 warrants that had been contemplated in connection with SFSC's August and September
1999 investments in the Company.
Related Party Stock Sale
In July 1998, the Company sold 443,459 shares of common stock in a private placement to SFSC for $5 million. As of
December 31, 1999, 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. (See note 13 - "Debt.")
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
F-18
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
per share, were repriced to $3.25 per share. In conjunction with the repricing, a one year period of non-exercisability was placed
on all repriced options, which period ended on October 21, 1999.
In October 1999, 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 29, 1999, with an option price greater than $0.625
per share, were repriced to $0.625 per share. In conjunction with the repricing, a six month period of non-exercisability was
placed on all repriced options, which period will end on April 29, 2000. Under a proposed Interpretation of the application of APB
Opinion No. 25 ("APB 25"), the change in the exercise price during the original option term would be required to be accounted for
as a variable award. Variable award accounting would apply to the modified option from the date of modification until the date of
exercise, regardless of whether the option is vested or unvested at the date of modification. Accordingly, estimates of the
compensation, based on the option's intrinsic value, would be recorded in future periods once this Interpretation is effective. The
provision of this Interpretation would be effective upon issuance and would apply to modifications of outstanding stock options
that occur after December 31, 1998.
At December 31, 1999, there were a total of 82,400 additional shares available for grant under the 1991 Plan and 1997 Plan. Of
the options outstanding at December 31, 1999, 1998 and 1997, 24,800, 194,040 and 584,920, respectively, were then exercisable,
with weighted-average exercise prices of $0.69, $2.68 and $6.77, respectively. The per share weighted-average fair value of stock
options granted during the years ended December 31, 1999, 1998 and 1997, was $1.11, $1.87, and $5.79, respectively, at the date
of grant. That fair value was computed using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Year ended December 31,
-------------------------------
1999 1998 1997
------ ----- -----
Expected life (years) ...................... 6.09 6.41 6.50
Risk-free interest rate .................... 5.96% 4.95% 6.48%
Volatility ................................. 114.79% 20.00% 52.04%
Expected dividend yield .................... -- -- --
The Company applies APB 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.
F-19
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands, except per share data)
Net income (loss)
As reported ......................... $ (44,532) $ 25,703 $ 18,532
Pro forma ........................... $ (46,236) $ 24,639 $ 18,182
Net earnings (loss) per share - basic
As reported ......................... $ (2.38) $ 1.67 $ 1.29
Pro forma ........................... $ (2.48) $ 1.60 $ 1.27
Net earnings (loss) per share - diluted
As reported ......................... $ (2.38) $ 1.50 $ 1.17
Pro forma ........................... $ (2.48) $ 1.48 $ 1.17
Pro forma net income (loss) and net earnings (loss) per share reflect only options granted in the years ended December 31,
1999, 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 amounts presented above, because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to Apri1 1, 1995, is not considered.
Stock option 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, 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
Granted ............................... 3,751 1.28
Exercised ............................. -- --
Canceled .............................. 3,318 3.27
----- ------
Balance at December 31, 1999 ............... 2,924 $ 0.69
===== ======
At December 31, 1999, 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 Exercise Number Exercise
Range of Exercise Number Remaining Price Per Exer- Price Per
Prices (per share) Outstanding Term Share cisable Share
------------------ ----------- --------- --------- ------- ----------
(in thousands, except per share data)
$0.63 - $1.56 2,863 7.29 $ 0.63 3 $ 0.63
$3.25 -$4.56 61 8.24 $ 3.40 22 $ 3.32
F-20
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the issuance of a $25.0 million subordinated promissory note to an affiliate of
LLCP, the Company issued warrants to purchase up to 3,450,000 shares of common stock at $3.00 per share, exercisable through
November 30, 2005. In April 1999, in conjunction with the issuance of $5.0 million of an additional subordinated promissory note
to an affiliate of LLCP, the Company issued additional warrants to purchase 1,335,000 shares of the Company's common stock at
$0.01 per share to LLCP. As part of the purchase agreement, the existing warrants to purchase 3,450,000 shares at $3.00 per share
were exchanged for warrants to purchase 3,115,000 shares at a price of $0.01 per share. The aggregate value of the warrants,
$12.9 million, which is comprised of $3.0 million from the original warrants issued in November 1998 and $9.9 million from the
repricing and additional warrants issued in April 1999, is reported as deferred interest expense to be amortized over the expected
life of the related debt, five years. As of December 31, 1999, 1,000 warrants remained unexercised. As of December 31, 1999, the
remaining warrants, and the common stock issued in conjunction with the exercise of 4,449,000 of warrants had not been
registered for public sale. However, the holder of the remaining warrants has the right to require the Company register the
warrants and common stock 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, subject to anti-dilution adjustments. 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, 1999, 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.
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain computer equipment under non-cancelable operating and capital leases, which
expire through 2009. Future minimum lease payments at December 31, 1999, under these leases are as follows:
F-21
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capital Operating
------- -------
(in thousands)
2000 $ 697 $ 3,311
2001 598 2,696
2002 413 2,599
2003 56 2,612
2004 -- 2,570
Thereafter -- 9,375
------- -------
Total minimum lease payments 1,764 $23,163
======= =======
Less: amount representing interest 258
-------
Present value of net minimum lease payments $ 1,506
=======
Included in furniture and equipment in the accompanying consolidated balance sheets are the following assets held under
capital leases at December 31, 1999:
Computer equipment $ 811
Furniture and fixtures 2,044
------
2,855
Less: accumulated depreciation 1,403
------
$1,452
======
Rent expense for the years ended December 31, 1999, 1998 and 1997, was $3.1 million, $2.0 million, and $1.0 million,
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 that had been the Company's
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 of the Company, plus all common area maintenance charges and property
taxes. During 1999 and 1998, the Company received $875,215 and $64,289, respectively, of sublease income, which is included in
occupancy expenses. Future minimum sublease payments totaled $1,057,235 at December 31, 1999.
Litigation
On May 18, 1999, Kevin Gilmore commenced a lawsuit against the Company in the Superior Court of California, San Francisco
County. The lawsuit alleges certain defects in repossession notices used by the Company in the State of California, and seeks
injunctive relief, including "restitution" of an unspecified amount. Similar cases have been filed against most of the major firms
financing motor vehicle purchases in California. Trial in the matter is set for May 2000. The Company plans to contest vigorously
this litigation.
On October 29, 1999, three ex-employees of LINC filed an involuntary petition under Chapter 7 of the Bankruptcy Code, naming
LINC as the debtor, and seeking its liquidation. The petition was filed in the U.S. Bankruptcy Court for the District of
Connecticut. Among the allegations made by the petitioners, which may be considered to be asserted against the Company, is that
LINC is entitled to a retained interest in the Contracts sold by LINC in securitizations, and thus to a share of the distributions from
the securitized pools. The Company intends to contest vigorously this matter.
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, beyond reserves already taken.
(12) INCOME TAXES
Income taxes consist of the following:
F-22
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year ended December 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Current
Federal ................................. $ (6,702) $ 3,318 $ 4,278
State ................................... -- 1,195 922
-------- -------- --------
(6,702) 4,513 5,200
Deferred
Federal ................................. (14,674) 10,451 4,505
State ................................... (6,255) 3,653 1,611
-------- -------- --------
(20,929) 14,104 6,116
Income tax (expense benefit)
from exercise of options credited
to shareholders' equity ................... -- -- 2,111
-------- -------- --------
Income taxes (benefit) .............. $(27,631) $ 18,617 $ 13,427
======== ======== ========
The Company's effective tax expense benefit for the years ended December 31, 1999, 1998 and 1997, differs from the
amount determined by applying the statutory federal rate of 35% to income (loss) before income taxes as follows:
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Expense (benefit) at federal tax rate ...................... $(25,257) $ 15,512 $ 11,186
California franchise tax, net of federal income tax benefit (4,066) 3,151 1,672
State tax benefit from exercise of options, net of
federal income tax benefit, credited to shareholders' equity -- -- 586
Non-deductible warrant amortization ........................ 514 -- --
Other ...................................................... 1,178 (46) (17)
-------- -------- --------
$(27,631) $ 18,617 $ 13,427
======== ======== ========
The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 1999 and
1998, are as follows:
F-23
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
------------------------
1999 1998
-------- --------
(in thousands)
Deferred Tax Assets:
Accrued liabilities .......................... $ 1,239 $ 1,296
Furniture and equipment ...................... 233 212
Equity investment ............................ 434 --
NOL Carryforward ............................. 6,373 --
Minimum tax credit ........................... 334 --
State taxes .................................. -- 403
Other ........................................ 123 --
-------- --------
8,736 1,911
Deferred Tax Liabilities:
NIRs ......................................... 8,168 21,054
Provision for credit losses .................. 6,140 7,511
Federal impact of state NOL carryforward ..... 746 --
Equity investments ........................... -- 593
-------- --------
15,054 29,158
-------- --------
Net deferred tax liability ................... $ 6,318 $ 27,247
======== ========
As of December 31, 1999, the Company has net operating loss carry-forwards for federal and state income tax purposes of $12.0
million and $20.0 million, respectively, which are available to offset future taxable income, if any, through 2019 and 2004,
respectively. In addition, the Company has an alternative minimum tax credit carry-forward of approximately $334,000 which is
available to reduce future federal regular income taxes, if any, over an indefinite period.
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 the expected future taxable income. In determining the possible future realization of deferred tax assets, future taxable
income from the following sources are taken into account: (a) reversal of taxable temporary differences, (b) future operations
exclusive of reversing temporary differences, and (c) tax planning strategies that, if necessary, would be implemented to
accelerate taxable income into years in which net operating losses might otherwise expire.
The Company files its tax returns on a fiscal year ending March 31. 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 November 1998, the Company entered into a warehouse line of credit agreement with General Electric Capital
Corporation (the "GECC Line"). The GECC Line provided for warehouse facility advances up to a maximum of $100 million at a
variable interest rate of LIBOR + 3.75% (8.87% at December 31, 1998). The GECC Line by its terms was to expire November 30,
1999. During 1999, the Company defaulted on the GECC Line agreements and was required to repay all balances owed. During
August 1999, all amounts owed under the GECC Line were repaid and the agreement was terminated.
F-24
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company was charged a non-utilization fee of .25% per annum on the unused portion of the GECC Line. The balance
outstanding at December 31, 1998, under the GECC Line was $21.7 million.
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 provided 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, renewable for one year with the mutual consent of the Company and First Union
Capital Markets. During 1999, the Company defaulted on the First Union Line agreement and was required to repay the balance
outstanding in its entirety. In June 1999, the balance of the First Union Line was repaid in its entirety and the related agreement
was terminated. The balance outstanding under the First Union Line at December 31, 1998, was $130.2 million.
In December 1996, the Company entered into an overdraft financing facility, with a bank, that provided for maximum
borrowings of $2.0 million. Interest was 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. During 1999, the Company defaulted under the overdraft facility and was required to repay the
outstanding balance in its entirety. In November 1999, the remaining balance outstanding under the overdraft facility was repaid
in its entirety and the related agreement was terminated.
In April 1998, the Company established a $33.3 million senior secured credit line (the "Senior Secured Line") with State
Street Bank and Trust Company, Prudential Insurance and an affiliate of Prudential. Borrowings under the Senior Secured Line
carried interest at LIBOR + 4.0% (9.54% at December 31, 1998), and were secured by all the Company's assets, including its
residual interest in securitizations. The Senior Secured Line was a revolving facility for one year, after which it converted into a
loan with a maximum term of four years. The lenders under the Senior Secured Line declared a default in August 1999, and in
November 1999 reached an agreement with the Company under which such lenders agreed to refrain from exercising their
remedies occasioned by such default, and under which the Company and such lenders agreed to a repayment schedule with respect
to all indebtedness under the Senior Secured Line. As part of the agreement to restructure the repayment schedule of the Senior
Secured Line, the interest rate was increased from LIBOR + 4% to LIBOR + 5%. At December 31, 1999, and 1998, the balance
outstanding under the Senior Secured Line was $23.2 million and $33.0 million, respectively. (See note 17 - "Subsequent
Events.")
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
F-25
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In April 1999, the Company issued an additional $5.0 million of subordinated promissory notes due April 30, 2004, to the
same affiliate of LLCP as noted above, and received proceeds (net of $312,000 of capitalized issuance costs) of $4.7 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,
exercisable through April 2009. The debt bears interest at 14.5% per annum, and may be prepaid without penalty at anytime. As
part of the purchase agreement, the interest rate on the previously issued LLCP notes was increased to 14.5% per annum, and the
warrant to purchase 3,450,000 shares of the Company's common stock at $3.00 per share was exchanged for a warrant to purchase
3,115,000 shares at a price of $0.01 per share.
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 on or
before of January 1, 2000, 2001, 2002, 2003, 2004 and 2005. The Company may at its option elect to redeem the Notes from the
registered holders of the Notes, in whole or in part at 100% of their principal amount, plus accrued interest to and including the
date of redemption. During 1999, the Company redeemed $1.0 million of principal amount of the notes in conjunction with the
requirements of the related sinking fund agreement.
During the year ended December 31, 1997 the Company acquired CPS Leasing, Inc. At December 31, 1999 and 1998, CPS
Leasing, Inc., had borrowings to banks of $3.3 million and $2.6 million, respectively.
F-26
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, the Company's subordinated debt exceeded its consolidated net worth, which excess was an
event of default under the indentures governing the RISRS and PENs. The event of default was cured on March 15, 2000, by the
issuance of senior secured debt in exchange for outstanding subordinated debt. (See note 17 - "Subsequent Events.")
The GECC Line, First Union Line, Senior Secured Line, PENs, Notes, LLCP notes, and the overdraft financing facility
contain various restrictive and financial covenants. With respect to the Senior Secured Line, an August 1999 default under the
GECC Line resulted in a default under the Senior Secured Line, which entitled the lender of that facility to accelerate the
repayment of the outstanding borrowings. In November 1999, the Company entered into a forebearance agreement with the lender
resulting in a revised repayment schedule. On March 15, 2000, the lender was repaid in full. With respect to the LLCP notes, as of
December 31, 1999, the Company was in violation of certain covenants. As of March 15, 2000, the holder of such notes has
waived such violations.
(14) EMPLOYEE BENEFITS
The Company sponsors a pretax savings and profit sharing plan (the "401(k) Plan") qualified under section 401(k) of the
Internal Revenue Code. Under the 401(k) Plan, eligible employees are able to contribute up to 15% of their compensation (subject
to stricter limitation in the case of highly compensated employees). 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 $300,791, $250,428, and $115,684
for the years ended December 31, 1999, 1998 and 1997, 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 markets do not exist. Therefore, considerable judgments were required in estimating fair value for certain items. The
subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is estimated as of December 31, 1999 and 1998, 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, 1999 and 1998, were as follows:
F-27
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
--------------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Carrying Carrying
Value or Value or
Notional Fair Notional Fair
Financial Instrument Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
Cash ............................... $ 1,640 $ 1,640 $ 1,940 $ 1,940
Restricted Cash .................... 1,684 1,684 1,619 1,619
Contracts held for sale ............ 2,421 2,421 165,582 169,958
Residual interest in securitizations 172,530 172,530 217,848 217,848
Related party receivables .......... 901 901 3,268 3,268
Commitments ........................ 1,661 44 2,313 61
Warehouse lines of credit .......... -- -- 151,857 151,857
Notes payable ...................... 4,006 4,006 2,557 2,557
Senior secured debt................. 23,161 23,161 33,000 33,000
Subordinated debt .................. 69,000 69,000 65,000 65,000
Related party debt ................. 21,500 21,500 20,000 20,000
Cash and Restricted Cash
The carrying value equals fair value.
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, Senior Secured Debt, 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.
F-28
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) LIQUIDITY
The Company's business requires substantial cash to support its operating activities. The Company's primary sources of
cash from operating activities have been proceeds from the sales of Contracts, amounts borrowed under its various warehouse
lines, servicing fees on portfolios of Contracts previously sold, proceeds from the sales of Contracts, customer payments of
principal and interest on Contracts held for sale, fees for origination of Contracts, and releases of cash from Spread Accounts. The
Company's primary uses of cash have been the purchases of Contracts, repayment of amounts borrowed under its warehouse lines
and otherwise, 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 has been dependent on its warehouse lines of credit
to purchase Contracts, and on the availability of capital from outside sources in order to finance its continued operations, and to
fund the portion of Contract purchase prices not borrowed under warehouse lines of credit. The Company is not presently party to
any warehouse line of credit, and did not receive any material releases of cash from Spread Accounts from June 1998 through
October 1999. The inability to borrow and the lack of cash releases resulted in a liquidity deficiency, which has been
progressively alleviated since the recommencement of releases of cash from Spread Accounts began in November 1999.
The Company has maintained its Contract purchasing program in the absence of any warehouse line of credit by entering
into flow purchase arrangements. Flow purchases allow the Company to purchase Contracts while maintaining only an immaterial
level of Contracts held for sale. The Company's revenues from flow purchase of Contracts, however, are materially less than may
be received by holding Contracts to maturity or by selling Contracts in securitization transactions.
Net cash provided by operating activities was $170,000 during the year ended December 31, 1999, compared to net cash
used in operating activities of $71.1 million for the year ended December 31, 1998. Net cash released from Trusts was $9.7
million as compared to net cash deposited into Trusts of $83.5 million for the year ended December 31, 1998.
During the year ended December 31, 1999, the Company did not complete a securitization transaction, and therefore, did
not use any cash for initial deposits to Spread Accounts, compared to $45.6 million used during the year ended December 31,
1998. Cash used for subsequent deposits to Spread Accounts for the year ended December 31, 1999, was $18.4 million, a decrease
of $35.7 million, or 66.1%, from cash used for subsequent deposits to Spread Accounts in the year ended December 31, 1998.
Cash released from Spread Accounts for the year ended December 31, 1999, was $28.0 million, an increase of $11.9 million, or
73.9%, from cash released from Spread Accounts in the year ended December 31, 1998. 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.
Beginning in June 1998, the Company's liquidity was adversely affected by the absence of releases from Spread Accounts.
Such releases did not occur because a number of the Trusts had incurred cumulative net losses as a percentage of the original
Contract balance or average delinquency ratios in excess of the predetermined levels specified in the respective Servicing
Agreements. Accordingly, pursuant to the Servicing Agreements, the specified levels applicable to the Company's Spread
Accounts were increased in most cases to an unlimited amount. Due to cross collateralization provisions of the Servicing
Agreements, the specified levels have been increased on 16 of the Company's 18 remaining Trusts. Until the November 1999
effectiveness of an amendment to the Servicing Agreement, described below, no material releases from any of the Spread
Accounts were available to the Company. Upon effectiveness of that amendment, the requisite Spread Account levels in general
have been set at 21% of the outstanding principal
F-29
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
balance of the Certificates issued by the related Trusts, with higher percentages applicable to those Trusts that have amortized to
the point that "floor" or minimum levels of credit enhancement are applicable.
In addition to requiring higher Spread Account levels, the Servicing Agreements provide the Certificate Insurer with
certain other rights and remedies, some of which have been waived on a monthly basis by the Certificate Insurer with respect to all
of the Trusts. Increased specified levels for the Spread Accounts have been in effect from time to time in the past. As a result of
the increased Spread Account specified levels and cross collateralization provisions, excess cash flows that would otherwise have
been released to the Company instead were retained in the Spread Accounts to bring the balance of those Spread Accounts up to
higher levels. As a result of the increased specified levels applicable to the Spread Accounts, approximately $39.1 million of cash
that would otherwise have been available to the Company had been delayed and retained in the Spread Accounts as of December
31, 1999. A portion of such cash was subsequently released to the Company as discussed below.
The acquisition of Contracts for subsequent sale in securitization transactions, and the need to fund Spread Accounts when
those transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on
the rate of the Company's Contract purchases (other than flow purchases), the required level of initial credit enhancement in
securitizations, 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 significant releases of cash from Spread Accounts since June 1998 had
materially impaired the Company's ability to meet such capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began 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 and April 1999 issued $25.0 million and $5.0 million,
respectively, of subordinated promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital Partners, L.P.
("LLCP"). The LLCP Notes are due in 2004, and bear interest at the rate of 14.5% per annum. Net proceeds received from the
issuances were approximately $28.5 million. In conjunction with the LLCP Notes, the Company issued warrants to purchase up to
4,450,000 shares of common stock at $0.01 per share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material increase in the cost of capital to the Company. As
part of the agreements for issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to purchase an
additional $15.0 million of notes (at least $7.5 million by July 31, 1999, and the remainder by August 31, 1999), and the Company
agreed to sell such notes. The chairman and the president of the Company are the principal shareholders of SFSC, and the
Company's chairman is the chief executive officer of SFSC. The terms of these transactions were subsequently modified in March
2000 (see Note 17 -- "Subsequent Events").
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 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. Of the $560.0
million committed, $310.0 million was used in the Company's December 1998 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 2,525,114 shares of the Company's common stock at $3.00 per share, exercisable through the fifth anniversary of the
F-30
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
warrants' issuance. The exercise price of the warrants is subject to certain anti-dilution adjustments.
The amendment agreement mentioned above (the "Amendment") fixes the amount of cash to be retained in the Spread
Accounts for 16 of the Company's 18 remaining securitization Trusts. The amended level is 21% of the outstanding principal
balance of the Certificates issued by such Trusts, computed on a pool by pool basis. The 21% level is subject to adjustment to
reflect over collateralization. Older Trusts may require more the 21% of credit if the Certificate balance has amortized to such a
level that "floor" or minimum levels of credit enhancement are applicable.
In the event of certain defaults by the Company, the specified level applicable to such Spread Accounts could increase to
an unlimited amount, but such defaults are narrowly defined, and the Company does not anticipate suffering such defaults. The
Amendment by its terms is applicable from September 1999 onward, and on November 3, 1999, the necessary signatures and
conditions were satisfied to make the Amendment effective. The Company on November 4, 1999, received its first material
release of cash from the securitized portfolio pursuant to the terms of the Amendment. The releases of cash are expected to
continue and to vary in amount from month to month. There can be no assurance that such releases of cash will continue in the
future.
As a 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 November 1998. In the first quarter of 1999, the Company purchased $158.2 million of Contracts.
During the second quarter of 1999, the Company purchased $59.3 million of Contracts, of which $34.0 million was on a flow
basis, as discussed below. During the third quarter of 1999, the Company purchased $89.6 million of Contracts, all of which was
on a flow basis. During the fourth quarter of 1999, the Company purchased $117.6 million of Contracts, all of which was on a
flow basis. The Company expects to purchase Contracts only on a flow basis in the future until the Company is able to identify
appropriate sources of capital to acquire and hold Contracts for the Company's own account. The reduction in the amount of
Contracts purchased for the Company's own account has materially reduced the Company's capital requirements.
Since late May 1999, the Company has purchased Contracts from Dealers without use of warehouse lines of credit, in
"flow purchase" arrangements with third parties. Under the flow purchase arrangements, the Company purchases Contracts from
Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of Contracts for the Company's own account, has
materially reduced the Company's cash requirements. The Company's plan for meeting its liquidity needs is (1) to increase the
quantity of Contracts that it purchases and sells on a flow basis, thus increasing the fees that it receives in connection with such
purchases and sales, and (2) to continue to receive releases of cash from its Spread Accounts, pursuant to the Amendment, which
became effective on November 3, 1999. There can be no assurance that this plan will be successful.
During the second and third quarters of 1999, the Company sold, on a servicing released basis, $318.0 million of its
Contracts held for sale. The remaining Contracts held for sale represent Contracts that did not meet the criteria for the various
sales occurring in the second and third quarters. The Company's ability to increase the quantity of Contracts that it purchases and
sells on a flow basis will be subject to general competitive conditions and other factors. Although the Company has continued to
increase the amount of Contracts purchased and sold on a flow basis, there can be no assurance that the current level of flow
production can be maintained or increased.
F-31
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Obtaining releases of cash from the Spread Accounts is dependent on collections from the related Trusts generating sufficient cash
in excess of the amended specified levels. There can be no assurance that collections from the related Trusts will generate cash in
excess of the amended specified levels.
(17) SUBSEQUENT EVENTS
In March 2000, the Company issued $16.0 million of new senior secured debt to LLCP, and used the proceeds to repay in
full all amounts outstanding under the Senior Secured Line. The new indebtedness bears interest at 12.5% per annum, and matures
in June 2001. The interest rate and maturity of the previously outstanding $30.0 million of indebtedness to LLCP are unchanged,
at 14.5% and November 2003, respectively. As additional terms of the restructuring agreement, all prior defaults under the
Company's existing agreements with LLCP were waived or cured, all of the Company's indebtedness to LLCP became senior
secured debt (rather than subordinated debt), LLCP received 103,500 shares of Company common stock, and the Company agreed
with SFSC to reduce by 50% the 207,000 warrants that had been contemplated in connection with SFSC's August and September
1999 investments in the Company.
(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)
1999
Revenues ................. $ 20,824 $ 13,406 $ (9,204) $(10,221)
Loss before income taxes . (3,667) (11,925) (28,559) (28,012)
Net loss ................. (2,127) (6,910) (16,569) (18,926)
Loss per share:
Basic ................ $ (0.14) $ (0.37) $ (0.82) $ (0.94)
Diluted .............. $ (0.14) $ (0.37) $ (0.82) $ (0.94)
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
F-32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS") (3)
4.2 First Supplemental Indenture re RISRS (3)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs") (4)
4.4 Form of First Supplemental Indenture re PENs (4)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder (5)
10.2 1997 Long-Term Incentive Stock Plan (5)
10.3 Lease Agreement re Chesapeake Collection Facility (6)
10.4 Lease of Headquarters Building (7)
10.5 Partially Convertible Subordinated Note (7)
10.6 Registration Rights Agreement (7)
10.7 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 (8)
10.7a Second Amendment Agreement dated November 17, 1998 re: State Street
residual interest in Securitizations Revolving Credit and Term Loan
Agreement (9)
10.7b Amendment and Forbearance Agreement (10)
10.8 Pledge and Security Agreement dated as of April 30, 1998, between
the Company and State Street Bank and Trust Company (8)
10.9 Revolving Credit and Term Note dated April 30, 1998 (8)
10.10 Subscription Agreement regarding shares issued in July 1998 (11)
10.11 Registration Rights Agreement regarding shares issued in July 1998
(11)
10.12 Amended and Restated Motor Vehicle Installment Contract Loan and
Security Agreement (9)
10.13 FSA Warrant Agreement dated November 30, 1998 (9)
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.14 Securities Purchase Agreement dated November 17, 1998 (12)
10.14a First Amendment dated as of April 15, 1999, to Securities Purchase
Agreement dated as of November 17, 1998, between the Company and
Levine Leichtman Capital Partners II, L.P. ("LLCP"). (said
Securities Purchase Agreement, as amended, is referred to below as
the "Amended SPA") (13)
10.14b Amended and Restated Securities Purchase Agreement dated as of
March 15, 2000, between the LLCP and the Company (14)
10.15 Senior Subordinated Primary Note dated November 17, 1998 (12)
10.15a Senior Subordinated Primary Note in the principal amount of
$25,000,000, as amended and restated pursuant to the Amended SPA
(13)
10.16 Primary Warrant to purchase 3,450,000 shares of common stock dated
November 17, 1998 (12)
10.16a Primary Warrant to Purchase 3,115,000 Shares of Common Stock, as
amended and restated pursuant to the Amended SPA (13)
10.17 Investor Rights Agreement dated November 17, 1998 (12)
10.17a First Amendment to Investors Rights Agreement, dated as of April
15, 1999 (13)
10.18 Waiver Agreement dated as of March 15, 2000, between LLCP and the
Company (14)
10.19 Amended and Restated Investor Rights Agreement dated as of March
15, 2000 (14)
10.20 Registration Rights Agreement dated as of November 17, 1998 (12)
10.20a First Amendment to Registration Rights Agreement, dated as of April
15, 1999 (13)
10.20b Amended and Restated Registration Rights Agreement dated as of
March 15, 2000, between LLCP and the Company (14)
10.21 Subordination Agreement dated as of November 17, 1998 re: Stanwich
Note and Poole Note (9)
10.22 Investment Agreement and Continuing Guaranty, dated as of April 15,
1999 (13)
10.23 Termination and Settlement Agreement with Respect to Investment
Agreement and Continuing Guaranty dated as of March 15, 2000, (14)
10.24 Consolidated Registration Rights Agreement dated November 17, 1998
re: 1997 Stanwich Notes (9)
10.25 Securities Purchase Agreement dated as of April 15, 1999, between
the Company and LLCP (13)
10.26 Senior Subordinated Note in the principal amount of $5,000,000 (13)
10.27 Amended and Restated Secured Senior Note Due 2003 in the principal
amount of $30,000,000 (14)
10.28 Secured Senior Note Due 2001 in the principal amount of $16,000,000
(14)
10.29 Warrant to Purchase 1,335,000 Shares of Common Stock (13)
10.30 FSA Letter Agreement dated November 17, 1998 (9)
10.31 Agreement dated May 29, 1999 for Sale of Contracts on a Flow Basis
(15)
10.32 Amendment to Master Spread Account Agreement (filed herewith)
21.1 Subsidiaries of the Company (9)
23.1 Consent of independent auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
EXHIBIT 10.32
EXECUTION COPY
AMENDMENT
dated as of September 1, 1999
to
Master Spread Account Agreement, as amended and restated as of December 1, 1998 (the "Master Agreement") by and among
CPS Receivables Corp. (the "Company"), Financial Security Assurance Inc. ("Financial Security") and Norwest Bank
Minnesota, National Association, as Trustee and Collateral Agent
Series 1998-4 Supplement to the Master Agreement, dated as of December 1, 1998
Series 1998-3 Supplement to the Master Agreement, dated as of July 15, 1998
Series 1998-2 Supplement to the Master Agreement, dated as of May 1, 1998
Series 1998-1 Supplement to the Master Agreement, dated as of March 1, 1998
Series 1997-5 Supplement to the Master Agreement, dated as of December 1, 1997
Series 1997-4 Supplement to the Master Agreement, dated as of October 1, 1997
Series 1997-3 Supplement to the Master Agreement, dated as of August 1, 1997
Series 1997-2 Supplement to the Master Agreement, dated as of May 1, 1997
Series 1997-1 Supplement to the Master Agreement, dated as of March 1, 1997
Series 1996-3 Supplement to the Master Agreement, dated as of December 1, 1996
Series 1996-2A Supplement to the Master Agreement, dated as of September 1, 1996
Series 1996-2 Supplement to the Master Agreement, dated as of June 17, 1996
Series 1996-1 Supplement to the Master Agreement, dated as of March 28, 1996
Series 1995-4 Supplement to the Master Agreement, dated as of December 21, 1995
Series 1995-3 Supplement to the Master Agreement, dated as of September 18, 1995
Series 1995-2 Supplement to the Master Agreement, dated as of June 12, 1995
Series 1995-1 Supplement to the Master Agreement, dated as of February 3, 1995
Series 1994-4 Supplement to the Master Agreement, dated as of December 1, 1994
Series 1994-3 Supplement to the Master Agreement, dated as of October 5, 1994
Series 1994-2 Supplement to the Master Agreement, dated as of August 31, 1994
and LIMITED WAIVER
dated as of September 1, 1999
by
Financial Security Assurance Inc.
AMENDMENT dated as of September 1, 1999 to:
(i)
Master Spread Account Agreement, as amended and restated as of December
1, 1998 (the "Master Agreement") by and among CPS Receivables Corp. (the
"Company"), Financial Security Assurance Inc. ("Financial Security") and
Norwest Bank Minnesota, National Association, as Trustee and Collateral
Agent;
(ii)
Series 1998-4 Supplement to the Master Agreement, dated as of December
1, 1998 (the "Series 1998-4 Supplement");
(iii) Series 1998-3 Supplement to the Master Agreement, dated as of July 15,
1998 (the "Series 1998-3 Supplement");
(iv)
(v)
(vi)
Series 1998-2 Supplement to the Master Agreement, dated as of May 1,
1998 (the "Series 1998-2 Supplement");
Series 1998-1 Supplement to the Master Agreement, dated as of March 1,
1998 (the "Series 1998-1 Supplement");
Series 1997-5 Supplement to the Master Agreement, dated as of December
1, 1997 (the "Series 1997-5 Supplement");
(vii) Series 1997-4 Supplement to the Master Agreement, dated as of October 1,
1997 (the "Series 1997-4 Supplement");
(viii) Series 1997-3 Supplement to the Master Agreement, dated as of August 1,
1997 (the "Series 1997-3 Supplement");
(ix)
(x)
(xi)
Series 1997-2 Supplement to the Master Agreement, dated as of May 1,
1997 (the "Series 1997-2 Supplement");
Series 1997-1 Supplement to the Master Agreement, dated as of March 1,
1997 (the "Series 1997-1 Supplement");
Series 1996-3 Supplement to the Master Agreement, dated as of December
1, 1996 (the "Series 1996-3 Supplement");
(xii) Series 1996-2A Supplement to the Master Agreement, dated as of September
1, 1996 (the "Series 1996-2A Supplement");
(xiii) Series 1996-2 Supplement to the Master Agreement dated as of June 17,
1996, as amended (the "Series 1996-2 Supplement");
(xiv) Series 1996-1 Supplement to the Master Agreement, dated as of March 28,
1996 (the "Series 1996-1 Supplement");
(xv)
Series 1995-4 Supplement to the Master Agreement, dated as of December
21, 1995 (the "Series 1995-4 Supplement");
(xvi) Series 1995-3 Supplement to the Master Agreement, dated as of September
18, 1995 (the "Series 1995-3 Supplement");
(xvii) Series 1995-2 Supplement to the Master Agreement, dated as of June 12,
1995 (the "Series 1995-2 Supplement");
(xviii) Series 1995-1 Supplement to the Master Agreement, dated as of February
3, 1995 (the "Series 1995-1 Supplement");
(xix) Series 1994-4 Supplement to the Master Agreement, dated as of December
1, 1994 (the "Series 1994-4 Supplement");
(xx)
Series 1994-3 Supplement to the Master Agreement, dated as of October 5,
1994 (the "Series 1994-3 Supplement"); and
(xxi) Series 1994-2 Supplement to the Master Agreement, dated as of August 31,
1994 (the "Series 1994-2 Supplement");
in each case as amended to the date hereof and as hereinafter amended unless the terms of any subsequent amendment conflict
with the terms hereof, in which case the terms of such subsequent amendment shall control (each a "Series Supplement" and,
collectively, the "Series Supplements") among Consumer Portfolio Services, Inc., CPS Receivables Corp., Financial Security
Assurance Inc. and Norwest Bank Minnesota, National Association, as Trustee and as Collateral Agent; and LIMITED WAIVER
dated as of September 1, 1999 by Financial Security Assurance Inc. of certain provisions of certain Insurance and Indemnity
Agreements among Financial Security, Consumer Portfolio Services, Inc. and such other Persons as may be a party thereto, as
more fully described in Section 5 hereto (this "Amendment and Limited Waiver"). Terms used but not defined herein shall have
the respective meanings assigned thereto in the Master Agreement or the relevant Series Supplement, as applicable.
WHEREAS, the respective parties to the Master Agreement and each
Series Supplement (the "Parties") have heretofore executed such agreements (collectively, the "Series Supplements");
WHEREAS, the Master Agreement permits amendment of the Master
Agreement upon the terms and conditions specified therein;
WHEREAS, the Parties wish to amend the Master Agreement and the
Series Supplements;
WHEREAS, the respective parties to the Master Agreement and each
Series Supplement (the "Parties") have heretofore executed an Amendment dated as of April 7, 1999 to the Series Supplement;
and
2
WHEREAS, Financial Security has agreed to waive certain
provisions of certain Insurance and Indemnity Agreements.
NOW, THEREFORE, the Parties agree that effective as of the
Effective Date, the Master Agreement and the Series Supplements are hereby further amended and that the provisions referenced
in Section 5 hereto are waived by Financial Security, in each case, as follows:
Section 1. Amendment to Definition of "Requisite Amount". The
definition of "Requisite Amount" is hereby amended in the following manner:
(a) with respect to each of the Master Agreement, the Series
1994-2 Supplement, the Series 1994-3 Supplement, the Series 1994-4 Supplement, the Series 1995-1 Supplement, the Series
1995-2 Supplement, the Series 1995-3 Supplement, the Series 1995-4 Supplement, the Series 1996-1 Supplement, the Series
1996-2 Supplement, the Series 1996-2A Supplement, the Series 1996-3 Supplement, the Series 1997-1 Supplement, the Series
1997-2 Supplement and the Series 1998-2 Supplement, clause (b) of the definition of Requisite Amount is amended and restated,
in each case, by deleting it in its entirety and replacing it with the following:
"(b)(i) if no Insurance Agreement Event of Default shall have
occurred as of such Determination Date, 21% of the Certificate Balance;
or (ii) if an Insurance Agreement Event of Default shall have occurred
as of such Determination Date, an unlimited amount.";
(b) with respect to each of the Series 1997-3 Supplement, the
Series 1997-4 Supplement, the Series 1997-5 Supplement and the Series 1998-1 Supplement: clause (2) of the definition of
Requisite Amount is amended and restated, in each case, by deleting it in its entirety and replacing it with the following:
(i) with respect to the Series 1998-1 Supplement:
"(2)(A) if no Insurance Agreement Event of Default shall have
occurred as of such Determination Date, 21% of the Certificate Balance;
or (B) if an Insurance Agreement Event of Default shall have occurred as
of such Determination Date, an unlimited amount.";
(ii) with respect to each of the Series 1997-5 Supplement, the
Series 1997-4 Supplement and the Series 1997-3 Supplement:
"(2)(A) if no Insurance Agreement Event of Default shall have
occurred as of such Determination Date, 21% of the Pool Balance, minus
the positive difference, if any, of (i) the Pool Balance and (ii) the
Securities Balance; or (B) if an Insurance Agreement Event of Default
shall have occurred as of such Determination Date, an unlimited
amount.";
(c) for each Series Supplement, the definition of Requisite
Amount is amended by adding the following paragraph to the end thereof:
3
"Notwithstanding anything contained herein or in the Related
Documents with respect to each Series to the contrary, (i) assets other
than cash or Eligible Investments, if any, on deposit in any Spread
Account (as defined in the Spread Account Agreement) or otherwise
pledged to the Collateral Agent shall not be included in any calculation
of Requisite Amount hereunder and (ii) the term "Insurance Agreement
Event of Default" as used in this definition shall be deemed to refer to
only an Insurance Agreement Event of Default that is not a Waived
Insurance Agreement Event of Default."
Section 2. Addition of Definition of "Waived Insurance Agreement
Event of Default". The Master Agreement is amended and restated by inserting the following definition in Section 1.01 thereof:
"Waived Insurance Agreement Event of Default" means either or
both of (i) with respect to any Series (unless specified otherwise in
the related Series Supplement), an Event of Default caused by the
failure of the Servicer to deliver Liquidation Proceeds or Purchase
Amounts to the Collection Account within the period specified in and
pursuant to the terms of the Related Documents; provided, however, that
this definition shall (A) only include and apply to any such failure
which shall have occurred on or prior to August 31, 1999; and (B) only
apply so long as the Servicer complies fully with the provisions of
Section 6 of that certain Amendment and Limited Waiver dated September
1, 1999 (the "September 1999 Amendment and Limited Waiver") among
Consumer Portfolio Services, Inc., CPS Receivables Corp., Financial
Security Assurance Inc. and Norwest Bank Minnesota, National
Association, as Trustee and as Collateral Agent, or (ii) an Event of
Default under any Insurance Agreement where such default has been duly
waived (including, without limitation, the limited waiver pursuant to
Section 5 of the September 1999 Amendment and Limited Waiver).
Section 3. Amendment to Definition of "Spread Account Shortfall".
The definition of "Spread Account Shortfall" is hereby amended in the following manner:
(a) With respect to the Master Agreement, the definition of
Spread Account Shortfall is amended and restated by deleting it in its entirety and replacing it with the following:
""Spread Account Shortfall" means, with respect to any Series
(unless specified otherwise in the related Series Supplement) and any
Determination Date, an amount equal to the excess of (1) the Requisite
Amount with respect to such Distribution Date over (2) the amount on
deposit in the Spread Account after making any withdrawals therefrom
required by priority THIRD of Section 3.03(b)."
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(b) Each of the Series 1998-3 Supplement and the Series 1998-4
Supplement, is amended and restated, in each case, by inserting the following definition in Section 1 of each such Series
Supplement (substituting, in each case, the applicable Series designation (e.g. "Series 1998-3" with respect to the Series 1998-3
Supplement) for the bracketed text contained in such definition):
""Spread Account Shortfall" means, with respect to [INSERT
APPLICABLE SERIES DESIGNATION] and any Determination Date with respect
to which (a) a Trigger Event has occurred and has not been deemed cured
or (b) an Insurance Agreement Event of Default has occurred and is
continuing, an amount equal to the excess of (1) the Requisite Amount
with respect to such Distribution Date over (2) the amount on deposit in
the [INSERT APPLICABLE SERIES DESIGNATION] Spread Account after making
any withdrawals therefrom required by priority THIRD of Section 3.03(b)
of the Spread Account Agreement. Notwithstanding anything contained
herein to the contrary, the term "Insurance Agreement Event of Default"
as used in this definition shall be deemed to refer to only an Insurance
Agreement Event of Default that is not a Waived Insurance Agreement
Event of Default."
Section 4. Amendment to Section 3.03 of the Master Agreement.
Subparagraph FOURTH of Section 3.03(b) of the Master Agreement is hereby amended and restated by deleting it in its entirety
and replacing it with the following:
"FOURTH, if with respect to one or more Series there exists a
Spread Account Shortfall, from amounts, if any, (1) on deposit in each
Spread Account (other than any Non-Crosscollateralized Spread Account,
except as provided in the second proviso to priority SEVENTH), in excess
of the related Requisite Amount or (2) on deposit in any Spread Account
(other than any Non-Crosscollateralized Spread Account, except as
provided in the second proviso to priority SEVENTH) with respect to
which the Final Termination Date shall have occurred on such
Distribution Date or a prior Distribution Date, an amount determined in
the discretion of Financial Security (which shall not exceed the
aggregate of the Spread Account Shortfalls for all Series) for deposit
into such Spread Accounts with respect to which there exists a Spread
Account Shortfall as shall be selected by Financial Security in its
discretion in such respective amounts up to the related Spread Account
Shortfall as shall be determined by Financial Security."
Section 5. Limited Waiver. In addition to and not in limitation
of the foregoing, Financial Security hereby irrevocably waives each "Event of Default" set forth and as defined in the Series 1994-
1 Insurance Agreement, the Series 1994-2 Insurance Agreement, the Series 1994-3 Insurance Agreement, the Series 1994-4
Insurance Agreement, the Series 1995-1 Insurance Agreement, the Series 1995-2 Insurance Agreement, the Series 1995-3
Insurance Agreement, the Series 1995-4 Insurance Agreement, the Series 1996-1 Insurance Agreement, the Series 1996-2
Insurance
5
Agreement, the Series 1996-2A Insurance Agreement, the Series 1996-3 Insurance Agreement, the Series 1997-1 Insurance
Agreement, the Series 1997-2 Insurance Agreement, the Series 1997-3 Insurance Agreement, the Series 1997-4 Insurance
Agreement, the Series 1997-5 Insurance Agreement, the Series 1998-1 Insurance Agreement and the Series 1998-2 Insurance
Agreement (each as defined in the related Series Supplement) pertaining to Average Delinquency Ratio, Cumulative Default Rate
and Cumulative Net Loss Rate levels (each as set forth in the related Series Supplement and as defined in the Master Agreement)
or otherwise defined but pertaining to the level of delinquencies, defaults or losses experienced by the related pool of receivables,
in each case, whether occurring before, on or after the date hereof; provided, however, that the limited waiver contained in this
Section 5 shall be effective solely for the purpose of causing each such Event of Default and each Event of Default under any
other Insurance Agreement (as defined in the Master Agreement) caused by such Event of Default and the applicable cross-default
provisions of the related Insurance Agreement to be deemed to be a Waived Insurance Agreement Event of Default and not for
any other purpose.
Section 6. Purchased and Liquidated Receivables. In consideration
of the agreements contained herein and as a condition precedent to the continued effectiveness of this Amendment and Limited
Waiver, Consumer Portfolio Services, Inc. ("CPS") agrees, with respect to each Series, to charge off and otherwise account for all
Receivables which qualify as Purchased Receivables or Liquidated Receivables but, in each case, which have not been treated by
CPS as such in accordance with the terms of the Related Documents with respect to each Series (the "Charged Off Receivables"),
in accordance with the terms of such Related Documents and in the stages set forth on the following schedule; provided, however,
that notwithstanding anything contained herein to the contrary, any Purchased Receivables or Liquidated Receivables arising
subsequent to the date hereof shall be treated by CPS as such in accordance with the terms of the applicable Related Documents:
PERCENTAGE OF CHARGED OFF RECEIVABLES
COLLECTION PERIOD ENDED: REMAINING
------------------------ -------------------------------------
September 30, 1999 75%
October 31, 1999 50%
November 30, 1999 25%
December 31, 1999 0%
Subject to Sections 2, 3 and 5 hereof, in no event shall the
provisions of this Section 6 be construed to constitute a waiver of any rights granted to Financial Security under the terms of the
any Related Documents.
Section 7. Effective Date. Notwithstanding anything herein to the
contrary, this Amendment and Limited Waiver shall not be effective until the date (the "Effective Date"), if any, on which the
Company shall have obtained the satisfaction or waiver of each condition to the effectiveness of this Amendment and Limited
Waiver required by the Master Agreement and the Series Supplements necessary to be obtained from any Person other than
Financial Security. Subject to the satisfaction of the conditions specified herein, in the Spread Account Agreement or in any Series
6
Supplement, Financial Security hereby consents to the effectiveness of this Amendment and Limited Waiver and waives any
requirement that any rating be confirmed with respect to the securities of any Series that are not guaranteed by Financial Security.
Section 8. Counterparts. This Amendment and Limited Waiver may be
executed in several counterparts, each of which shall be deemed an original hereof and all of which, when taken together, shall
constitute one and the same Amendment and Limited Waiver.
Section 9. Ratification of Master Agreement and Series
Supplements. Except as provided herein, all provisions, terms and conditions of the Master Agreement and the Series
Supplements shall remain in full force and effect. As amended hereby, the Master Agreement and the Series Supplements are
ratified and confirmed in all respects.
7
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment and Limited Waiver specified above as of the date set forth on the first page hereof.
FINANCIAL SECURITY ASSURANCE INC.
By: /s/
Authorized Officer
CPS RECEIVABLES CORP.
By: /s/
Name:
Title:
CONSUMER PORTFOLIO SERVICES, INC.
By: /s/
Name:
Title:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/
Name:
Title:
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 and 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 30, 2000, relating to the consolidated balance sheets of Consumer Portfolio Services, Inc. and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form
10-K of Consumer Portfolio Services, Inc.
KPMG LLP
Orange County, California
March 30, 2000