UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
[ ] 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
(State or other jurisdiction of incorporation or organization)
33-0459135
(I.R.S. Employer Identification No.)
16355 Laguna Canyon Road, Irvine, California
(Address of principal executive offices)
92618
(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:
Name of each exchange on which registered:
Rising Interest Subordinated Redeemable Securities due 2006
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) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the 11,492,807 shares of the registrant’s common stock held by non-affiliates, based
upon the closing price of the registrant’s common stock on Nasdaq on June 30, 2004, was approximately $51,717,632.
For purposes of this computation, a registrant sponsored pension plan and all directors, executive officers, and
beneficial owners of 10 percent or more of the registrant’s common stock are deemed to be affiliates. Such
determination is not an admission that such plan, directors, executive officers, and beneficial owners are, in fact,
affiliates of the registrant. The number of shares of the registrant's Common Stock outstanding on March 14, 2005, was
21,586,828.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant’s proxy statement for its 2005 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 purchasing, selling and servicing retail automobile installment purchase
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 purchases Contracts under any of
several programs (the “CPS Programs”) that it offers to Dealers.
CPS was incorporated and began its operations in 1991. From inception through December 31, 2004, the
Company has purchased approximately $5.4 billion of Contracts from Dealers. In addition, the Company
obtained a total of approximately $605 million of Contracts in its 2002, 2003 and 2004 acquisitions, described
below. As of December 31, 2004, the Company had a total managed portfolio, net of unearned interest on pre-
computed Contracts, of approximately $906.9 million, including the remaining outstanding balance of
Contracts acquired in the two acquisitions and $53.5 million of Contracts serviced for non-affiliated owners of
the Contracts.
Acquisitions
In March 2002, the Company acquired MFN Financial Corporation and its subsidiaries in a merger (the “MFN
Merger”). In May 2003, the Company acquired TFC Enterprises, Inc. and its subsidiaries in a second merger
(the “TFC Merger”). MFN Financial Corporation and its subsidiaries (“MFN”) and TFC Enterprises, Inc. and
its subsidiaries (“TFC”) were engaged in businesses similar to that of the Company; buying Contracts from
Dealers, repackaging those Contracts in securitization transactions, and servicing those Contracts. The
Company acquired approximately $380 million of Contracts in the MFN Merger, and approximately $150
million in the TFC Merger. MFN ceased acquiring Contracts in March 2002; TFC continues to acquire
Contracts under its “TFC Programs,” on terms and conditions similar to those it used prior to the TFC Merger.
Contracts purchased by TFC during the year ended December 31, 2004 accounted for less than 10% of the
Company’s total purchases during the year.
The Company on April 2, 2004 acquired (in the “SeaWest Asset Acquisition”) automotive finance receivables
and other assets from SeaWest Financial Corporation and its subsidiaries (collectively, “SeaWest”). The
aggregate purchase price was approximately $63.2 million, which was funded with the proceeds of an
acquisition financing facility and existing cash. The other assets included a $2.8 million note to an affiliate of
SeaWest and certain furniture and equipment. In addition, the Company was appointed the successor servicer
of three separate term securitization transactions originally sponsored by SeaWest (the “SeaWest Third Party
Portfolio”).
Securitizations
Generally
Throughout the periods for which information is presented in this report, the Company has purchased
Contracts with the intention of repackaging them in securitizations. All such securitizations have involved
identification of specific Contracts, sale of those Contracts (and associated rights) to a special purpose
subsidiary of the Company, and issuance of asset-backed securities to fund the transactions. Depending on the
structure of the securitization, the transaction may be properly accounted for as a sale of the Contracts, or as a
secured financing.
When structured to be treated as a secured financing, the subsidiary is consolidated with the Company.
Accordingly, the Contracts and the related securitization trust debt appear as assets and liabilities, respectively,
of the Company on its Consolidated Balance Sheet. The Company then recognizes interest income on the
receivables and interest expense on the securities issued in the securitization and records as expense a
provision for probable credit losses on the receivables.
When structured to be treated as a sale, the subsidiary is not consolidated with the Company. Accordingly, the
securitization removes the sold Contracts from the Company’s Consolidated Balance Sheet, the asset-backed
securities (debt of the non-consolidated subsidiary) do not appear as debt of the Company, and the Company
shows as an asset a retained residual interest in the sold Contracts. The residual interest represents the
discounted value of what the Company expects will be the excess of future collections on the Contracts over
principal and interest due on the asset-backed securities and other expenses. That residual interest appears on
the Company’s Consolidated Balance Sheet as “Residual interest in securitizations,” and its value is dependent
on estimates of the future performance of the sold Contracts.
Change in Policy
In August 2003 the Company announced that it would structure its future securitization transactions related to
Contracts purchased under the CPS Programs to be reflected as secured financings for financial accounting
purposes. Its six subsequent term securitizations of such finance receivables have been so structured. Prior to
August 2003, the Company had structured its term securitization transactions related to the CPS Programs to
be reflected as sales for financial accounting purposes. In the MFN Merger and TFC Merger the Company
acquired finance receivables that had been previously securitized in term securitization transactions that were
reflected as secured financings. As of December 31, 2004, the Company’s Consolidated Balance Sheet
included net finance receivables of approximately $40.8 million and securitization trust debt of $32.8 million
related to finance receivables acquired in the two mergers, out of totals of net finance receivables of
approximately $550.2 million and securitization trust debt of approximately $542.8 million.
Credit Risk Retained
Whether a securitization is treated as a secured financing or as a sale for financial accounting purposes, the
related special purpose subsidiary may be unable to release excess cash to the Company if the credit
performance of the securitized Contracts falls short of pre-determined standards. Such releases represent a
material portion of the cash that the Company uses to fund its operations. An unexpected deterioration in the
performance of securitized Contracts could therefore have a material adverse effect on both the Company's
liquidity and its results of operations, regardless of whether such Contracts are treated as having been sold or
as having been financed. For estimation of the magnitude of such risk, it may be appropriate to look to the size
of the Company’s “managed portfolio,” which represents both financed and sold Contracts as to which such
credit risk is retained. The Company’s managed portfolio as of December 31, 2004 was approximately $906.9
million (this amount includes $53.5 million related to the SeaWest Third Party Portfolio on which the
Company earns only servicing fees and has no credit risk). See “— Securitization of Contracts,” “— The
Servicing Agreements,” “—Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and “—Liquidity and Capital Resources.”
2
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 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, 2004, the
Company was a party to its standard form dealer agreements (“Dealer Agreements”) with over 5,700 Dealers.
Approximately 96% of these Dealers are franchised new car dealers that sell both new and used cars and the
remainders are independent used car dealers. For the year ended December 31, 2004, approximately 85% of
the Contracts purchased under the CPS Programs consisted of financing for used cars and the remaining 15%
for new cars, as compared to 85% used and 15% new in the year ended December 31, 2003.
The Company establishes relationships with Dealers through Company representatives who contact a
prospective Dealer to explain the Company’s Contract purchase programs, and who thereafter provide Dealer
training and support services. As of December 31, 2004, the Company had 63 representatives. The
representatives are contractually obligated to represent the Company’s financing program exclusively. The
Company’s representatives present the Dealer with a marketing package, which includes the Company’s
promotional material containing the terms offered by the Company for the purchase of Contracts, a copy of the
Company’s standard-form Dealer Agreement, 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, 2004, no Dealer accounted for more than 1%
of the total number of Contracts purchased by the Company under the CPS Programs. Contracts purchased by
TFC after the TFC Merger under the TFC programs are purchased with a dealer marketing strategy that is
similar to that of CPS as described above except that the marketing efforts are directed at independent used car
dealers. The following table sets forth the geographical sources of the Contracts purchased by the Company
under the CPS Programs (based on the addresses of the customers as stated on the Company’s records) during
the years ended December 31, 2004 and 2003. Contracts purchased by TFC after the TFC Merger are not
included because such purchases accounted for less than 10% of the total purchases during the year. All
Contracts are acquired from Dealers located within the United States.
3
Texas…………………………………….….
California…………………………….…….
Louisiana………………………………..….
Florida…………………………………..….
Pennsylvania…………………………….. .
Ohio………………………………….…….
North Carolina…………………………... .
Maryland………………………………..….
Illinois…………………………………… .
Georgia……………………………...…… .
Michigan……………………………….….
Kentucky……………………..…………….
New York…………………………….…….
Virginia………………………………….. .
Other States……………………...………….
Total………………………………...…… .
Contracts Purchased During the Year Ended (1)
December 31, 2004
December 31, 2003
Number
3,422
2,431
1,949
1,731
1,676
1,437
1,390
1,373
1,312
1,263
1,121
1,118
1,102
1,043
6,008
28,376
Percent (2)
12.1%
8.6%
6.9%
6.1%
5.9%
5.1%
4.9%
4.8%
4.6%
4.5%
4.0%
3.9%
3.9%
3.7%
21.2%
100.0%
Number
2,333
1,461
1,637
1,343
1,567
1,398
1,281
1,070
1,466
1,046
1,258
948
932
498
5,662
23,900
Percent (2)
9.8%
6.1%
6.8%
5.6%
6.6%
5.8%
5.4%
4.5%
6.1%
4.4%
5.3%
4.0%
3.9%
2.1%
23.7%
100.0%
________________
(1) Excludes purchases under the TFC Programs.
(2) Amounts may not total 100% due to rounding.
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 choose the Company, rather than
other financing sources, is based primarily on the monthly payment that will be offered to the automobile
buyer, the purchase price offered for the Contract, the timeliness, consistency and predictability of response,
and any conditions to purchase.
Upon receipt of information 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 credit analyst, it is determined that the
Contract 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 two hours as to whether it would purchase the related Contract. The Company’s TFC
subsidiaries finance vehicle purchases exclusively by members of the United States armed forces.
The actual agreement for purchase of the vehicle (“Contract”) is prepared by the Dealer. The Dealer also
arranges for recording the Company’s lien on the vehicle. After the appropriate documents are signed by the
Dealer and the customer, the Dealer sells the Contract to the Company. During 2001 and the first quarter of
2002 the Company immediately sold most of the Contracts that it purchased, and held the remainder for its
own account. See “—Flow Purchase Program.”
The Company purchases Contracts under the CPS Programs from Dealers at a price generally equal to the total
amount financed under the Contracts, adjusted for an acquisition fee, which may either increase or decrease the
Contract purchase price paid by the Company. The amount of the acquisition fee, and whether it results in an
increase or decrease to the Contract purchase price, is based on the perceived credit risk and, in some cases, the
interest rate on the Contract. For the years ended December 31, 2004, 2003 and 2002, the average acquisition
4
fee charged per Contract purchased under the CPS Programs was $226, $372 and $313, respectively, or 1.6%,
2.7% and 2.2%, respectively, of the amount financed.
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 willingness or 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 Contract 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 interest
rate; mileage, age and type of vehicle; principal amount of the Contract in relation to the value of the vehicle;
customer income level, employment and residence stability, credit history and debt service ability; and other
factors. Specifically, the Company’s guidelines for the CPS Programs generally limit the maximum principal
amount of a purchased Contract to 115% of wholesale book value in the case of used vehicles or to 115% of
the manufacturer’s invoice in the case of new vehicles, plus, in each case, sales tax, licensing and, when the
customer purchases such additional items, a service contract or a credit life or disability policy. 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 72 months; a shorter maximum term may
be applied based on the mileage of the vehicle, and Contracts with the maximum term of 72 months may be
purchased if the customer is among the more creditworthy of CPS’s obligors and the vehicle is generally not
more than two model years old and has less than 30,000 miles. 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. In addition, prior to purchasing a Contract under the CPS Programs,
CPS contacts each customer by telephone to confirm that the Customer understands and agrees to the terms of
the related Contract.
Credit Scoring. Under the CPS Programs, the Company uses a proprietary scoring model to assign to each
Contract 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 employment 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 the
CPS Programs and in the year ended December 31, 2004, was approximately $14,410, with an average original
term of approximately 61 months and an average down payment amount of 13.8%. Based on information
5
contained in customer applications, for this 12-month period, the retail purchase price of the related
automobiles averaged $14,812 (which excludes tax, 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 three years,
and CPS customers averaged approximately 38 years of age, with approximately $38,463 in average annual
household income and an average of 5.0 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, plus, in either case, adding any accrued fees such as late fees.
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. The Company generally does 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 could render a Contract unenforceable. 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 particular Dealer will satisfy its obligations to the Company.
Servicing of Contracts
General. The Company’s servicing activities consist of mailing monthly billing statements; collecting,
accounting for and posting of all payments received; responding to customer inquiries; taking all necessary
action to maintain the security interest granted in the financed vehicle or other collateral; investigating
delinquencies; communicating with the customer to obtain timely payments; repossessing and liquidating the
collateral when necessary; and generally monitoring each Contract and the 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.
6
With the aid of its high-penetration automatic dialer, as well as manual efforts made by collection staff, 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 as 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 promise queue and is not contacted until the
outcome of the promise is known. If the payment is made by the promise date and the account is no longer
delinquent, the account is routed out of the collection system. If the payment is not made, or if the payment is
made, but the account remains delinquent, the account is returned to the queue for subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to
evade contact or hide the vehicle, a supervisor will review the collection activity relating to the account to
determine if repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th
and 90th day past the customer’s payment due date, but could occur sooner or later, depending on the specific
circumstances. At the time the vehicle is repossessed the Company will stop accruing interest in this Contract,
and reclassify the remaining Contract balance to other assets. In addition the Company will apply a specific
reserve to this Contract so that the net balance represents the estimated fair value less costs to sell.
If the Company 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. The Uniform Commercial Code (“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 that have been repossessed are generally 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. Such proceeds usually are insufficient to pay the
customer’s obligation in full, resulting in a deficiency.
Under the UCC and other laws applicable in most states, a creditor is entitled to obtain a judgment against a
customer for such a deficiency. However, some states impose prohibitions or limitations on deficiency
judgments. When obtained, deficiency judgments are entered against defaulting individuals who may have
little capital or income. Therefore, in many cases, it may not be useful to seek a deficiency judgment against a
customer or, if one is obtained, it may be settled at a significant discount.
Once a Contract becomes greater than 90 days delinquent, the Company does not recognize additional interest
income until the borrower under the Contract makes sufficient payments to be less than 90 days delinquent.
Any payments received by a borrower that is greater than 90 days delinquent is first applied to accrued interest
and then to principle reduction.
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 (excluding Contracts from the SeaWest Third Party Portfolio) as
of the respective dates shown. Credit experience for CPS, MFN (since the date of the MFN Merger), TFC
7
(since the date of the TFC Merger) and SeaWest (since the date of the SeaWest Asset Acquisition) is shown on
both a combined and individual basis in the tables below.
Delinquency Experience (1)
CPS, MFN, TFC and SeaWest Combined
December 31, 2004
December 31, 2003
December 31, 2002
Number of
Contracts
Amount
83,018
$
873,880
Number of
Contracts
Amount
(Dollars in thousands)
84,860
773,220
$
Number of
Contracts
Amount
86,940
$
616,519
2,106
1,069
1,176
4,351
1,408
19,010
8,051
7,758
34,819
14,090
2,506
1,340
1,522
5,368
1,242
17,982
8,942
9,452
36,376
11,751
3,658
1,541
825
6,024
1,402
18,388
6,595
3,422
28,405
10,835
5,759
$
48,909
6,610
$
48,127
7,426
$
39,240
5.2
%
4.0
%
6.3
%
4.7
%
6.9
%
4.6
%
6.9
%
5.6
%
7.8
%
6.2
%
8.5
%
6.4
%
9,661
4,383
14,044
$
$
86,138
10,004
23,659
109,797
7,347
17,351
$
$
76,617
16,284
34,224
110,841
10,586
26,870
$
$
90,846
45,355
136,201
Delinquency Experience
Gross servicing portfolio (1)……… .
Period of delinquency (2)
.
31-60 days………………………… .
61-90 days………………………… .
91+ days…………………………… .
Total delinquencies (2)……………….
Amount in repossession (3)………….
Total delinquencies and
.
amount in repossession (2)……… .
Delinquencies as a percentage
.
of gross servicing portfolio……… .
.
Total delinquencies and
amount in repossession as a
.
.
percentage of gross servicing
portfolio…………………………….
Extension Experience
Contracts with One Extension (4)… .
.
Contracts with Two or More
Extensions (4)…………………….
Total Contracts with Extensions…….
CPS
December 31, 2004
December 31, 2003
December 31, 2002
Number of
Contracts
Amount
59,124
$
706,810
Number of
Contracts
Amount
(Dollars in thousands)
47,615
543,776
$
Number of
Contracts
Amount
43,244
$
394,845
1,302
520
288
2,110
891
14,546
5,430
3,139
23,115
9,929
1,175
657
393
2,225
725
11,766
5,719
3,105
20,590
8,434
1,734
643
282
2,659
654
10,738
3,619
1,508
15,865
6,305
3,001
$
33,044
2,950
$
29,024
3,313
$
22,170
3.6
%
3.3
%
4.7
%
3.8
%
6.2
%
4.0
%
5.1
%
4.7
%
6.2
%
5.3
%
7.7
%
5.6
%
6,226
1,324
7,550
$
$
68,156
12,963
81,119
4,500
1,354
5,854
$
$
52,997
9,702
62,699
5,742
2,893
8,635
$
$
32,007
10,386
42,393
Delinquency Experience
Gross servicing portfolio (1)………..
Period of delinquency (2)
.
31-60 days………………………… .
61-90 days………………………… .
91+ days…………………………… .
Total delinquencies (2)……………….
Amount in repossession (3)………….
Total delinquencies and
.
amount in repossession (2)……… .
Delinquencies as a percentage
.
of gross servicing portfolio……… .
.
Total delinquencies and
amount in repossession as a
.
.
percentage of gross servicing
portfolio…………………………….
Extension Experience
Contracts with One Extension (4)… .
.
Contracts with Two or More
Extensions (4)…………………….
Total Contracts with Extensions…….
8
MFN
December 31, 2004
December 31, 2003
December 31, 2002
Number of
Contracts
Amount
Number of
Contracts
Amount
Number of
Contracts
Amount
6,647
$
18,255
(Dollars in thousands)
20,282
77,717
$
43,696
$
221,674
233
175
137
545
111
457
365
254
1,076
475
769
327
227
1,323
369
2,128
843
532
3,503
1,899
1,924
898
543
3,365
748
7,650
2,976
1,914
12,540
4,530
656
$
1,551
1,692
$
5,402
4,113
$
17,070
8.2
%
5.9
%
6.5
%
4.5
%
7.7
%
5.7
%
9.9
%
8.5
%
8.3
%
7.0
%
9.4
%
7.7
%
1,530
2,609
4,139
$
$
4,352
5,197
8,043
12,395
5,707
10,904
$
$
21,560
10,542
23,050
44,610
7,693
18,235
$
$
58,839
34,969
93,808
Delinquency Experience
Gross servicing portfolio (1)……… .
Period of delinquency (2)
.
31-60 days………………………..….
61-90 days…………………………..
91+ days………………………….….
Total delinquencies (2)……………. .
Amount in repossession (3)………….
Total delinquencies and
.
amount in repossession (2)……… .
Delinquencies as a percentage
.
of gross servicing portfolio……… .
.
Total delinquencies and
.
amount in repossession as a
percentage of gross servicing
.
portfolio……………………….… .
Extension Experience
Contracts with One Extension (4)… .
Contracts with Two or More
.
Extensions (4)…………………..….
Total Contracts with Extensions…….
TFC
December 31, 2004
December 31, 2003
Number of
Contracts
Amount
Number of
Contracts
Amount
11,278
$
(Dollars in thousands)
16,963
107,635
$
151,727
342
226
409
977
180
2,589
1,375
2,225
6,189
1,977
562
356
902
1,820
148
4,088
2,380
5,815
12,283
1,418
1,157
$
8,166
1,968
$
13,701
8.7
%
5.8
%
10.7
%
8.1
%
10.3
%
7.6
%
11.6
%
9.0
%
446
114
560
$
$
3,599
446
4,045
307
286
593
$
$
2,061
1,472
3,533
Delinquency Experience
Gross servicing portfolio (1)…………….
Period of delinquency (2)
.
31-60 days……………………………….
61-90 days……………………………. .
91+ days……………………………… .
Total delinquencies (2)………………….
Amount in repossession (3)…………….
Total delinquencies and
.
amount in repossession (2)…………….
Delinquencies as a percentage
.
of gross servicing portfolio…………….
.
Total delinquencies and
.
amount in repossession as a
percentage of gross servicing
.
portfolio…………………………….. .
Extension Experience
Contracts with One Extension (4)……….
Contracts with Two or More
.
Extensions (4)……………………..….
Total Contracts with Extensions……… .
9
SeaWest Acquired
December 31, 2004
Number of
Contracts
Amount
(Dollars in thousands)
5,969
$
41,181
229
148
342
719
226
1,418
881
2,140
4,439
1,714
945
$
6,153
12.1
%
10.8
%
15.8
%
14.9
%
1,459
336
1,795
$
$
10,031
2,208
12,239
Delinquency Experience
Gross servicing portfolio (1)…………….
Period of delinquency (2)
.
31-60 days……………………………….
61-90 days……………………………….
91+ days……………………………… .
Total delinquencies (2)………………….
Amount in repossession (3)…………….
Total delinquencies and
.
amount in repossession (2)…………….
Delinquencies as a percentage
.
of gross servicing portfolio…………….
.
Total delinquencies and
.
amount in repossession as a
percentage of gross servicing
.
portfolio……………………………….
Extension Experience
Contracts with One Extension (4)……….
Contracts with Two or More
.
Extensions (4)………………………….
Total Contracts with Extensions……… .
________________________
(1) All amounts and percentages are based on the amount remaining to be repaid on each Contract, including, for pre-computed
Contracts, any unearned interest. The information in the table represents the gross principal amount of all Contracts purchased
by the Company on an other than flow basis, including Contracts subsequently sold by the Company in securitization
transactions that it continues to service. The table does not include Contracts from the SeaWest Third Party Portfolio.
(2) The Company considers a Contract delinquent when an obligor fails to make at least 90% of a contractually due payment by
the following due date, which date may have been extended within limits specified in the Servicing Agreements. The period of
delinquency is based on the number of days payments are contractually past due. Contracts less than 31 days delinquent are not
included.
(3) Amount in repossession represents financed vehicles that have been repossessed but not yet liquidated.
(4) The aging categories shown in the tables reflect the impact of extensions.
Extensions
The Company may offer a customer an extension, under which the customer and the Company agree to move
past due payments to the end of the Contract term. In such cases the customer must sign an agreement for the
extension, and may pay a fee representing partial payment of accrued interest. The Company’s policies, and its
contractual arrangements for its warehouse and securitization transactions, limit the number of extensions that
may be granted. In general, a customer may arrange for an extension no more than once every 12 months, not
to exceed three extensions over the life of the Contract.
If a customer is granted such an extension, the date next due is advanced and the Contract is classified as
current for delinquency aging purposes. Subsequent delinquency aging classifications would be based on the
future payment performance of the Contract.
10
Net Charge-Off Experience (1)
CPS, MFN, TFC and SeaWest Combined
Average servicing portfolio outstanding…………………$
$
Net charge-offs as a percentage of average
servicing portfolio (2)…….………………………..……$
Average servicing portfolio outstanding…………………$
Net charge-offs as a percentage of average
$
servicing portfolio (2)…….………………………..……$
Average servicing portfolio outstanding…………………$
Net charge-offs as a percentage of average
$
servicing portfolio (2)….…………………………………$
Average servicing portfolio outstanding…………………$
Net charge-offs as a percentage of average
$
servicing portfolio (2) (3)….………………………………$
Year Ended December 31,
2003
(Dollars in thousands)
$
674,523
$
2004
796,436
2002
524,286
7.8
%
6.8
%
8.6
%
CPS
Year Ended December 31,
2003
(Dollars in thousands)
$
483,647
$
2004
623,639
2002
291,863
5.7
%
4.7
%
5.0
%
MFN
Year Ended December 31,
2003
(Dollars in thousands)
$
123,140
$
2004
38,569
2002
278,908
(0.5)
%
12.6
%
11.0
%
TFC
Year Ended December 31,
2004
2003
(Dollars in thousands)
102,467
$
133,428
11.9
%
11.3
%
SeaWest Acquired (4)
March 1, through December 31,
2004
(Dollars in thousands)
54,040
Average servicing portfolio outstanding…………………$
Net charge-offs as a percentage of average
$
servicing portfolio (2)…..……………………………… $
_________________________
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each Contract, net of unearned
income on pre-computed Contracts. The information in the table represents all Contracts serviced by the Company (excluding
Contracts from the SeaWest Third Party Portfolio).
(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the
vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off.
(3) TFC Contracts are expected to charge off at rates greater than CPS. To partially compensate for this higher risk, TFC
Contracts are purchased with a higher acquisition fee than CPS Contracts.
(4) Charge-off amounts are before consideration of the acquisition purchase discount.
37.4%
11
Flow Purchase Program
From May 1999 through the second quarter of 2002, the Company purchased Contracts primarily for
immediate and outright resale to either of two non-affiliated third parties. The Company sold such Contracts
for a mark-up above what the Company paid the Dealer. That markup represented the purchasers’
compensating the Company for services in selecting Contracts for purchase and verifying customer credit
information. In such sales, the Company made certain representations and warranties to the purchasers, normal
in the industry, which related primarily to the legality of the sale of the underlying motor vehicle and to the
validity of the security interest that conveyed to the purchaser. These representations and warranties were
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 might 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).
One of the two flow purchasers ceased to purchase Contracts in December 2001, and the other ceased to
purchase in May 2002. The flow purchase program accordingly ended at that time. The Company does not
expect to recommence a flow purchase program.
Securitization of Contracts
The Company purchases Contracts for resale in or to be financed through securitization transactions. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources” and Note 1 of Notes to Consolidated Financial Statements. During 2004, the Company
funded such purchases primarily with proceeds from four short-term revolving warehouse lines of credit. As of
December 31, 2004, the Company had $225 million in warehouse credit capacity, in the form of a $125
million facility and a $100 million facility. The first facility provides funding for Contracts purchased under
the TFC Programs while both warehouse facilities provide funding for Contracts purchased under the CPS
Programs. A third facility in the amount of $75 million, which the Company utilized to fund Contracts under
the CPS Programs, expired on February 21, 2004. A fourth facility in the amount of $25 million, which the
Company utilized to fund Contracts under the TFC Programs, expired on June 24, 2004. These facilities are
independent of each other. With the two currently existing facilities, two different financial institutions
purchase the notes issued by these facilities, and two different insurers insure the notes (each a “Note Insurer”).
The Note Insurer on the $125 million facility is the controlling party whereas the lender on the $100 million
facility is the controlling party. Up to 73.5% of the principal balance of Contracts may be advanced to the
Company under these facilities, subject to collateral tests and certain other conditions and covenants. Long-
term funding for the purchase of Contracts is achieved by the Company through term securitization
transactions, in which the liabilities (the asset-backed securities) are repaid as the underlying Contracts
amortize. Proceeds from term securitization transactions are used primarily to repay the warehouse facilities.
The Company completed five term securitization transactions in 2004 and four term securitization transactions
in 2003.
In a securitization, 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 the principal balance plus accrued and unpaid interest. 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 principal 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 that it
repurchases.
Upon the sale or financing of a portfolio of Contracts in a securitization transaction, generally utilizing a trust
that is specifically created for such purpose (“Trust”), the Company retains the obligation to service the
12
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 lockbox account.
The Company engages an independent lockbox processing agent to retrieve and process payments received in
the lockbox account. This results in a daily deposit to the Trust’s bank account of the entire amount of each
day’s lockbox receipts and the simultaneous electronic data transfer to the Company of customer payment data
records. Pursuant to the Servicing Agreements, as defined below, 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 lockbox
processing agent.
In its securitization transactions, 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, that 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 Agreements
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 sold in its flow
purchase 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 Company is entitled under most of the Servicing Agreements to receive a base monthly servicing fee
between 2.5% and 5.0% per annum computed as a percentage of the declining outstanding principal balance of
the non-defaulted Contracts in the pool. Each month, after payment of the Company’s base monthly servicing
fee and certain other fees, the Trust receives the paid principal reduction of the Contracts in its pool 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 pool. The
“Spread Account” is an account established at the time the Company sells a pool of Contracts, to provide
security to the Note Insurers, as defined below. If collections on the Contracts exceed such amounts, the excess
is utilized, first, to build up or replenish the Spread Account or other credit enhancement to the extent required,
next, in certain cases to cover deficiencies in Spread Accounts for other pools, and the balance, if any,
constitutes excess cash flows, which are distributed to the Company.
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 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 (“Investors”) of interests in the Trust 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 pool 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
13
backing the Notes, as defined below, 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 insurers of certain of the Trust’s obligations (“Note Insurers”)
in the event of certain defaults by the Company and under certain other circumstances. Were a Note Insurer in
the future to exercise its option to terminate the Servicing Agreements, such a termination would have a
material adverse effect on the Company’s liquidity and results of operations. The Company continues to
receive Servicer extensions on a monthly and/or quarterly basis, pursuant to the Servicing Agreements.
Competition
The automobile financing business is highly competitive. The Company competes with a number of national,
regional and local 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
Finance 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 that may be unavailable to the Company. Many of these companies also have long-
standing relationships with Dealers and may provide other financing to Dealers, including floor plan financing
for the Dealers’ purchase of automobiles from manufacturers, which is not offered by the Company.
The Company believes that the principal competitive factors affecting a Dealer’s decision to offer Contracts
for sale to a particular financing source are the 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 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
14
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.”
Employees
As of December 31, 2004, the Company had 758 full-time and 14 part-time employees, of whom 7 are senior
management personnel, 451 are collections personnel, 124 are Contract origination personnel, 78 are
marketing personnel (63 of whom are marketing representatives), 67 are operations and systems personnel, and
31 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 base rent was approximately $1.9 million
through October 2003, and increased to $2.1 million for the following five years. In addition to base rent, the
Company pays the property taxes, maintenance and other expenses of the premises.
In March 1997, the Company established a branch collection facility in Chesapeake, Virginia. The Company
leases approximately 28,000 square feet of general office space in Chesapeake, Virginia, at a base rent that is
currently $465,720 per year, increasing to $501,542 over a 10-year term.
The remaining four regional servicing centers occupy a total of approximately 49,000 square feet of leased
space in Orlando, Florida; Atlanta, Georgia; Hinsdale, Illinois and Cleveland, Ohio. The termination dates of
such leases range from 2007 to 2008.
See Notes 2 and 14 of Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
Stanwich Litigation. CPS was a defendant in a class action (the “Stanwich Case”) brought in the California
Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the “Settlement Payments”) under out-of-court settlements reached with third party
defendants. Stanwich Financial Services Corp. (“Stanwich”), an affiliate of the former Chairman of the Board
of Directors of CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich has defaulted on
15
its payment obligations to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy Code,
in the federal Bankruptcy Court of Connecticut. At year-end, CPS was a defendant only in a cross-claim
brought by one of the other defendants in the case, Bankers Trust Company, which asserted a claim of
contractual indemnity against CPS.
Subsequent to year-end, CPS settled the cross-claim of Bankers Trust by payment of $3.24 million, on or about
February 8, 2005. Pursuant to that settlement, the court has dismissed the cross-claim, with prejudice.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for
indemnity against the Company in a separate action, which is now pending in federal district court in Rhode
Island. The Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same court. The litigation between
Mr. Pardee and CPS is stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the
bankruptcy court, which is hearing the bankruptcy of Stanwich.
The reader should consider that an adverse judgment against CPS in the Rhode Island case for indemnification,
if in an amount materially in excess of any liability already recorded in respect thereof, could have a material
adverse effect.
Other Litigation. On November 15, 2000, Denice and Gary Lang filed a lawsuit against CPS in South Carolina
Common Pleas Court, Beaufort County, alleging that they, and a purported nationwide class, were harmed by
an alleged failure to refer, in the notice given after repossession of their vehicle, to the right to purchase the
vehicle by tender of the full amount owed under the retail installment contract. They sought damages in an
unspecified amount. CPS filed a counterclaim to recover any delinquent amounts owed by the members of the
putative class in the event that the class were to be certified. In February 2004, CPS reached an agreement to
settle that case on a class basis for payment of attorneys’ fees and other immaterial consideration.
On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit court of Tuscaloosa, Alabama, making
allegations similar to those that were asserted in the Lang case, and seeking damages in an unspecified amount,
on behalf of a purported nationwide class. The Company removed the case to federal bankruptcy court, and
filed a motion for summary judgment as part of its adversary proceeding against the plaintiff in the bankruptcy
court. The federal bankruptcy court granted the plaintiff’s motion to send the matter back to Alabama state
court. The Company has appealed the ruling. Although the Company believes that it has one or more defenses
to each of the claims made in this lawsuit, no discovery has yet been conducted and the case is in its earliest
stages. Accordingly, there can be no assurance as to its outcome.
In June 2004, Plaintiff Jeremy Henry filed a lawsuit against the Company in the California Superior Court, San
Diego County, alleging improper practices related to the notice given after repossession of a vehicle that he
purchased. The lawsuit is styled a class action, though no motion for class certification has yet been filed. CPS
and its subsidiary have a number of defenses that may be asserted with respect to the claims of plaintiff Henry.
The Company has recorded a liability as of December 31, 2004 that it believes represents a sufficient
allowance for legal contingencies. Any adverse judgment against the Company, if in an amount materially in
excess of the recorded liability, could have a material adverse effect.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
16
Item 4a. Executive Officers of the Registrant
Information regarding the Company’s executive officers follows:
Charles E. Bradley, Jr., 45, 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.
Nicholas P. Brockman, 60, has been Senior Vice President – Collections 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.
Mark A. Creatura, 45, has been Senior Vice President – General Counsel since October 1996. From October
1993 through October 1996, he was Vice President and General Counsel at Urethane Technologies, Inc., a
polyurethane chemicals formulator. Mr. Creatura was previously engaged in the private practice of law with
the Los Angeles law firm of Troy & Gould Professional Corporation, from October 1985 through October
1993.
Jeffrey P. Fritz, 45, has been Senior Vice President – Accounting since August 2004. He served as a
consultant to the Company from May 2004 to August 2004. Previously, he was the Chief Financial Officer of
SeaWest Financial Corp. from February 2003 to May 2004, and the Chief Financial Officer of AFCO Auto
Finance from April 2002 to February 2003. He practiced public accounting with Glenn M. Gelman &
Associates from March 2001 to April 2002 and was Chief Financial Officer of Credit Services Group, Inc.
from May 1999 to November 2000. He previously served as the Company’s Chief Financial Officer from its
inception through May 1999.
Curtis K. Powell, 48, has been Senior Vice President – Contract Origination since June 2001. Previously, he
was the Company’s Senior Vice President – Marketing, from 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.
Robert E. Riedl, 41, has been Senior Vice President – Chief Financial Officer since August 2003. Mr. Riedl
joined the Company as Senior Vice President – Risk Management in January 2003. Mr. Riedl was a Principal
at Northwest Capital Appreciation (“NCA”), a middle market private equity firm, from 2000 to 2002. For a
year prior to joining Northwest Capital, Mr. Riedl served as Senior Vice President for one of NCA’s portfolio
companies, SLP Capital. Mr. Riedl was an investment banker for ContiFinancial Services Corporation from
1995 until joining SLP Capital in 1999.
Christopher Terry, 37, has been Senior Vice President – Asset Recovery since January 2003. He joined the
Company in January 1995 as a loan officer, held a series of successively more responsible positions, and was
promoted to Vice President - Asset Recovery in June 1999. Mr. Terry was previously a branch manager with
Norwest Financial from 1990.
17
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
The Company’s Common Stock is traded on the Nasdaq National Market System, under the symbol “CPSS.”
The following table sets forth the high and low sales prices reported by Nasdaq for the Common Stock for the
periods shown.
January 1 - March 31, 2003…………………………………...………….
April 1 - June 30, 2003……………………………………...………… .
July 1 - September 30, 2003………………………………….………….
October 1 - December 31, 2003…………………………………..…… .
January 1 - March 31, 2004…………………………………….……….
April 1 - June 30, 2004………………………………………….……….
July 1 - September 30, 2004…………………………………...……… .
October 1 - December 31, 2004……………………………….………….
High
2.200
3.455
3.700
4.180
3.960
4.970
5.210
4.870
Low
1.500
1.630
2.480
2.750
2.940
3.120
3.710
3.980
As of March 16, 2005, there were 86 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 income, 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 cash flow for use in the Company’s operations.
The table below presents information regarding outstanding options to purchase the Company’s Common
Stock.
Plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
4,052,049
None
4,052,049
Weighted-average
exercise price of
outstanding options,
warrants and rights
December 31, 2004
(b)
$2.51
N/A
$2.51
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
1,391,631
N/A
1,391,631
18
During the year ended December 31, 2004, the Company purchased a total of 25,999 shares of its common
stock, as described in the following table:
Issuer Purchases of Equity Securities
Total
Number of
Shares
Purchased
6,738
12,861
6,400
25,999
Average
Price Paid
per Share
$
$
$
$
3.75
4.39
4.50
4.25
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(2)
Value of Shares that
May Yet be Purchased
Under the Plans or
Programs
6,738
12,861
6,400
25,999
1,577,863
1,521,411
1,492,604
Period
May 2004
November 2004
December 2004
Total
(1) Each monthly period is the calendar month.
(2) The Company announced in August 2000 its intention to purchase up to $5 million of its outstanding
securities, inclusive of annual $1 million sinking fund redemptions on its Rising Interest Redeemable
Subordinated Securities due 2006. In October 2002, the July 2000 program having been exhausted, the
Company’s board of directors authorized the purchase of up to an additional $5 million of such securities,
which program was first announced in the Company’s annual report for the year 2002, filed on March 26,
2003. All purchases described in the table above were under the plan announced in March 2003, which has no
fixed expiration date.
On June 30, 2004, the Company issued 333,333 shares of its common stock to John G. Poole, a director of the
Company, upon conversion at maturity, and pursuant to its terms, of a $1,000,000 note held by Mr. Poole since
1998. The issuance of shares was exempt from registration under the Securities Act of 1933 pursuant to
Section 3(a)(9) thereof, as the shares were issued in exchange for the outstanding note, and no commission was
paid for soliciting such exchange.
19
Item 6. Selected Financial Data
Statement of Operations Data:
Net gain on sale of Contracts (2)….………………...…$
Interest income…………………………..……………$
Servicing fees……………………………….…………$
Total revenue……………………………...……………$
Operating expenses…………………………..…………$
Income (loss) before extraordinary item (3)……………$
Extraordinary item (4)…………………………….……$
Net income (loss)……………………………...………$
Basic income (loss) per share before ex. item…………$
Diluted income (loss) per share before ex. item………$
Basic income (loss) per share, ex. item……………… $
Diluted income (loss) per share, ex. item……………. $
Basic income (loss) per share…………………….……$
Diluted income (loss) per share…………………….... $
$
2004
-
105,818
12,480
132,692
148,580
(15,888)
-
(15,888)
(0.75)
(0.75)
-
-
(0.75)
(0.75)
2004
Year Ended December 31,
2002
(In thousands, except per share data)
2003
2001
2000(1)
$
10,421
58,164
17,058
104,986
108,025
395
-
395
0.02
0.02
-
-
0.02
0.02
$
21,518
48,644
14,621
98,388
98,326
2,996
17,412
20,408
0.15
0.14
0.87
0.83
1.03
0.97
$
32,765
17,205
10,666
62,576
62,256
320
-
320
0.02
0.02
-
-
0.02
0.02
16,234
3,480
15,848
35,951
68,354
(22,147)
-
(22,147)
(1.10)
(1.10)
-
-
(1.10)
(1.10)
2003
Year Ended December 31,
2002
(In thousands)
2001
2000
$
$
$
$
Balance Sheet Data:
Cash and restricted cash…………………………..……$
Finance receivables, net………………..………………$
Residual interest in securitizations…………….………$
Total assets…………………………………...……… $
Term debt……………………………………...………$
Total liabilities……………………………….…………$
Total shareholders' equity……………………….…… $
________________________
(1) During the year ended December 31, 2000, the Company did not sell any Contracts in securitization transactions.
(2) The decrease in 2003 and 2004 is primarily the result of the change in securitization structure implemented in the third
quarter of 2003.
(3) Results for 2003 and 2002 include a tax benefit of $3.4 million and $2.9 million, respectively.
(4) On March 8, 2002, CPS acquired 100% of MFN Financial Corporation and subsidiaries, resulting in the recognition of
$17.4 million of negative goodwill as an extraordinary gain, which is reflected in the Company’s 2002 Consolidated Statement of
Operations.
139,479
550,191
50,430
766,599
675,548
696,679
69,920
51,859
84,592
127,170
285,448
175,942
202,874
82,574
13,924
-
106,103
151,204
82,555
89,518
61,686
100,486
266,189
111,702
492,470
384,622
410,310
82,160
24,315
18,830
99,199
175,694
102,614
113,572
62,122
20
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. The Company's Consolidated Balance Sheet and Consolidated
Statement of Operations as of and for the years ended December 31, 2004 and 2003 include the results of
operations of TFC Enterprises, Inc. for the period subsequent to May 20, 2003, the TFC Merger date, through
December 31, 2004. The Company’s Consolidated Balance Sheet and Consolidated Statement of Operations as
of and for the years ended December 31, 2004, 2003 and 2002 include the results of operations of MFN
Financial Corporation for the period subsequent to March 8, 2002, the MFN Merger date, through December
31, 2002. See Note 2 of Notes to Consolidated Financial Statements.
Overview
Consumer Portfolio Services, Inc. (“CPS,” and together with its subsidiaries, the “Company”) is a consumer
finance company which specializes in purchasing, selling and servicing retail automobile installment purchase
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 for borrowers 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 based on its financing programs (the “CPS
Programs”).
On March 8, 2002, the Company acquired MFN Financial Corporation and its subsidiaries in a merger (the
“MFN Merger”). On May 20, 2003, the Company acquired TFC Enterprises, Inc. and its subsidiaries in a
second merger (the “TFC Merger”). Each merger was accounted for as a purchase. MFN Financial Corporation
and its subsidiaries (“MFN”) and TFC Enterprises, Inc. and its subsidiaries (“TFC”) were engaged in
businesses similar to that of the Company: buying Contracts from Dealers, repackaging those Contracts in
securitization transactions, and servicing those Contracts. MFN ceased acquiring Contracts in May 2002; TFC
continues to acquire Contracts under its “TFC Programs,” which provide financing for vehicle purchases
exclusively by members of the United States Armed Forces.
On April 2, 2004, the Company purchased (in the “SeaWest Asset Acquisition”) a portfolio of Contracts and
certain other assets from SeaWest Financial Corporation and its subsidiaries (collectively, “SeaWest”). In
addition, the Company was named the successor servicer of three term securitization transactions originally
sponsored by SeaWest (the “SeaWest Third Party Portfolio”). The Company does not intend to offer financing
programs similar to those previously offered by SeaWest.
The Company historically has generated revenue primarily from the gains recognized on the sale or
securitization of Contracts, servicing fees earned on Contracts sold, interest earned on Residuals, as defined
below, and interest on finance receivables. During the years ended December 31, 2002 and 2001, the Company
sold some Contracts on a servicing released basis, as part of a program (the “flow purchase program”) in which
the Company sold Contracts to unaffiliated third parties immediately after purchasing such Contracts from
Dealers. The flow purchase program ended in May 2002. During the years ended December 31, 2002 and
2001, the Company's gain on sale of Contracts included $5.7 million and $16.6 million, respectively,
representing mark-up on Contracts sold in the flow purchase program.
21
Securitization
Generally
Throughout the periods for which information is presented in this report, the Company has purchased
Contracts with the intention of repackaging them in securitizations. All such securitizations have involved
identification of specific Contracts, sale of those Contracts (and associated rights) to a special purpose
subsidiary of the Company, and issuance of asset-backed securities to fund the transactions. Depending on the
structure of the securitization, the transaction may properly be accounted for as a sale of the Contracts, or as a
secured financing.
When structured to be treated as a secured financing, the subsidiary is consolidated with the Company.
Accordingly, the sold Contracts and the related securitization trust debt appear as assets and liabilities,
respectively, of the Company on its Consolidated Balance Sheet. The Company then periodically (i)
recognizes interest and fee income on the receivables (ii) recognizes interest expense on the securities issued in
the securitization, and (iii) records as expense a provision for credit losses on the receivables.
When structured to be treated as a sale, the subsidiary is not consolidated with the Company. Accordingly, the
securitization removes the sold Contracts from the Company’s Consolidated Balance Sheet, the asset-backed
securities (debt of the non-consolidated subsidiary) do not appear as debt of the Company, and the Company
shows, as an asset, a retained residual interest in the sold Contracts. The residual interest represents the
discounted value of what the Company expects will be the excess of future collections on the Contracts over
principal and interest due on the asset-backed securities. That residual interest appears on the Company’s
Consolidated Balance Sheet as “Residual interest in securitizations,” and the determination of its value is
dependent on estimates of the future performance of the sold Contracts.
Change in Policy
In August 2003, the Company announced that it would structure its future securitization transactions related to
Contracts purchased under the CPS Programs to be reflected as secured financings for financial accounting
purposes. Its six subsequent term securitizations of such finance receivables have been so structured. Prior to
August 2003, the Company had structured its term securitization transactions related to the CPS Programs to
be treated as sales for financial accounting purposes. In the MFN Merger and in the TFC Merger the Company
acquired finance receivables that had been previously securitized in term securitization transactions that were
reflected as secured financings. As of December 31, 2004, the Company’s Consolidated Balance Sheet
included net finance receivables of approximately $40.8 million and securitization trust debt of $32.8 million
related to finance receivables acquired in the two mergers, out of totals of net finance receivables of
approximately $550.2 million and securitization trust debt of approximately $542.8 million.
Credit Risk Retained
Whether a securitization is treated as a secured financing or as a sale for financial accounting purposes, the
related special purpose subsidiary may be unable to release excess cash to the Company if the credit
performance of the securitized Contracts falls short of pre-determined standards. Such releases represent a
material portion of the cash that the Company uses to fund its operations. An unexpected deterioration in the
performance of securitized Contracts could therefore have a material adverse effect on both the Company’s
liquidity and its results of operations, regardless of whether such Contracts are treated as having been sold or
as having been financed. For estimation of the magnitude of such risk, it may be appropriate to look to the size
of the Company’s “managed portfolio,” which represents both financed and sold Contracts as to which such
credit risk is retained. The Company’s managed portfolio as of December 31, 2004 was approximately $906.9
million (this amount includes $53.5 million related to the SeaWest Third Party Portfolio on which the
Company earns only servicing fees and has no credit risk).
22
Critical Accounting Policies
The Company believes that its accounting policies related to (a) Allowance for Finance Credit Losses, (b)
Residual Interest in Securitizations and Gain on Sale of Contracts and (c) Income Taxes could be considered
critical. Such policies are described below.
(a) Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, the Company
uses a loss allowance methodology commonly referred to as “static pooling,” which stratifies its finance
receivable portfolio into separately identified pools. Using analytical and formula driven techniques, the
Company estimates an allowance for finance credit losses, which management believes is adequate for
probable credit losses that can be reasonably estimated in its portfolio of finance receivable Contracts.
Provision for loss is charged to the Company’s Consolidated Statement of Operations. Net losses incurred on
finance receivables 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.
As conditions change, the Company’s level of provisioning and/or allowance may change as well.
(b) Treatment of Securitizations
Gain on sale may be recognized on the disposition of Contracts either outright or in securitization transactions.
In those securitization transactions that were treated as sales for financial accounting purposes, the Company,
or a wholly-owned, consolidated subsidiary of the Company, retains a residual interest in the Contracts that
were sold to a wholly-owned, unconsolidated special purpose subsidiary. The Company’s securitization
transactions include “term” securitizations (the purchaser holds the Contracts for substantially their entire
term) and “continuous” or “warehouse” securitizations (which finance the acquisition of the Contracts for
future sale into term securitizations).
As of December 31, 2004 and 2003 the line item “Residual interest in securitizations” on the Company’s
Consolidated Balance Sheet represents the residual interests in certain term securitizations that were accounted
for as sales. Warehouse securitizations accounted for as secured financings are accordingly reflected in the line
items “Finance receivables” and “Warehouse lines of credit” on the Company’s Consolidated Balance Sheet,
and the term securitizations accounted for as secured financings are reflected in the line items “Finance
receivables” and “Securitization trust debt.” The “Residual interest in securitizations” represents the
discounted sum of expected future releases from securitization trusts. Accordingly, the valuation of the
residual is heavily dependent on estimates of future performance.
The key economic assumptions used in measuring all residual interests in securitizations as of December 31,
2004 and 2003 are included in the table below. The Company has used an effective pre-tax discount rate of
14% per annum except for certain collections from charged off receivables related to the Company’s
securitizations in 2001 and later, where the Company has used a discount rate of 25% per annum.
Prepayment speed (Cumulative)…………………………..………. 20.0% - 30.5%
Net credit losses (Cumulative)………………………….…………. 13.0% - 20.5%
2004
2003
18.1% - 22.1%
11.8% - 18.0%
Key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate
10% and 20% adverse changes in those assumptions are as follows:
23
December 31,
2004
(Dollars in thousands)
Carrying amount/fair value of residual interest in securitizations….……. $
Weighted average life in years………………………………………..… .
50,430
2.95
Prepayment Speed Assumption (Cumulative)…………………...……….
Estimated fair value assuming 10% adverse change……………………. . $
Estimated fair value assuming 20% adverse change……………………. .
Expected Net Credit Losses (Cumulative)……….………………….…….
Estimated fair value assuming 10% adverse change…………………..…. $
Estimated fair value assuming 20% adverse change…………………..….
Residual Cash Flows Discount Rate (Annual)……………………….…….
Estimated fair value assuming 10% adverse change……………………. . $
Estimated fair value assuming 20% adverse change……………………. .
20.0% - 30.5%
50,199
49,951
13.0% - 20.5%
48,764
47,268
14.0% - 25.0%
49,320
48,230
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair
value based on 10% and 20% percent variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the
effect of a variation in a particular assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result in changes in another (for example,
increases in market rates may result in lower prepayments and increased credit losses), which could magnify or
counteract the sensitivities.
The Company’s securitization structure has generally been as follows:
The Company sells Contracts it acquires to a wholly-owned Special Purpose 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 another entity, typically a statutory trust (“Trust”). The Trust issues interest-
bearing asset-backed securities (“Notes”), in a principal amount equal to or less than the aggregate principal
balance of the Contracts. 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 Notes issued by the Trust; the
proceeds from the sale of the Notes are then used to purchase the Contracts from the Company. The Company
may retain or sell subordinated Notes issued by the Trust or by a related entity. The Company purchases a
financial guaranty insurance policy, guaranteeing timely payment of principal and interest on the senior Notes,
from an insurance company (a “Note Insurer”). In addition, the Company provides “Credit Enhancement” for
the benefit of the Note Insurer and the investors in the form of an initial cash deposit to a bank account
(“Spread Account”) held by the Trust, in the form of overcollateralization of the Notes, where the principal
balance of the Notes issued is less than the principal balance of the Contracts, in the form of subordinated
Notes, or some combination of such Credit Enhancements. The agreements governing the securitization
transactions (collectively referred to as the “Securitization Agreements”) require that the initial level of Credit
Enhancement be supplemented by a portion of collections from the Contracts until the level of Credit
Enhancement reaches specified levels which are then maintained. The specified levels are generally computed
as a percentage of the principal amount remaining unpaid under the related Contracts. The specified levels at
which the Credit Enhancement is to be maintained will vary depending on the performance of the portfolios of
Contracts held by the Trusts and on other conditions, and may also be varied by agreement among the
Company, the SPS, the Note Insurers and the trustee. Such levels have increased and decreased from time to
time based on performance of the various portfolios, and have also varied by Securitization Agreement. The
Securitization Agreements generally grant the Company the option to repurchase the sold Contracts from the
Trust when the aggregate outstanding balance of the Contracts has amortized to a specified percentage of the
initial aggregate balance.
24
The prior securitizations that were treated as sales for financial accounting purposes differ from secured
financings in that the Trust to which the SPS sold the Contracts met the definition of a “qualified special
purpose entity” under Statement of Financial Accounting Standards No. 140 (“SFAS 140”). As a result, assets
and liabilities of the Trust are not consolidated into the Company’s Consolidated Balance Sheet.
The Company’s warehouse securitization structures were similar to the above, except that (i) the SPS that
purchases the Contracts pledges the Contracts to secure promissory notes which it issues, (ii) the promissory
notes are in an aggregate principal amount of not more than 73.0% to 73.5% of the aggregate principal balance
of the Contracts (that is, at least 26.5% overcollateralization), and (iii) no increase in the required amount of
Credit Enhancement is contemplated unless certain portfolio performance tests are breached. During the
quarter ended September 30, 2003 the warehouse securitizations related to the CPS Programs were amended to
cause the transactions to be treated as secured financings for financial accounting purposes. The Contracts held
by the warehouse SPSs and the promissory notes that they issue are therefore included in the Company’s
Consolidated Financial Statements as of December 31, 2004 and 2003 as assets and liabilities, respectively.
Upon each sale of Contracts in a securitization structured as a secured financing, whether a term securitization
or a warehouse securitization, the Company retains on its Consolidated Balance Sheet the Contracts securitized
as assets and records the Notes issued in the transaction as indebtedness of the Company.
Under the prior securitizations structured as sales for financial accounting purposes, the Company removed
from its Consolidated Balance Sheet the Contracts sold and added to its Consolidated Balance Sheet (i) the
cash received, if any, and (ii) the estimated fair value of the ownership interest that the Company retains in
Contracts sold in the securitization. That retained or residual interest (the “Residual”) consists of (a) the cash
held in the Spread Account, if any, (b) overcollateralization, if any, (c) subordinated Notes retained, if any, and
(d) receivables from Trust, which include the net interest receivables (“NIRs”). NIRs represent the estimated
discounted cash flows to be received from the Trust in the future, net of principal and interest payable with
respect to the Notes, 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. Until the maturity of these transactions, the Company’s Consolidated
Balance Sheet will reflect both securitization transactions structured as sales and others structured as secured
financings.
With respect to securitizations structured as sales for financial accounting purposes, the Company allocates its
basis in the Contracts between the Notes sold 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. 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 of anticipated cash flows that it estimates will
be released to the Company in the future (the cash out method), using a discount rate that the Company
believes is appropriate for the risks involved. The anticipated cash flows include collections from both current
and charged off receivables. The Company has used an effective pre-tax discount rate of 14% per annum
except for certain collections from charged off receivables related to the Company’s securitizations in 2001
and later where the Company has used a discount rate of 25% 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 Trusts that represent collections on the Contracts
in excess of the amounts required to pay principal and interest on the Notes, the base servicing fees, and
certain other fees (such as trustee and custodial fees). Required principal payments on the notes are generally
defined as the payments sufficient to keep the principal balance of the Notes equal to the aggregate principal
balance of the related Contracts (excluding those Contracts that have been charged off), or a pre-determined
percentage of such balance. Where that percentage is less than 100%, the related Securitization Agreements
require accelerated payment of principal until the principal balance of the Notes is reduced to the specified
percentage. Such accelerated principal payment is said to create overcollateralization of the Notes.
25
If the amount of cash required for payment of fees, interest and principal exceeds the amount collected during
the collection period, the shortfall is withdrawn from the Spread Account, if any. If the cash collected during
the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related
Spread Account or other form of Credit Enhancement, the excess is released to the Company, or in certain
cases is transferred to other Spread Accounts related to transactions insured by the same Note Insurer that may
be below their required levels. If the total Credit Enhancement amount is not at the required level, then the
excess cash collected is retained in the Trust until the specified level is achieved. Although Spread Account
balances are held by the Trusts on behalf of the Company’s SPS as the owner of the Residuals (in the case of
securitization transactions structured as sales for financial accounting purposes) or the Trusts (in the case of
securitization transactions structured as secured financings for financial accounting purposes), 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 Securitization Agreements. The interest rate
payable on the Contracts is significantly greater than the interest rate on the Notes. As a result, the Residuals
described above are a significant asset of the Company. In determining the value of the Residuals, the
Company must estimate the future rates of prepayments, delinquencies, defaults, default loss severity, and
recovery rates, as all of these factors affect the amount and timing of the estimated cash flows. The Company
estimates prepayments by evaluating historical prepayment performance of comparable Contracts. As of
December 31, 2004, the Company used prepayment estimates of approximately 20.0% to 30.5% cumulatively
over the lives of the related Contracts. 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. The Company estimates recovery rates of previously charged off receivables using
available historical recovery data. In valuing the Residuals as of December 31, 2004, the Company estimates
that charge-offs as a percentage of the original principal balance will approximate 17.2% to 26.3%
cumulatively over the lives of the related Contracts, with recovery rates approximating 3.2% to 5.8% of the
original principal balance.
Following a securitization that is structured as a sale for financial accounting purposes, interest income is
recognized on the balance of the Residuals at the same rate as used for calculating the present value of the
NIRs, which is 14% per annum. In addition, the Company will recognize as a gain additional revenue from the
Residuals if the actual performance of the Contracts is better than the Company’s estimate of the value of the
residual. If the actual performance of the Contracts were worse than the Company’s estimate, then a downward
adjustment to the carrying value of the Residuals and a related impairment charge would be required. In a
securitization structured as a secured financing for financial accounting purposes, interest income is recognized
when accrued under the terms of the related Contracts and, therefore, presents less potential for fluctuations in
performance when compared to the approach used in a transaction structured as a sale for financial accounting
purposes.
In all the Company’s term securitizations, whether treated as secured financings or as sales, the Company has
sold the receivables (through a subsidiary) to the securitization Trust. The difference between the two
structures is that in securitizations that are treated as secured financings the Company reports the assets and
liabilities of the securitization Trust on its Consolidated Balance Sheet. Under both structures the Noteholders
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, however, are subordinate to the Notes until the
Noteholders are fully paid, and the Company is therefore at risk to that extent.
(c) 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 the differences between the
financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in
26
tax rates is recognized in income in the period that includes the enactment date. The Company has estimated a
valuation allowance against that portion of the deferred tax asset whose utilization in future periods is not more
than likely.
In determining the possible realization of deferred tax assets, future taxable income from the following sources
are considered: (a) the 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 periods in which net operating losses might otherwise expire.
See “Liquidity and Capital Resources” and Note 1 of Notes to Consolidated Financial Statements.
Results of Operations
Acquisitions
The Company’s Consolidated Balance Sheet and Consolidated Statement of Operations as of and for the years
ended December 31, 2004, 2003 and 2002 include the results of operations of MFN Financial Corporation for
the period subsequent to March 8, 2002, the date on which the Company acquired that corporation and its
subsidiaries in the MFN Merger. See Note 2 of Notes to Consolidated Financial Statements, Acquisition of
MFN Financial Corporation.
The Company’s Consolidated Balance Sheet and Consolidated Statement of Operations as of and for the year
ended December 31, 2004 and 2003 include the results of operations of TFC Enterprises, Inc. for the period
subsequent to May 20, 2003, the date on which the Company acquired that corporation and its subsidiaries in
the TFC Merger. See Note 2 of Notes to Consolidated Financial Statements, Acquisition of TFC Enterprises,
Inc.
Effects of Change in Securitization Structure
The Company’s decision in the third quarter of 2003 to structure securitization transactions as borrowings
secured by receivables for financial accounting purposes, rather than as sales of receivables, has affected and
will affect the way in which the transactions are reported. The major effects are these: (i) the finance
receivables are shown as assets of the Company on its balance sheet; (ii) the debt issued in the transactions is
shown as indebtedness of the Company; (iii) cash deposited to enhance the credit of the securitization
transactions (“Spread Accounts”) is shown as “Restricted cash” on the Company’s balance sheet; (iv) cash
collected from borrowers and other sources related to the receivables prior to making the required payments
under the Securitization Agreements is also shown as “Restricted cash” on the Company’s balance sheet; (v)
the servicing fee that the Company receives in connection with such receivables is recorded as a portion of the
interest earned on such receivables in the Company’s statements of operations; (vi) the Company has initially
and periodically recorded as expense a provision for estimated credit losses on the receivables in the
Company’s statements of operations; and (vii) of scheduled payments on the receivables and on the debt issued
in the transactions, the portion representing interest is recorded as interest income and expense, respectively, in
the Company’s statements of operations.
These changes collectively represent a deferral of revenue and acceleration of expenses, and thus a more
conservative approach to accounting for the Company’s operations compared to the previous term
securitization transactions, which were accounted for as sales at the consummation of the transaction. The
changes have resulted in the Company’s reporting lower earnings than it would have reported if it had
continued to structure its securitizations to require recognition of gain on sale. As a result, reported earnings
have been less than they would have been had the Company continued to structure its securitizations to record
a gain on sale. It should also be noted that growth in the Company’s portfolio of receivables in excess of
current expectations would result in an increase in expenses in the form of provision for credit losses, and
27
would initially have a negative effect on net earnings. The Company’s cash availability and cash requirements
should be unaffected by the change in structure.
The Company has conducted six term securitizations of Contracts originated under the CPS Programs
structured as secured financings. These securitizations were completed in the following periods: September
2003, December 2003, May 2004, August 2004, September 2004 and December 2004. In March 2004, the
Company completed a securitization of its retained interest in eight securitization transactions previously
sponsored by the Company and its affiliates, which was also structured as a secured financing. In addition, in
June 2004, the Company completed a term securitization of Contracts purchased in the SeaWest Asset
Acquisition and under the TFC Programs, which was structured as a secured financing. The Company’s MFN
and TFC subsidiaries completed term securitizations structured as secured financings prior to their becoming
subsidiaries of the Company.
The Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Revenues. During the year ended December 31, 2004, revenues were $132.7 million, an increase of $27.7
million, or 26.4%, from the prior year revenue of $105.0 million. The primary reason for the increase in
revenues is an increase in interest income. Interest income for the year ended December 31, 2004 increased
$47.7 million, or 81.9%, to $105.8 million in 2004 from $58.2 million in 2003. The primary reasons for the
increase in interest income are the change in securitization structure implemented during the third quarter of
2003 as described above (an increase of $56.0 million) and the interest income earned on the portfolios of
Contracts acquired in the TFC Merger (an increase of $7.2 million) and the SeaWest Asset Acquisition (an
increase of $6.1 million). This increase was partially offset by the decline in the balance of the portfolio of
Contracts acquired in the MFN Merger (resulting in a decrease of $10.1 million in interest income) and a
decrease in residual interest income (a decrease of $11.6 million).
The increase in interest income is offset in part by the elimination of net gain on sale of Contracts revenue and
a decrease in servicing fees. As a result of the change in securitization structure, zero net gain on sale of
Contracts was recorded in 2004, compared to $10.4 million net gain on sale in the year earlier period.
Servicing fees totaling $12.5 million in the year ended December 31, 2004 decreased $4.6 million, or 26.8%,
from $17.1 million in the same period a year earlier. The decrease in servicing fees is the result of the change
in securitization structure and the consequent decline in the Company’s managed portfolio held by non-
consolidated subsidiaries. The decrease was partially offset by the servicing fees earned on the SeaWest Third
Party Portfolio, which totaled $2.0 million. As a result of the decision to structure future securitizations as
secured financings, the Company’s managed portfolio held by non-consolidated subsidiaries will continue to
decline in future periods, and servicing fee revenue is anticipated to decline proportionately. As of December
31, 2004 and 2003, the Company’s managed portfolio owned by consolidated vs. non-consolidated
subsidiaries and other third parties was as follows:
December 31, 2004
December 31, 2003
Amount
%
Amount
%
Total Managed Portfolio
Owned by Consolidated Subsidiaries……..……$
Owned by Non-Consolidated Subsidiaries……$
SeaWest Third Party Portfolio……………...…$
Total……………………………….……………$
619.8
233.6
53.5
906.9
($ in millions)
68.3% $
25.8%
5.9%
100.0% $
315.6
425.5
-
741.1
42.6%
57.4%
0.0%
100.0%
At December 31, 2004, the Company was generating income and fees on a managed portfolio with an
outstanding principal balance approximating $906.9 million (this amount includes $53.5 million related to the
SeaWest Third Party Portfolio on which the Company earns only servicing fees), compared to a managed
28
portfolio with an outstanding principal balance approximating $741.1 million as of December 31, 2003. As the
portfolios of Contracts acquired in the MFN Merger and the TFC Merger decrease, the portfolio of Contracts
originated under the CPS Programs continues to expand. At December 31, 2004 and 2003, the managed
portfolio composition was as follows:
December 31, 2004
December 31, 2003
Amount
%
Amount
%
Originating Entity
CPS……………………………………….……$
TFC………………………………..………… $
MFN………………………………...…………$
SeaWest……………………………….………$
SeaWest Third Party Portfolio……………..…$
Total………………………………….……… $
706.8
89.4
17.8
39.4
53.5
906.9
($ in millions)
77.9% $
9.9%
2.0%
4.3%
5.9%
100.0% $
543.8
123.6
73.7
-
-
741.1
73.4%
16.7%
9.9%
0.0%
0.0%
100.0%
Other income decreased $4.9 million, or 25.6%, to $14.4 million during 2004 from $19.3 million during 2003.
The period over period decrease resulted primarily from a sales tax refund of $3.0 received in 2003 and
decreased recoveries on previously charged off MFN Contracts, which were $8.0 million during 2004,
compared to $12.2 million for 2003.
Expenses. The Company’s operating expenses consist primarily of employee costs and other operating
expenses, which are incurred as applications and Contracts are received, processed and serviced. Factors that
affect margins and net income include changes in the automobile and automobile finance market
environments, and macroeconomic factors such as interest rates and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses
related to the accounting treatment of outstanding warrants and stock options, and are one of the Company’s
most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate
with the level of applications and Contracts processed and serviced.
Other operating expenses consist primarily of interest expense, provisions for credit losses, facilities expenses,
telephone and other communication services, credit services, computer services (including employee costs
associated with information technology support), professional services, marketing and advertising expenses,
and depreciation and amortization.
Total operating expenses were $148.6 million for 2004, compared to $108.0 million for 2003. The increase is
primarily due to a $21.2 million increase in the provision for credit losses to $32.6 million during the 2004
period as compared to $11.4 million in the 2003 period. Increased interest expense was also significant.
Employee costs increased to $38.2 million during 2004, representing 25.7% of total operating expenses, from
$37.1 million for 2003, or 34.4% of total operating expenses. The slight increase is primarily the result of staff
additions related to increased Contract purchases in 2004 (an increase of $3.9 million). This increase was
partially offset by staff reductions since the MFN Merger in 2002 related to the integration and consolidation
of certain service and administrative activities and the decline in the balance of the portfolio of Contracts
acquired in the MFN Merger (a decrease of $3.2 million). The decrease as a percentage of total operating
expenses reflects the higher total of operating expenses, primarily a result of the increased provision for credit
losses and interest expense.
General and administrative expenses remained essentially unchanged at $21.3 million, or 14.3% of total
operating expenses, in 2004, as compared to $21.3 million, or 19.7% of total operating expenses, in 2003. The
decrease as a percentage of total operating expenses reflects the higher operating expenses primarily a result of
the provision for credit losses and interest expense.
29
Interest expense for 2004 increased $8.3 million, or 34.7%, to $32.1 million, compared to $23.9 million in
2003. The increase is primarily the result of changes in the amount and composition of securitization trust debt
carried on the Company’s Consolidated Balance Sheet. Such debt increased as a result of the change in
securitization structure implemented beginning in July 2003, the TFC Merger in May 2003 and the SeaWest
Asset Acquisition in April 2004 (a combined increase of approximately $10.3 million), partially offset by the
decrease in the balance of the securitization trust debt acquired in the MFN Merger (resulting in a decrease of
approximately $2.0 million in interest expense).
Impairment loss increased by $7.7 million, or 190.0%, to $11.8 million in 2004 as compared to $4.1 million in
2003. Such impairment loss relates to the Company’s analysis and estimate of the expected ultimate
performance of the Company’s previously securitized pools that are held by non-consolidated subsidiaries and
the residual interest in securitizations. The impairment loss is a result of the actual net loss and prepayment
rates exceeding the Company’s previous estimates for the Contracts held by non-consolidated subsidiaries.
Marketing expenses increased by $3.0 million, or 55.0%, and represented 5.6% of total operating expenses.
The increase is primarily due to the increase in Contracts purchased by the Company during the year ended
December 31, 2004.
Occupancy expenses decreased by $410,000, or 10.4%, and represented 2.4% of total operating expenses. The
decrease is primarily due to the closure and sub-leasing during 2004 of certain facilities acquired in the MFN
Merger and the TFC Merger.
Depreciation and amortization expenses decreased by $215,000, or 21.5%, to $785,000 from $1.0 million.
No income tax benefit was recorded in 2004 as compared to $3.4 million recorded in 2003 periods. The 2003
benefit is primarily the result of the resolution of certain Internal Revenue Service examinations of previously
filed MFN tax returns, resulting in a tax benefit of $4.9 million, and other state tax matters resulting in a tax
provision of $1.5 million. The Company does not expect any comparable income tax benefit in future periods.
The Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Revenues. During the year ended December 31, 2003, revenues were $105.0 million, an increase of $6.6
million, or 6.7%, from the prior year revenue of $98.4 million. With the change in securitization structure and
consequent end to recording gain on sale revenue in the third quarter of 2003, net gain on sale of Contracts
decreased $11.1 million, or 51.6%, to $10.4 million in 2003, compared to $21.5 million in 2002.
Interest income for the year ended December 31, 2003 increased $9.5 million, or 19.6%, to $58.2 million in
2003 from $48.6 million in 2002. The primary reasons for the increase in interest income are the change in
securitization structure (an increase of $11.3 million), the interest income earned on the portfolio of Contracts
acquired in the TFC Merger (an increase of $13.9 million) and an increase in residual interest income (an
increase of $0.7 million). This increase was partially offset by the decline in the balance of the portfolio of
Contracts acquired in the MFN Merger (resulting in a decrease of $16.4 million in interest income).
Servicing fees totaling $17.1 million in the year ended December 31, 2003 increased $2.4 million, or 16.7%,
from $14.6 million in the same period a year earlier. The increase in servicing fees can be attributed to the
growth of the Company’s managed portfolio held by non-consolidated subsidiaries related to the CPS
Programs. For the year ended December 31, 2003, the Company’s managed portfolio held by non-consolidated
subsidiaries had an average outstanding principal balance approximating $489.9 million, compared to $347.3
million for the year ended December 31, 2002. At December 31, 2003, the Company’s managed portfolio held
by consolidated subsidiaries had an outstanding principal balance approximating $315.6 million, compared to
$117.1 million as of December 31, 2002. As a result of the decision to structure future securitizations as
secured financings, the Company’s managed portfolio held by non-consolidated subsidiaries will decline in
future periods, and servicing fee revenue is anticipated to decline proportionately.
30
At December 31, 2003, the Company was generating income and fees on a managed portfolio with an
outstanding principal balance approximating $741.1 million, compared to a managed portfolio with an
outstanding principal balance approximating $595.2 million as of December 31, 2002. As the portfolio of
Contracts acquired in the MFN Merger amortizes, the portfolio of Contracts originated under the CPS and TFC
programs continues to expand. At December 31, 2003 and 2002, the managed portfolio composition was as
follows:
December 31, 2003
December 31, 2002
Amount
%
Amount
%
Originating Entity
CPS………………………………..……………$
TFC…………………………………...……… $
MFN……………………...……………………$
Total……………………………….……………$
543.8
123.6
73.7
741.1
($ in millions)
73.4% $
16.7%
9.9%
100.0% $
394.3
-
200.9
595.2
66.2%
0.0%
33.8%
100.0%
Other income increased 42% to $19.3 million in 2003 from $13.6 million in 2002. The period over period
increase can be attributed in part to the receipt of state sales tax refunds of $3.2 million during third quarter of
2003 and recoveries on previously charged off MFN Contracts totaling $12.2 million for the year ended
December 31, 2003, compared to $10.5 million for the comparable period in 2002.
Expenses. The Company’s operating expenses consist primarily of employee costs and other operating
expenses, which are incurred as applications and Contracts are received, processed and serviced. Factors that
affect margins and net income include changes in the automobile and automobile finance market
environments, macroeconomic factors such as interest rates and the unemployment level, and mix of business
between Contracts purchased on a flow basis and Contracts purchased on an other than flow basis. The
Company ceased to purchase Contracts on a flow basis in May 2002.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses
related to the accounting treatment of outstanding stock options, and are one of the Company’s most
significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with
the level of applications and Contracts processed and serviced.
Other operating expenses consist primarily of interest expense, provisions for credit losses, facilities expenses,
telephone and other communication services, credit services, computer services (including employee costs
associated with information technology support), professional services, marketing and advertising expenses,
and depreciation and amortization.
Total operating expenses were $108.0 million for the year ended December 31, 2003, compared to $98.3
million for the same period in 2002. Total operating expenses for the year ended December 31, 2003 would
have been significantly lower except for the $11.4 million provision for credit loss expense recorded during the
third and fourth quarters of 2003. Such provision for credit loss is a result of the decision to structure
securitizations as financings, rather than as sales. Provisions for credit loss expense should be anticipated to
increase in future periods.
Employee costs decreased to $37.1 million during the year ended December 31, 2003, representing 34.4% of
total operating expenses, compared to $37.8 million for the 2002 period, or 38.4% of total operating expenses.
The decrease is primarily the result of staff reductions since the MFN Merger in 2002 related to the integration
and consolidation of certain service and administrative activities and the decline in the balance of the portfolio
of Contracts acquired in the MFN Merger (a decrease of $4.8 million). This decrease was partially offset by
staff additions related to the TFC Merger in May 2003 (an increase of $3.6 million).
31
In connection with the termination of MFN origination activities and the integration and consolidation of
certain activities (see above) related to the MFN Merger and the TFC Merger, the Company has recognized
certain liabilities related to the costs to exit these activities and terminate the affected employees of MFN and
TFC. These activities include service departments such as accounting, finance, human resources, information
technology, administration, payroll and executive management. Such exit and termination costs have been
charged against these liabilities and are not reflected in the Company’s Consolidated Statement of Operations.
General and administrative expenses increased to $21.3 million, or 19.7% of total operating expenses, in the
year ended December 31, 2003, from $20.1 million, or 20.5% of total operating expenses, in the same period
of 2002. The decrease as a percentage of total operating expenses is a result primarily of the change in
securitization structure during the third quarter of 2003 which increased total expenses, and of continued
general cost cutting during the period, offset in part by an increase in legal and other corporate expenses.
Interest expense for the year ended December 31, 2003, decreased $64,000, or 0.3%, to $23.9 million in 2003.
The slight decrease is the result of changes in the amount and composition of securitization trust debt carried
on the Company’s Consolidated Balance Sheet: such debt related to the MFN Merger declined as it was paid
down (a decrease of $3.0 million), partially offset by the addition of securitization trust debt associated with
the TFC Merger (an increase of $2.9 million) and with the securitizations subsequent to the Company’s change
in securitization structure (an increase of $0.1 million). As the Company continues to structure future
securitization transactions as secured financings, the balances of securitization trust debt and the related
interest expense are expected to increase.
Impairment loss decreased by $1.0 million, or 20.1%, to $4.1 million in 2003 as compared to $5.1 million in
2002. Such impairment loss relates to the Company’s analysis and estimate of the expected ultimate
performance of the Company’s previously securitized pools that are held by non-consolidated subsidiaries and
the residual interest in securitizations.
Marketing expenses decreased by $873,000, or 14.0%, and represented 5.0% of total operating expenses. The
decrease is primarily due to the decrease in Contracts purchased by the Company during the year ended
December 31, 2003.
Occupancy expenses decreased by $97,000, or 2.4%, and represented 3.6% of total operating expenses. The
decrease is primarily due to the closure during 2003 of certain facilities acquired in the MFN Merger. The
decrease was partially offset by the addition of facilities acquired in the TFC Merger.
Depreciation and amortization expenses decreased by $138,000, or 12.1%, to $1.0 million from $1.1 million.
Income tax benefit of $3.4 million and $2.9 million was recorded in the 2003 and 2002 periods, respectively.
The 2003 benefit is primarily the result of the resolution of certain Internal Revenue Service examinations of
previously filed MFN tax returns, resulting in a tax benefit of $4.9 million, and other state tax matters which
have been included in the current period tax provision. The 2002 benefit is due to tax legislation passed in
early 2002, which enabled the Company to reverse a previously recorded valuation allowance of
approximately $3.2 million, as well as to record benefit during the same 2002 period. The Company does not
expect any comparable income tax benefit in future periods.
Extraordinary Item. The year ended December 31, 2002 included $17.4 million of unallocated negative
goodwill, which represented the difference between the net assets acquired and the purchase price paid by the
Company in connection with the MFN Merger.
32
Liquidity and Capital Resources
Liquidity
The Company’s business requires substantial cash to support its purchases of Contracts and other operating
activities. The Company’s primary sources of cash have been cash flows from operating activities, including
proceeds from sales of Contracts, amounts borrowed under various revolving credit facilities (also sometimes
known as warehouse credit facilities), servicing fees on portfolios of Contracts previously sold in securitization
transactions or serviced for third parties, customer payments of principal and interest on finance receivables,
fees for origination of Contracts, and releases of cash from securitized portfolios of Contracts in which the
Company has retained a residual ownership interest and from the Spread Accounts associated with such pools.
The Company’s primary uses of cash have been the purchases of Contracts, repayment of amounts borrowed
under lines of credit and otherwise, operating expenses such as employee, interest, occupancy expenses and
initial
other general and administrative expenses,
overcollateralization, if any, and the increase of Credit Enhancement to required levels in securitization
transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to
meet the Company’s cash demands. The sufficiency of internally generated cash will depend on the
performance of securitized pools (which determines the level of releases from those portfolios and their related
Spread Accounts), the rate of expansion or contraction in the Company’s managed portfolio, and the terms
upon which the Company is able to acquire, sell, and borrow against Contracts.
the establishment of Spread Accounts and
Net cash provided by operating activities for the years ended December 31, 2004, 2003 and 2002 was $12.2
million, $99.8 million and $146.9 million, respectively. Cash from operating activities is generally provided by
the net releases from the Company’s securitization Trusts and from the amortization of Contracts held for sale
to non-consolidated subsidiaries offset by the purchase of such Contracts. The decrease in 2003 vs. 2002 is
primarily a result of lower cash releases from the MFN Trusts as the principal balance of the Contracts in those
two pools decreased significantly year-over-year. The decrease in 2004 vs. 2003 is primarily the result of the
Company’s decision, in July 2003, to treat all of its future securitizations as secured financings. As a result
2004 includes no activity related to Contracts held for sale.
On April 2, 2004, the Company purchased a portfolio of Contracts and certain other assets in the SeaWest
Asset Acquisition. The aggregate purchase price was approximately $63.2 million, which was funded with the
proceeds of an acquisition financing facility and existing cash. On May 20, 2003, the Company completed the
TFC Merger (see Note 2 of Notes to Consolidated Financial Statements). The acquisition cost was
approximately $23.7 million, and was substantially funded by existing cash. On March 8, 2002, the Company
completed the MFN Merger (see Note 2 of Notes to Consolidated Financial Statements). The acquisition cost
was approximately $123.2 million, and was substantially funded by existing cash and borrowings.
Net cash used in investing activities for the years ended December 31, 2004, 2003 and 2002, was $314.0
million, $179.8 million, and $29.8 million, respectively. Cash used in investing activities has generally related
to purchases of Contracts, the cost of acquiring TFC and MFN and the purchase of furniture and equipment.
With the change in the securitization structure implemented in the third quarter of 2003, $506.0 million of
Contracts were purchased for investment in 2004 as compared to $175.3 million in 2003 and none in 2002.
Cash used in the TFC Merger, net of the cash acquired in the transaction, totaled $10.2 million for the year
ended December 31, 2003. Cash used in the acquisition of MFN Financial Corporation, net of the cash
acquired in the transaction, totaled $29.5 million for the year ended December 31, 2002.
Net cash provided by financing activities for the year ended December 31, 2004, was $285.3 million compared
with $80.3 million in 2003 and net cash used in financing activities of $86.8 million for the year ended
December 31, 2002. Cash used or provided by financing activities is primarily attributable to the repayment or
issuance of debt. In connection with the TFC Merger the Company assumed securitization trust debt related to
three securitization transactions held by consolidated subsidiaries (see Note 7 of Notes to Consolidated
Financial Statements) and assumed additional subordinated debt (see Note 8 of Notes to Consolidated
Financial Statements). In connection with the MFN Merger the Company assumed securitization trust debt
related to one securitization transaction held by a consolidated subsidiary and one securitization transaction
33
held by a non-consolidated subsidiary (see Note 7 of Notes to Consolidated Financial Statements) and incurred
additional senior secured debt (see Note 8 of Notes to Consolidated Financial Statements). Cash used in
financing activities is primarily attributable to the repayment of outstanding debt. With the change in the
securitization structure implemented in the third quarter of 2003, $472.0 million of securitization trust debt
was issued in 2004 as compared to $154.4 million in 2003 and none in 2002.
There can be no assurance that cash flows generated as a result of the SeaWest Asset Acquisition, the TFC
Merger and the MFN Merger will be sufficient to meet the obligations assumed or incurred as a result of such
transactions. The sufficiency of internally generated cash will depend on the performance of the securitized
pools. At the time of the TFC Merger, TFC had outstanding $6.3 million in principal amount of subordinated
debt, which the Company assumed as part of the TFC Merger. Such debt bears interest at the rate of 13.25%
per annum payable monthly in arrears, requires monthly amortization, is due in June 2005 and has $1.0 million
outstanding at December 31, 2004. At the time of the MFN Merger, MFN had outstanding $22.5 million in
principal amount of senior subordinated debt, which was due and repaid in full on March 23, 2002. Such debt
bore interest at the rate of 11.00% per annum, payable quarterly in arrears.
Contracts are purchased from Dealers for a cash price approximating their principal amount, adjusted for an
acquisition fee which may either increase or decrease the Contract purchase price, and generate cash flow over
a period of years. As a result, the Company has been dependent on warehouse credit facilities to purchase
Contracts, and on the availability of cash from outside sources in order to finance its continuing operations, as
well as to fund the portion of Contract purchase prices not financed under revolving warehouse credit
facilities. As of December 31, 2004, the Company had $225 million in warehouse credit capacity, in the form
of a $125 million facility and a $100 million facility. The first facility provides funding for Contracts
purchased under the TFC Programs while both warehouse facilities provide funding for Contracts purchased
under the CPS Programs. A third facility in the amount of $75 million, which the Company utilized to fund
Contracts under the CPS Programs, expired on February 21, 2004. A fourth facility in the amount of $25
million, which the Company utilized to fund Contracts under the TFC Programs, expired on June 24, 2004.
Through May 2002, the Company’s Contract purchasing program consisted of both (i) flow purchases for
immediate resale to non-affiliates and (ii) purchases for the Company's own account made on other than a flow
basis, funded primarily by advances under a revolving warehouse credit facility. Flow purchases allowed the
Company to purchase Contracts with minimal demands on liquidity. The Company's revenues from the resale
of flow purchase Contracts, however, were materially less than those that may be received by holding
Contracts to maturity or by selling Contracts in securitization transactions. During the years ended December
31, 2004 and 2003 the Company purchased $447.2 million and $357.3 million, respectively, of Contracts for
its own account, compared to $282.2 million for its own account and $181.1 million of Contracts on a flow
basis in 2002. The Company’s flow purchase program ended in May 2002.
The $125 million warehouse facility is structured to allow CPS to fund a portion of the purchase price of
Contracts by drawing against a floating rate variable funding note issued by CPS Warehouse Trust. This
facility was established on March 7, 2002, in the maximum amount of $100 million. Such maximum amount
was increased to $125 million in November 2002. Up to 73% of the principal balance of Contracts may be
advanced to the Company under this facility, subject to collateral tests and certain other conditions and
covenants. Notes under this facility accrue interest at a rate of one-month commercial paper plus 1.18% per
annum. This facility was renewed on April 5, 2004 and expires on April 4, 2005.
The $100 million warehouse facility is similarly structured to allow CPS to fund a portion of the purchase
price of Contracts by drawing against a floating rate variable funding note issued by its subsidiary Page
Funding LLC. Approximately 73.5% of the principal balance of Contracts may be advanced to the Company
under this facility, subject to collateral tests and certain other conditions and covenants. Notes under this
facility accrue interest at a rate of one-month LIBOR plus 1.50% per annum. This facility was entered into on
June 30, 2004. The lender has annual termination options at its sole discretion on each June 30 through 2007,
at which time the agreement expires.
34
The $75 million warehouse facility was similarly structured to allow CPS to fund a portion of the purchase
price of Contracts by drawing against a floating rate variable funding note issued by CPS Funding LLC.
Approximately 72.5% of the principal balance of Contracts could be advanced to the Company under this
facility, subject to collateral tests and certain other conditions and covenants. Notes under this facility accrued
interest at a rate of one-month LIBOR plus 0.75% per annum. This facility expired on February 21, 2004.
The $25 million warehouse facility was similarly structured to allow TFC to fund a portion of the purchase
price of Contracts by drawing against a floating rate variable funding note issued by TFC Warehouse I LLC.
Approximately 71% of the principal balance of Contracts was advanced to TFC under this facility, subject to
collateral tests and certain other conditions and covenants. Notes under this facility accrued interest at a rate of
one-month LIBOR plus 1.75% per annum. This facility expired on June 24, 2004.
These facilities are independent of each other. With the two currently existing facilities, two different financial
institutions purchase the notes issued by these facilities, and two different insurers insure the notes (each a
“Note Insurer”). The Note Insurer on the $125 million facility is the controlling party whereas the lender on
the $100 million facility is the controlling party. Up through June 30, 2003, sales of Contracts to the special
purpose subsidiaries (“SPS”) related to the first two facilities had been treated as sales for financial accounting
purposes. The Company, therefore, removed these securitized Contracts and related debt from its Consolidated
Balance Sheet and recognized a gain on sale in the Company’s Consolidated Statement of Operations.
Indebtedness related to Contracts funded by the third facility, however, was retained on the Company’s
Consolidated Balance Sheet and no gain on sale has ever been recognized in the Company’s Consolidated
Statement of Operations. During July 2003, each of the first two facilities was amended, with the effect that
subsequent use of such facilities is treated for financial accounting purposes as borrowing secured by such
receivables, rather than as a sale of receivables. The effects of that amendment are similar to those discussed
above with respect to the change in securitization structure.
The Company securitized $463.9 million of Contracts in five private placement transactions during the year
ended December 31, 2004. All of these transactions were structured as secured financings and, therefore,
resulted in no gain on sale. The Company securitized $416.9 million of Contracts in four private placement
transactions during the year ended December 31, 2003. The first two such transactions of 2003 were structured
as sales for financial accounting purposes, resulting in a gain on sale of $6.4 million (net of a negative fair
value adjustment of $4.1 million related to the performance of previously securitized pools). The final two
transactions of 2003 were structured as secured financings and, therefore, resulted in no gain on sale. The
Company securitized $281.2 million of Contracts in three private placement transactions during the year ended
December 31, 2002. All of these transactions were structured as sales for financial accounting purposes,
resulting in a gain on sale of $16.9 million (net of a pre-tax charge of $2.5 million related to the performance
of previously securitized pools). In March 2004 a wholly-owned bankruptcy remote consolidated subsidiary of
the Company issued $44 million of asset-backed notes secured by its retained interest in eight term
securitization transactions. The notes, which have an interest rate of 10% per annum and a final maturity in
October 2009, are required to be repaid from the distributions on the underlying retained interests. In
connection with the issuance of the notes, the Company incurred and capitalized issuance costs of $1.3 million.
Prior to June 2002, the Company also purchased Contracts on a flow basis, which, as compared with purchases
of Contracts for the Company’s own account, involved a materially reduced demand on the Company’s cash.
The Company’s plan for meeting its liquidity needs is to match its levels of Contract purchases to its
availability of cash.
For the portfolio owned by non-consolidated subsidiaries, cash used to increase Credit Enhancement amounts
to required levels for the years ended December 31, 2004, 2003 and 2002 was $2.1 million, $20.9 million and
$24.2 million, respectively. Cash released from Trusts and their related Spread Accounts to the Company
related to the portfolio owned by non-consolidated subsidiaries for the years ended December 31, 2004, 2003
and 2002 was $17.2 million, $25.9 million and $60.4 million, respectively. Changes in the amount of Credit
Enhancement required for term securitization transactions and releases from Trusts and their related Spread
Accounts are affected by the relative size, seasoning and performance of the various pools of Contracts
securitized that make up the Company’s managed portfolio to which the respective Spread Accounts are
35
related. During the year ended December 31, 2004 the Company made no initial deposits to Spread Accounts
and funded no initial overcollateralization related to its term securitization transactions owned by non-
consolidated subsidiaries, compared to $18.7 million in the 2003 period and $16.7 million in the 2002 period.
The acquisition of Contracts for subsequent sale in securitization transactions, and the need to fund Spread
Accounts and initial overcollateralization, if any, and increase Credit Enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company’s Contract purchases (other than flow purchases), the required level of
initial Credit Enhancement in securitizations, and the extent to which the previously established Trusts and
their related Spread Accounts either release cash to the Company or capture cash from collections on
securitized Contracts. The Company is currently limited in its ability to purchase Contracts due to certain
liquidity constraints. As of December 31, 2004, the Company had cash on hand of $14.4 million and available
Contract purchase commitments from its warehouse credit facilities of $190.7 million. The Company’s plans
to manage the need for liquidity include the completion of additional term securitizations that would provide
additional credit availability from the warehouse credit facilities, and matching its levels of Contract purchases
to its availability of cash. There can be no assurance that the Company will be able to complete term
securitizations on favorable economic terms or that the Company will be able to complete term securitizations
at all. If the Company is unable to complete such securitizations, interest income and other portfolio related
income would decrease.
The Company’s primary means of ensuring that its cash demands do not exceed its cash resources is to match
its levels of Contract purchases to its availability of cash. The Company’s ability to adjust the quantity of
Contracts that it purchases and securitizes will be subject to general competitive conditions and the continued
availability of warehouse credit facilities. There can be no assurance that the desired level of Contract
acquisition can be maintained or increased. While the specific terms and mechanics of each Spread Account
vary among transactions, the Company’s Securitization Agreements generally provide that the Company will
receive excess cash flows only if the amount of Credit Enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the Contracts in the pool are below certain predetermined levels.
In the event delinquencies, defaults or net losses on the Contracts exceed such levels, the terms of the
securitization: (i) may require increased Credit Enhancement to be accumulated for the particular pool; (ii)
may restrict the distribution to the Company of excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on some or all of the Contracts to
another servicer. There can be no assurance that collections from the related Trusts will continue to generate
sufficient cash.
Certain of the Company’s securitization transactions and the warehouse credit facilities contain various
financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining
minimum levels of liquidity and net worth and not exceeding maximum leverage levels and maximum
financial losses. As a result of waivers and amendments to these covenants throughout 2004 and during the
first quarter of 2005, the Company was in compliance with all such covenants as of December 31, 2004.
Without the waivers and amendments obtained in the first quarter of 2005, the Company would have been in
breach of covenants related to maintaining a minimum level of net worth and incurring a maximum financial
loss as of December 31, 2004.
The Servicing Agreements of the Company’s securitization transactions and warehouse credit facilities are
terminable by the insurers of certain of the Trust’s obligations (“Note Insurers”) in the event of certain defaults
by the Company and under certain other circumstances. Were a Note Insurer in the future to exercise its option
to terminate the Servicing Agreements, such a termination would have a material adverse effect on the
Company’s liquidity and results of operations. The Company continues to receive Servicer extensions on a
monthly and/or quarterly basis, pursuant to the Servicing Agreements.
36
Contractual Obligations
The following table summarizes the Company’s material contractual obligations as of December 31, 2004
(dollars in thousands):
Long Term Debt……………………………$
76,250
$
37,039
$
39,211
$
-
$
-
Payment due by period(1)
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than
5 Years
Operating Leases……………………………$
_________________
(1)Securitization trust debt, in the aggregate amount of $542.8 million as of December 31, 2004, is omitted from this table
because it becomes due as and when the related receivables balance is reduced. Expected payments, which will depend on the
performance of such receivables, as to which there can be no assurance, are $202.7 million in 2005, $150.8 million in 2006,
$94.9 million in 2007, $56.3 million in 2008, $31.2 million in 2009, and $6.9 million in 2010
12,437
4,370
6,319
1,748
$
$
$
$
-
Long term debt includes senior secured, subordinated debt and notes payable.
Credit Facilities
The terms on which credit has been available to the Company for purchase of Contracts have varied over the
three-year period ended December 31, 2004, as shown in the following recapitulation:
In November 2000, the Company (through its subsidiary CPS Funding LLC) entered into a floating rate
variable note purchase facility under which up to $75 million of notes may be outstanding at any time subject
to collateral tests and other conditions. The Company uses funds derived from this facility to purchase
Contracts under the CPS Programs, which are pledged to secure the notes. The collateral tests and other
conditions generally allow the Company to borrow up to approximately 72.5% of the price paid for such
Contracts. Notes issued under this facility bear interest at one-month LIBOR plus 0.75% per annum. This
facility expired on February 21, 2004.
Additionally, in March 2002, the Company (through its subsidiary CPS Warehouse Trust) entered into a
second floating rate variable note purchase facility, under which up to $125.0 million of notes may be
outstanding at any time, subject to collateral tests and other conditions. The Company uses funds derived from
this facility to purchase Contracts under the CPS Programs and the TFC Programs, which are pledged to secure
the notes. The collateral tests and other conditions generally allow the Company to borrow up to
approximately 73% of the price paid for such Contracts for Contracts purchased under the CPS Programs.
Notes issued under this facility bear interest at commercial paper plus 1.18% per annum. During November
2004, this facility was amended to allow the Company to borrow up to approximately 70% for Contracts
purchased under the TFC Programs. The balance of notes outstanding related to this facility at December 31,
2004 was $34.3 million. This facility expires on April 3, 2005. The Company is currently in discussions with
the related parties to renew such facility.
In connection with the TFC Merger in May 2003, the Company (through its subsidiary TFC Warehouse I
LLC) entered into a third floating rate variable note purchase facility, under which up to $25.0 million of notes
may be outstanding at any time, subject to collateral tests and other conditions. The Company uses funds
derived from this facility to purchase Contracts under the TFC programs, which are pledged to secure the
notes. The collateral tests and other conditions generally allow the Company to borrow up to approximately
71% of the price paid for such Contracts. Notes issued under this facility bear interest at LIBOR plus 1.75%
per annum. This facility expired on June 24, 2004.
In June 2004, the Company (through its subsidiary Page Funding LLC) entered into a floating rate variable
note purchase facility to replace the $75 million facility described above. Up to $100 million of notes may be
outstanding under this facility at any time subject to certain collateral tests and other conditions. The Company
37
uses funds derived from this facility to purchase Contracts under the CPS Programs, which are pledged to
secure the notes. The collateral tests and other conditions generally allow the Company to borrow up to
approximately 73.5% of the price paid for such Contracts. Notes issued under this facility bear interest at one-
month LIBOR plus 1.50% per annum. The balance of notes outstanding related to this facility at December 31,
2004 was zero.
Capital Resources
Prior to 1999, and again in 2001, 2002, 2003 and 2004 the Company has funded increases in its managed
portfolio through 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.
As noted above, $37,039,000 of long-term debt matures prior to December 31, 2005. The Company plans to
repay its long-term debt from a combination of the following: (i) the proceeds from a public offering of
renewable notes; (ii) a possible transaction similar to the financing that it undertook in March 2004 where the
Company issued notes secured by its residual interests in securitizations; and (iii) possible senior secured
financing similar to its existing outstanding senior secured financing. There can be no assurance that the
Company will be able to complete these transactions. Securitization trust debt is repaid from collections on the
related receivables, and becomes due in accordance with its terms as the principal amount of the related
receivables is reduced. Although the securitization trust debt also has alternative maximum maturity dates,
those dates are significantly later than the dates at which repayment of the related receivables is anticipated,
and at no time in the Company’s history have any of its sponsored asset-backed securities reached those
alternative maximum maturities.
The acquisition of Contracts for subsequent transfer in securitization transactions, and the need to fund Spread
Accounts and initial overcollateralization, if any, when those transactions take place, results in a continuing
need for capital. The amount of capital required is most heavily dependent on the rate of the Company’s
Contract purchases, the required level of initial credit enhancement in securitizations, and the extent to which
the Trusts and related Spread Accounts either release cash to the Company or capture cash from collections on
securitized Contracts. The Company plans to adjust its levels of Contract purchases so as to match anticipated
releases of cash from the Trusts and related Spread Accounts with its capital requirements.
Capitalization
Over the three-year period ended December 31, 2004; the Company has managed its capitalization by issuing
and restructuring debt as summarized in the following table:
38
2004
Year Ended December 31,
2003
(In thousands)
2002
Securitization trust debt:
Beginning balance…………………………………..………...……$
Assumption in connection with MFN & TFC Merger………….…$
Issuances……………………………………...………………… $
Payments………………………………………..…………………$
Ending balance……………………………………………..………$
245,118
-
474,720
(177,023)
542,815
Senior secured debt:
Beginning balance……………………………………………...……$
Issuances………………………………………….………………$
Payments………………………………………..…………………$
Ending balance……………………………………...………………$
Subordinated debt:
Beginning balance……………………………………..……...……$
Assumption in connection with MFN & TFC Merger……………$
Payments…………………………………………………….……$
Ending balance………………………………………….………… $
Related party debt:
Beginning balance………………………………….………...…… $
Non-cash conversion………………………………………………$
Payments……………………………………...………………… $
Ending balance…………………………………..…………………$
49,965
25,000
(15,136)
59,829
35,000
-
(20,000)
15,000
17,500
(1,000)
(16,500)
-
$
$
$
$
$
$
$
$
71,630
115,597
154,375
(96,484)
245,118
50,072
25,000
(25,107)
49,965
36,000
-
(1,000)
35,000
17,500
-
-
17,500
$
$
$
$
$
$
$
$
-
156,923
-
(85,293)
71,630
26,000
46,242
(22,170)
50,072
36,989
22,500
(23,489)
36,000
17,500
-
-
17,500
The assumption of debt related to the TFC Merger is included in the 2003 activity in the table above. The
assumption of debt related to the MFN Merger is included in the 2002 activity in the table above.
During the first quarter of 2001, the Company purchased a total of $8,000,000 of outstanding indebtedness
held by Levine Leichtman Capital Partners II, L.P. (“LLCP”) and Stanwich Financial Services Corp.
(“SFSC”). The Company purchased and retired $4,000,000 of subordinated debt held by SFSC in exchange for
payment of $3,920,000, and purchased and retired $4,000,000 of senior secured debt held by LLCP in
exchange for payment of $4,200,000. The LLCP debt by its terms called for a prepayment penalty of 3% (or
$120,000); the additional 2% (or $80,000) paid in connection with its February 2001 prepayment was absorbed
by SFSC.
In March 2002, the Company and LLCP entered into an additional series of agreements under which LLCP
provided additional funding to enable the Company to acquire MFN Financial Corporation. Under the March
2002 agreements, the Company borrowed $35 million from LLCP as a bridge note (the “Bridge Note”) and
approximately $8.5 million (the “Term C Note”) on a deemed principal amount of approximately $11.2
million. The Bridge Note requires principal payments of $2.0 million a month, which began in June 2002, with
a final balloon payment in the amount of $17.0 million, which was made pursuant to the terms of the Bridge
Note in February 2003. The Term C Note repayment schedule is based on the performance of a certain
securitized pool. As the subordinated Note of the pool is repaid from the Trust, principal payments are due on
the Term C Note. The maturity date of the Term C Note was March 2008. Interest was due monthly on the
Bridge Note at a rate of 13.5% per annum and on the Term C Note at a rate of 12.0% per annum. In connection
with the March 2002 agreements and the acquisition of MFN, the Company paid LLCP a structuring fee of
$1.75 million and an investment banking fee of $1.0 million, and paid LLCP’s out-of-pocket expenses of
approximately $315,000. In addition, the Company paid LLCP certain other fees and interest amounting to
$426,181. Approximately $1.4 million of the fees and other amounts paid to LLCP were deferred as financing
costs and are being amortized over the life of the related debt. The remaining fees and other costs were
included in the purchase price of MFN.
39
At the time of the MFN Merger, MFN had outstanding $22.5 million in principal amount of senior
subordinated debt, which was due and repaid in full on March 23, 2002. Such debt bore interest at the rate of
11.00% per annum, payable quarterly in arrears. At the time of the TFC Merger, TFC had outstanding $6.3
million in principal amount of subordinated debt, which the Company assumed as part of the TFC Merger. The
remaining debt bears interest at the rate of 13.25% per annum payable monthly in arrears, requires monthly
amortization and is due in June 2005.
On February 3, 2003, the Company borrowed $25.0 million from LLCP, net of fees and expenses of $1.05
million. The indebtedness, represented by the “Term D Note,” was originally due in April 2003, with
Company options to extend the maturity to May 2003 and January 2004, upon payment of successive
extension fees of $125,000. The Company has paid the fees to extend the maturity to January 2004. Interest on
the Term D Note is payable monthly at rates that averaged 4.79% per annum through June 30, 2003, and
12.0% per annum thereafter. In a separate transaction, the Bridge Note issued to LLCP in connection with the
acquisition of MFN, in an original principal amount of $35.0 million, was due on February 28, 2003. The
outstanding principal balance of $17.0 million was paid in February 2003. In addition, the maturity of the
Term B Note was extended in October 2003 from November 2003 to January 2004. The Company repaid in
full the Term C Note on January 29, 2004 and repaid $10.0 million of the Term D Note on January 15, 2004.
In addition, on January 29, 2004 the maturities of the Term B Note and the Term D Note were extended to
December 15, 2005 and the coupons on both notes were decreased to 11.75% per annum from 14.50% and
12.00%, respectively. The Company paid LLCP fees equal to $921,000 for these amendments, which will be
amortized over the remaining life of the notes. As of December 31, 2004, the outstanding principal balances of
the Term B Note and the Term D Note were $19.8 million and $15.0 million, respectively.
On May 28, 2004 and June 25, 2004, the Company borrowed $15 million and $10 million, respectively, from
LLCP. The indebtedness, represented by the “Term E Note,” and the “Term F Note,” respectively, bears
interest at 11.75% per annum. Both the Term E Note and the Term F Note mature two years from their
respective funding dates. As of December 31, 2004, the outstanding principal balances of the Term E Note and
the Term F Note were $15.0 million and $10.0 million, respectively.
In the second quarter of 2004, the Company retired an aggregate of $37.5 million of long-term indebtedness,
comprising (i) $20.0 million of partially convertible debt (“Participating Equity Notes” or “PENs”) issued in
an April 1997 public offering and bearing interest at 10.50% per annum, (ii) $15.0 million of debt issued in
June 1997 to SFSC on terms similar to those of the PENs, but bearing interest at 9.00% per annum, (iii) $1.0
million of convertible debt issued in 1998 to a director of the Company, bearing interest at 12.50% per annum,
and (iv) $1.5 million of debt issued in 1999 to SFSC, bearing interest at 14.50% per annum. The indebtedness
to the director was converted, in accordance with its terms, into common stock at the rate of $3.00 per share;
the remainder of such indebtedness was repaid.
LLCP holds approximately 21.2% of the Company’s outstanding common shares. SFSC was an affiliate of
Charles E. Bradley, Sr., the Company’s former chairman and father of the company’s current chairman and
Chief Executive Officer, and SFSC and Mr. Bradley, Sr. together hold approximately 8.9% of the Company’s
outstanding common shares.
The Company must comply with certain affirmative and negative covenants related to debt facilities, which
require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth,
capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. As a result of
waivers and amendments to covenants related to securitization and non-securitization related debt throughout
2004 and during the first quarter of 2005, the Company was in compliance with all such covenants as of
December 31, 2004. Without the waivers and amendments obtained in the first quarter of 2005, the Company
would have been in breach of covenants related to maintaining a minimum level of net worth and incurring a
maximum financial loss as of December 31, 2004. In addition, certain securitization and non-securitization
related debt contain cross-default provisions, which would allow certain creditors to declare default if a default
were declared under a different facility.
40
In July 2000, the Board of Directors authorized the purchase of up to $5,000,000 of outstanding debt and
equity securities of the Company, inclusive of the mandatory annual purchase or redemption of $1,000,000 of
the Company’s outstanding “RISRS” subordinated debt securities, due 2006. In October 2002, the Board of
Directors authorized the purchase of an additional $5,000,000 of outstanding debt or equity securities. In
October 2004, the Board of Directors authorized the purchase of an additional $5,000,000 of outstanding debt
or equity securities. As of December 31, 2004, the Company had purchased $4.0 million in principal amount
of the RISRS, and $4.0 million of its common stock, representing 2,167,036 shares.
Forward-looking Statements
This report on Form 10-K includes certain “forward-looking statements,” including, without limitation, the
statements or implications to the effect that prepayments as a percentage of original balances will approximate
20.0% to 30.5% cumulatively over the lives of the related Contracts, that charge-offs as a percentage of
original balances will approximate 17.2% to 26.3% cumulatively over the lives of the related Contracts, with
recovery rates approximating 3.2% to 5.8% of original principal balances. Other forward-looking statements
may be identified by the use of words such as “anticipates,” “expects,” “plans,” “estimates,” or words of like
meaning. As to the specifically identified forward-looking statements, factors that could affect charge-offs and
recovery rates include changes in the general economic climate, which could affect the willingness or ability of
obligors to pay pursuant to the terms of Contracts, changes in laws respecting consumer finance, which could
affect the ability of the Company to enforce rights under Contracts, and changes in the market for used
vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles. Factors that could affect
the Company’s revenues in the current year include the levels of cash releases from existing pools of
Contracts, which would affect the Company’s ability to purchase Contracts, the terms on which the Company
is able to finance such purchases, the willingness of Dealers to sell Contracts to the Company on the terms that
it offers, and the terms on which the Company is able to complete term securitizations once Contracts are
acquired. Factors that could affect the Company’s expenses in the current year include competitive conditions
in the market for qualified personnel, and interest rates (which affect the rates that the Company pays on Notes
issued in its securitizations). The statements concerning the Company structuring future securitization
transactions as secured financings and the effects of such structures on financial items and on the Company’s
future profitability also are forward-looking statements. Any change to the structure of the Company’s
securitization transaction could cause such forward-looking statements not to be accurate. Both the amount of
the effect of the change in structure on the Company’s profitability and the duration of the period in which the
Company’s profitability would be affected by the change in securitization structure are estimates. The accuracy
of such estimates will be affected by the rate at which the Company purchases and sells Contracts, any changes
in that rate, the credit performance of such Contracts, the financial terms of future securitizations, any changes
in such terms over time, and other factors that generally affect the Company’s profitability.
Additional risk factors, any of which could have a material effect on the Company’s performance, are set forth
below:
Dependence on Warehouse Financing. The Company’s primary source of day-to-day liquidity is continuous
securitization of Contracts, under which it sells or pledges Contracts, as often as once a week, to either of two
special-purpose affiliated entities in the case of CPS, or to one of the two special-purpose affiliated entities in the
case of TFC. Such transactions function as a “warehouse,” in which Contracts are held. The Company expects to
continue to effect similar transactions (or to obtain replacement or additional financing) as current arrangements
expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on
favorable terms. To the extent that the Company is unable to maintain its existing structures or is unable to
arrange new warehouse facilities, the Company may have to curtail Contract purchasing activities, which could
have a material adverse effect on the Company’s financial condition, results of operations and liquidity.
Dependence on Securitization Program. The Company is dependent upon its ability to continue to finance
pools of Contracts in term securitizations in order to generate cash proceeds for new purchases. Adverse
changes in the market for securitized Contract pools, or a substantial lengthening of the warehousing period,
41
would burden the Company’s financing capabilities, could require the Company to curtail its purchase of
Contracts, and could have a material adverse effect on the Company. In addition, as a means of reducing the
percentage of cash collateral that the Company would otherwise be required to deposit and maintain in Spread
Accounts and overcollateralization, all of the Company’s securitizations since June 1994 have utilized Credit
Enhancement in the form of financial guaranty insurance policies issued by monoline financial guaranty
insurers. The Company believes that financial guaranty insurance policies reduce the costs of securitizations
relative to alternative forms of Credit Enhancements available to the Company. No insurer is required to insure
Company-sponsored securitizations and there can be no assurance that any will continue to do so. Similarly,
there can be no assurance that any securitization transaction will be available on terms acceptable to the
Company, or at all. The timing of any securitization transaction is affected by a number of factors beyond the
Company’s control, any of which could cause substantial delays, including, without limitation, market
conditions and the approval by all parties of the terms of the securitization.
Risk of General Economic Downturn. The Company’s business is directly related to sales of new and used
automobiles, which are affected by employment rates, prevailing interest rates and other domestic economic
conditions. Delinquencies, repossessions and losses generally increase during economic slowdowns or recessions.
Because of the Company’s focus on Sub-Prime Customers, the actual rates of delinquencies, repossessions and
losses on such Contracts could be higher under adverse economic conditions than those experienced in the
automobile finance industry in general. Any sustained period of economic slowdown or recession could
adversely affect the Company’s ability to sell or securitize pools of Contracts. The timing of any economic
changes is uncertain, and sluggish sales of automobiles and weakness in the economy could have an adverse
effect on the Company’s business and that of the Dealers from which it purchases Contracts.
Dependence on Performance of Securitized Contracts. Under the financial structures the Company has used to
date in its term securitizations, certain excess cash flows generated by the Contracts sold in the term
securitizations are used to increase overcollateralization or retained in a Spread Account within the securitization
trusts to provide liquidity and credit enhancement. While the specific terms and mechanics of each Spread
Account vary among transactions, the Company’s Securitization Agreements generally provide that the Company
will receive excess cash flows only if the amount of Credit Enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the Contracts in the pool are below certain predetermined levels. In
the event delinquencies, defaults or net losses on the Contracts exceed such levels, the terms of the securitization:
(i) may require increased Credit Enhancement to be accumulated for the particular pool; (ii) may restrict the
distribution to the Company of excess cash flows associated with other pools; or (iii) in certain circumstances,
may permit the insurers to require the transfer of servicing on some or all of the Contracts to another servicer.
Any of these conditions could materially adversely affect the Company’s liquidity and financial condition.
Creditworthiness of Consumers. The Company specializes in the purchase, sale and servicing of Contracts to
finance automobile purchases by Sub-Prime Customers, which entail a higher risk of non-performance, higher
delinquencies and higher losses than Contracts with more creditworthy customers. While the Company believes
that the underwriting criteria and collection methods it employs enable it to control the higher risks inherent in
Contracts with Sub-Prime Customers, no assurance can be given that such criteria and methods will afford
adequate protection against such risks. The Company has experienced fluctuations in the delinquency and charge-
off performance of its Contracts. In the event that portfolios of Contracts securitized and serviced by the
Company experience greater defaults, higher delinquencies or higher net losses than anticipated, the Company’s
income could be negatively affected. A larger number of defaults than anticipated could also result in adverse
changes in the structure of the Company's future securitization transactions, such as a requirement of increased
cash collateral or other Credit Enhancement in such transactions.
Probable Increase in Cost of Funds. The Company’s profitability is determined by, among other things, the
difference between the rate of interest charged on the Contracts purchased by the Company and the rate of
interest payable to purchasers of Notes issued in securitizations. The Contracts purchased by the Company
generally bear finance charges close to or at the maximum permitted by applicable state law. The interest rates
payable on such Notes are fixed, based on interest rates prevailing in the market at the time of sale. Consequently,
increases in market interest rates tend to reduce the “spread” or margin between Contract finance charges and the
interest rates required by investors and, thus, the potential operating profits to the Company from the purchase,
42
securitization and servicing of Contracts. Operating profits expected to be earned by the Company on portfolios
of Contracts previously securitized are insulated from the adverse effects of increasing interest rates because the
interest rates on the related Notes were fixed at the time the Contracts were sold. With interest rates near
historical lows as of the date of this report, it is reasonable to expect that interest rates will increase in the near to
intermediate term. Any future increases in interest rates would likely increase the interest rates on Notes issued in
future term securitizations and could have a material adverse effect on the Company’s results of operations and
liquidity.
Prepayments and Credit Losses. Gains from the sale of Contracts in the Company’s past securitization
transactions structured as sales for financial accounting purposes have constituted a significant portion of the
revenue of the Company. A portion of the gains is based in part on management’s estimates of future
prepayments and credit losses and other considerations in light of then-current conditions. If actual
prepayments with respect to Contracts occur more quickly than was projected at the time such Contracts were
sold, as can occur when interest rates decline, or if credit losses are greater than projected at the time such
Contracts were sold, a charge to income may be required and would be taken in the period of adjustment (as
has been the case, for example, in the year ended December 31, 2004). If actual prepayments occur more
slowly or if net losses are lower than estimated with respect to Contracts sold, total revenue would exceed
previously estimated amounts.
Provisions for credit losses are recorded in connection with the origination and throughout the life of Contracts
that are held on the Company’s Consolidated Balance Sheet. Such provisions are based on management’s
estimates of future credit losses in light of then-current conditions. If actual credit losses in a given period
exceed the allowance for credit losses, a bad debt expense during the period would be required.
Competition. The automobile financing business is highly competitive. The Company competes with a number
of national, local and regional finance companies. In addition, competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings and loan associations, leasing
companies, credit unions providing retail loan financing and lease financing for new and used vehicles and
captive finance companies affiliated with major automobile manufacturers such as General Motors Acceptance
Corporation and Ford Motor Credit Corporation. Many of 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 relative to that of its competitors. The Company’s competitors and potential competitors include far
larger, more established companies that have access to capital markets for unsecured commercial paper and
investment grade rated debt instruments, and to other funding sources which may be unavailable to the
Company. Many of these companies also have longstanding relationships with Dealers and may provide other
financing to Dealers, including floor plan financing for the Dealers’ purchases of automobiles from
manufacturers, which is not offered by the Company. There can be no assurance that the Company will be able
to continue to compete successfully.
Litigation. Because of 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 class-
action 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. Although the
Company is not involved in any such material consumer protection litigation, a significant judgment against
the Company or within the industry in connection with any such litigation, or an adverse outcome in the
litigation identified under the caption “Legal Proceedings” in this report, could have a material adverse effect
on the Company’s financial condition, results of operations and liquidity.
Dependence on Dealers. The Company is dependent upon establishing and maintaining relationships with
unaffiliated Dealers to supply it with Contracts. During the year ended December 31, 2004, no Dealer
accounted for more than 1.0% of the Contracts purchased by the Company. The Dealer Agreements do not
require Dealers to submit a minimum number of Contracts for purchase by the Company. The failure of
Dealers to submit Contracts that meet the Company’s underwriting criteria would have a material adverse
effect on the Company’s financial condition, results of operations and liquidity.
43
Government Regulations. The Company’s business is subject to numerous federal and state consumer protection
laws and regulations, which, among other things: (i) require the Company to obtain and maintain certain licenses
and qualifications; (ii) limit the interest rates, fees and other charges the Company is allowed to charge; (iii) limit
or prescribe certain other terms of its Contracts; (iv) require the Company to provide specified disclosures; and
(v) regulate certain servicing and collection practices and define its rights to repossess and sell collateral. An
adverse change in existing laws or regulations, or in the interpretation thereof, the promulgation of any additional
laws or regulations, or the failure to comply with such laws and regulations could have a material adverse effect
on the Company’s financial condition, results of operations and liquidity.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“FAS 123(R)” or the “Statement”). FAS 123 (R) requires that the
compensation cost relating to share-based payment transactions, including grants of employee stock options,
be recognized in financial statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair
value objective in the Statement. (Modifications of share-based payments will be treated as replacement
awards with the cost of the incremental value recorded in the financial statements.)
The Statement is effective at the beginning of the third quarter of 2005. As of the effective date, the Company
will apply the Statement using a modified version of prospective application. Under that transition method,
compensation cost is recognized for (1) all awards granted after the required effective date and to awards
modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma
disclosures under SFAS 123.
The impact of this Statement on the Company in 2005 and beyond will depend upon various factors, among
them being our future compensation strategy. The pro forma compensation costs presented (in the table above)
and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may
not be indicative of amounts that should be expected in future periods.
In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of
Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP
03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to
be collected from purchased loans or debt securities if those differences are attributable, in part, to credit
quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on
the present value of the cash flows expected to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be recognized based on the effective yield from the
cash flows expected to be collected. To the extent that the purchased loans or debt securities experience
subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash
flows that are not expected to be received. However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will
be effective for loans and debt securities acquired after December 31, 2004. The Company’s finance
receivables are acquired shortly after origination and there is no credit deterioration during the time between
origination of the finance receivable and purchase by the Company. Accordingly, management does not expect
the adoption of this statement to have a material impact on the Company's consolidated financial statements.
Off-Balance Sheet Arrangements
Prior to July 2003, the Company structured its securitization transactions to meet the accounting criteria for
sales of finance receivables. In this structure the notes issued by the Company’s special purpose subsidiary do
44
not appear as debt on the Company’s consolidated balance sheet. See Critical Accounting Policies for a
detailed discussion of the Company’s securitization structure.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is subject to interest rate risk during the period between when Contracts are purchased from
Dealers and when such Contracts become part of a term securitization. Specifically, the interest rates on the
warehouse facilities are adjustable while the interest rates on the Contracts are fixed. Historically, the
Company’s term securitization facilities have had fixed rates of interest. To mitigate some of this risk, the
Company has in the past, and intends to continue to, structure certain of its securitization transactions to
include pre-funding structures, whereby the amount of Notes issued exceeds the amount of Contracts initially
sold to the Trusts. In pre-funding, 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 Contracts
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 Notes outstanding, the amount as to which
there can be no assurance.
The following table provides information on the Company’s interest rate-sensitive financial instruments by
expected maturity date as of December 31, 2004:
2005
2006
2007
2008
2009
Thereafter
Fair Value
(In thousands)
Assets:
Finance receivables(1)………$
283,581
$
168,932
$
105,004
$
59,826
$
30,360
$
6,191
$
653,894
-
-
19,493
34,279
$
Liabilities:
Warehouse lines
$
of credit……………………$
Residual interest
$
financing………………… $
Securitization
$
trust debt………………… $
Weighted average
effective interest rate…… $
Senior secured debt…………$
Subordinated debt……………$
_________________________
(1) Includes approximately $34.1 million in unfunded Contracts that are included in Restricted Cash at December 31, 2004 as a
result of a prefunding structure.
2.98%
34,829
1,000
3.38%
25,000
14,000
4.31%
-
-
3.93%
-
-
4.01%
-
-
4.01%
-
-
59,829
15,000
150,798
539,749
202,713
22,204
34,279
31,204
94,929
56,342
6,829
2,711
-
-
-
-
-
-
-
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 the dates shown in the table, the amounts that will actually be realized or paid at
settlement or maturity of the instruments could be significantly different.
45
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.
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure
On October 16, 2004, the Company notified KPMG LLP ("KPMG") that KPMG's appointment as the
Company's independent auditor would cease upon completion of the review of the Company's consolidated
financial statements as of and for the three- and nine- month periods ended September 30, 2004. The Audit
Committee of the Board of Directors of the Company approved the decision to terminate such appointment.
KPMG's audit reports on the Company's financial statements for the most recent two fiscal years, which ended
December 31, 2003 and 2002, respectively, did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting principles.
On November 15, 2004, KPMG completed its review of the Company's consolidated financial statements as of
and for the three- and nine- month periods ended September 30, 2004. KPMG's appointment as the Company's
independent auditor ended at that time. On November 23, 2004 the Company engaged McGladrey & Pullen,
LLP to perform the audit of the Company’s consolidated financial statements of and for the year ending
December 31, 2004.
In connection with its audits of the Company's financial statements for the two most recent fiscal years, ended
December 31, 2002 and 2003, and through November 15, 2004:
a) there were no disagreements between the Company and KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved
to KPMG's satisfaction, would have caused KPMG to make reference to the subject matter of the
disagreements in connection with its opinions on the financial statements; and
b) there were no reportable events (as specified in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures
Quarterly Evaluation of the Company’s Disclosure Controls and Internal Controls
The Company maintains a system of internal controls and procedures designed to provide reasonable assurance
as to the reliability of its published financial statements and other disclosures included in this report. As of the
end of the period covered by this report, The Company evaluated the effectiveness of the design and operation
of such disclosure controls and procedures. Based upon that evaluation, the principal executive officer (Charles
E. Bradley, Jr.) and the principal financial officer (Robert E. Riedl) concluded that the disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on a timely basis, material
information relating to the Company that is required to be included in its reports filed under the Securities
Exchange Act of 1934. There have been no significant changes in our internal controls over financial reporting
during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
46
CEO and CFO Certifications
Immediately following the Signatures section of this Annual Report, there are two separate forms of
“Certifications” of the CEO and the CFO. The first form of Certification (the Rule 13a-14 Certification) is
required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). This Controls and
Procedures section of the Annual Report includes the information concerning the Controls Evaluation referred
to in the Rule 13a-14 Certifications and it should be read in conjunction with the Rule 13a-14 Certifications for
a more complete understanding of the topics presented.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities and Exchange Commission's (the “SEC”) rules and
forms. Disclosure Controls are also designed to ensure that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures designed to provide reasonable assurance that
(1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper
use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our
Consolidated Financial Statements in conformity with accounting principles generally accepted in the United
States of America.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or
our Internal Controls will prevent all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls
can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with its policies or procedures.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
Scope of the Controls Evaluation
The evaluation of our Disclosure Controls and our Internal Controls included a review of the controls'
objectives and design, the Company’s implementation of the controls and the effect of the controls on the
information generated for use in this Annual Report. In the course of the Controls Evaluation, we sought to
identify data errors, controls problems or acts of fraud and confirm that appropriate corrective actions,
including process improvements, were being undertaken. This type of evaluation is performed on a quarterly
basis so that the conclusions of management, including the CEO and CFO, concerning controls effectiveness
can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our Internal
Controls are also evaluated by other personnel in our organization, as well as independent interested third
47
parties such as financial guaranty insurers or their designees. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and our Internal Controls, and to modify them as necessary;
our intent is to maintain the Disclosure Controls and the Internal Controls as dynamic systems that change as
conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any “significant
deficiencies” or “material weaknesses” in the Company’s Internal Controls, and whether the Company had
identified any acts of fraud involving personnel with a significant role in the Company’s Internal Controls.
This information was important both for the Controls Evaluation generally, and because items 5 and 6 in the
Rule 13a-14 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our
Board’s Audit Committee and our independent auditors, and report on related matters in this section of the
Annual Report. In professional auditing literature, “significant deficiencies” are referred to as “reportable
conditions,” which are control issues that could have a significant adverse effect on the ability to record,
process, summarize and report financial data in the Consolidated Financial Statements. Auditing literature
defines “material weakness” as a particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the Consolidated Financial Statements and the risk that such misstatements
would not be detected within a timely period by employees in the normal course of performing their assigned
functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a
problem was identified, we considered what revision, improvement and/or correction to make in accordance
with our ongoing procedures.
From the date of the Controls Evaluation to the date of this Annual Report, there have been no significant
changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material weaknesses.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted
above, our Disclosure Controls are effective to ensure that material information relating to Consumer Portfolio
Services, Inc. and its consolidated subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our Consolidated Financial Statements are fairly presented in
conformity with accounting principles generally accepted in the United States of America.
48
PART III
Item 10. Directors and Executive Officers
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 2005 (the “2005 Proxy Statement”). The 2005
Proxy Statement will be filed not later than April 30, 2005. 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 2005 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the 2005 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the 2005 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to the 2005 Proxy Statement.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8K
(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 exhibits listed below are filed as part of this report, whether filed herewith or incorporated by reference to
an exhibit filed with the report identified in the parentheses following the description of such exhibit. Unless
otherwise indicated, each such identified report was filed by or with respect to the registrant.
Description
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.5.1
4.5.2
4.5.3
4.5.4
4.6
4.7
4.8
Agreement and Plan of Merger, dated as of November 18, 2001, by and among the Registrant, CPS Mergersub, Inc.
and MFN Financial Corporation. (Form 8-K filed on November 19, 2001 by MFN Financial Corporation).
Restated Articles of Incorporation (Form 10-KSB dated December 31, 1995)
Amended and Restated Bylaws (Form 10-K dated December 31, 1997)
Indenture re Rising Interest Subordinated Redeemable Securities (“RISRS”) (Form 8-K filed December 26, 1995)
First Supplemental Indenture re RISRS (Form 8-K filed December 26, 1995)
Form of Indenture re 10.50% Participating Equity Notes (“PENs”) (Form S-3, no. 333-21289)
Form of First Supplemental Indenture re PENs (Form S-3, no. 333-21289)
Third Amended and Restated Securities Purchase Agreement dated as of January 29, 2004, between the
registrant and Levine Leichtman Capital Partners II, L.P. (“LLCP”) (Schedule 13D filed by LLCP with
respect to the registrant on February 3, 2004)
Amendment to the Agreement filed as Exhibit 4.5, dated as of March 25, 2004. (Schedule 13D filed by
LLCP with respect to the registrant on June 4, 2004)
Amendment to the Agreement filed as Exhibit 4.5, dated as of April 2, 2004. (Schedule 13D filed by
LLCP with respect to the registrant on June 4, 2004)
Amendment to the Agreement filed as Exhibit 4.5, dated as of May 28, 2004. (Schedule 13D filed by
LLCP with respect to the registrant on June 4, 2004)
Amendment to the Agreement filed as Exhibit 4.5, dated as of June 25, 2004. (Schedule 13D filed by
LLCP with respect to the registrant on June 29, 2004)
Secured Senior Note due February 28, 2003 issued by the Registrant to Levine Leichtman Capital Partners II, L.P.
(Form 8-K filed on March 25, 2002).
Second Amended and Restated Secured Senior Note due November 30, 2003 issued by the Registrant to Levine
Leichtman Capital Partners II, L.P. (Form 8-K filed on March 25, 2002).
12.00% Secured Senior Note due 2008 issued by the Registrant to Levine Leichtman Capital Partners II, L.P. (Form
8-K filed on March 25, 2002).
50
4.9
4.10
4.11
4.12
4.13
4.14
Sale and Servicing Agreement, dated as of March 1, 2002, among the Registrant, CPS Auto Receivables Trust
2002-A, CPS Receivables Corp., Systems & Services Technologies, Inc. and Bank One Trust Company, N.A.
(Form 8-K filed on March 25, 2002).
Indenture, dated as of March 1, 2002, between CPS Auto Receivables Trust 2002-A and Bank One Trust Company,
N.A. (Form 8-K filed on March 25, 2002).
Third Amended and Restated Secured Senior Note Due 2005 (Schedule 13D filed by LLCP with respect to the
registrant on February 3, 2004)
Amended and Restated Secured Senior Note (Schedule 13D filed by LLCP with respect to the registrant on
February 3, 2004)
11.75% Secured Senior Note Due 2006 (Schedule 13D filed by LLCP with respect to the registrant on February 3,
2004)
11.75% Secured Senior Note Due 2006 (Schedule 13D filed by LLCP with respect to the registrant on February 3,
2004)
10.1
1991 Stock Option Plan & forms of Option Agreements thereunder (Form 10-KSB dated March 31, 1994)
10.2
1997 Long-Term Incentive Stock Plan (Form 10-K filed March 10, 1998) (amendment thereto, adopted April 26,
2004, to be filed by amendment)
10.3
Lease Agreement re Chesapeake Collection Facility (Form 10-K dated December 31, 1996)
10.4
Lease of Headquarters Building (Form 10-Q dated September 30, 1997)
10.5
Partially Convertible Subordinated Note (Form 10-Q dated September 30, 1997)
10.13
FSA Warrant Agreement dated November 30, 1998 (Form 10-K dated December 31, 1998)
10.29
Warrant to Purchase 1,335,000 Shares of Common Stock (Schedule 13D filed on April 21, 1999)
10.31
Agreement dated May 29, 1999 for Sale of Contracts on a Flow Basis (Form 10-Q dated June 30, 1999)
10.32
Amendment to Master Spread Account Agreement (Form 10-K dated December 31, 1999)
21
List of subsidiaries of the registrant
23.1
Consent of McGladrey & Pullen, LLP (filed herewith)
23.2
Consent of KPMG Peat Marwick, LLP (filed herewith)
(b) Reports on Form 8-K
The Company filed three reports on Form 8-K during the fourth quarter of the year ended December 31, 2004:
Date
Report
of
Date Filed
Item(s) reported
September
30, 2004
October 16,
2004
October 6, 2004
items 1.01, 2.03, and 9.01
October 21, 2004
items 4.01 and 9.01
(amended October 26,
2004)
51
November
15, 2004
November 19, 2004
items 4.01, 7.01, and 9.01
No financial statements were filed with or as a part of any of such reports
Signatures and Certifications of the Chief Executive Officer and the Chief Financial Officer
The following pages include the Signatures page for this Form 10-K, and two separate Certifications of the
Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of the company.
The first form of Certification is required by Rule 13a-14 (the Rule 13a-14 Certification) under the Securities
Exchange Act of 1934 (the “Exchange Act”). The Rule 13a-14 Certification includes references to an
evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and
procedures” and its “internal controls and procedures for financial reporting.” Item 14 of Part III of this Annual
Report presents the conclusions of the CEO and the CFO about the effectiveness of such controls based on and
as of the date of such evaluation (relating to Item 4 of the Rule 13a-14 Certification), and contains additional
information concerning disclosures to the company’s Audit Committee and independent auditors with regard
to deficiencies in internal controls and fraud (Item 5 of the Rule 13a-14 Certification) and related matters (Item
6 of the Rule 13a-14 Certification).
The second form of Certification is required by section 1350 of chapter 63 of title 18 of the United States
Code.
52
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 28, 2005
By:
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
March 28, 2005
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr., Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas L. Chrystie
Thomas L. Chrystie, Director
/s/ E. Bruce Fredrikson
E. Bruce Fredrikson, Director
/s/ John E. McConnaughy, Jr.
John E. McConnaughy, Jr., Director
/s/ John G. Poole
John G. Poole, Director
/s/ William B. Roberts
William B. Roberts, Director
/s/ John C. Warner
John C. Warner, Director
/s/ Daniel S. Wood
Daniel S. Wood, Director
/s/ Robert E. Riedl
Robert E. Riedl, Chief Financial Officer
(Principal Financial Officer)
/s/ Denesh Bharwani
Denesh Bharwani, Controller
53
I, Charles E. Bradley, Jr., certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Consumer Portfolio Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant’s auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant’s ability to record, process, summarize and report financial data and have
identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 28, 2005
By:
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr.
President and Chief Executive Officer
54
I, Robert E. Riedl, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Consumer Portfolio Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant’s ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 28, 2005
By:
/s/ Robert E. Riedl
Robert E. Riedl, Chief Financial Officer
55
CERTIFICATION
Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the
United States Code, in his capacity as an officer of Consumer Portfolio Services, Inc., that, to his knowledge,
the Annual Report of Consumer Portfolio Services, Inc. on Form 10-K for the period ended December 31,
2004, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material respects, the financial condition and
results of operations of Consumer Portfolio Services, Inc.
March 28, 2005
By:
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr.
President and Chief Executive Officer
March 28, 2005
By:
/s/ Robert E. Riedl
Robert E. Riedl, Chief Financial Officer
56
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm – McGladrey & Pullen LLP ......................
Report of Independent Registered Public Accounting Firm – KPMG, LLP ...........................................
Consolidated Balance Sheets as of December 31, 2004 and 2003 ..........................................................
Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002 ........
Page
Reference
F-2
F-3
F-4
F-5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31,
2004, 2003, and 2002..........................................................................................................................
F-6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2003,
and 2002 .............................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002 .......
F-7
F-8
Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003, and
2002 ....................................................................................................................................................
F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Consumer Portfolio Services, Inc.:
We have audited the consolidated balance sheet of Consumer Portfolio Services, Inc. and subsidiaries (the
“Company”) as of December 31, 2004 and the related consolidated statements of operations, comprehensive
income (loss), shareholders’ equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States of America). 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 audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 2004, and the
results of their operations and their cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Irvine, California
March 16, 2005, except for the last paragraph of note 8 as to which the date is March 22, 2005.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Consumer Portfolio Services, Inc.:
We have audited the accompanying consolidated balance sheet of Consumer Portfolio Services, Inc. and
subsidiaries (the “Company”) as of December 31, 2003, and the related consolidated statements of operations,
comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period
ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 2003, and the
results of their operations and their cash flows for each of the years in the two-year period ended December 31,
2003, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
March 15, 2004
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2004
December 31,
2003
ASSETS
Cash
Restricted cash
Finance receivables
Less: Allowance for finance credit losses
Finance receivables, net
Servicing fees receivable
Residual interest in securitizations
Furniture and equipment, net
Deferred financing costs
Accrued interest receivable
Other assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses
Warehouse lines of credit
Tax liabilities, net
Notes payable
Residual interest financing
Securitization trust debt
Senior secured debt
Subordinated debt
Related party debt
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding
Common stock, no par value; authorized
30,000,000 shares; 21,471,478 and 20,588,924
shares issued and outstanding at December 31, 2004 and
December 31, 2003, respectively
Retained earnings
Accumulated other comprehensive loss
Deferred compensation
$
$
$
$
$
$
14,366
125,113
592,806
(42,615)
550,191
2,791
50,430
1,567
5,096
6,411
10,634
766,599
18,153
34,279
2,978
1,421
22,204
542,815
59,829
15,000
-
696,679
-
-
66,283
5,104
(1,017)
(450)
69,920
33,209
67,277
302,078
(35,889)
266,189
3,942
111,702
826
1,529
2,901
4,895
492,470
22,920
33,709
2,768
3,330
-
245,118
49,965
35,000
17,500
410,310
-
-
64,397
20,992
(2,426)
(803)
82,160
$
766,599
$
492,470
See accompanying Notes to Consolidated Financial Statements.
F-4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenues:
Net gain on sale of contracts
Interest income
Servicing fees
Other income
Expenses:
Employee costs
General and administrative
Interest
Provision for credit losses
Impairment loss on residual asset
Marketing
Occupancy
Depreciation and amortization
Income (loss) before income tax benefit
Income tax benefit
Income (loss) before extraordinary item
Extraordinary item, unallocated negative goodwill
Net income (loss)
Earnings (loss) per share before extraordinary item:
Basic
Diluted
Earnings per share, extraordinary item:
Basic
Diluted
Earnings (loss) per share after extraordinary item:
Basic
Diluted
Number of shares used in computing
earnings (loss) per share:
Basic
Diluted
Year Ended December 31,
2003
2004
2002
$
$
$
$
$
$
$
-
105,818
12,480
14,394
132,692
10,421
58,164
17,058
19,343
104,986
38,173
21,293
32,147
32,574
11,750
8,338
3,520
785
148,580
(15,888)
-
(15,888)
-
(15,888)
(0.75)
(0.75)
-
-
(0.75)
(0.75)
$
$
$
$
37,141
21,271
23,861
11,390
4,052
5,380
3,930
1,000
108,025
(3,039)
(3,434)
395
-
395
0.02
0.02
-
-
0.02
0.02
$
$
$
$
21,518
48,644
14,621
13,605
98,388
37,778
20,131
23,925
-
5,074
6,253
4,027
1,138
98,326
62
(2,934)
2,996
17,412
20,408
0.15
0.14
0.87
0.83
1.03
0.97
21,111
21,111
20,263
21,578
19,902
20,987
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
2003
2004
2002
Net income (loss)
Other comprehensive income (loss):
Minimum pension liability, net of tax
Comprehensive income (loss)
$
$
(15,888)
1,409
(14,479)
$
$
395
(832)
(437)
$
$
20,408
(1,594)
18,814
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2001
19,281
$
61,874
$
-
Deferred
Compensation
$
(377)
Retained
Earnings
Total
$
189
$
61,686
Common stock issued upon exercise
of options, including tax benefit
Purchase of common stock
Pension benefit obligation
Increase in deferred compensation
on stock options
Amortization of stock compensation
Net income
Balance at December 31, 2002
Common stock issued upon exercise
of options, including tax benefit
Purchase of common stock
Pension benefit obligation
Repurchase of warrants issued
Increase in deferred compensation
on stock options
Amortization of stock compensation
Net income
Balance at December 31, 2003
Common stock issued upon exercise
of options, including tax benefit
Common stock issued upon
conversion of debt
Purchase of common stock
Pension benefit obligation
Increase in deferred compensation
on stock options
Amortization of stock compensation
Net loss
Balance at December 31, 2004
1,255
(8)
-
-
-
-
20,528
609
(548)
-
-
-
-
-
20,589
575
333
(26)
-
893
(15)
-
1,177
-
-
63,929
974
(1,195)
-
(896)
1,585
-
-
64,397
.
.
1,079
1,000
(111)
-
-
-
(1,594)
-
-
-
(1,594)
-
-
(832)
-
-
-
-
(2,426)
-
-
-
1,409
-
-
-
(1,177)
1,196
-
(358)
-
-
-
-
(1,585)
1,140
-
(803)
-
-
-
-
-
-
-
-
-
20,408
20,597
-
-
-
-
-
-
395
20,992
-
-
-
-
893
(15)
(1,594)
-
1,196
20,408
82,574
974
(1,195)
(832)
(896)
-
1,140
395
82,160
1,079
1,000
(111)
1,409
-
-
-
21,471
$
(82)
-
-
66,283
$
-
-
-
(1,017)
$
82
271
-
(450)
$
-
-
(15,888)
5,104
$
-
271
(15,888)
69,920
See accompanying Notes to Consolidated Financial Statements.
F-7
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Reversal of restructuring accrual
Impairment loss on residual asset
Amortization of deferred acquisition fees
Amortization of discount on Class B Notes
Extraordinary gain, excess of assets acquired over purchase price
Depreciation and amortization
Amortization of deferred financing costs
Provision for credit losses
NIR (gains) losses recognized on sale of contracts
Write off of related party debt
Deferred compensation
Releases of cash from Trusts to Company
Initial deposits to Trusts
Net deposits to Trusts to increase Credit Enhancement
Interest income on residual assets
Cash received from retained interests
Changes in assets and liabilities:
Payments on restructuring accrual
Restricted cash
Purchases of contracts held for sale
Proceeds received on contracts held for sale
Other assets
Accounts payable and accrued expenses
Tax liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of finance receivables held for investment
Purchases of note receivable
Proceeds received on finance receivables held for investment
Purchase of furniture and equipment
Purchase of subsidiary, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of residual financing debt
Proceeds from issuance of securitization trust debt
Proceeds from issuance of senior secured debt
Net proceeds from warehouse lines of credit
Repayment of residual interest financing debt
Repayment of securitization trust debt
Repayment of senior secured debt
Repayment of subordinated debt
Repayment of notes payable
Repayment of related party debt
Payment of financing costs
Repurchase of common stock
Repurchase of warrants issued
Exercise of options and warrants
Net cash provided by (used in) financing activities
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Year Ended December 31,
2003
2002
2004
$
(15,888)
$
395
$
20,408
(1,287)
11,750
(6,725)
588
-
785
3,479
32,574
-
-
271
21,357
-
(2,858)
(4,633)
54,154
(1,969)
(76,336)
-
-
(5,415)
715
(606)
9,956
(505,977)
(2,799)
196,126
(1,408)
-
(314,058)
44,000
474,720
25,000
570
(21,796)
(177,611)
(15,137)
(20,000)
(1,909)
(16,500)
(7,046)
(111)
-
1,079
285,259
(18,843)
33,209
14,366
$
$
-
4,052
(870)
-
-
1,000
2,695
11,916
(4,381)
-
1,140
25,934
(18,736)
(20,867)
(16,178)
45,644
(1,804)
(30,641)
(182,045)
283,423
6,936
(1,559)
(7,162)
98,892
(175,275)
-
6,611
(93)
(10,181)
(178,938)
-
154,375
25,000
31,332
-
(96,484)
(25,107)
(1,000)
(3,748)
-
(2,553)
(1,195)
(896)
584
80,308
262
32,947
33,209
$
-
5,074
-
-
(17,412)
1,138
4,547
2,639
(16,873)
669
1,196
60,393
(16,749)
(24,236)
(15,392)
19,202
(3,274)
17,940
(463,253)
566,124
5,021
(12,839)
12,570
146,893
-
-
-
(285)
(29,467)
(29,752)
-
-
46,242
-
-
(85,293)
(22,170)
(23,489)
(1,326)
-
(1,037)
(15)
-
324
(86,764)
30,377
2,570
32,947
See accompanying Notes to Consolidated Financial Statements.
F-8
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2003
2004
2002
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest
Income taxes
Supplemental disclosure of non-cash investing and financing activities:
Stock-based compensation
Conversion of related party debt to common stock
Pension benefit obligation, net
Deferred income taxes
Purchase of common stock with notes
$
$
$
$
28,228
420
271
(1,000)
(1,409)
-
-
$
$
18,677
3,728
1,140
-
832
944
-
19,255
(15,565)
1,196
-
1,594
1,632
479
See accompanying Notes to Consolidated Financial Statements.
F-9
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Consumer Portfolio Services, Inc. (“CPS”) was incorporated in California on March 8, 1991. CPS and its
subsidiaries (collectively, the “Company”) specialize in purchasing, selling and servicing retail automobile
installment sale contracts (“Contracts”) originated by licensed motor vehicle dealers (“Dealers”) located
throughout the United States. 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.
Acquisitions
On March 8, 2002, the Company acquired MFN Financial Corporation and its subsidiaries in a merger (the
“MFN Merger”). On May 20, 2003, the Company acquired TFC Enterprises, Inc. and its subsidiaries in a
second merger (the “TFC Merger”). Each merger was accounted for as a purchase. MFN Financial Corporation
and its subsidiaries (“MFN”) and TFC Enterprises, Inc. and its subsidiaries (“TFC”) were engaged in
businesses similar to that of the Company: buying Contracts from Dealers, repackaging those Contracts in
securitization transactions, and servicing those Contracts. MFN ceased acquiring Contracts in March 2002;
TFC continues to acquire Contracts under its “TFC Programs.”
On April 2, 2004, the Company purchased a portfolio of Contracts and certain other assets (the “SeaWest
Asset Acquisition”) from SeaWest Financial Corporation (“SeaWest”). In addition, the Company was named
the successor servicer for three term securitization transactions originally sponsored by SeaWest (the “SeaWest
Third Party Portfolio”). The Company does not intend to offer financing programs similar to those previously
offered by SeaWest.
Recent Developments
In July 2003, the Company agreed with the other parties to its continuous, or “warehouse”, securitization
facilities to amend the terms of such facilities. The effect of the amendments was to cause use of those
facilities for Contracts purchased in July 2003 and in the future to be treated for financial accounting purposes
as borrowings secured by pledged Contracts, rather than as sales of such Contracts.
In addition, the Company announced in August 2003 that it would structure its future term securitization
transactions so that they will be treated for financial accounting purposes as borrowings secured by
receivables, rather than as sales of receivables. The new structure for the warehouse facilities described in the
preceding paragraph and the intended future structure of the Company’s term securitizations has affected and
will affect the way in which the transactions are reported. The major effects are these: (i) the finance
receivables will be shown as assets of the Company on its balance sheet; (ii) the debt issued in the transactions
will be shown as indebtedness of the Company; (iii) cash deposited to enhance the credit of the securitization
transactions will be shown as “restricted cash” on the Company’s balance sheet; (iv) cash collected from
borrowers and other sources related to the receivables prior to making the required payments under the
warehouse and term securitization transactions is also shown as “restricted cash” on the Company’s balance
sheet; (v) the servicing fee that the Company receives in connection with such receivables will be recorded as a
portion of the interest earned on such receivables in the Company’s statements of operations; (vi) the Company
will initially and periodically record as expense a provision for estimated credit losses on the receivables in the
Company’s statements of operations; and (vii) the portion of scheduled payments on the receivables and debt
representing interest will be recorded as interest income and interest expense in the Company’s statements of
operations.
F-10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These changes collectively represent a deferral of revenue and acceleration of expenses, and thus a more
conservative approach to accounting for the Company’s operations compared to the previous term
securitization transactions which were accounted for as sales at the consummation of the transaction. The
changes have resulted in the Company reporting lower earnings than it would have reported if it had continued
structuring its securitizations to require recognition of gain on sale.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Consumer Portfolio Services, Inc. and its
wholly-owned subsidiaries, certain of which are Special Purpose Subsidiaries (“SPS”), formed to
accommodate the structures under which the Company purchases and securitizes its Contracts. The
Consolidated Financial Statements also include the accounts of CPS Leasing, Inc., an 80% owned subsidiary.
All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and
due from banks and money market accounts. The Company’s cash is primarily deposited at three financial
institutions. The Company periodically maintains cash due from banks in excess of the bank’s insured deposit
limits. The Company does not believe it is exposed to any significant credit risk on these deposits. As part of
certain financial covenants related to debt facilities, the Company is required to maintain a minimum
unrestricted cash balance.
Finance Receivables, net of unearned income
Finance receivables are presented at cost. All Finance receivable Contracts are held for investment and include
automobile installment sales contracts on which interest is pre-computed and added to the amount financed.
The interest on such Contracts is included in unearned finance charges. Unearned finance charges are
amortized using the interest method over the remaining period to contractual maturity. Generally, payments
received on finance receivables are restricted to certain securitized pools, and the related Contracts cannot be
resold. Finance receivables are charged off pursuant to the controlling documents of certain securitized pools,
generally before they become contractually delinquent five payments. Contracts that are deemed uncollectible
prior to the maximum delinquency period are charged off immediately. Management may authorize an
extension of payment terms if collection appears likely during the next calendar month.
The Company’s portfolio of finance receivables is comprised of smaller-balance homogeneous Contracts that
are collectively evaluated for impairment on a portfolio basis. The Company reports delinquency on a
contractual basis. Once a Contract becomes greater than 90 days delinquent, the Company does not recognize
additional interest income until the borrower under the Contract makes sufficient payments to be less than 90
days delinquent. Any payments received by a borrower that is greater than 90 days delinquent is first applied to
accrued interest and then to principal reduction.
Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, the Company
uses a loss allowance methodology commonly referred to as “static pooling,” which stratifies its finance
receivable portfolio into separately identified pools. Using analytical and formula driven techniques, the
F-11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company estimates an allowance for finance credit losses, which management believes is adequate for
probable credit losses that can be reasonably estimated in its portfolio of finance receivable Contracts.
Provision for loss is charged to the Company’s Consolidated Statement of Operations. Net losses incurred on
finance receivables are charged to the allowance. Management evaluates the adequacy of the allowance by
examining current delinquencies, the characteristics of the portfolio, the value of the underlying collateral and
historical loss trends. As conditions change, the Company’s level of provisioning and/or allowance may
change as well.
Contract Acquisition Fees
Upon purchase of a Contract from a Dealer, the Company generally charges or advances the Dealer an
acquisition fee. For Contracts securitized in pools which were structured as sales for financial accounting
purposes, the acquisition fees associated with Contract purchases were deferred until the Contracts were
securitized, at which time the deferred acquisition fees were recognized as a component of the gain on sale.
For Contracts purchased and securitized in pools which are structured as secured financings for financial
accounting purposes, the acquisition fees associated with Contract purchases are deferred and recognized as
interest income over the life of the Contracts on a level yield basis. The Company also charged the purchaser
an origination fee for those Contracts that were sold on a flow basis. Those fees were recognized at the time
the Contracts were sold and were also a component of the gain on sale.
Repossessed Assets
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to
evade contact or hide the vehicle, a supervisor will review the collection activity relating to the account to
determine if repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th
and 90th day past the customer’s payment due date, but could occur sooner or later, depending on the specific
circumstances. At the time the vehicle is repossessed the Company will stop accruing interest in this Contract,
and reclassify the remaining Contract balance to other assets. In addition the Company will apply a specific
reserve to this Contract so that the net balance represents the estimated fair value less costs to sell.
Flow Purchase Program
Through May 2002, the Company purchased Contracts for immediate and outright resale to non-affiliated third
parties. The Company sold such Contracts for a mark-up above what the Company paid the Dealer. In such
sales, the Company made certain representations and warranties to the purchasers, normal in the industry,
which related primarily to the legality of the sale of the underlying motor vehicle and to the validity of the
security interest being conveyed to the purchaser. Those representations and warranties were 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).
Treatment of Securitizations
Gain on sale may be recognized on the disposition of Contracts either outright or in securitization transactions.
In those securitization transactions that were treated as sales for financial accounting purposes, the Company,
or a wholly-owned, consolidated subsidiary of the Company, retains a residual interest in the Contracts that
were sold to a wholly-owned, unconsolidated special purpose subsidiary. The Company’s securitization
F-12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions include “term” securitizations (the purchaser holds the Contracts for substantially their entire
term) and “continuous” or “warehouse” securitizations (which finance the acquisition of the Contracts for
future sale into term securitizations).
As of December 31, 2004 and 2003 the line item “Residual interest in securitizations” on the Company’s
Consolidated Balance Sheet represents the residual interests in certain term securitizations but no residual
interest in warehouse securitizations, because the Company’s warehouse securitizations were restructured in
July 2003 as secured financings. All subsequent term securitizations were also structured as secured
financings. The warehouse securitizations are accordingly reflected in the line items “Finance receivables” and
“Warehouse lines of credit” on the Company’s Consolidated Balance Sheet, and the term securitizations are
reflected in the line items “Finance receivables” and “Securitization trust debt.” The “Residual interest in
securitizations” represents the discounted sum of expected future cash flows from securitization trusts.
Accordingly, the valuation of the residual is heavily dependent on estimates of future performance of the
Contracts included in the term securitizations.
The Company’s securitization structure has generally been as follows:
The Company sells Contracts it acquires to a wholly-owned Special Purpose 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 another entity, typically a statutory trust (“Trust”). The Trust issues interest-
bearing asset-backed securities (“Notes”), in a principal amount equal to or less than the aggregate principal
balance of the Contracts. 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 Notes issued by the Trust; the
proceeds from the sale of the Notes are then used to purchase the Contracts from the Company. The Company
may retain or sell subordinated Notes issued by the Trust or a related entity. The Company purchases a
financial guaranty insurance policy, guaranteeing timely payment of principal and interest on the senior Notes,
from an insurance company (a “Note Insurer”). In addition, the Company provides “Credit Enhancement” for
the benefit of the Note Insurer and the investors in the form of an initial cash deposit to a bank account (a
“Spread Account”) held by the Trust, in the form of overcollateralization of the Notes, where the principal
balance of the Notes issued is less than the principal balance of the Contracts, in the form of subordinated
Notes, or some combination of such Credit Enhancements. The agreements governing the securitization
transactions (collectively referred to as the “Securitization Agreements”) require that the initial level of Credit
Enhancement be supplemented by a portion of collections from the Contracts until the level of Credit
Enhancement reaches specified levels which are then maintained. The specified levels are generally computed
as a percentage of the principal amount remaining unpaid under the related Contracts. The specified levels at
which the Credit Enhancement is to be maintained will vary depending on the performance of the portfolios of
Contracts held by the Trusts and on other conditions, and may also be varied by agreement among the
Company, the SPS, the Note Insurers and the trustee. Such levels have increased and decreased from time to
time based on performance of the various portfolios, and have also varied by Securitization Agreement. The
Securitization Agreements generally grant the Company the option to repurchase the sold Contracts from the
Trust when the aggregate outstanding balance of the Contracts has amortized to a specified percentage of the
initial aggregate balance.
The prior securitizations that were treated as sales for financial accounting purposes differ from secured
financings in that the Trust to which the SPS sold the Contracts met the definition of a “qualified special
purpose entity” under Statement of Financial Accounting Standards No. 140 (“SFAS 140”). As a result, assets
and liabilities of the Trust are not consolidated into the Company’s Consolidated Balance Sheet.
The Company’s warehouse securitization structures are similar to the above, except that (i) the SPS that
purchases the Contracts pledges the Contracts to secure promissory notes which it issues, (ii) the promissory
notes are in an aggregate principal amount of not more than 73.0% to 73.5% of the aggregate principal balance
of the Contracts (that is, at least 26.5% overcollateralization), and (iii) no increase in the required amount of
Credit Enhancement is contemplated unless certain portfolio performance tests are breached. During the
F-13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarter ended September 30, 2003 the warehouse securitizations related to the CPS Programs were amended to
cause the transactions to be treated as secured financings for financial accounting purposes. The Contracts held
by the warehouse SPSs and the promissory notes that they issue are therefore included in the Company’s
Consolidated Financial Statements as of December 31, 2004 and 2003 as assets and liabilities, respectively.
Upon each sale of Contracts in a securitization structured as a secured financing, whether a term securitization
or a warehouse securitization, the Company retains on its Consolidated Balance Sheet the Contracts securitized
as assets and records the Notes issued in the transaction as indebtedness of the Company.
Under the prior securitizations structured as sales for financial accounting purposes, the Company removed
from its Consolidated Balance Sheet the Contracts sold and added to its Consolidated Balance Sheet (i) the
cash received, if any, and (ii) the estimated fair value of the ownership interest that the Company retains in
Contracts sold in the securitization. That retained or residual interest (the “Residual”) consists of (a) the cash
held in the Spread Account, if any, (b) overcollateralization, if any, (c) subordinated Notes retained, if any, and
(d) receivables from Trust, which include the net interest receivables (“NIRs”). NIRs represent the estimated
discounted cash flows to be received from the Trust in the future, net of principal and interest payable with
respect to the Notes, 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. Until the maturity of these transactions, the Company’s Consolidated
Balance Sheet will reflect securitization transactions structured both as sales and as secured financings.
With respect to securitizations structured as sales for financial accounting purposes, the Company allocates its
basis in the Contracts between the Notes sold 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
estimated fair value of the Residuals. Gains in fair value are recognized in the income statement with losses
being recorded as an impairment loss in the income statement. 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 of anticipated cash flows that it estimates will be
released to the Company in the future (the cash out method), using a discount rate that the Company believes is
appropriate for the risks involved. The anticipated cash flows include collections from both current and
charged off receivables. The Company has used an effective pre-tax discount rate of 14% per annum except for
certain collections from charged off receivables related to the Company’s securitizations in 2001 and later
where the Company has used a discount rate of 25%.
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 Trusts that represent collections on the Contracts
in excess of the amounts required to pay principal and interest on the Notes, the base servicing fees, and certain
other fees (such as trustee and custodial fees). Required principal payments on the notes are generally defined
as the payments sufficient to keep the principal balance of the Notes equal to the aggregate principal balance of
the related Contracts (excluding those Contracts that have been charged off), or a pre-determined percentage of
such balance. Where that percentage is less than 100%, the related Securitization Agreements require
accelerated payment of principal until the principal balance of the Notes is reduced to the specified percentage.
Such accelerated principal payment is said to create “overcollateralization” of the Notes.
If the amount of cash required for payment of fees, interest and principal exceeds the amount collected during
the collection period, the shortfall is withdrawn from the Spread Account, if any. If the cash collected during
the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related
Spread Account or other form of Credit Enhancement, the excess is released to the Company, or in certain
cases is transferred to other Spread Accounts related to transactions insured by the same Note Insurer that may
be below their required levels. If the total Credit Enhancement amount is not at the required level, then the
excess cash collected is retained in the Trust until the specified level is achieved. Although Spread Account
balances are held by the Trusts on behalf of the Company’s SPS as the owner of the Residuals (in the case of
securitization transactions structured as sales for financial accounting purposes) or the Trusts (in the case of
securitization transactions structured as secured financings for financial accounting purposes), the cash in the
F-14
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Securitization Agreements. The interest rate
payable on the Contracts is significantly greater than the interest rate on the Notes. As a result, the Residuals
described above are a significant asset of the Company. In determining the value of the Residuals, the
Company must estimate the future rates of prepayments, delinquencies, defaults, default loss severity, and
recovery rates, as all of these factors affect the amount and timing of the estimated cash flows. The Company
estimates prepayments by evaluating historical prepayment performance of comparable Contracts. As of
December 31, 2004 the Company used prepayment estimates of approximately 20.0% to 30.5% cumulatively
over the lives of the related Contracts. 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. The Company estimates recovery rates of previously charged off receivables using
available historical recovery data. In valuing the Residuals as of December 31, 2004, the Company estimates
that charge-offs as a percentage of the original principal balance will approximate 17.2% to 26.3%
cumulatively over the lives of the related Contracts, with recovery rates approximating 3.2% to 5.8% of the
original principal balance.
Following a securitization that is structured as a sale for financial accounting purposes, interest income is
recognized on the balance of the Residuals at the same rate as used for calculating the present value of the
NIRs, which is 14% per annum. In addition, the Company will recognize as a gain additional revenue from the
Residuals if the actual performance of the Contracts is better than the Company’s estimate of the value of the
residual. If the actual performance of the Contracts were worse than the Company’s estimate, then a downward
adjustment to the carrying value of the Residuals and a related impairment charge would be required. In a
securitization structured as a secured financing for financial accounting purposes, interest income is recognized
when accrued under the terms of the related Contracts and, therefore, presents less potential for fluctuations in
performance when compared to the approach used in a transaction structured as a sale for financial accounting
purposes.
In all the Company’s term securitizations, whether treated as secured financings or as sales, the Company has
transferred the receivables (through a subsidiary) to the securitization Trust. The difference between the two
structures is that in securitizations that are treated as secured financings the Company reports the assets and
liabilities of the securitization Trust on its Consolidated Balance Sheet. Under both structures the Noteholders
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, however, are subordinate to the Notes until the
Noteholders are fully paid, and the Company is therefore at risk to that extent.
Servicing
The Company considers the contractual servicing fee received on its managed portfolio held by non-
consolidated subsidiaries to approximate adequate compensation. As a result, no servicing asset or liability has
been recognized. Servicing fees received on its managed portfolio held by non-consolidated subsidiaries are
reported as income when earned. Servicing fees received on its managed portfolio held by consolidated
subsidiaries are included in interest income when earned. Servicing costs are charged to expense as incurred.
Servicing fees receivable represent fees earned but not yet remitted to the Company by the trustee.
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation. The Company calculates
depreciation using the straight-line method over the estimated useful lives of the assets, which range from three
to five years. Assets held under capital leases and leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the related lease terms. Amortization expense on assets acquired under
capital lease is included with depreciation expense on Company owned assets.
F-15
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 144, “Accounting
for the Impairment of Long-Lived Assets.” 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.
Other Income
Other Income consists primarily of recoveries on previously charged off MFN contracts. These Contracts were
acquired in the MFN acquisition. No amounts were allocated for these assets acquired at the time of the
acquisition. These recoveries totaled $8.0 million, $12.2 million and $10.5 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
Earnings Per Share
The following table illustrates the computation of basic and diluted earnings (loss) per share:
Numerator:
Numerator for basic and diluted earnings (loss) per
share before extraordinary item………………………………… $
Denominator:
Denominator for basic earnings (loss) per share before
extraordinary item - weighted average number of
common shares outstanding during the year…………………… $
Incremental common shares attributable to exercise
of outstanding options and warrants……………………………. $
Denominator for diluted earnings (loss) before
extraordinary item per share………………………...………...…$
Basic earnings (loss) per share before extraordinary item….………$
Diluted earnings (loss) per share before extraordinary item………$
Year Ended December 31,
2002
2003
2004
(In thousands, except per share data)
(15,888)
$
395
$
2,996
21,111
20,263
19,902
-
1,315
1,085
21,111
(0.75)
(0.75)
$
$
21,578
0.02
0.02
$
$
20,987
0.15
0.14
Incremental shares of 1.1 million related to the conversion of subordinated debt have been excluded from the
calculation for the years ended December 31, 2003 and 2002, because the impact of assumed conversion of
such subordinated debt is anti-dilutive. Incremental shares of 1.8 million shares related to stock options have
been excluded from the diluted earnings (loss) per share calculation for the year ended December 31, 2004
because the impact is anti-dilutive.
F-16
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferral and Amortization of Debt Issuance Costs
Costs related to the issuance of debt are amortized on a level yield basis over the shorter of the actual or
expected term of the related debt.
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 the differences between the
financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company has estimated a
valuation allowance against that portion of the deferred tax asset whose utilization in future periods is not more
than likely.
In determining the possible realization of deferred tax assets, future taxable income from the following sources
are considered: (a) the 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 periods in which operating losses might otherwise expire.
Purchases of Company Stock
The Company records purchases of its own common stock at cost.
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, whereby stock options are recorded at intrinsic value equal to the excess of the
share price over the exercise price at the date of grant. The Company provides the pro forma net income (loss),
pro forma earnings (loss) per share, and stock based compensation plan disclosure requirements set forth in
SFAS No. 123. The Company accounts for repriced options as variable awards.
The per share weighted-average fair value of stock options granted during the years ended December 31, 2004,
2003 and 2002, was $2.30, $2.09, and $1.39, respectively, at the date of grant. That fair value was computed
using the Black-Scholes option-pricing model with the following weighted average assumptions:
Expected life (years)…………………………………... .
Risk-free interest rate…………………………………….
Volatility………………………………………….……….
Expected dividend yield……………………………..… .
Year Ended December 31,
2003
7.63
4.16
100.82
-
%
%
%
%
2004
6.50
4.48
54.65
-
2002
8.21
4.19
107.56
-
%
%
F-17
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation cost has been recognized for certain stock options in the Consolidated Financial Statements in
accordance with APB Opinion No. 25. 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
(“SFAS 123”), “Accounting for Stock Based Compensation,” the Company’s net income (loss) and earnings
(loss) per share would have been adjusted to the pro forma amounts indicated below.
Year Ended December 31,
2004
2002
( In thousands, except per share data)
2003
Net income (loss)
As reported…………………………………………… $
Pro forma……………………………………………...…$
Earnings (loss) per share - basic
As reported…………………………………..…………$
Pro forma…………………………………………..…… $
Earnings (loss) per share - diluted
As reported…………………………………………... $
Pro forma………………………………………………. $
(15,888)
(16,808)
(0.75)
(0.80)
$
$
$
$
(0.75)
(0.80)
$
$
395
175
0.02
0.01
0.02
0.01
$
$
$
$
$
$
20,408
20,109
1.03
1.01
0.97
0.96
Segment Reporting
Operations are managed and financial performance is evaluated on a Company-wide basis by a chief decision
maker. Accordingly, all of the Company’s operations are aggregated in one reportable operating segment.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“FAS 123(R)” or the “Statement”). FAS 123 (R) requires that the
compensation cost relating to share-based payment transactions, including grants of employee stock options,
be recognized in financial statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair
value objective in the Statement. Modifications of share-based payments will be treated as replacement awards
with the cost of the incremental value recorded in the financial statements.
The Statement is effective at the beginning of the third quarter of 2005. As of the effective date, the Company
will apply the Statement using a modified version of prospective application. Under that transition method,
compensation cost is recognized for (1) all awards granted after the required effective date and to awards
modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma
disclosures under SFAS 123.
The impact of this Statement on the Company in 2005 and beyond will depend upon various factors, among
them being our future compensation strategy. The pro forma compensation costs presented (in the table above)
and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may
not be indicative of amounts which should be expected in future periods.
In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of
Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP
03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to
be collected from purchased loans or debt securities if those differences are attributable, in part, to credit
quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on
F-18
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the present value of the cash flows expected to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be recognized based on the effective yield from the
cash flows expected to be collected. To the extent that the purchased loans or debt securities experience
subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash
flows that are not expected to be received. However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will
be effective for loans and debt securities acquired after December 31, 2004. The Company’s finance
receivables are acquired shortly after origination and there is no credit deterioration during the time between
origination of the finance receivable and purchase by the Company. Accordingly, management does not expect
the adoption of this statement to have a material impact on the Company's consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America 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 finance credit losses, valuing the Residuals, computing the
related gain on sale on the transactions that created the Residuals, and the recording of the deferred tax asset
valuation allowance. Actual results could differ from those estimates depending on the future performance of
the related Contracts.
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year’s presentation.
(2) Acquisitions
Acquisition of MFN Financial Corporation
On March 8, 2002, CPS acquired 100% of MFN Financial Corporation, a Delaware corporation (“MFN”) and
its subsidiaries, by the merger (the “MFN Merger”) of a direct wholly–owned subsidiary of CPS with and into
MFN. MFN thus became a wholly-owned subsidiary of CPS, and CPS thus acquired the assets of MFN, which
consisted principally of interests in automobile installment sales finance Contracts and the facilities for
originating and servicing such Contracts. The MFN Merger was accounted for as a purchase.
MFN, through its primary operating subsidiary, Mercury Finance Company LLC, was in the business of
purchasing automobile installment sales finance Contracts from Dealers, and securitizing and servicing such
Contracts. CPS continues to use the assets acquired in the MFN Merger in the automobile finance business, but
has disposed of a portion of such assets. MFN has ceased to purchase automobile installment sales finance
Contracts, and does not anticipate recommencing such purchasing. In connection with the termination of MFN
origination activities and the integration and consolidation of certain activities, the Company has recognized
certain liabilities related to the costs to exit these activities and terminate the affected employees of MFN.
These activities include service departments such as accounting, finance, human resources, information
technology, administration, payroll and executive management. These costs include the following:
F-19
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2004 (2)
Activity
December 31,
2003
(In thousands)
Activity
March 8,
2002
Severance payments and
consulting contracts……………….…… $
Facilities closures (1)………………..… $
Termination of contracts,
$
leases, services and other
$
obligations…………………………...… $
$
Acquisition expenses
accrued but unpaid………………………$
Total liabilities assumed……………. $
$
-
1,184
$
-
705
$
-
1,889
$
3,215
263
-
-
1,184
$
-
-
705
-
597
-
1,889
$
250
4,325
$
$
3,215
2,152
597
250
6,214
_________________________
(1) For the period from March 8, 2002 to December 31, 2003 the activity resulting in a net charge of $263,000, includes charges
against liability of $1.5 million, and the “reclassification” of an existing accrual for offices closed prior to the Merger Date of
approximately $1.2 million.
(2) The Company believes that this amount provides adequately for anticipated remaining costs related to exiting certain
activities of MFN, and that amounts indicated above are reasonably allocated.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the
date of acquisition.
Cash……………………………………………………… $
Restricted cash……………………………………………$
Finance Contracts, net……………………………………$
Residual interest in securitizations……………………… $
Other assets……………………………………………… $
Total assets acquired………………………………… $
Securitization trust debt……………………………………$
Subordinated debt…………………………………………$
Accounts payable and other liabilities……………………$
Total liabilities assumed………………………………$
Net assets acquired……………………………………$
Less: purchase price……………………………………$
Excess of net assets acquired over purchase price…... $
March 8, 2002
(In thousands)
93,782
25,499
186,554
32,485
12,006
350,326
156,923
22,500
30,242
209,665
140,661
123,249
17,412
Acquisition of TFC Enterprises, Inc.
On May 20, 2003, CPS acquired TFC Enterprises, Inc., a Delaware corporation (“TFC”) and its subsidiaries,
by the merger (the “TFC Merger”) of a direct, wholly-owned subsidiary of CPS, with and into TFC. In the
TFC Merger, TFC became a wholly-owned subsidiary of CPS. CPS thus acquired the assets of TFC and its
subsidiaries, which consisted principally of interests in motor vehicle installment sales, finance Contracts,
interests in securitized pools of such Contracts, and the facilities for originating and servicing such Contracts.
The merger was accounted for as a purchase.
TFC, through its primary operating subsidiary, “The Finance Company,” purchases motor vehicle installment
sales finance Contracts from automobile Dealers, and securitizes and services such Contracts. CPS intends to
continue to use the assets acquired in the TFC Merger in the automobile finance business.
F-20
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the integration and consolidation of certain activities between CPS and TFC, the Company
has recognized certain liabilities related to the costs to integrate certain activities and terminate the affected
employees of TFC. These activities include service departments such as accounting, finance, human resources,
information technology, administration, payroll and executive management. The total of these liabilities
recognized by the Company at the time of the merger were $4.5 million. These costs include the following:
December 31,
2004(2)
Activity
December 31,
2003
(In thousands)
Activity
May 20,
2003
Severance Payments and
consulting contracts (1)……….………$
Facilities closures…………………… $
Other obligations………………………$
$
418
822
-
Total liabilities assumed……………$
1,240
$
1,908
409
234
2,551
$
$
2,326
1,231
234
3,791
$
$
357
190
206
753
$
$
2,683
1,421
440
4,544
____________________________
(1) For the period from December 31, 2003 to December 31, 2004 the activity resulting in a change of $1.9 million, includes
charges against the liability of $621,000 and the reversal of $1.3 million of costs that the Company no longer expects to incur.
The $1.3 was recorded in the statement of income as a reduction of current operating expenses.
(2) The Company believes that this amount provides adequately for anticipated remaining costs related to exiting certain
activities of TFC, and that amounts indicated above are reasonably allocated.
At the closing of the TFC Merger, each outstanding share of common stock of TFC became a right to receive
$1.87 per share in cash. The total merger consideration payable to stockholders of TFC was approximately
$21.6 million. The recipients of the total merger consideration had no material relationship with CPS, its
directors, its officers or any associates of such directors or officers, to the best of CPS’s knowledge. The
merger consideration was paid with existing cash of CPS. The aggregate purchase price, including expenses
related to the transaction, was approximately $23.7 million.
The Company’s Consolidated Balance Sheet and Consolidated Statement of Operations as of and for the year
ended December 31, 2003, include the balance sheet accounts of TFC Enterprises, Inc. as of December 31,
2003 and the results of operations subsequent to May 20, 2003, the merger date. The Company has recorded
certain purchase accounting adjustments on its Consolidated Balance Sheet, which are estimates based on
available information.
The following table summarizes the recorded amounts of the assets acquired and liabilities assumed at the date
of acquisition.
Cash……………………………………………………… $
Restricted cash……………………………………………$
Finance Contracts, net……………………………………$
Other assets……………………………………………… $
Total assets acquired………………………………… $
Securitization trust debt……………………………………$
Subordinated debt…………………………………………$
Capital lease obligations………………………………… $
Accounts payable and other liabilities……………………$
Total liabilities assumed………………………………$
Purchase price…………………………………………$
May 20, 2003
(In thousands)
13,545
17,723
125,108
502
156,878
115,597
6,321
17
11,217
133,152
23,726
F-21
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Results of Operations
Selected unaudited pro forma combined results of operations for the years ended December, 2003 and 2002,
assuming the MFN Merger and TFC Merger occurred on January 1, 2003 and 2002, are as follows:
Pro Forma Presentation (Unaudited)
Year Ended December 31,
2003
2002
(In thousands)
Total revenue………………………………………………………….…………$
Net earnings before Merger- related expenses and extraordinary item….…… $
Net earnings……………………………………………………………….……$
107,598
824
824
Basic net earnings per share before Merger-related expenses and
extraordinary item………………………………………………………..……$
Extraordinary item…………………………………………………………….…$
Basic net earnings per share………………………………………………….…$
Diluted net earnings per share before Merger-related expenses and
extraordinary item……………………………………………………………$
Extraordinary item……………………………………………………….………$
Diluted net earnings per share……………………………………...………… $
0.04
-
0.04
0.04
-
0.04
$
$
$
$
$
$
130,212
(1,695)
(1,695)
(0.09)
-
(0.09)
(0.08)
-
(0.08)
(3) Restricted Cash
Restricted cash comprised the following components:
December 31,
2004
2003
(In thousands)
Securitization trust accounts……………………….…$
Litigation reserve……………………………….…… $
Note purchase facility reserve……………….………. $
Other………………………………………………… $
Total restricted cash…………………………………. $
118,944
5,503
516
150
125,113
$
$
60,550
5,503
1,074
150
67,277
Certain of the Company’s operating agreements require that the Company establish cash reserves for the
benefit of the other parties to the agreements, in case those parties are subject to any claims or exposure. In
addition, certain of these agreements require that the Company establish amounts in reserve related to
outstanding litigation.
F-22
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Finance Receivables
The following table presents the components of Finance Receivables, net of unearned interest:
Finance Receivables
Automobile
Simple Interest………………………………………………...………. $
Pre-compute, net of unearned interest……………………………… .
Finance Receivables, net of unearned interest……………………….
Less: Unearned acquisition fees and discounts……………………….
Finance Receivables…………………………………………………. $
December 31,
2004
December 31,
2003
(In thousands)
522,346
86,932
609,278
(16,472)
592,806
$
$
178,679
133,339
312,018
(9,940)
302,078
The following table presents a summary of the activity for the allowance for credit losses, for the years ended
December 31, 2004 and 2003:
December 31,
2004
2003
(In thousands)
Balance at beginning of year……………...……….…………………….. . $
Addition to allowance for credit losses from acquisitions………………...
Provision for credit losses………………………….………………..…….
Charge-offs………………………………….………………….………….
Recoveries…………………………………………………………...…….
Balance at end of year…….………………………………………...…… . $
35,889
-
32,574
(34,636)
8,788
42,615
$
$
25,828
24,271
11,667
(32,117)
6,240
35,889
(5) Residual Interest in Securitizations
The following table presents the components of the residual interest in securitizations and shown at their
discounted amounts:
Cash, commercial paper, United States government securities
and other qualifying investments (Spread Accounts)…………………$
Receivables from Trusts (NIRs)…………………………………………$
Overcollateralization…………………………………………………..…$
Investment in subordinated certificates……………………………….…$
Residual interest in securitizations………………………………...……$
December 31,
2004
2003
(In thousands)
17,776
12,483
16,644
3,527
50,430
$
$
$
$
$
27,210
36,991
32,195
15,306
111,702
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 managed portfolio held by non-consolidated
subsidiaries subject to recourse provisions:
F-23
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Undiscounted estimated credit losses………………………………………$
Managed portfolio held by non-consolidated subsidiary………………...…$
Undiscounted estimated credit losses as a percentage of managed
$
portfolio held by non-consolidated subsidiary………………………….……$
December 31,
2003
(Dollars in thousands)
$
$
47,935
425,534
2004
23,588
233,621
2002
54,363
478,136
10.10%
11.30%
11.40%
The key economic assumptions used in measuring the residual interest in securitizations at the date of
securitization in 2003 are as follows: prepayment speed of 21.7%, net credit losses of 12.5%, and a discount
rate of 14%. There were no securitizations accounted for as sales for financial accounting purposes in 2004.
The key economic assumptions used in measuring all residual interest in securitizations as of December 31,
2004 and 2003 are included in the table below. The pre-tax discount rate remained constant at 14%, except for
certain cash flows from charged off receivables related to the Company’s securitizations from 2001 to 2003
where the Company has used a discount rate of 25%.
Prepayment speed (Cumulative)…………………………..………. 20.0% - 30.5%
Net credit losses (Cumulative)………………………….…………. 13.0% - 20.5%
2004
2003
18.1% - 22.1%
11.8% - 18.0%
Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by
the original balance of each pool of assets.
Key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate
10% and 20% adverse changes in those assumptions are as follows:
December 31,
2004
(Dollars in thousands)
Carrying amount/fair value of residual interest in securitizations……... . $
Weighted average life in years………………………………………….. .
50,430
2.95
Prepayment Speed Assumption (Cumulative)………………………… .
Estimated fair value assuming 10% adverse change……………………. . $
Estimated fair value assuming 20% adverse change……………………….
Expected Net Credit Losses (Cumulative)……….……………………...
Estimated fair value assuming 10% adverse change……………………. . $
Estimated fair value assuming 20% adverse change……………………. .
Residual Cash Flows Discount Rate (Annual)………………………… .
Estimated fair value assuming 10% adverse change……………………. . $
Estimated fair value assuming 20% adverse change……………………. .
20.0% - 30.5%
50,199
49,951
13.0% - 20.5%
48,764
47,268
14.0% - 25.0%
49,320
48,320
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair
value based on 10% and 20% percent variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the
effect of a variation in a particular assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result in changes in another (for example,
increases in market rates may result in lower prepayments and increased credit losses), which could magnify or
counteract the sensitivities.
F-24
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the cash flows received from (paid to) the Company’s unconsolidated
securitization Trusts:
For the Year Ended December 31,
2002
2003
2004
(In thousands)
$
$
Releases of cash from Spread Accounts………………. $
Servicing Fees received……………………………….
Net deposits to increase Credit Enhancement………….
Initial funding of Credit Enhancement……………… .
Purchase of delinquent or foreclosed assets………… .
Repurchase of trust assets…………………………… .
17,175
13,631
(2,106)
-
(44,473)
-
25,934
17,039
(20,867)
(18,736)
(45,747)
-
60,393
13,761
(24,236)
(16,749)
(34,365)
(97,946)
The following table presents the historical loss and delinquency amounts for the serviced portfolio:
Total Principal
Amount of Contracts
At December 31,
2004
2003
Principal Amount of
Contracts 60 Days
or More Past Due
At December 31,
2004
2003
(In thousands)
Net Credit Losses
for the Year Ended
December 31,
2004
2003
Contracts held by
consolidated subsidiaries…...……. $
Contracts held by
non-consolidated subsidiaries.………$
SeaWest Third Party Portfolio…….. $
Total managed portfolio…………… $
619,794
$
315,598
$
17,379
$
16,176
$
26,418
$
4,210
233,621
53,463
906,878
$
425,534
-
741,132
$
10,037
5,065
32,481
$
13,969
-
30,145
$
36,042
18,018
80,478
$
40,096
-
44,306
(6) Furniture and Equipment
The following table presents the components of furniture and equipment:
December 31,
2004
2003
Furniture and fixtures…………………………….….. $
Computer equipment……………………………..….. $
Leasing assets………………………………..………. $
Leasehold improvements………………………….…. $
Other fixed assets………………………….…………. $
Less: accumulated depreciation and amortization
$
$
(In thousands)
3,744
4,699
673
651
17
9,784
(8,218)
1,566
$
2,994
4,034
673
637
50
8,388
(7,562)
826
Depreciation expense totaled $660,000, $878,000 and $1.0 million for the years ended December 31, 2004,
2003 and 2002, respectively.
F-25
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Securitization Trust Debt
The Company has completed a number of securitization transactions that are structured as secured borrowings
for financial accounting purposes. The debt issued in these transactions is shown on the Company’s
consolidated balance sheets as “Securitization Trust Debt,” and the components of such debt are summarized
in the following table:
Series
Issue Date
Final
Scheduled
Payment
Date (1)
Outstanding
Principal at
December 31,
2004
Outstanding
Principal at
December 31,
2003
Initial
Principal
Weighted
Average
Interest Rate at
December 31,
2004
MFN 2001-A
TFC 2002-1
TFC 2002-2
TFC 2003-1
CPS 2003-C
CPS 2003-D
CPS 2004-A
PCR 2004-1
CPS 2004-B
CPS 2004-C
CPS 2004-D
June 15, 2007 $
June 28, 2001
March 19, 2002
August 15, 2007
October 9, 2002
March 15, 2008
May 20, 2003
January 15, 2009
September 30, 2003
March 15, 2010
December 16, 2003
October 15, 2010
May 5, 2004
October 15, 2010
June 24, 2004
March 15, 2010
August 2, 2004
February 15, 2011
April 15, 2011
September 30, 2004
December 21, 2004 December 15, 2011
301,000 $
64,552
62,589
52,365
87,500
75,000
82,094
76,257
96,369
100,000
109,200
3,382 $
2,574
9,152
17,703
53,456
50,722
66,737
52,633
84,185
93,071
109,200
20,987
12,403
25,436
37,114
77,928
71,250
N/A
N/A
N/A
N/A
N/A
$ 1,106,926 $
542,815 $
245,118
5.07%
4.23%
2.95%
2.69%
2.92%
2.97%
3.22%
3.14%
4.10%
3.70%
3.67%
________________________
(1) The Final Scheduled Payment Date represents final legal maturity of the securitization trust debt. Securitization trust debt is
expected to become due and to be paid prior to those dates, based on amortization of the finance receivables pledged to the
Trusts. Expected payments, which will depend on the performance of such receivables, as to which there can be no assurance,
are $202.7 million in 2005, $150.8 million in 2006, $94.9 million in 2007, $56.3 million in 2008, $31.2 million in 2009, and $6.9
million in 2010.
All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers.
The debt was issued through wholly-owned, bankruptcy remote subsidiaries of CPS, TFC or MFN, and is
secured by the assets of such subsidiaries, but not by other assets of the Company. Principal and interest
payments are guaranteed by financial guaranty insurance policies.
The terms of the various Securitization Agreements related to the issuance of the securitization trust debt
require that certain delinquency and credit loss criteria be met with respect to the collateral pool, and require
that the Company maintain minimum levels of liquidity and net worth and not exceed maximum leverage
levels and maximum financial losses. As a result of waivers and amendments to these covenants throughout
2004 and during the first quarter of 2005, the Company was in compliance with all such covenants as of
December 31, 2004. Without the waivers and amendments obtained in the first quarter of 2005, the Company
would have been in breach of covenants related to maintaining a minimum level of net worth and incurring a
maximum financial loss as of December 31, 2004.
The Company is responsible for the administration and collection of the Contracts. The Securitization
Agreements also require certain funds be held in restricted cash accounts to provide additional collateral for
the borrowings or to be applied to make payments on the securitization trust debt. As of December 31, 2004,
restricted cash under the various agreements totaled approximately $118.9 million. Interest expense on the
securitization trust debt is composed of the stated rate of interest plus amortization of additional costs of
borrowing. Additional costs of borrowing include facility fees, insurance and amortization of deferred
financing costs. Deferred financing costs related to the securitization trust debt are amortized in proportion to
F-26
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the principal distributed to the noteholders. Accordingly, the effective cost of borrowing of the securitization
trust debt is greater than the stated rate of interest.
The wholly-owned, bankruptcy remote subsidiaries of CPS, MFN and TFC were formed to facilitate the above
asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under
the Company’s warehouse lines of credit. Bankruptcy remote refers to a legal structure in which it is expected
that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the
assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as
secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal
and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors of the
Company or its affiliates.
(8) Debt
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 Notes are subordinated to certain existing and future indebtedness of the
Company as defined in the indenture agreement. The Company is required to redeem on an annual basis,
subject to certain adjustments, $1.0 million of the aggregate principal amount of the Notes through the
operation of a sinking fund 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 each of
the years 1999 through 2003, the Company redeemed $1.0 million of principal amount of the notes in
conjunction with the requirements of the related sinking fund agreement. The balance outstanding of the Notes
at December 31, 2004 and 2003, was $15.0 million, with an interest rate of 12% and 11.75% respectively.
On April 15, 1997, the Company issued $20.0 million in subordinated participating equity notes (“PENs”) due
April 15, 2004. The PENs were unsecured general obligations of the Company. Interest on the PENs was
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 recognized interest and amortization expense related to the PENs using the effective
interest method over the expected redemption period. The PENs were subordinated to certain existing and
future indebtedness of the Company as defined in the indenture agreement. The Company had the option 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 had 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. The Company fully repaid the PENs in April 2004.
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., Levine Leichtman Capital Partners II, L.P.
(“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 13). The debt bore interest at 13.5% per
annum. 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
F-27
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 2004, and to reduce their interest rate from 15% to 12.5%. Such affiliates received in return the option to
convert such debt into an aggregate of 1,666,667 shares of common stock at the rate of $3.00 per share through
maturity at June 30, 2004. Additionally, SFSC also agreed to subordinate $6.0 million, or 40%, of its related
party loan in favor of LLCP (see Note 13).
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. Remaining outstanding as of December 31, 2004 was a
warrant to purchase 1,000 shares.
In March 2000, the Company issued $16.0 million of senior secured debt to LLCP (the “Term B Note”). The
proceeds from the issuance were used to repay in full all amounts owed under the Senior Secured Line. As part
of the agreement, all of LLCP’s existing debt of $30.0 million was restructured as senior secured debt, making
the Company’s aggregate principal indebtedness to LLCP equal to $46.0 million. The $16.0 million bears
interest at 12.5% per annum and the interest rate on the $30.0 million is unchanged at 14.5% per annum. As
part of the agreement, all prior defaults were either waived or cured. As of December 31, 2000, the amount
outstanding of the $16.0 million portion of senior secured debt was $8.0 million. The outstanding balance on
the $16.0 million LLCP debt was repaid during the first quarter of 2001. In addition, during the first quarter of
2001, the Company made a $4.0 million principal prepayment on the remaining outstanding LLCP debt,
incurring $200,000 in prepayment penalties and waiver fees. The outstanding balance of Term B Note at
December 31, 2004 was $19.8 million. The interest rate on this note has been adjusted as discussed below.
In March 2002, the Company and LLCP entered into an additional series of agreements under which LLCP
provided additional funding to enable the Company to acquire MFN Financial Corporation. Under the March
2002 agreements, the Company borrowed $35 million from LLCP as a bridge note (the “Bridge Note”) and
approximately $8.5 million (the “Term C” Note) on a deemed principal amount of approximately $11.2
million. The Bridge Note requires principal payments of $2.0 million a month, which began in June 2002, with
a final balloon payment in the amount of $17.0 million, which was made pursuant to the terms of the Bridge
Note in February 2003. The Term C Note repayment schedule is based on the performance of a certain
securitized pool. As the subordinated Note of the pool is repaid from the Trust, principal payments are due on
the Term C Note. The maturity date of the Term C Note was March 2008. Interest was due monthly on the
Bridge Note at a rate of 13.5% per annum and on the Term C Note at a rate of 12.0% per annum. In connection
with the March 2002 agreements and the acquisition of MFN, the Company paid LLCP a structuring fee of
$1.75 million and an investment banking fee of $1.0 million, and paid LLCP's out-of-pocket expenses of
approximately $315,000. In addition, the Company paid LLCP certain other fees and interest amounting to
$426,181. Approximately $1.4 million of the fees and other amounts paid to LLCP were deferred as financing
costs and are being amortized over the life of the related debt. The remaining fees and other costs were
included in the purchase price of MFN.
On February 3, 2003, the Company borrowed $25.0 million from LLCP, net of fees and expenses of $1.05
million. The indebtedness, represented by the “Term D Note,” was originally due in April 2003, with
Company options to extend the maturity to May 2003 and January 2004, upon payment of successive
extension fees of $125,000. The Company has paid the fees to extend the maturity to January 2004. Interest on
the Term D Note is payable monthly at rates that averaged 4.79% per annum through June 30, 2003, and
12.0% per annum thereafter. In a separate transaction, the Bridge Note issued to LLCP in connection with the
acquisition of MFN, in an original principal amount of $35.0 million, was due on February 28, 2003. The
outstanding principal balance of $17.0 million was paid in February 2003. In addition, the maturity of the
Term B Note was extended in October 2003 from November 2003 to January 2004. The Company repaid in
full the Term C Note on January 29, 2004 and repaid $10.0 million of the Term D Note on January 15, 2004.
F-28
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, on January 29, 2004 the maturities of the Term B Note and the Term D Note were extended to
December 15, 2005 and the coupons on both notes were decreased to 11.75% per annum from 14.50% and
12.00%, respectively. The Company paid LLCP fees equal to $921,000 for these amendments, which will be
amortized over the remaining life of the notes. As of December 31, 2004, the outstanding principal balances of
the Term B Note and the Term D Note were $19.8 million and $15.0 million, respectively.
On May 28, 2004 and June 25, 2004, the Company borrowed $15 million and $10 million, respectively, from
LLCP. The indebtedness, represented by the “Term E Note,” and the “Term F Note,” respectively, bears
interest at 11.75% per annum. Both the Term E Note and the Term F Note mature two years from their
respective funding dates. As of December 31, 2004, the outstanding principal balances of the Term E Note and
the Term F Note were $15.0 million and $10.0 million, respectively.
On March 16, 2004, a special-purpose subsidiary of CPS issued $44 million of asset-backed 10% notes. The
notes, issued by CPS Auto Receivables Trust 2004-R, are rated BBB by Standard & Poor’s and have a final
maturity date of October 16, 2009. The notes are secured by the Company’s residual interest in four
securitizations sponsored by CPS, two securitizations sponsored by MFN, and two securitization transactions
sponsored by TFC. The notes are non-recourse obligations of the Company and will be repaid solely from the
cash distributions on the retained interests securing the notes. As of December 31, 2004, $22.2 million of the
notes remain outstanding.
At the time of the MFN Merger, MFN had outstanding $22.5 million in principal amount of senior
subordinated debt, which was due and repaid in full on March 23, 2002. Such debt bore interest at the rate of
11.00% per annum, payable quarterly in arrears. At the time of the TFC Merger, TFC had outstanding $6.3
million in principal amount of subordinated debt, which the Company assumed as part of the TFC Merger.
Such debt bears interest at the rate of 13.25% per annum payable monthly in arrears, requires monthly
amortization, is due in June 2005 and has $1.0 million outstanding at December 31, 2004.
The Company must comply with certain affirmative and negative covenants related to debt facilities, which
require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth,
capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. The Company
was in compliance with all of its debt covenants with respect to non-securitization related debt as of December
31, 2004. As a result of amendments to covenants related to securitization related debt throughout 2004 and
during the first quarter of 2005, the Company was in compliance with all such covenants as of December 31,
2004.
The following table summarizes the contractual maturity amounts of notes payable, senior secured and
subordinated debt as of December 31, 2004:
2005…………………………………………………………………...………$
2006………………………………………………………………….…………$
2007……………………………………………………………..…………….$
Total…………………………………...……………………….……………$
Principal
Amount
(In thousands)
37,039
39,166
45
76,250
(9) Shareholders’ Equity
Common Stock
Holders of 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
F-29
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, senior debt, subordinated debt, and related party debt. The covenants restrict
the payment of certain distributions, including dividends (See Note 8.).
Included in common stock at December 31, 2003, is additional paid in capital of $1.6 million related to the
valuation of certain stock options as required by Financial Interpretation No. 44 (“FIN 44”) or the valuation of
conditionally granted options as required under Accounting Principals Board Opinion No. 25 (“APB 25”).
Included in compensation expense for December 31, 2004 and 2003, is $271,000 and $1.1 million related to
the amortization of deferred compensation expense and valuation of stock options.
Stock Purchases
During 2000, the Company’s Board of Directors authorized the Company to purchase up to $5 million of
Company securities. In October 2002, the Board of Directors authorized the purchase of an additional $5
million of outstanding debt or equity securities. In October 2004, the Board of Directors authorized the
purchase of an additional $5,000,000 of outstanding debt or equity securities. As of December 31, 2004, the
Company had purchased $4.0 million in principal amount of the debt securities, and $4.0 million of its
common stock, representing 2,167,036 shares.
Options and Warrants
In 1991, the Company adopted and its sole shareholder approved 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. The Plan
terminated in December 2001, without affecting the validity of the outstanding options.
In July 1997, the Company adopted and its shareholders approved the 1997 Long-Term Incentive Plan (the
“1997 Plan”) pursuant to which the Company’s Board of Directors may grant stock options, restricted stock
and stock appreciation rights to employees, directors or employees of entities in which the Company has a
controlling or significant equity interest. Options that have been granted under the 1997 Plan have in all cases
been granted at an exercise price equal to the stock’s fair market value at the date of the grant, with terms of 10
years and vesting over 5 years. In 2001, the shareholders of the Company approved an amendment to the 1997
Plan providing that an aggregate maximum of 3,400,000 shares of the Company’s common shares may be
subject to awards under the 1997 Plan. In 2003, the shareholders of the Company approved an amendment to
the 1997 Plan to further increase the aggregate maximum number of shares that may be granted within the Plan
to 4,900,000 shares. A further increase to 6,900,000 shares in the aggregate maximum number of shares that
may be granted was approved by the shareholders in 2004.
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
F-30
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ended on
April 29, 2000.
At December 31, 2004, there were a total of 1,391,631 additional shares available for grant under the 1997
Plan and the 1991 Plan. Of the options outstanding at December 31, 2004, 2003 and 2002, 1,611,182,
1,168,042, and 920,101, respectively, were then exercisable, with weighted-average exercise prices of $2.25,
$1.71, and $1.30, respectively.
Stock option activity during the periods indicated is as follows:
Number of
Shares
Weighted
Average
Exercise Price
Balance at December 31, 2001……………………….
Granted………………………………………………
Exercised……………………………………………
Canceled…………………………………………….
Balance at December 31, 2002……………………….
Granted………………………………………………
Exercised……………………………………………
Canceled…………………………………………….
Balance at December 31, 2003……………………….
Granted………………………………………………
Exercised……………………………………………
Canceled…………………………………………….
Balance at December 31, 2004……………………….
$
(In thousands, except per share data)
1.35
1.55
0.64
1.63
1.64
2.46
0.93
1.69
1.96
3.96
1.23
2.39
2.51
3,822
1,804
1,254
340
4,032
1,013
609
564
3,872
938
575
183
4,052
$
The per share weighted average fair value of stock options granted whose exercise price was equal to the
market price of the stock on the grant date during the years ended December 31, 2004, 2003 and 2002, was
$2.30, $2.09, and $1.39, respectively. The Company did not issue any stock options above or below the market
price of the stock on the grant date.
During 2002, the Company’s Board of Directors approved a program whereby officers of the Company would
be loaned amounts sufficient to enable them to exercise certain of their outstanding options. See Note 13.
At December 31, 2004, 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:
F-31
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding
Options Exercisable
Range of Exercise Prices
(per share)
Number
Outstanding
$0.63 - $1.50………………. .
$1.54 - $1.88………………. .
$1.99 - $2.50………………. .
$2.64 - $3.64………………. .
$4.00 - $4.49………………. .
1,047
758
509
748
990
Weighted
Average
Remaining
Term (Years)
Weighted
Average
Exercise Price
Per Share
(In thousands, except per share data)
Number
Exercisable
Weighted
Average
Exercise Price
Per Share
7.37
6.38
7.05
8.65
8.69
$
$
$
$
$
1.46
1.74
2.20
2.87
4.08
380
588
219
141
283
$
$
$
$
$
1.47
1.74
2.27
2.74
4.07
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,
2004, 1,000 warrants remained unexercised. Such warrants, and the 4,449,000 shares of common stock have,
upon the exercise of such warrants, not been registered for public sale. However, the holder 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 Note Insurer of its asset-backed
securities. The agreement committed the Note 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 were fully exercisable on the date of grant and expired in December 2003. In
November 2003, the Company purchased the warrants from the Note Insurer for $896,415.
(10) Net Gain on Sale of Contracts
The following table presents the components of the net gain on sale of Contracts:
Year Ended December 31,
2003
2002
Gain recognized on sale of Contracts……….………$
Deferred acquisition fees and discounts……………$
Expenses related to sales………………………… $
Provision for credit losses………………………... $
Net gain on sale of Contracts…………………….. $
$
(In thousands)
8,433
4,590
(2,076)
(526)
10,421
$
22,554
5,285
(3,682)
(2,639)
21,518
No gain on sale was recorded in the year ended December 31, 2004 due to the July 2003 decision to structure
future securitizations as secured financings, rather than as sales.
F-32
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Interest Income
The following table presents the components of interest income:
2004
Interest on Finance Receivables……………………...…………$
Residual interest income …………………….……………….…$
Other interest income……………..…………………..………. $
Net interest income………………..…………………….………$
Year Ended December 31,
2003
(In thousands)
$
40,380
16,178
1,606
58,164
$
$
$
99,701
4,634
1,483
105,818
2002
32,851
15,392
401
48,644
(12) Income Taxes
Income taxes consist of the following:
Current:
Federal…………………………………………… $
State…………………………………………..……$
Deferred:
Federal…………………………………………… $
State……………………………………………... $
Change in valuation allowance……………………$
2004
Year Ended December 31,
2003
(In thousands)
2002
$
712
862
1,574
$
2,781
356
3,137
(11,295)
(715)
(12,010)
(5,859)
(2,282)
6,567
(1,574)
(25,345)
(4,141)
22,915
(6,571)
10,867
1,428
(3,219)
9,076
(2,934)
Income tax benefit……………………………$
-
$
(3,434)
$
The Company’s effective tax expense benefit for the years ended December 31, 2004, 2003 and 2002, differs
from the amount determined by applying the statutory federal rate of 35% to income (loss) before income taxes
as follows:
Expense (benefit) at federal tax rate………………$
California franchise tax, net of federal income
tax benefit……………………………………… $
Other……………………………………………… $
Negative Goodwill…………………………………$
Debt Forgiveness………………………………..…$
Valuation allowance……………………………… $
$
2002
6,116
459
(196)
(6,094)
-
(3,219)
(2,934)
2004
Year Ended December 31,
2003
(In thousands)
$
(1,064)
$
(5,561)
(1,015)
9
-
-
6,567
-
$
(2,460)
92
-
(22,917)
22,915
(3,434)
$
F-33
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of
December 31, 2004 and 2003, are as follows:
Deferred Tax Assets:
Accrued liabilities……………………………………. $
Furniture and equipment………………………………$
Equity investment……………………………………..$
NOL carryforwards and BILs………………………...…$
Minimum tax credit……………………………………$
Pension Accrual……………………………………...…$
Other……………………………………………...……$
Total deferred tax assets………………………….…$
Valuation allowance……………………………………$
$
Deferred Tax Liabilities:
$
NIRs………………………………………………….. $
Provision for loan loss……………………………….…$
Total deferred tax liabilities……………………..… $
$
Net deferred tax asset (liability)……………….……$
December 31,
2004
2003
(In thousands)
$
23,841
1,016
82
27,702
697
801
(339)
53,800
(43,930)
9,870
(1,407)
(8,463)
(9,870)
11,185
1,465
82
31,397
481
1,617
461
46,688
(37,363)
9,325
(6,789)
(2,125)
(8,914)
-
$
411
As part of the MFN Merger, CPS acquired certain net operating losses, debt forgiveness, as discussed below,
and built in loss assets. Moreover, MFN has undergone an ownership change for purposes of Internal Revenue
Code (“IRC”) section 382. In general, IRC section 382 imposes an annual limitation on the ability of a loss
corporation (i.e., a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain
built-in losses (“BILs”)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising
after an ownership change. During 1999, MFN recorded an extraordinary gain from the discharge of
indebtedness related to the emergence from Bankruptcy. This gain was not taxable under IRC section 108. In
accordance with the rules under IRC section 108, MFN has reduced certain tax attributes including unused net
operating losses and tax basis in certain MFN assets. Deferred taxes have been provided for the estimated tax
effect of the future reversing timing differences related to the discharge of indebtedness gain as reduced by the
tax attributes. Additionally, the Company has established a valuation allowance of $31.0 million against
MFN’s deferred tax assets, as it is not more than likely that these amounts will be realized in the future. 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.
As part of the TFC Merger, CPS acquired certain built in loss assets. Moreover, TFC has undergone an
ownership change for purposes of Internal Revenue Code (“IRC”) section 382. In general, IRC section 382
imposes an annual limitation on the ability of a loss corporation (i.e., a corporation with a net operating loss
(“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize its pre-change NOL
carryforwards or BILs to offset taxable income arising after an ownership change. Additionally, the Company
has established a valuation allowance of $10.0 million against TFC’s deferred tax assets, as it is not more than
likely that these amounts will be realized in the future. 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.
F-34
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004, the Company has net operating loss carryforwards for federal and state income tax
purposes of $18.5 million ($17.4 million subject to IRC 382) and $3.1 million, respectively, which are
available to offset future taxable income, if any, subject to IRC section 382 limitations, through 2021 and
2013, respectively. In addition, the Company has an alternative minimum tax credit carry forward of
approximately $697,000, which is available to reduce future federal regular income taxes, if any, over an
indefinite period.
The Company’s tax returns are open for audits by various tax authorities. Therefore, from time-to-time there
may be differences in opinions with respect to the tax treatment accorded to certain transactions. When, and if,
such differences occur and become probable and estimatable, such amounts will be recognized. The Company
filed its tax returns on a fiscal year ending March 31 through March 31, 2002. It changed its tax fiscal year to a
calendar year effective December 31, 2002.
(13) Related Party Transactions
Related Party Receivables
As of December 31, 2001, the Company had receivables of $669,000 from CARSUSA, Inc. (“CARSUSA”),
which owned and operated a Mitsubishi automobile dealership in Southern California, and is owned by
Charles E. Bradley, Sr. and Charles E. Bradley, Jr. During 2002, CARSUSA became insolvent, sold its assets
to an unaffiliated party, partially paid its secured creditors, and wound up its business. The Company
determined that the receivable was uncollectible, and wrote down its value to zero. The writedown-related
expense of $669,000 is reflected in the Company’s Consolidated Statement of Operations for the year ended
December 31, 2002 in general and administrative expenses. The Company purchased seven and 16 Contracts
from CARSUSA, with an aggregate principal balance of approximately $99,996 and $233,431, respectively, in
2002 and 2001. The Company did not purchase any contracts from CARSUSA in 2003 and 2004.
CPS Leasing, Inc. Related Party Direct Lease Receivables
Included in other assets recorded in the Company’s Consolidated Balance Sheet are direct lease receivables
due to CPS Leasing, Inc. from related parties, primarily companies affiliated with the Company’s former
Chairman of the Board of Directors. Such related party direct lease receivables net of a valuation allowance
totaled approximately $1.8 million and $1.9 million at December 31, 2004 and 2003, respectively.
Related Party Debt
In June 1997 the Company borrowed $15.0 million on an unsecured and subordinated basis from Stanwich
Financial Services Corp. (“SFSC”), an affiliate of Charles E. Bradley, Sr., the former Chairman of the
Company’s Board of Directors. This loan (“RPL”) was due 2004, and had a fixed rate of interest of 9% per
annum, payable monthly beginning July 1997. The Company had the right to pre-pay the RPL without penalty
at any time after three years. At maturity or repayment of the RPL, the holder thereof had 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
Company fully repaid the RPL in June 2004.
During 1998, the Company borrowed $1.0 million on an unsecured basis from John G. Poole, a director of the
Company. This note (“RPL3”) had a fixed rate of interest of 12.5% per annum payable monthly beginning
December 1998. The Company had the right to pre-pay the RPL3, without penalty, at any time after June 12,
2000. At maturity or repayment of the RPL3, the holder thereof would have the option to convert the entire
F-35
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal balance of the note, or a portion thereof, into common stock of the Company, at a conversion rate of
$3 per share. The entire balance of the RPL3 was converted to common stock of the Company in June 2004.
During 1999, the Company borrowed $1.5 million on an unsecured basis from SFSC. This loan (“RPL4”) was
due 2004, had a fixed rate of interest of 14.5% per annum payable monthly beginning October 1999. In
conjunction with the issuance of the RPL4, the Company issued warrants to purchase 103,500 shares of the
Company’s common stock at a price of $0.01 per share. The Company fully repaid the RPL4 in June 2004.
Loans to Officers to Exercise Certain Stock Options
During 2002, the Company’s Board of Directors approved a program under which officers of the Company
would be advanced amounts sufficient to enable them to exercise certain of their outstanding options. Such
loans were available for a limited period of time, and available only to exercise previously repriced options.
The loans bear interest at a rate of 5.50% per annum, and are due in 2007. At December 31, 2004, there was
$454,000 outstanding related to these loans. Such amounts have been recorded as contra-equity within
common stock in the Shareholders’ Equity section of the Company’s Consolidated Balance Sheet.
(14) Commitments and Contingencies
Leases
The Company leases its facilities and certain computer equipment under non-cancelable operating leases,
which expire through 2008. Future minimum lease payments at December 31, 2004, under these leases are due
during the years ended December 31 as follows:
2005…………………………………………………………………...………$
2006………………………………………………………………….…………$
2007……………………………………………………………..…………….$
2008…………………………………...……………………….………………$
Amount
(In thousands)
4,370
3,524
2,795
1,748
Total minimum lease payments………………………………….……………$
12,437
Rent expense for the years ended December 31, 2004, 2003 and 2002, was $3.5 million, $3.9 million, and $4.0
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.
During 2004, 2003 and 2002, the Company received $385,000, $170,000 and $141,000, respectively, of
sublease income, which is included in occupancy expense. Future minimum sublease payments totaled
$967,000 at December 31, 2004.
F-36
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
Stanwich Litigation. CPS was a defendant in a class action (the “Stanwich Case”) brought in the California
Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the “Settlement Payments”) under out-of-court settlements reached with third party
defendants. Stanwich Financial Services Corp. (“Stanwich”), an affiliate of the former Chairman of the Board
of Directors of CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich has defaulted on
its payment obligations to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy Code,
in the federal Bankruptcy Court of Connecticut. At year-end, CPS was a defendant only in a cross-claim
brought by one of the other defendants in the case, Bankers Trust Company, which asserted a claim of
contractual indemnity against CPS.
Subsequent to year-end, CPS has settled the cross-claim of Bankers Trust by payment of $3.24 million, on or
about February 8, 2005. Pursuant to that settlement, the court has dismissed the cross-claim, with prejudice.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for
indemnity against the Company in a separate action, which is now pending in federal district court in Rhode
Island. The Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same court. The action of Mr. Pardee
against CPS is stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the bankruptcy
court, which is hearing the bankruptcy of Stanwich.
The reader should consider that any adverse judgment against CPS in the Stanwich Case (or the related case in
Rhode Island) for indemnification, in an amount materially in excess of any liability already recorded in
respect thereof, could have a material adverse effect on the Company’s financial position.
Other Litigation. On November 15, 2000, Denice and Gary Lang filed a lawsuit against CPS in South Carolina
Common Pleas Court, Beaufort County, alleging that they, and a purported nationwide class, were harmed by
an alleged failure to refer, in the notice given after repossession of their vehicle, to the right to purchase the
vehicle by tender of the full amount owed under the retail installment contract. They sought damages in an
unspecified amount. CPS filed a counterclaim to recover any delinquent amounts owed by the members of the
putative class in the event that the class were to be certified. In February 2004, CPS reached an agreement to
settle that case on a class basis for payment of attorneys’ fees and other immaterial consideration.
On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit court of Tuscaloosa, Alabama, making
allegations similar to those that were asserted in the Lang case, and seeking damages in an unspecified amount,
on behalf of a purported nationwide class. The Company removed the case to federal bankruptcy court, and
filed a motion for summary judgment as part of its adversary proceeding against the plaintiff in the bankruptcy
court. The federal bankruptcy court granted the plaintiff’s motion to send the matter back to Alabama state
court. The Company has appealed the ruling. Although the Company believes that it has one or more defenses
to each of the claims made in this lawsuit, no discovery has yet been conducted and the case is in its earliest
stages. Accordingly, there can be no assurance as to its outcome.
In June 2004, Plaintiff Jeremy Henry filed a lawsuit against the Company in the California Superior Court, San
Diego County, alleging improper practices related to the notice given after repossession of a vehicle that he
purchased. The lawsuit is styled a class action, though no motion for class certification has yet been filed. CPS
and its subsidiary have a number of defenses that may be asserted with respect to the claims of plaintiff Henry.
The Company has recorded a liability as of December 31, 2004 that it believes represents a sufficient
allowance for legal contingencies. Any adverse judgment against the Company, if in an amount materially in
excess of the recorded liability, could have a material adverse effect. The Company is involved in various legal
matters arising in the normal course of business. Management believes that any liability as a result of those
matters would not have a material effect on the Company’s financial position, Results of Operations or Cash
Flows.
F-37
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) 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, may, at its discretion, match 100% of employees’ contributions up to $1,000 per employee per
calendar year. The Company’s contributions to the 401(k) Plan were $409,000 for the year ended December
31, 2004. The Company did not make a matching contribution in 2003 or 2002, other than to employees
eligible for the MFN Financial Corporation Retirement Savings Plan. Such contribution amounted to $250,682
for the period from the Merger Date through December 31, 2002. The MFN Financial Corporation Retirement
Savings Plan was merged into the Company’s 401(k) Plan in February 2003.
The Company also sponsors the MFN Financial Corporation Pension Plan (“the Plan”). The Plan benefits were
frozen June 30, 2001. The following table sets forth the plan’s benefit obligations, fair value of plan assets, and
funded status at December 31, 2004 and 2003:
December 31,
2004
2003
(In thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year………………………………….…………………$
Service cost…………………………………………………………………………………………$
Interest cost…………………………………………………………………………………………$
Settlements…………………………………………………………………………………………$
Actuarial gain……………………………………………………………….………………….… $
Benefits paid……………………………………………………………………………………..…$
Projected benefit obligation, end of year…………………………………………………………$
15,023
-
821
-
(1,616)
(545)
13,683
$
$
The accumulated benefit obligation for the pension plan was $13.7 million and $15.0 million at December 31, 2004 and
2003, respectively.
Change in Plan Assets
Fair value of plan assets, beginning of year……………………………………………………… $
Return on assets……………………………………………………………………………………$
Employer contribution………………………………………………………………………..……$
Benefits paid……………………………………………………………………………………… $
Fair value of plan assets, end of year…..………………………………………………………. $
Reconciliation of accrued pension cost and
total amount recognized
Funded status of the plan………………………………………………………………………..…$
Unrecognized loss…………………………………………………………………………...……$
Unrecognized transition asset…………………………………………………………………… $
Unrecognized prior service cost…………………………………………………….…………… $
Accrued pension cost……………..…..……………………………………………………...…$
11,253
1,483
1,149
(598)
13,287
(396)
2,062
(46)
-
1,620
$
$
$
$
Weighted average assumptions used to determine benefit obligations at December 31, 2004 and 2003 were as follows:
Weighted average assumptions
Discount rate……………………………………………………………………………………….
Expected return on plan assets……………………………………………………………...…….
Rate of compensation increase…………………………………………………………………..….
The Company’s overall expected long-term rate of return on assets is 9.00% per annum. The expected long-term rate of
return is based on the weighted average of historical returns on individual asset categories, which are described in more
detail below.
6.25%
9.00%
N/A
13,743
-
902
-
1,578
(1,200)
15,023
9,906
1,001
1,546
(1,200)
11,253
(3,770)
4,136
(80)
-
286
6.25%
9.00%
N/A
F-38
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the statement of financial position
Prepaid benefit cost……………………………………………………………………………… $
Accrued benefit liability………………..……………………………………………………...…$
Intangible asset…………………………………………………………………………………...$
Accumulated other comprehensive income, pretax…….…………………………………………$
Net amount recognized…………………………………………………………………………$
Components of net periodic benefit cost
Service cost…………………………………………………….……………………….………… $
Interest Cost………………………………………………………………………..………………$
Expected return on assets…………………………………………………………...………………$
Amortization of transition (asset)/obligation………………………………..…………………… $
Amortization of prior service cost……………………………………………………..……………$
Recognized net actuarial loss...……………………………………………………………………$
Net periodic benefit cost..……………..…..……………………………….……….……………$
Unfunded Accumulated Benefit Obligation at Year-End
Accumulated Benefit Obligation…………………………………………………………………. $
Fair Value of Plan Assets…………………………………………………………………..………$
Increase (decrease) in other comprehensive income...…………………………………..…………$
-
(396)
-
2,016
1,620
-
821
(1,041)
(35)
-
69
(186)
13,683
13,288
(2,039)
$
$
$
$
$
$
The weighted average asset allocation of the Company’s pension benefits at December 31, 2004 and 2003 were as
follows:
Weighted Average Asset Allocation at Year-End
Asset Category
Domestic equity funds……………………………………………………………………...…$
International equity funds……………………………………………………….…………… $
Domestic fixed income funds………………………………………………………………… $
Other……………………………………………………………………………………………$
Total…………………………………………………………………………………………$
Cash Flows
Expected Benefit Payouts
2005………………………………………………………………………………………...…$
2006……………………………………………………………………………………………$
2007………………………………………………………………………………...…………$
2008……………………………………………………………………………………………$
2009…………………………………………………………………………...………………$
Years 2010 - 2014…………………………………………………………………………..…$
Anticipated Contributions…………………………………………………………..…………$
60.9%
11.9%
27.1%
0.1%
100.0%
445
471
505
563
567
3,519
-
286
(4,055)
-
4,055
286
-
902
(872)
(35)
-
98
93
15,023
11,253
1,386
51.0%
10.7%
29.1%
9.2%
100.0%
The Company’s investment policies and strategies for the pension benefits plan utilize a target allocation of
70% equity securities and 30% fixed income securities. The Company’s investment goals are to maximize
returns subject to specific risk management policies. The Company addresses risk management and
diversification by the use of a professional investment advisor and several sub-advisors which invest in
domestic and international equity securities and domestic fixed income securities. Each sub-advisor focuses its
investments within a specific sector of the equity or fixed income market. For the sub-advisors focused on the
equity markets, the sectors are differentiated by the market capitalization and the relative valuation of the
underlying issuer. For the sub-advisors focused on the fixed income markets, the sectors are differentiated by
the credit quality and the maturity of the underlying fixed income investment. The investments made by the
sub-advisors are readily marketable and can be sold to fund benefit payment obligations as they become
payable.
F-39
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) 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, 2004 and 2003, 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, 2004 and 2003, were as
follows:
Financial Instrument
December 31,
2004
2003
Carrying Value
or Notional
Amount
Fair
Value
Carrying Value
or Notional
Amount
Fair
Value
Cash………………………………………….…$
Restricted Cash………………………………. $
Finance receivables, net…………………….…$
Residual interest in securitizations………...…$
Accrued interest receivable…………….………$
SeaWest note receivable………………………$
Warehouse lines of credit……………………. $
Notes payable……………………………..……$
Residual interest financing………………..……$
Securitization trust debt……………...……… $
Senior secured debt………………….…………$
Subordinated debt……………………………. $
Related party debt……………………………. $
$
14,366
125,113
550,191
50,430
6,411
2,800
34,279
1,063
22,204
542,815
59,829
15,000
-
$
$
(In thousands)
14,366
125,113
550,191
50,430
6,411
2,800
34,279
1,063
22,204
539,749
59,829
15,113
-
33,209
67,277
266,189
111,702
2,901
-
33,709
3,330
-
245,118
49,965
35,000
17,500
33,209
67,277
266,189
111,702
2,901
-
33,709
3,330
-
245,118
49,965
35,506
17,763
Cash and Restricted Cash
The carrying value equals fair value.
Finance Receivables, net
The carrying value approximates fair value because the related interest rates are estimated to reflect current
market conditions for similar types of instruments.
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.
F-40
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Interest Receivable
The carrying value approximates fair value because the related interest rates are estimated to reflect current
market conditions for similar types of instruments.
SeaWest Note Receivable
The fair value is estimated by discounting future cash flows using credit and discount rates that the Company
believes reflect the estimated credit and interest rate risks associated with similar types of instruments.
Commitments
The fair value of commitments to purchase contracts from Dealers is determined by purchase commitments
from investors and prevailing market rates.
Warehouse Lines of Credit, Notes Payable, Residual Interest Financing, and Senior Secured Debt
The carrying value approximates fair value because the related interest rates are estimated to reflect current
market conditions for similar types of secured instruments.
Securitization Trust Debt
The fair value is estimated by discounting future cash flows using interest rates that the Company believes
reflect the current market rates.
Subordinated Debt
The fair value is based on a market quote.
Related Party Debt
The fair value is based on the fair value of subordinated debt, as the terms and structure are similar.
(17) Liquidity
The Company's business requires substantial cash to support its purchases of Contracts and other operating
activities. The Company's primary sources of cash have been cash flows from operating activities, including
proceeds from sales of Contracts, amounts borrowed under various revolving credit facilities (also sometimes
known as warehouse credit facilities), servicing fees on portfolios of Contracts previously sold in securitization
transactions or serviced for third parties, customer payments of principal and interest on finance receivables,
fees for origination of Contracts, and releases of cash from securitized pools of Contracts in which the
Company has retained a residual ownership interest, and from the Spread Accounts associated with such
portfolios. The Company's primary uses of cash have been the purchases of Contracts, repayment of amounts
borrowed under lines of credit and otherwise, operating expenses such as employee, interest, occupancy
F-41
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses and other general and administrative expenses, the establishment of Spread Accounts and initial
overcollateralization, if any, and the increase of Credit Enhancement to required levels in securitization
transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to
meet the Company's cash demands. The sufficiency of internally generated cash will depend on the
performance of securitized pools (which determines the level of releases from those pools and their related
Spread Accounts), the rate of expansion or contraction in the Company’s managed portfolio, and the terms
upon which the Company is able to acquire, sell, and borrow against Contracts.
Contracts are purchased from Dealers for a cash price approximating their principal amount, and generate cash
flow over a period of years. As a result, the Company has been dependent on warehouse credit facilities to
purchase Contracts, and on the availability of cash from outside sources in order to finance its continuing
operations, as well as to fund the portion of Contract purchase prices not financed under revolving warehouse
credit facilities. As of December 31, 2004, the Company had $225 million in warehouse credit capacity, in the
form of a $125 million facility and a $100 million facility. The first facility provides funding for Contracts
purchased under the TFC Programs while both warehouse facilities provide funding for Contracts purchased
under the CPS Programs. A third facility in the amount of $75 million, which the Company utilized to fund
Contracts under the CPS Programs, expired on February 21, 2004. A fourth facility in the amount of $25
million, which the Company utilized to fund Contracts under the TFC Programs, expired on June 24, 2004.
These facilities are independent of each other and provide funding equal up to 73.0-73.5% of the principal
balance of the Contracts pledged, subject to collateral tests and certain other conditions and covenants.
With the two currently existing facilities, two different financial institutions purchase the notes issued by these
facilities, and two different insurers insure the notes (each a “Note Insurer”). The Note Insurer on the $125
million facility is the controlling party whereas the lender on the $100 million facility is the controlling party.
Up through June 30, 2003, sales of Contracts to the special purpose subsidiaries (“SPS”) related to the $75
million and $125 million facilities had been treated as sales for financial accounting purposes. The Company,
therefore, removed these securitized Contracts and related debt from its Consolidated Balance Sheet and
recognized a gain on sale in the Company’s Consolidated Statement of Operations. Indebtedness related to
Contracts funded by the $25 million facility, however, were on the Company’s Consolidated Balance Sheet
and no gain on sale has ever been recognized in the Company’s Consolidated Statement of Operations. During
July 2003, each of the $75 million and $125 million facilities was amended, with the effect that subsequent use
of such facilities is treated for financial accounting purposes as borrowings secured by such receivables, rather
than as a sale of receivables. The effects of that amendment are similar to those discussed above with respect
to the change in securitization structure.
Through May 2002, the Company’s Contract purchasing program consisted of both (i) flow purchases for
immediate resale to non-affiliates and (ii) purchases for the Company's own account made on other than a flow
basis, funded primarily by advances under a revolving warehouse credit facility. Flow purchases allowed the
Company to purchase Contracts with minimal demands on liquidity. The Company’s revenues from the resale
of flow purchase Contracts, however, were materially less than those that may be received by holding
Contracts to maturity or by selling Contracts in securitization transactions. During the years ended December
31, 2004 and 2003 the Company purchased $447.2 million and $357.3 million, respectively, of Contracts for
its own account, compared to $282.2 million for its own account and $181.1 million of Contracts on a flow
basis in 2002. The Company’s flow purchase program ended in May 2002.
The $125 million warehouse facility is structured to allow CPS to fund a portion of the purchase price of
Contracts by drawing against a floating rate variable funding note issued by CPS Warehouse Trust. This
facility was established on March 7, 2002, in the maximum amount of $100 million. Such maximum amount
was increased to $125 million in November 2002. Up to 73% of the principal balance of Contracts may be
advanced to the Company under this facility, subject to collateral tests and certain other conditions and
covenants. Notes under this facility accrue interest at a rate of one-month commercial paper plus 1.18% per
annum. This facility was renewed on April 4, 2004 and expires on April 3, 2005. The Company is currently in
discussions with the parties to renew such facility. The balance outstanding at December 31, 2004 was $34.3
million.
F-42
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The $100 million warehouse facility is similarly structured to allow CPS to fund a portion of the purchase
price of Contracts by drawing against a floating rate variable funding note issued by its subsidiary Page
Funding LLC. Approximately 73.5% of the principal balance of Contracts may be advanced to the Company
under this facility, subject to collateral tests and certain other conditions and covenants. Notes under this
facility accrue interest at a rate of one-month LIBOR plus 1.50% per annum. This facility was entered into on
June 30, 2004 and expires on June 30, 2007. The lender has annual termination options at its sole discretion.
The $75 million warehouse facility which expired on February 21, 2004, was similarly structured to allow CPS
to fund a portion of the purchase price of Contracts by drawing against a floating rate variable funding note
issued by CPS Funding LLC. Approximately 72.5% of the principal balance of Contracts could be advanced to
the Company under this facility, subject to collateral tests and certain other conditions and covenants. Notes
under this facility accrued interest at a rate of one-month LIBOR plus 0.75% per annum. This facility expired
on February 21, 2004.
The $25 million warehouse facility was similarly structured to allow TFC to fund a portion of the purchase
price of Contracts by drawing against a floating rate variable funding note issued by TFC Warehouse I LLC.
Approximately 71% of the principal balance of Contracts was advanced to TFC under this facility, subject to
collateral tests and certain other conditions and covenants. Notes under this facility accrue interest at a rate of
one-month LIBOR plus 1.75% per annum. This facility was entered into as part of the TFC Merger on May 20,
2003 and expired on June 24, 2004.
The Company’s primary means of ensuring that its cash demands do not exceed its cash resources is to match
its levels of Contract purchases to its availability of cash. The Company’s ability to adjust the quantity of
Contracts that it purchases and securitizes will be subject to general competitive conditions and the continued
availability of warehouse credit facilities. There can be no assurance that the desired level of Contract
acquisition can be maintained or increased. While the specific terms and mechanics of each Spread Account
vary among transactions, the Company’s Securitization Agreements generally provide that the Company will
receive excess cash flows only if the amount of Credit Enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the Contracts in the pool are below certain predetermined levels.
In the event delinquencies, defaults or net losses on the Contracts exceed such levels, the terms of the
securitization: (i) may require increased Credit Enhancement to be accumulated for the particular pool; (ii)
may restrict the distribution to the Company of excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on some or all of the Contracts to
another servicer. There can be no assurance that collections from the related Trusts will continue to generate
sufficient cash.
Certain of the Company’s securitization transactions and the warehouse credit facilities contain various
financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining
minimum levels of liquidity and net worth and not exceeding maximum leverage levels and maximum
financial losses. As a result of waivers and amendments to these covenants throughout 2004 and during the
first quarter of 2005, the Company was in compliance with all such covenants as of December 31, 2004. In
addition, certain securitization and non-securitization related debt contain cross-default provisions, which
would allow certain creditors to declare default if a default were declared under a different facility.
The Servicing Agreements of the Company’s securitization transactions and warehouse credit facilities are
terminable by the insurers of certain of the Trust’s obligations (“Note Insurers”) in the event of certain defaults
by the Company and under certain other circumstances. Were a Note Insurer in the future to exercise its option
to terminate the Servicing Agreements, such a termination would have a material adverse effect on the
Company’s liquidity and results of operations. The Company continues to receive Servicer extensions on a
monthly and/or quarterly basis, pursuant to the Servicing Agreements.
F-43
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Selected Quarterly Data (Unaudited)
2004
Revenues…………………………………………………...… $
Income (loss) before income taxes………….…………...……$
Net income (loss)……………………………………...………$
Income (loss) per share:
$
Basic……………………………………….………….…… $
Diluted………………………………………………..………$
$
2003
Revenues…………………………………………...………..…$
Income (loss) before income taxes……………………...…… $
Net income (loss)……………………………………...……... $
Income (loss) per share:
$
Basic………………………………………………..……… $
Diluted…………………………………………………….…$
Quarter
Ended
March 31,
Quarter
Ended
June 30,
Quarter
Ended
September 30,
Quarter
Ended
December 31,
(In thousands, except per share data)
27,522
(1,407)
(1,407)
(0.07)
(0.07)
23,915
2,354
6,278
0.31
0.29
$
$
$
$
$
$
$
$
$
$
$
$
$
32,687
(174)
(174)
(0.01)
(0.01)
25,104
3,132
2,642
0.13
0.12
$
$
$
$
$
$
$
$
$
$
$
$
$
34,913
(2,061)
(2,061)
(0.10)
(0.10)
26,041
(2,852)
(2,852)
(0.14)
(0.14)
$
$
$
$
$
$
$
$
$
$
$
$
$
37,570
(12,246)
(12,246)
(0.57)
(0.57)
29,926
(5,674)
(5,674)
(0.28)
(0.28)
F-44
Exhibit 21
Subsidiaries of the Registrant
The following corporations and limited liabilities are direct or indirect subsidiaries of the registrant. Each does
business under its own name, except that The Finance Company also does business under the name Old
Dominion Acceptance, Inc.
Name
State or other jurisdiction of
incorporation or organization
CPS Leasing, Inc.
CPS Marketing, Inc.
CPS Receivables Corp.
CPS Receivables Two Corp.
CPS 123 Corp.
MFN Financial Corporation
TFC Enterprises, Inc.
CPS Receivables Two Corp.
CPS Residual Corp.
71270 Corp.
Page Funding LLC
CPS Funding LLC
Pacific Coast Receivables Corp.
Mercury Finance Corporation of Alabama
Mercury Finance Company of Arizona
Mercury Finance Company of Colorado
Mercury Finance Company of Delaware
Mercury Finance Company of Florida
Mercury Finance Company of Georgia
Mercury Finance Company of Illinois
Mercury Finance Company of Indiana
Mercury Finance Company of Kentucky
Mercury Finance Company of Louisiana
Mercury Finance Company of Michigan
Mercury Finance Company of Mississippi
Mercury Finance Company of Missouri
Mercury Finance Company of Nevada
Mercury Finance Company of New York
Mercury Finance Company of North Carolina
Mercury Finance Company of Ohio
MFC Finance Company of Oklahoma
Mercury Finance Company of Pennsylvania
Mercury Finance Company of South Carolina
Mercury Finance Company of Tennessee
MFC Finance Company of Texas
Mercury Finance Company of Virginia
Mercury Finance Company of Wisconsin
Gulfco Investment, Inc.
Gulfco Finance Company
Midland Finance Co.
DE
CA
CA
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
AL
AZ
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
MO
NV
DE
DE
DE
DE
DE
DE
TN
DE
DE
DE
LA
LA
IL
E-1
MFN Insurance Company
Mercury Finance Company LLC
MFN Funding LLC
MFN Securitization LLC
The Finance Company
First Community Finance, Inc.
Recoveries, Inc.
PC Acceptance.com, Inc.
The Insurance Agency, Inc.
TFC Receivables Corporation
TFC Receivables Corporation V
TFC Receivables Corporation VI
TFC Receivables Corporation VII
TFC Warehouse Corporation I
TFC Warehouse I LLC
Turks and Caicos
DE
DE
DE
VA
VA
VA
VA
DE
DE
DE
DE
DE
DE
DE
E-2
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Consumer Portfolio Services, Inc:
We consent to the incorporation by reference in the Registration Statements (Nos. 333-58199, 333-35758, 333-
75594 and 333-115622) of Consumer Portfolio Services, Inc. on Form S-8 of Consumer Portfolio Services,
Inc., of our report dated March 16, 2005,appearing in the Annual Report on Form 10-K of Consumer Portfolio
Services, Inc. for the year ended December 31, 2004.
/s/ MCGLADREY & PULLEN LLP
Irvine, California
March 30, 2005
E-3
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Consumer Portfolio Services, Inc:
We consent to the incorporation by reference in the registration statements (Nos. 333-58199, 333-35758, 333-
75594 and 333-115622) on Form S-8 of Consumer Portfolio Services, Inc., of our report dated March 15,
2004, with respect to the consolidated balance sheet of Consumer Portfolio Services, Inc. and subsidiaries as of
December 31, 2003, and the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2003,
which report appears in the December 31, 2004, annual report on Form 10-K of Consumer Portfolio Services,
Inc.
/s/ KPMG LLP
Orange County, California
March 28, 2005
E-4