UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FORM 10-K
For the fiscal year ended December 31, 2007
Commission file number: 0-51027
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
Common Stock, no par value
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC (Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
The aggregate market value of the 15,353,414 shares of the registrant’s common stock held by non-affiliates as of the
date of filing of this report, based upon the closing price of the registrant’s common stock of $6.25 per share reported by
Nasdaq as of June 30, 2007, was approximately $95,958,838. 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 6, 2008, was 19,160,149.
The proxy statement for registrant’s 2008 annual shareholders meeting is incorporated by reference into Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Business ................................................................................................................................................. 1
Item 1A. Risk Factors .......................................................................................................................................... 10
Item 1B. Unresolved Staff Comments ................................................................................................................ 18
Item 2.
Property ................................................................................................................................................ 18
Item 3.
Legal Proceedings ................................................................................................................................ 18
Item 4.
Submission of Matters to a Vote of Security Holders .......................................................................... 19
Item 4A. Executive Officers of the Registrant .................................................................................................... 19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities .............................................................................................................................. 21
Item 6.
Selected Financial Data ........................................................................................................................ 22
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations ........... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................. 41
Item 8.
Financial Statements and Supplementary Data .................................................................................... 42
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 42
Item 9A. Controls and Procedures ....................................................................................................................... 42
Item 9B. Other Information ................................................................................................................................. 43
PART III
Item 10. Directors and Executive Officers of the Registrant .............................................................................. 43
Item 11. Executive Compensation ...................................................................................................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................. 43
Item 13. Certain Relationships and Related Transactions, and Director Independence ..................................... 43
Item 14.
Principal Accountant Fees and Services............................................................................................... 43
PART IV
Item 15. Exhibits, Financial Statement Schedules .............................................................................................. 44
Item 1. Business
Overview
PART I
We are a specialty finance company engaged in purchasing and servicing retail automobile contracts originated
primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States
in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract
purchases, we provide indirect financing to the customers of dealers who have limited credit histories, low incomes
or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for
dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources,
such as commercial banks, credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also (i)
acquired installment purchase contracts in three merger and acquisition transactions described below, (ii) purchased
immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) originated ourselves an
immaterial amount of vehicle purchase money loans by lending money directly to consumers. In this report, we
refer to all of such contracts and loans as "automobile contracts."
We are headquartered in Irvine, California, where most operational and administrative functions are centralized.
All credit and underwriting functions are performed either in our California headquarters or our Florida branch, and
we service our automobile contracts from our California headquarters and from three servicing branches in Virginia,
Florida and Illinois.
We direct our marketing efforts primarily to dealers, rather than to consumers. We establish relationships with
dealers through our employee marketing representatives who contact a prospective dealer to explain our automobile
contract purchase programs, and thereafter provide dealer training and support services. The marketing
representatives are obligated to represent our financing program exclusively. Our marketing representatives present
the dealer with a marketing package, which includes our promotional material containing the terms offered by us for
the purchase of automobile contracts, a copy of our standard-form dealer agreement, and required documentation
relating to automobile contracts. As of December 31, 2007, we had 134 marketing representatives and we were a
party to dealer agreements with over 10,255 dealers in 46 states. Approximately 85% of these dealers are franchised
new car dealers that sell both new and used cars and the remainder are independent used car dealers. For the year
ended December 31, 2007, approximately 84% of the automobile contracts purchased under our programs consisted
of financing for used cars and 16% consisted of financing for new cars, as compared to 87% financing for used cars
and 13% for new cars in the year ended December 31, 2006.
We purchase automobile contracts with the intention of financing them on a long-term basis through
securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose
entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.
Depending on the structure of the securitization, the transaction may, for financial accounting purposes, be treated as
a sale of the contracts or as a secured financing. From inception through the third quarter of 2003, we generated
revenue primarily from the gains recognized on the sale or securitization of automobile contracts, servicing fees
earned on automobile contracts sold, interest earned on residual interests and interest on finance receivables.
However, since the third quarter of 2003, we have structured our securitizations to be treated as secured financings
rather than as sales of automobile contracts for financial accounting purposes. By accounting for these
securitizations as secured financings, the contracts and asset-backed notes issued remain on our balance sheet with
the interest income of the contracts in the trust and the related financing costs reflected over the life of the
underlying pool of contracts.
We were incorporated and began our operations in March 1991. From inception through December 31, 2007, we
have purchased a total of approximately $8.4 billion of automobile contracts from dealers. In addition, we obtained
a total of approximately $605.0 million of automobile contracts in our 2002, 2003 and 2004 acquisitions, as
described below. Our total managed portfolio, net of unearned interest on pre-computed automobile contracts, grew
to approximately $2,126.2 million at December 31, 2007 from $1,565.9 million at December 31, 2006,
$1,122.0 million as of December 31, 2005 and $906.9 million as of December 31, 2004.
Historical Acquisitions
In March 2002, we acquired MFN Financial Corporation and its subsidiaries, or MFN, in a merger, which we refer
to as the MFN merger. In May 2003, we acquired TFC Enterprises, Inc. and its subsidiaries, or TFC, in a second
merger, which we refer to as the TFC merger. We acquired $381.8 million of automobile contracts in the
MFN merger, and $152.1 million in the TFC merger. MFN and TFC were engaged in businesses similar to that of
ours. MFN ceased acquiring automobile contracts in March 2002, while TFC continues to acquire automobile
contracts under its TFC programs. Automobile contracts purchased by TFC during the year ended December 31,
2007 accounted for less than 3% of our total purchases during the year. In April 2004, we acquired $74.9 million in
automobile contracts from SeaWest Financial Corporation and its subsidiaries. In addition, we were named servicer
of approximately $111.8 million of automobile contracts that SeaWest had previously securitized, and which we do
not own. We sometimes refer to those non-owned contracts as the SeaWest third-party portfolio. As of December
31, 2007, the remaining outstanding principal balance of automobile contracts acquired in the MFN and TFC
mergers, and from SeaWest Financial Corporation was $958,000, while the remaining outstanding principal balance
of the SeaWest third-party portfolio was $422,000.
Sub-Prime Auto Finance Industry
Automobile financing is the second largest consumer finance market in the United States. The automobile finance
industry can be divided into two principal segments: a prime credit market and a sub-prime credit market.
Traditional automobile finance companies, such as commercial banks, savings institutions, credit unions and captive
finance companies of automobile manufacturers, generally lend to the most creditworthy, or so-called prime,
borrowers. The sub-prime automobile credit market, in which we operate, provides financing to less creditworthy
borrowers, at higher interest rates.
Historically, traditional lenders have not serviced the sub-prime market or have done so through programs that
were not consistently available. Independent companies specializing in sub-prime automobile financing and
subsidiaries of larger financial services companies currently compete in this segment of the automobile finance
market, which we believe remains highly fragmented, with no single company having a dominant position in the
market.
Our Operations
Our automobile financing programs are designed to serve sub-prime customers, who generally have limited credit
histories, low incomes or past credit problems. Because we serve customers who are unable to meet certain credit
standards, we incur greater risks, and generally receive interest rates higher than those charged in the prime credit
market. We also sustain a higher level of credit losses because we provide financing in a relatively high risk market.
Originations
When a retail automobile buyer elects to obtain financing from a dealer, the dealer takes a credit application to
submit to its financing sources. Typically, a dealer will submit the buyer's application to more than one financing
source for review. We believe the dealer’s decision to choose a financing source is based primarily on: (i) the
monthly payment made available to the dealer's customer; (ii) the purchase price offered to the dealer for the
contract; (iii) timeliness, consistency and predictability of response; (iv) funding turnaround time; and (v) any
conditions to purchase. Dealers can send credit applications to us by entering the necessary data on our website, by
fax, or through one of several third-party application aggregators. For the year ended December 31, 2007, we
received approximately 85% of all applications through DealerTrack (the industry leading dealership application
aggregator), 9% via our website and 6% via fax or other aggregators. Our automated application decisioning system
produced our response within minutes to about 86% of those applications.
Upon receipt of information from a dealer, we immediately order a credit report to document the buyer's credit
history. If, upon review by our proprietary automated decisioning system, or in some cases, one of our credit
analysts, we determine that the automobile contract meets our underwriting criteria, or would meet such criteria with
modification, we request and review further information and supporting documentation and, ultimately, decide
whether to approve the automobile contract for purchase. When presented with an application, we attempt to notify
the dealer within one hour as to whether we would purchase the related automobile contract.
Dealers with which we do business are under no obligation to submit any automobile contracts to us, nor are we
obligated to purchase any automobile contracts from them. During the year ended December 31, 2007, no dealer
accounted for more than 1% of the total number of automobile contracts we purchased. Automobile 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 ours as described above, except that the marketing efforts are directed at independent used
car dealers and the vehicle purchasers we are looking for are enlisted personnel of the U.S. Armed Forces. The
following table sets forth the geographical sources of the automobile contracts purchased by us (based on the
addresses of the customers as stated on our records) during the years ended December 31, 2007 and 2006.
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(1) Automobile contracts purchased by TFC after the TFC merger are not included because such purchases
accounted for less than 10% of the total purchases during the year.
(2) Percentages may not total to 100.0% due to rounding.
We purchase automobile contracts under our programs from dealers at a price generally computed as the total
amount financed under the automobile contracts, adjusted for an acquisition fee, which may either increase or
decrease the automobile contract purchase price paid by us. The amount of the acquisition fee, and whether it results
in an increase or decrease to the automobile contract purchase price, is based on the perceived credit risk of and, in
some cases, the interest rate on the automobile contract. For the years ended December 31, 2007, 2006 and 2005, the
average acquisition fee charged per automobile contract purchased under our programs was $209, $241 and $150,
respectively, or 1.4%, 1.6% and 1.0%, respectively, of the amount financed.
We offer seven different financing programs to our dealership customers, and price each program according to the
relative credit risk. We offer programs covering a wide band of the credit spectrum. Our upper credit tier products,
which are our Preferred, Super Alpha, Alpha Plus and Alpha programs accounted for approximately 76% and 78%
of our new contract originations in 2007 and 2006, respectively, in each case measured by aggregate amount
financed.
The following table identifies the credit program, sorted from highest to lowest credit quality, under which we
purchased automobile contracts during the years ended December 31, 2007, 2006 and 2005.
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NumberPercent (2)NumberPercent (2)California8,358 10.4%5,887 9.2%Texas7,408 9.2%7,004 10.9%Florida6,774 8.4%5,100 7.9%Ohio4,990 6.2%4,758 7.4%Pennsylvania4,967 6.2%3,642 5.7%New York4,087 5.1%2,732 4.3%North Carolina3,748 4.7%2,864 4.5%Michigan3,229 4.0%2,791 4.3%Illinois3,164 3.9%2,950 4.6%Louisiana3,006 3.7%2,755 4.3%Kentucky2,797 3.5%2,180 3.4%Maryland2,779 3.4%2,107 3.3%Georgia2,263 2.8%1,378 2.1%Indiana2,165 2.7%1,401 2.2%Virginia2,091 2.6%1,678 2.6%New Jersey2,030 2.5%1,543 2.4%Other States16,725 20.8%13,431 20.9%Total80,581 100.0%64,201 100.0%December 31, 2006December 31, 2007Contracts Purchased During the Year Ended (1)Amount FinancedPercent (2)Amount FinancedPercent (2)Amount FinancedPercent (2)Preferred55,717$ 4.5%30,700$ 3.1%13,735$ 2.1%Super Alpha153,410 12.3%120,118 12.2%78,030 11.8%Alpha Plus215,248 17.3%178,371 18.1%135,926 20.6%Alpha 523,259 42.0%444,775 45.0%314,444 47.6%Standard116,424 9.3%85,190 8.6%67,293 10.2%Mercury / Delta104,990 8.4%77,481 7.8%20,346 3.1%First Time Buyer77,283 6.2%50,893 5.2%30,329 4.6%1,246,331$ 100.0%987,528$ 100.0%660,103$ 100.0%Contracts Purchased (1) During the Year Ended (dollars in thousands)December 31, 2007December 31, 2006December 31, 2005
(1) Automobile contracts purchased by TFC after the TFC merger are not included because such purchases
accounted for less than 10% of the total purchases during the year.
(2) Percentages may not total to 100.0% due to rounding.
We attempt to control misrepresentation regarding the customer's credit worthiness by carefully screening the
automobile contracts we purchase, by establishing and maintaining professional business relationships with dealers,
and by including certain representations and warranties by the dealer in the dealer agreement. Pursuant to the dealer
agreement, we may require the dealer to repurchase any automobile contract in the event that the dealer breaches our
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 us.
In addition to our purchases of installment contracts from dealers, we have purchased since 2006 an immaterial
number of vehicle purchase money loans, evidenced by promissory notes and security agreements. A non-affiliated
lender originated all such loans directly to vehicle purchasers, and sold the loans to us. We began financing vehicle
purchases by direct loans to consumers in January 2008, on terms similar to those that we offer through dealers,
though without a down payment requirement and with more restrictive loan-to-value and credit score requirements.
There can be no assurance as to the extent to which we will continue to make such loans, or as to their future
performance.
Underwriting
To be eligible for purchase by us, an automobile contract must have been originated by a dealer that has entered
into a dealer agreement to sell automobile contracts to us. The automobile contract must be secured by a first
priority lien on a new or used automobile, light truck or passenger van and must meet our underwriting criteria. In
addition, each automobile contract requires the customer to maintain physical damage insurance covering the
financed vehicle and naming us as a loss payee. We may, nonetheless, suffer a loss upon theft or physical damage of
any financed vehicle if the customer fails to maintain insurance as required by the automobile contract and is unable
to pay for repairs to or replacement of the vehicle or is otherwise unable to fulfill his or her obligations under the
automobile contract.
We believe that our underwriting criteria enable us to evaluate effectively the creditworthiness of sub-prime
customers and the adequacy of the financed vehicle as security for an automobile contract. The underwriting criteria
include standards for price, term, amount of down payment, installment payment and interest rate; mileage, age and
type of vehicle; principal amount of the automobile contract in relation to the value of the vehicle; customer income
level, employment and residence stability, credit history and debt service ability, as well as other factors.
Specifically, the underwriting guidelines for our CPS programs generally limit the maximum principal amount of a
purchased automobile contract to 115% of wholesale book value in the case of used vehicles or to 115% of the
manufacturer's invoice in the case of new vehicles, plus, in each case, sales tax, licensing and, when the customer
purchases such additional items, a service contract or a credit life or disability policy. We generally do not finance
vehicles that are more than eight model years old or have in excess of 99,999 miles. Under most of our programs,
the maximum term of a purchased contract is 72 months; a shorter maximum term may be applicable based on the
mileage and age of the vehicle. Automobile contracts with the maximum term of 72 months may be purchased if the
customer is among the more creditworthy of our obligors and the vehicle is generally not more than four model
years old and has less than 45,000 miles. Automobile contract purchase criteria are subject to change from time to
time as circumstances may warrant. Upon receiving the vehicle and customer information with the customer's
application, our underwriters verify the customer's employment, income, residency, and credit information by
contacting various parties noted on the customer's application, credit information bureaus and other sources. In
addition, prior to purchasing an automobile contract, we contact each customer by telephone to confirm that the
customer understands and agrees to the terms of the related automobile contract. During this "welcome call," we also
ask the customer a series of open ended questions about his application and the contract to uncover any potential
misrepresentations.
Credit Scoring. We use a proprietary scoring model to assign each automobile 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 including the customer's credit history,
employment and residence stability, income, and monthly payment amount. Our score also considers the loan-to-
value ratio, payment-to-income ratio and the sales price and make of the vehicle. We have developed the credit
score utilizing statistical risk management techniques and historical performance data from our managed portfolio.
We believe this improves our allocation of credit evaluation resources, enhances our competitiveness in the
marketplace and more effectively manages the risk inherent in the sub-prime market.
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Characteristics of Contracts. All of the automobile contracts purchased by us are fully amortizing and provide for
level payments over the term of the automobile contract. All automobile contracts may be prepaid at any time
without penalty. The average original principal amount financed, under the CPS programs and in the year ended
December 31, 2007, was $15,467, with an average original term of 63 months and an average down payment
amount of 12.6%. Based on information contained in customer applications for this 12-month period, the retail
purchase price of the related automobiles averaged $15,621 (which excludes tax, license fees and any additional
costs such as a maintenance contract), the average age of the vehicle at the time the automobile contract was
purchased was three years, and our customers averaged approximately 38 years of age, with approximately $41,619
in average annual household income and an average of five years history with his or her current employer. Because
our TFC programs are directed towards enlisted military personnel, contracts purchased under the TFC programs
tend to have smaller balances and the purchasers are generally younger and have lower incomes.
Dealer Compliance. The dealer agreement and related assignment contain representations and warranties by the
dealer that an application for state registration of each financed vehicle, naming us as secured party with respect to
the vehicle, was effected at the time of sale of the related automobile contract to us, and that all necessary steps have
been taken to obtain a perfected first priority security interest in each financed vehicle in favor of us under the laws
of the state in which the financed vehicle is registered.
Servicing and Collection
We currently service all automobile contracts that we own as well as those automobile contracts that are included
in portfolios that we have sold to off balance sheet securitization trusts or in the SeaWest third party portfolio. We
organize our servicing activities based on the tasks performed by our personnel. Our servicing activities consist of
mailing monthly billing statements; collecting, accounting for and posting of all payments received; responding to
customer inquiries; taking all necessary action to maintain the security interest granted in the financed vehicle or
other collateral; investigating delinquencies; communicating with the customer to obtain timely payments;
repossessing and liquidating the collateral when necessary; collecting deficiency balances; and generally monitoring
each automobile contract and the related collateral. We are typically entitled to receive a base monthly servicing fee
between 2.5% and 3.5% per annum computed as a percentage of the declining outstanding principal balance of the
non-charged-off automobile contracts in the securitization pools. The servicing fee is included in interest income for
on balance sheet financings.
Collection Procedures. We believe that our ability to monitor performance and collect payments owed from
sub-prime customers is primarily a function of our collection approach and support systems. We believe that if
payment problems are identified early and our collection staff works closely with customers to address these
problems, it is possible to correct many of problems before they deteriorate further. To this end, we utilize pro-active
collection procedures, which include making early and frequent contact with delinquent customers; educating
customers as to the importance of maintaining good credit; and employing a consultative and customer service
approach to assist the customer in meeting his or her obligations, which includes attempting to identify the
underlying causes of delinquency and cure them whenever possible. In support of our collection activities, we
maintain a computerized collection system specifically designed to service automobile contracts with sub-prime
customers and similar consumer obligations.
With the aid of our automatic dialer, as well as manual efforts made by collection staff, we attempt to make
telephonic contact with delinquent customers from one to 29 days after their monthly payment due date, depending
on our proprietary behavioral assessment of the customer’s likelihood of payment during early stages of
delinquency. Using coded instructions from a collection supervisor, the automatic dialer will attempt to contact
customers based on their physical location, stage 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 we can expect to receive the payment. The
collector will attempt to get the customer to make an electronic payment over the phone or a promise for the
payment for a time generally not to exceed one week from the date of the call. If the customer makes such a
promise, the account is routed to a promise queue and is not contacted until the outcome of the promise is known. If
the payment is made by the promise date and the account is no longer delinquent, the account is routed out of the
collection system. If the payment is not made, or if the payment is made, but the account remains delinquent, the
account is returned to the queue for subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to evade
contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine if
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repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th and 90th day past
the customer's payment due date, but could occur sooner or later, depending on the specific circumstances. At the
time the vehicle is repossessed we will stop accruing interest in this automobile contract, and reclassify the
remaining automobile contract balance to other assets. In addition we will apply a specific reserve to this automobile
contract so that the net balance represents the estimated fair value less costs to sell.
If we elect to repossess the vehicle, we assign the task to an independent local repossession service. Such services
are licensed and/or bonded as required by law. When the vehicle is recovered, the repossessor delivers it to a
wholesale automobile auction, where it is kept until sold. Financed vehicles that have been repossessed are generally
resold by us through unaffiliated automobile auctions, which are attended principally by car dealers. Net liquidation
proceeds are applied to the customer's outstanding obligation under the automobile contract. Such proceeds usually
are insufficient to pay the customer's obligation in full, resulting in a deficiency. In most cases we will continue to
contact our customers to recover all or a portion of this deficiency for up to several years after charge-off.
Once an automobile contract becomes greater than 90 days delinquent, we do not recognize additional interest
income until the borrower under the automobile contract makes sufficient payments to be less than 90 days
delinquent. Any payments received by a borrower that are greater than 90 days delinquent are first applied to
accrued interest and then to principal reduction.
We generally charge off the balance of any contract by the earlier of the end of the month in which the automobile
contract becomes five scheduled installments past due or, in the case of repossessions, the month that the proceeds
from the liquidation of the financed vehicle are received by us or if the vehicle has been in repossession inventory
for more than three months. In the case of repossession, the amount of the charge-off is the difference between the
outstanding principal balance of the defaulted automobile contract and the net repossession sale proceeds.
Credit Experience
Our financial results are dependent on the performance of the automobile contracts in which we retain an
ownership interest. The tables below document the delinquency, repossession and net credit loss experience of all
automobile contracts that we are servicing (excluding contracts from the SeaWest third party portfolio) as of the
respective dates shown. Credit experience for us, MFN (since the date of the MFN merger), TFC (since the date of
the TFC merger) and SeaWest (since the date of the SeaWest asset acquisition) is shown on a combined basis in the
table below.
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(1) All amounts and percentages are based on the amount remaining to be repaid on each automobile contract,
including, for pre-computed automobile contracts, any unearned interest. The information in the table
represents the gross principal amount of all automobile contracts we purchased, including automobile
contracts we subsequently sold in securitization transactions that we continue to service. The table does not
include the SeaWest third party portfolio (automobile contracts that we service on behalf of SeaWest
securitizations, but do not own).
(2) We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually
due payment by the following due date, which date may have been extended within limits specified in the
servicing agreements. The period of delinquency is based on the number of days payments are contractually
past due. Automobile contracts less than 31 days delinquent are not included.
(3) Amount in repossession represents the contract balance on financed vehicles that have been repossessed but not
yet liquidated. This amount is not netted with the specific reserve to arrive at the estimated asset value less costs
to sell.
(4) The aging categories shown in the tables reflect the effect of extensions.
Extensions
We may offer a customer an extension, under which the customer agrees with us to move past due payments to the
end of the automobile contract term. In such cases the customer must sign an agreement for the extension, and may
pay a fee representing partial payment of accrued interest. Our policies, and contractual arrangements for our
warehouse and securitization transactions, limit the number of extensions that may be granted. In general, a
customer may arrange for an extension no more than once every 12 months, not to exceed four extensions over the
life of the contract.
If a customer is granted such an extension, the date next due is advanced. Subsequent delinquency aging
classifications would be based on the future payment performance of the automobile contract.
7
AmountAmountDelinquency Experience (Dollars in thousands)Gross servicing portfolio (1).….168,260$2,128,656126,574$1,568,32995,689 $1,116,534 Period of delinquency (2).31-60 days……….………….4,22748,134.3,27537,3282,367 24,047 61-90 days……….………….2,37027,877.1,36714,9031,057 10,156 91+ days………..………………2,03924,888.1,03510,3011,031 7,946 Total delinquencies (2)…..……..8,636100,899.5,67762,5324,455 42,149 Amount in repossession (3)……3,04933,400.2,14824,1351,335 13,531 Total delinquencies and. amount in repossession (2)...….11,685$134,2997,825$86,6675,790 $55,680 Delinquencies as a percentage. of gross servicing portfolio...….5.1 %4.7 %.4.5 %4.0 %4.7 %3.8 %.Total delinquencies and. amount in repossession as a . percentage of gross servicing. portfolio……………….…6.9 %6.3 %.6.2 %5.5 %6.1 %5.0 %Extension ExperienceContracts with One Extension (4)21,555$251,067.12,318$128,38610,602 $95,412 Contracts with Two or More. Extensions (4)……...……….4,37738,2643,18324,9784,575 29,428 Total Contracts with Extensions25,932$289,33115,501$153,36415,177 $124,840 Delinquency Experience (1)CPS, MFN, TFC and SeaWest CombinedContractsNumber ofContractsAmountDecember 31, 2007Number of ContractsDecember 31, 2006December 31, 2005Number of
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile
contract, net of unearned income on pre-computed automobile contracts. The information in the table
represents all automobile contracts serviced by us, excluding the SeaWest third party portfolio (automobile
contracts originated by SeaWest for which we are the servicer but have no equity interest).
(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the
liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date
of charge-off, including some recoveries which have been classified as other income in the accompanying
financial statements.
Securitization of Automobile Contracts
We purchase automobile contracts with the intention of financing them on a long-term basis through
securitizations. All such securitizations have involved identification of specific automobile contracts, sale of those
automobile contracts (and associated rights) to a special purpose subsidiary, and issuance of asset−backed securities
to fund the transactions. Upon the securitization of a portfolio of automobile contracts, we retain the obligation to
service the contracts, and receive a monthly fee for doing so. We have been a regular issuer of asset-backed
securities since 1994, completing 47 securitizations totaling over $6.1 billion through December 31, 2007.
Depending on the structure of the securitization, the transaction may be treated as a sale of the automobile contracts
or as a secured financing for financial accounting purposes. Since the third quarter of 2003, we have structured our
securitizations as secured financings rather than as sales of contracts.
When structured to be treated as a secured financing, the subsidiary is consolidated and, accordingly, the
automobile contracts and the related securitization trust debt appear as assets and liabilities, respectively, on our
consolidated balance sheet. We then recognize interest income on the contracts and interest expense on the securities
issued in the securitization and record as expense a provision for probable credit losses on the contracts.
When structured to be treated as a sale, the subsidiary is not consolidated. Accordingly, the securitization removes
the sold automobile contracts from our consolidated balance sheet, the related debt does not appear as our debt, and
our consolidated balance sheet shows, as an asset, a retained residual interest in the sold automobile contracts. The
residual interest represents the discounted value of what we expect will be the excess of future collections on the
automobile contracts over principal and interest due on the asset-backed securities. That residual interest appears on
our consolidated balance sheet as "residual interest in securitizations," and the determination of its value is
dependent on our estimates of the future performance of the sold automobile contracts.
Prior to a securitization transaction, we fund our automobile contract purchases primarily with proceeds from
warehouse credit facilities. As of December 31, 2006, we had $400 million in warehouse credit capacity, in the form
of two $200 million facilities. Both warehouse credit facilities provide funding for automobile contracts purchased
under the CPS programs, while one facility also provides funding for automobile contracts purchased under the
TFC programs. Up to 83% of the principal balance of the automobile contracts may be advanced to us under these
facilities, subject to collateral tests and certain other conditions and covenants. In January and February 2007, we
amended our warehouse facilities to permit issuance of subordinated debt to two additional lenders. The result was
to increase the effective advance rate to as high as 93% and aggregate warehouse capacity to $425 million. In
January 2008, the commitments to purchase the subordinated debt were to expire in accordance with their terms.
We have entered into a series of short-term extensions with the subordinated lenders and are discussing longer-term
extensions with these and other possible lenders. Long-term financing for the automobile contract purchases is
achieved through securitization transactions. The proceeds from such securitization transactions are used primarily
to repay the warehouse credit facilities.
In a securitization and in our warehouse credit facilities, we are required to make certain representations and
warranties, which are generally similar to the representations and warranties made by dealers in connection with our
purchase of the automobile contracts. If we breach any of our representations or warranties, we will be obligated to
repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid interest. We
may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract
8
CPS, MFN, TFC and SeaWest CombinedAverage servicing portfolio outstanding………………………….....……….$1,905,162 $1,367,935 $966,295 Net charge-offs as a percentage of average$servicing portfolio (2)…….………………………..……………………..$5.3 %4.5 %5.3 %(Dollars in thousands)Year Ended December 31,200720062005
at a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse
against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts that
we repurchase.
Whether a securitization is treated as a secured financing or as a sale for financial accounting purposes, the related
special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized
automobile contracts falls short of pre-determined standards. Such releases represent a material portion of the cash
that we use to fund our operations. An unexpected deterioration in the performance of securitized automobile
contracts could therefore have a material adverse effect on both our liquidity and results of operations, regardless of
whether such automobile contracts are treated as having been sold or as having been financed. For estimation of the
magnitude of such risk, it may be appropriate to look to the size of our "managed portfolio," which represents both
financed and sold automobile contracts as to which such credit risk is retained. Our managed portfolio as of
December 31, 2007 was approximately $2.1 billion (this amount includes $422,000 related to the SeaWest
third party portfolio, on which we earn only servicing fees and have no credit risk).
Competition
The automobile financing business is highly competitive. We compete with a number of national, regional and
local finance companies with operations similar to ours. In addition, competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings and loan associations, leasing
companies, credit unions providing retail loan financing and lease financing for new and used vehicles, and captive
finance companies affiliated with major automobile manufacturers such as General Motors Acceptance Corporation,
Ford Motor Credit Corporation, Chrysler Finance and Nissan Motors Acceptance Corporation. Many of our
competitors and potential competitors possess substantially greater financial, marketing, technical, personnel and
other resources than we do. Moreover, our future profitability will be directly related to the availability and cost of
our capital in relation to the availability and cost of capital to our competitors. Our competitors and potential
competitors include far larger, more established companies that have access to capital markets for unsecured
commercial paper and investment grade-rated debt instruments and to other funding sources that may be unavailable
to us. Many of these companies also have long-standing relationships with dealers and may provide other financing
to dealers, including floor plan financing for the dealers' purchase of automobiles from manufacturers, which we do
not offer.
We believe that the principal competitive factors affecting a dealer's decision to offer automobile contracts for sale
to a particular financing source are the purchase price offered for the automobile contracts, the timeliness of the
response to the dealer upon submission of the initial application, the reasonableness of the financing source's
underwriting guidelines and documentation requests, the predictability and timeliness of purchases and the financial
stability of the funding source. While we believe that we can obtain from dealers sufficient automobile contracts for
purchase at attractive prices by consistently applying reasonable underwriting criteria and making timely purchases
of qualifying automobile contracts, there can be no assurance that we will do so.
Regulation
Several federal and state consumer protection laws, including the federal Truth-In-Lending Act, the federal
Equal Credit Opportunity Act, the federal Fair Debt Collection Practices Act and the Federal Trade Commission
Act, regulate the extension of credit in consumer credit transactions. These laws mandate certain disclosures with
respect to finance charges on automobile contracts and impose certain other restrictions on dealers. In many states, a
license is required to engage in the business of purchasing automobile contracts from dealers. In addition, laws in a
number of states impose limitations on the amount of finance charges that may be charged by dealers on credit sales.
The so-called Lemon Laws enacted by various states provide certain rights to purchasers with respect to automobiles
that fail to satisfy express warranties. The application of Lemon Laws or violation of such other federal and state
laws may give rise to a claim or defense of a customer against a dealer and its assignees, including us and purchasers
of automobile contracts from us. The dealer agreement contains representations by the dealer that, as of the date of
assignment of automobile contracts, no such claims or defenses have been asserted or threatened with respect to the
automobile contracts and that all requirements of such federal and state laws have been complied with in all material
respects. Although a dealer would be obligated to repurchase automobile contracts that involve a breach of such
warranty, there can be no assurance that the dealer will have the financial resources to satisfy its repurchase
obligations. Certain of these laws also regulate our servicing activities, including our methods of collection.
Although we believe that we are currently in material compliance with applicable statutes and regulations, there
can be no assurance that we will be able to maintain such compliance. The past or future failure to comply with such
statutes and regulations could have a material adverse effect upon us. Furthermore, the adoption of additional
statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations or the
9
expansion of our business into jurisdictions that have adopted more stringent regulatory requirements than those in
which we currently conduct business could have a material adverse effect upon us. In addition, due to the consumer-
oriented nature of the industry in which we operate 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 us or within the industry in connection with any such litigation could
have a material adverse effect on our financial condition, results of operations or liquidity.
Employees
As of December 31, 2007, we had 997 employees. The breakdown of the employees is as follows: 8 are senior
management personnel, 532 are collections personnel, 209 are automobile contract origination personnel, 156 are
marketing personnel (134 of whom are marketing representatives), 66 are operations and systems personnel, and 34
are administrative personnel. We believe that our relations with our employees are good. We are not a party to any
collective bargaining agreement.
Item 1A.
RISK FACTORS
Our business, operating results and financial condition could be adversely affected by any of the following specific
risks. The trading price of our common stock could decline due to any of these risks and other industry risks. In
addition to the risks described below, we may encounter risks that are not currently known to us or that we currently
deem immaterial, which may also impair our business operations and the value of our common stock.
Risks Related to Our Business
We Require a Substantial Amount of Cash to Service Our Substantial Debt.
To service our existing substantial indebtedness, we require a significant amount of cash. Our ability to generate
cash depends on many factors, including our successful financial and operating performance. Our financial and
operational performance depends upon a number of factors, many of which are beyond our control. These factors
include, without limitation:
the economic and competitive conditions in the asset-backed securities market;
the performance of our current and future automobile contracts;
the performance of our residual interests from our securitizations and warehouse credit facilities;
any operating difficulties or pricing pressures we may experience;
our ability to obtain credit enhancement for our securitizations;
our ability to establish and maintain dealer relationships;
the passage of laws or regulations that affect us adversely;
our ability to compete with our competitors; and
our ability to acquire and finance automobile contracts.
Depending upon the outcome of one or more of these factors, we may not be able to generate sufficient cash flow
from operations or obtain sufficient funding to satisfy all of our obligations. If we were unable to pay our debts, we
would be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. These alternative strategies might not be feasible at the time, might
prove inadequate or could require the prior consent of our lenders.
We Need Substantial Liquidity to Operate Our Business.
We have historically funded our operations principally through internally generated cash flows, sales of debt and
equity securities, including through securitizations and warehouse credit facilities, borrowings under senior
subordinated debt agreements and sales of subordinated notes. However, we may not be able to obtain sufficient
funding for our future operations from such sources. If we were unable to access the capital markets or obtain other
acceptable financing, our results of operations, financial condition and cash flows would be materially and adversely
affected. We require a substantial amount of cash liquidity to operate our business. Among other things, we use such
cash liquidity to:
acquire automobile contracts;
fund overcollateralization in warehouse credit facilities and securitizations;
pay securitization fees and expenses;
fund spread accounts in connection with securitizations;
10
satisfy working capital requirements and pay operating expenses;
pay taxes; and
pay interest expense.
Our Results of Operations Will Depend on Our Ability to Secure and Maintain Adequate Credit and
Warehouse Financing on Favorable Terms.
We depend on warehouse credit facilities to finance our purchases of automobile contracts. Our business strategy
requires that these warehouse credit facilities continue to be available to us from the time of purchase or origination
of an automobile contract until it is financed through a securitization.
Our primary sources of day-to-day liquidity are our warehouse credit facilities, in which we sell and contribute
automobile contracts, as often as twice a week, to special-purpose subsidiaries, where they are "warehoused" until
they are securitized, at which time funds advanced under one or more warehouse credit facilities are repaid from the
proceeds of the securitizations. The special-purpose subsidiaries obtain the funds to purchase these contracts by
pledging the contracts to a trustee for the benefit of senior warehouse lenders, who advance funds to our special-
purpose subsidiaries based on the dollar amount of the contracts pledged. We depend substantially on two
warehouse credit facilities: (i) a $200 million warehouse credit facility, which we established in November 2005
and, unless earlier renewed or terminated upon the occurrence of certain events, which will expire in November
2008; and (ii) a $200 million warehouse credit facility, which we established in June 2004 and which, unless
renewed or earlier terminated upon the occurrence of certain events, will expire in September 2008. Each of these
facilities may be renewed by mutual agreement between the senior lender and us. The reader should note that the
lender under one of the two warehouse credit facilities is an affiliate of Bear Stearns, and that any liquidity issues or
possible changes in business strategy on the part of that lender may adversely affect that lender's ability to continue
to do business with CPS.
Each of these two warehouse facilities has included since January or February 2007 a supplemental subordinated
credit facility, pursuant to which our special purpose subsidiary issues subordinated notes to lenders that are
unaffiliated with us, and unaffiliated with the senior lenders. The effect is to increase the percentage of the value of
the pledged automobile contracts that our special purpose subsidiary may borrow. The supplemental subordinated
credit facility was to expire by its terms on January 14, 2008. We have entered into a series of successive short-term
extensions on the supplemental subordinated credit facility, but there can be no assurance as to our ability to come to
terms regarding any further extensions that are acceptable to us and to the subordinated lenders. We expect that
such terms as we agree to with respect to such subordinated credit facility will involve (i) a reduced advance rate,
and (ii) an increased interest rate, in each case as compared to the terms applicable in 2007.
Both warehouse facilities provide for advances based on a percentage of the eligible collateral and we typically
utilize the facilities in such a way to maximize the borrowings available thereunder. However, the maximum
advance rate percentage under each facility is subject to each lender’s valuation of the collateral which, in turn, is
affected by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in conjunction with our term securitizations.
These warehouse credit facilities will remain available to us only if, among other things, we comply with certain
financial covenants contained in the documents governing these facilities. These warehouse credit facilities may not
be available to us in the future and we may not be able to obtain other credit facilities on favorable terms to fund our
operations.
Within the period of approximately four months prior to the filing of this report, we have observed adverse
changes in the market for securitized pools of automobile contracts. These changes have resulted in a substantial
extension of the period during which our automobile contracts are financed through our warehouse credit facilities,
which has burdened our financing capabilities. Continued adverse conditions in the market for securitized pools of
automobile contracts could result in our reaching maximum limits for advances and age of eligible collateral under
our warehouse facilities which would preclude further borrowings thereunder.
If we were unable to arrange new warehousing or other credit facilities or renew our existing warehouse credit
facilities when they come due, or if the advance rate as determined by the lenders were significantly reduced, or if
we reached the maximum limits for advances under the facilities, our results of operations, financial condition and
cash flows could be materially and adversely affected. The anticipated adverse changes in terms of the subordinated
warehouse credit facility would have an adverse effect on our results of operations, financial condition and cash
flows, in amounts that may be considered material, depending on the terms that are ultimately agreed to.
11
Our Results of Operations Will Depend on Our Ability to Securitize Our Portfolio of Automobile Contracts.
We are dependent upon our ability to continue to finance pools of automobile contracts in term securitization
transactions in order to generate cash proceeds for new purchases of automobile contracts. We have historically
depended on securitizations of automobile contracts to provide permanent financing of those contracts. By
"permanent financing" we mean financing that extends to cover the full term during which the underlying contracts
are outstanding and requires repayment as the underlying contracts are repaid or charged off. By contrast, our
warehouse credit facilities permit us to borrow against the value of such receivables only for limited periods of time.
Our past practice and future plan has been and is to repay loans made to us under our warehouse credit facilities with
the proceeds of securitizations. There can be no assurance that any securitization transaction will be available on
terms acceptable to us, or at all. The timing of any securitization transaction is affected by a number of factors
beyond our control, any of which could cause substantial delays, including, without limitation:
market conditions;
the approval by all parties of the terms of the securitization;
the availability of credit enhancement on acceptable terms; and
our ability to acquire a sufficient number of automobile contracts for securitization.
Within the period of approximately four months prior to the filing of this report, we have observed adverse
changes in the market for securitized pools of automobile contracts. These changes include reduced liquidity,
increased financial guaranty premiums and reduced demand for asset-backed securities, including for securities
carrying a financial guaranty or for securities backed by sub-prime automobile receivables. We believe that these
adverse changes in the capital markets are primarily the result of widespread defaults of sub-prime mortgages
securing a variety of term securitizations and related financial instruments, including instruments carrying financial
guarantees similar to those we typically secure for our own term securitizations. Further adverse changes might
result in our inability to securitize automobile contracts.
The adverse changes that have taken place in the market to date have resulted in a substantial extension of the
period during which our automobile contracts are financed through our warehouse credit facilities, which has
burdened our financing capabilities, and has caused us to curtail our purchase of automobile contracts. Further
adverse changes in such market could be expected to have a material adverse effect on our results of operations.
Our Results of Operations Will Depend on Cash Flows from Our Residual Interests in Our Securitization
Program and Our Warehouse Credit Facilities.
When we finance our automobile contracts through securitizations and warehouse credit facilities, we receive cash
and a residual interest in the assets financed. Those financed assets are owned by the special-purpose subsidiary that
is formed for the related securitization. This residual interest represents the right to receive the future cash flows to
be generated by the automobile contracts in excess of (i) the interest and principal paid to investors on the
indebtedness issued in connection with the financing (ii) the costs of servicing the contracts and (iii) certain other
costs incurred in connection with completing and maintaining the securitization or warehouse credit facility. We
sometimes refer to these future cash flows as "excess spread cash flows."
Under the financial structures we have used to date in our securitizations and warehouse credit facilities, excess
spread cash flows that would otherwise be paid to the holder of the residual interest are first used to increase
overcollateralization or are retained in a spread account within the securitization trusts or the warehouse facility to
provide liquidity and credit enhancement for the related securities.
While the specific terms and mechanics vary among transactions, our securitization and warehousing agreements
generally provide that we will receive excess spread cash flows only if the amount of overcollateralization and
spread account balances have reached specified levels and/or the delinquency, defaults or net losses related to the
contracts in the automobile contract pools are below certain predetermined levels. In the event delinquencies,
defaults or net losses on contracts exceed these levels, the terms of the securitization or warehouse credit facility:
may require increased credit enhancement, including an increase in the amount required to be on deposit in the
spread account to be accumulated for the particular pool;
may restrict the distribution to us of excess spread cash flows associated with other securitized or warehoused
pools; and
in certain circumstances, may permit affected parties to require the transfer of servicing on some or all of the
securitized or warehoused contracts from us to an unaffiliated servicer.
12
We typically retain residual interests or use them as collateral to borrow cash. In any case, the future excess spread
cash flow received in respect of the residual interests is integral to the financing of our operations. The amount of
cash received from residual interests depends in large part on how well our portfolio of securitized and warehoused
automobile contracts performs. If our portfolio of securitized and warehoused automobile contracts has higher
delinquency and loss ratios than expected, then the amount of money realized from our retained residual interests, or
the amount of money we could obtain from the sale or other financing of our residual interests, would be reduced,
which could have an adverse effect on our operations, financial condition and cash flows.
If We Are Unable to Obtain Credit Enhancement for Our Securitizations Upon Favorable Terms, Our
Results of Operations Would Be Impaired.
In our securitizations, we typically utilize credit enhancement in the form of one or more financial guaranty
insurance policies issued by financial guaranty insurance companies. Each of these policies unconditionally and
irrevocably guarantees certain interest and principal payments on the senior classes of the securities issued in our
securitizations. These guarantees enable these securities to achieve the highest credit rating available. This form of
credit enhancement reduces the costs of our securitizations relative to alternative forms of credit enhancement
currently available to us. None of such financial guaranty insurance companies is required to insure future
securitizations. As we pursue future securitizations, we may not be able to obtain:
credit enhancement in any form from financial guaranty insurance companies or any other provider of credit
enhancement on terms acceptable to us, or at all; or
similar ratings for senior classes of securities to be issued in future securitizations.
If we were unable to obtain such enhancements or such ratings, we would expect to incur increased interest
expense, which would adversely affect our results of operations.
If We Are Unable to Successfully Compete With Our Competitors, Our Results of Operations May Be
Impaired.
The automobile financing business is highly competitive. We compete with a number of national, regional and
local finance companies. In addition, competitors or potential competitors include other types of financial services
companies, such as commercial banks, savings and loan associations, leasing companies, credit unions providing
retail loan financing and lease financing for new and used vehicles and captive finance companies affiliated with
major automobile manufacturers such as General Motors Acceptance Corporation and Ford Motor Credit
Corporation. Many of our competitors and potential competitors possess substantially greater financial, marketing,
technical, personnel and other resources than we do, including greater access to capital markets for unsecured
commercial paper and investment grade rated debt instruments, and to other funding sources which may be
unavailable to us. Moreover, our future profitability will be directly related to the availability and cost of our capital
relative to that of our competitors. Many of these companies also have long-standing relationships with automobile
dealers and may provide other financing to dealers, including floor plan financing for the dealers' purchases of
automobiles from manufacturers, which we do not offer. There can be no assurance that we will be able to continue
to compete successfully and, as a result, we may not be able to purchase contracts from dealers at a price acceptable
to us, which could result in reductions in our revenues or the cash flows available to us.
If Our Dealers Do Not Submit a Sufficient Number of Suitable Automobile Contracts to Us for Purchase, Our
Results of Operations May Be Impaired.
We are dependent upon establishing and maintaining relationships with a large number of unaffiliated automobile
dealers to supply us with automobile contracts. During the year ended December 31, 2007, no dealer accounted for
more than 1.0% of the contracts we purchased. The agreements we have with dealers to purchase contracts do not
require dealers to submit a minimum number of contracts for purchase. The failure of dealers to submit contracts
that meet our underwriting criteria could result in reductions in our revenues or the cash flows available to us, and,
therefore, could have an adverse effect on our results of operations.
If a Significant Number of Our Automobile Contracts Experience Defaults, Our Results of Operations May
Be Impaired.
We specialize in the purchase and servicing of contracts to finance automobile purchases by sub-prime customers,
those who have limited credit history, low income, or past credit problems. Such contracts entail a higher risk of
non-performance, higher delinquencies and higher losses than contracts with more creditworthy customers. While
we believe that our pricing of the automobile contracts and the underwriting criteria and collection methods we
employ enable us to control, to a degree, the higher risks inherent in contracts with sub-prime customers, no
13
assurance can be given that such pricing, criteria and methods will afford adequate protection against such risks. We
have in the past experienced fluctuations in the delinquency and charge-off performance of our contracts.
If automobile contracts that we purchase experience defaults to a greater extent than we have anticipated, this
could materially and adversely affect our results of operations, financial condition, cash flows and liquidity. Our
results of operations, financial condition, cash flows and liquidity, depend, to a material extent, on the performance
of automobile contracts that we purchase, warehouse and securitize. A portion of the automobile contracts acquired
by us will default or prepay. In the event of payment default, the collateral value of the vehicle securing an
automobile contract realized by us in a repossession will most likely not cover the outstanding principal balance on
that contract and the related costs of recovery. We maintain an allowance for credit losses on automobile contracts
held on our balance sheet, which reflects our estimates of probable credit losses that can be reasonably estimated for
securitizations that are accounted for as financings and warehoused contracts. If the allowance is inadequate, then
we would recognize the losses in excess of the allowance as an expense and our results of operations could be
adversely affected. In addition, under the terms of our warehouse credit facilities, we are not able to borrow against
defaulted automobile contracts, including contracts that are, at the time of default, funded under our warehouse
credit facilities, which will reduce the overcollateralization of those warehouse credit facilities and possibly reduce
the amount of cash flows available to us.
If We Lose Servicing Rights on Our Portfolio of Automobile Contracts, Our Results of Operations Would Be
Impaired.
We are entitled to receive servicing fees only while we act as servicer under the applicable sale and servicing
agreements governing our warehouse facilities and securitizations. Under such agreements, we may be terminated as
servicer upon the occurrence of certain events, including:
our failure generally to observe and perform covenants and agreements applicable to us;
certain bankruptcy events involving us; or
the occurrence of certain events of default under the documents governing the facilities.
The loss of our servicing rights could materially and adversely affect our results of operations, financial condition
and cash flows. Our results of operations, financial condition and cash flows, would be materially and adversely
affected if we were to be terminated as servicer with respect to a material portion of the automobile contracts for
which we are receiving servicing fees.
If We Lose Key Personnel, Our Results of Operations May Be Impaired.
Our senior management team averages thirteen years of service with us. Charles E. Bradley, Jr., our President and
CEO, has been our President since our formation in 1991. Our future operating results depend in significant part
upon the continued service of our key senior management personnel, none of whom is bound by an employment
agreement. Our future operating results also depend in part upon our ability to attract and retain qualified
management, technical, sales and support personnel for our operations. Competition for such personnel is intense.
We cannot assure you that we will be successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his or her current position or our inability to attract and
retain skilled employees, as needed, could materially and adversely affect our results of operations, financial
condition and cash flows.
If We Fail to Comply with Regulations, Our Results of Operations May Be Impaired.
Failure to materially comply with all laws and regulations applicable to us could materially and adversely affect
our ability to operate our business. Our business is subject to numerous federal and state consumer protection laws
and regulations, which, among other things:
require us to obtain and maintain certain licenses and qualifications;
limit the interest rates, fees and other charges we are allowed to charge;
limit or prescribe certain other terms of our automobile contracts;
require specific disclosures to our customers;
define our rights to repossess and sell collateral; and
maintain safeguards designed to protect the security and confidentiality of customer information.
We believe that we are in compliance in all material respects with all such laws and regulations, and that such laws
and regulations have had no material adverse effect on our ability to operate our business. However, we may be
materially and adversely affected if we fail to comply with:
14
applicable laws and regulations;
changes in existing laws or regulations;
changes in the interpretation of existing laws or regulations; or
any additional laws or regulations that may be enacted in the future.
If We Experience Unfavorable Litigation Results, Our Results of Operations May Be Impaired.
Unfavorable outcomes in any of our current or future litigation proceedings could materially and adversely affect
our results of operations, financial conditions and cash flows. As a consumer finance company, we are subject to
various consumer claims and litigation seeking damages and statutory penalties based upon, among other things,
disclosure inaccuracies and wrongful repossession, which could take the form of a plaintiff's class action complaint.
We, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed
by consumers principally against dealers. We are also subject to other litigation common to the automobile industry
and businesses in general. The damages and penalties claimed by consumers and others in these types of matters can
be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and
punitive damages.
While we intend to vigorously defend ourselves against such proceedings, there is a chance that our results of
operations, financial condition and cash flows could be materially and adversely affected by unfavorable outcomes.
If We Experience Problems with Our Originations, Accounting or Collection Systems, Our Results of
Operations May Be Impaired.
We are dependent on our receivables originations, accounting and collection systems to service our portfolio of
automobile contracts. Such systems are vulnerable to damage or interruption from natural disasters, power loss,
telecommunication failures, terrorist attacks, computer viruses and other events. A significant number of our
systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Our systems are
also subject to break-ins, sabotage and intentional acts of vandalism by internal employees and contractors as well as
third parties. Despite any precautions we may take, such problems could result in interruptions in our services,
which could harm our reputation and financial condition. We do not carry business interruption insurance sufficient
to compensate us for losses that may result from interruptions in our service as a result of system failures. Such
systems problems could materially and adversely affect our results of operations, financial conditions and cash
flows.
We Have Substantial Indebtedness.
We have and will continue to have a substantial amount of indebtedness. At December 31, 2007, we had
approximately $2,132.3 million of debt outstanding. Such debt consisted primarily of $1,798.3 million of
securitization trust debt, and also included $235.9 million of warehouse indebtedness, $70.0 million of residual
interest financing, and $28.1 million owed under a subordinated notes program. We are also currently offering the
subordinated notes to the public on a continuous basis, and such notes have maturities that range from three months
to ten years.
Our substantial indebtedness could adversely affect our financial condition by, among other things:
increasing our vulnerability to general adverse economic and industry conditions;
requiring us to dedicate a substantial portion of our cash flow from operations payments on our indebtedness,
thereby reducing amounts available for working capital, capital expenditures and other general corporate
purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate;
placing us at a competitive disadvantage compared to our competitors that have less debt; and
limiting our ability to borrow additional funds.
Although we believe we are able to service and repay such debt, there is no assurance that we will be able to do so.
If we do not generate sufficient operating profits, our ability to make required payments on our debt would be
impaired. Failure to pay our indebtedness when due could have a material adverse effect.
Because We Are Subject to Many Restrictions in Our Existing Credit Facilities and Securitization
Transactions, Our Ability to Pay Dividends or Engage in Specified Transactions May Be Impaired.
The terms of our existing credit facilities and our outstanding debt impose significant operating and financial
restrictions on us and our subsidiaries and require us to meet certain financial tests. These restrictions may have an
15
adverse effect on our business activities, results of operations and financial condition. These restrictions may also
significantly limit or prohibit us from engaging in certain transactions, including the following:
incurring or guaranteeing additional indebtedness;
making capital expenditures in excess of agreed upon amounts;
paying dividends or other distributions to our stockholders or redeeming, repurchasing or retiring our capital
stock or subordinated obligations;
making investments;
creating or permitting liens on our assets or the assets of our subsidiaries;
issuing or selling capital stock of our subsidiaries;
transferring or selling our assets;
engaging in mergers or consolidations;
permitting a change of control of our company;
liquidating, winding up or dissolving our company;
changing our name or the nature of our business, or the names or nature of the business of our subsidiaries; and
engaging in transactions with our affiliates outside the normal course of business.
These restrictions may limit our ability to obtain additional sources of capital, which may limit our ability to
generate earnings. In addition, the failure to comply with any of the covenants of our existing credit facilities or to
maintain certain indebtedness ratios would cause a default under one or more of our credit facilities or our other debt
agreements that may be outstanding from time to time. A default, if not waived, could result in acceleration of the
related indebtedness, in which case such debt would become immediately due and payable. A continuing default or
acceleration of one or more of our credit facilities or any other debt agreement, would likely cause a default under
other debt agreements that otherwise would not be in default, in which case all such related indebtedness could be
accelerated. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance our
indebtedness. Even if any new financing is available, it may not be on terms that are acceptable to us or it may not
be sufficient to refinance all of our indebtedness as it becomes due.
In addition, the transaction documents for our securitizations restrict our securitization subsidiaries from declaring
or making payment to us of (i) any dividend or other distribution on or in respect of any shares of their capital stock,
or (ii) any payment on account of the purchase, redemption, retirement or acquisition of any option, warrant or other
right to acquire shares of their capital stock unless (in each case) at the time of such declaration or payment (and
after giving effect thereto) no amount payable under any transaction document with respect to the related
securitization is then due and owing, but unpaid. These restrictions may limit our ability to receive distributions in
respect of the residual interests from our securitization facilities, which may limit our ability to generate earnings.
Risks Related to General Factors
If The Economy of All or Certain Regions of the United States Slows or Enters Into a Recession, Our Results
of Operations May Be Impaired.
Our business is directly related to sales of new and used automobiles, which are sensitive to employment rates,
prevailing interest rates and other domestic economic conditions. Delinquencies, repossessions and losses generally
increase during economic slowdowns or recessions. Because of our focus on sub-prime customers, the actual rates
of delinquencies, repossessions and losses on our automobile contracts could be higher under adverse economic
conditions than those experienced in the automobile finance industry in general, particularly in the states of Texas,
California, Ohio, Florida, Pennsylvania and Louisiana, states in which our automobile contracts are geographically
concentrated. Any sustained period of economic slowdown or recession could adversely affect our ability to acquire
suitable contracts, or to securitize pools of such contracts. The timing of any economic changes is uncertain, and
weakness in the economy could have an adverse effect on our business and that of the dealers from which we
purchase contracts and result in reductions in our revenues or the cash flows available to us.
Our Results Of Operations May Be Impaired As a Result of Natural Disasters.
Our automobile contracts are geographically concentrated in the states of Texas, California, Ohio, Florida,
Pennsylvania, and Louisiana. Several of such states are particularly susceptible to natural disasters: earthquake in the
case of California, and hurricanes and flooding in the states of Florida, Texas and Louisiana. Natural disasters, in
those states or others, could cause a material number of our vehicle purchasers to lose their jobs, or could damage or
destroy vehicles that secure our automobile contracts. In either case, such events could result in our receiving
16
reduced collections on our automobile contracts, and could thus result in reductions in our revenues or the cash
flows available to us.
If an Increase in Interest Rates Results in a Decrease in Our Cash Flow from Excess Spread, Our Results of
Operations May Be Impaired.
Our profitability is largely determined by the difference, or "spread," between the effective interest rate received
by us on the automobile contracts that we acquire and the interest rates payable under our warehouse credit facilities
and on the asset-backed securities issued in our securitizations. Recent disruptions in the market for asset-backed
securities may result in an increase in the interest rates we pay on asset-backed securities that we may issue in future
securitizations. Although we have the ability to partially offset increases in our cost of funds by increasing fees we
charge to dealers when purchasing contracts, or in some cases, by demanding higher interest rates on contracts we
purchase, there is no assurance that such actions will materially offset increases in interest we pay to finance our
managed portfolio.
Several factors affect our ability to manage interest rate risk. Specifically, we are subject to interest rate risk during
the period between when automobile contracts are purchased from dealers and when such contracts are sold and
financed in a securitization. Interest rates on our warehouse credit facilities are adjustable while the interest rates on
the automobile contracts are fixed. Therefore, if interest rates increase, the interest we must pay to the lenders under
our warehouse credit facilities is likely to increase while the interest realized by us from those warehoused
automobile contracts remains the same, and thus, during the warehousing period, the excess spread cash flow
received by us would likely decrease. Additionally, contracts warehoused and then securitized during a rising
interest rate environment may result in less excess spread cash flow realized by us under those securitizations as,
historically, our securitization facilities pay interest to security holders on a fixed rate basis set at prevailing interest
rates at the time of the closing of the securitization, which may be several months after the securitized contracts
were originated and entered the warehouse, while our customers pay fixed rates of interest on the contracts, set at the
time they purchase the underlying vehicles. A decrease in excess spread cash flow could adversely affect our
earnings and cash flow.
To mitigate, but not eliminate, the short-term risk relating to interest rates payable by us under the warehouse
facilities, we generally hold automobile contracts in the warehouse credit facilities for less than four months. To
mitigate, but not eliminate, the long-term risk relating to interest rates payable by us in securitizations, we have in
the past, and intend to continue to, structure some of our securitization transactions to include pre-funding structures,
whereby the amount of securities issued exceeds the amount of contracts initially sold into the securitization. In
pre-funding, the proceeds from the pre-funded portion are held in an escrow account until we sell the additional
contracts into the securitization in amounts up to the balance of the pre-funded escrow account. In pre-funded
securitizations, we effectively lock in our borrowing costs with respect to the contracts we subsequently sell into the
securitization. However, we incur an expense in pre-funded securitizations equal to the difference between the
money market yields earned on the proceeds held in escrow prior to subsequent delivery of contracts and the interest
rate paid on the securities issued in the securitization. The amount of such expense may vary. Despite these
mitigation strategies, an increase in prevailing interest rates would cause us to receive less excess spread cash flows
on automobile contracts, and thus could adversely affect our earnings and cash flows.
The Effects Of Terrorism And Military Action May Impair Our Results of Operations.
The long-term economic impact of the events of September 11, 2001, possible future terrorist attacks or other
incidents and related military action, or current or future military action by United States forces in Iraq and other
regions, could have a material adverse effect on general economic conditions, consumer confidence, and market
liquidity in the United States. No assurance can be given as to the effect of these events on the performance of our
automobile contracts. Any adverse effect resulting from these events could materially affect our results of
operations, financial condition and cash flows. In addition, activation of a substantial number of U.S. military
reservists or members of the National Guard may significantly increase the proportion of contracts whose interest
rates are reduced by the application of the Servicemembers' Civil Relief Act, which provides, generally, that an
obligor who is covered by that act may not be charged interest on the related contract in excess of 6% annually
during the period of the obligor's active duty.
Risks Related to Our Common Stock
Our Common Stock Is Thinly-Traded.
Our stock is thinly-traded, which means investors will have limited opportunities to sell their shares of common
stock in the open market. Limited trading of our common stock also contributes to more volatile price fluctuations.
17
Because there historically has been low trading volume in our common stock, there can be no assurance that our
stock price will not decline as additional shares are sold in the public market. As of December 31, 2007, all of our
directors and executive officers beneficially owned 3,297,165 shares of our common stock, or approximately 17%.
We Do Not Intend to Pay Dividends on Our Common Stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future
earnings and do not expect to pay any dividends in the foreseeable future. See "Dividend Policy".
Forward-Looking Statements
Discussions of certain matters contained in this report may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among
other things, expectations of the business environment in which we operate, projections of future performance,
perceived opportunities in the market and statements regarding our mission and vision. You can generally identify
forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect,"
"anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and
achievements may differ materially from the results, performance and achievements expressed or implied in such
forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such
a difference, including the following:
changes in general economic conditions;
changes in interest rates;
our ability to generate sufficient operating and financing cash flows;
competition;
level of future provisioning for receivables losses; and
regulatory requirements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions.
Actual results may differ from expectations due to many factors beyond our ability to control or predict, including
those described herein, and in documents incorporated by reference in this report. For these statements, we claim the
protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
We undertake no obligation to publicly update any forward-looking information. You are advised to consult any
additional disclosure we make in our periodic reports filed with the SEC. See "Where You Can Find More
Information" and "Documents Incorporated by Reference."
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Property
The Company’s headquarters are located in Irvine, California, where it leases approximately 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 $508,472 per year, increasing to $589,458 over a five year term.
The remaining two regional servicing centers occupy a total of approximately 59,000 square feet of leased space in
Maitland, Florida; and Hinsdale, Illinois. The termination dates of such leases range from 2008 to 2011.
Item 3. Legal Proceedings
Stanwich Litigation. CPS was for some time a defendant in a class action (the "Stanwich Case") brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the "Settlement Payments") pursuant to earlier settlements of claims, generally personal injury
18
claims, against unrelated defendants. Stanwich Financial Services Corp. ("Stanwich"), which was an affiliate of the
former chairman of the board of directors of CPS, is the entity that was obligated to pay the Settlement Payments.
Stanwich defaulted on its payment obligations to the plaintiffs and in June 2001 filed for reorganization under the
Bankruptcy Code, in the federal bankruptcy court in Connecticut. At December 31, 2004, CPS was a defendant only
in a cross-claim brought by one of the other defendants in the case, Bankers Trust Company, which asserted a claim
of contractual indemnity against CPS.
By February 2005, CPS had settled all claims brought against it in the Stanwich Case.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for indemnity
against the Company in a separate action, which is now pending in federal district court in Rhode Island. The
Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has filed a separate
action against Mr. Pardee's Rhode Island attorneys, in the same court. The litigation between Mr. Pardee and CPS is
stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.
CPS has reached an agreement in principle with the representative of creditors in the Stanwich bankruptcy to
resolve the adversary action. Under the agreement in principle, CPS was to pay the bankruptcy estate $625,000 and
abandon its claims against the estate, while the estate would abandon its adversary action against Mr. Pardee. The
bankruptcy court has rejected that proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon appeal, CPS would expect that the agreement
would result in (i) limitation of its exposure to Mr. Pardee to no more than some portion of his attorneys fees
incurred and (ii) stays in Rhode Island being lifted, causing those cases to become active again. CPS is unable to
predict whether the ruling of the bankruptcy court will be sustained or overturned on appeal.
The reader should consider that an adverse judgment against CPS in the Rhode Island case for indemnification, if
in an amount materially in excess of any liability already recorded in respect thereof, could have a material adverse
effect on our financial condition.
Other Litigation. In December 2006 an individual resident of Ohio, Agborebot Bate-Eya, filed a purported class
counterclaim to a collection lawsuit brought by SeaWest Financial Corp. ("SeaWest") in Ohio state court. The
counterclaim alleged that a form notice sent by SeaWest to counterplaintiff in December 2000, and used then and at
other times, was not compliant with Ohio law. In August 2007, the counterplaintiff added us as an additional
defendant, noting that we in April 2004 had purchased from SeaWest a number of consumer receivables, including
that of the counterplaintiff. We have filed a motion to dismiss the counterclaim, and believe that our no more than
tenuous connection to the counterplaintiff will protect us from any material liability or expense. There can be no
assurance, however, as to the outcome of contested litigation, including this case.
We are routinely involved in various legal proceedings resulting from our consumer finance activities and
practices, both continuing and discontinued. We believe that there are substantive legal defenses to such claims, and
intend to defend them vigorously. There can be no assurance, however, as to their outcomes. We have recorded a
liability as of December 31, 2007 that we believe represents a sufficient allowance for legal contingencies. Any
adverse judgment against us, if in an amount materially in excess of the recorded liability, could have a material
adverse effect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our shareholders during the fourth quarter of 2007.
Item 4A. Executive Officers of the Registrant
Charles E. Bradley, Jr., 48, has been our President and a director since our formation in March 1991, and was
elected Chairman of the Board of Directors in July 2001. In January 1992, Mr. Bradley was appointed
Chief Executive Officer. From April 1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr. Bradley, Jr. was an associate of
The Harding Group, a private investment banking firm. Mr. Bradley does not currently serve on the board of
directors of any other publicly-traded companies.
Mark A. Creatura, 48, 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
19
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, 48, has been Senior Vice President - Chief Financial Officer since April 2006. He was Senior
Vice President - Accounting from August 2004 through March 2006. He served as a consultant to us from May 2004
to August 2004. Previously, he was the Chief Financial Officer of SeaWest Financial Corp. from February 2003 to
May 2004, and the Chief Financial Officer of AFCO Auto Finance from April 2002 to February 2003. He practiced
public accounting with Glenn M. Gelman & Associates from March 2001 to April 2002 and was Chief Financial
Officer of Credit Services Group, Inc. from May 1999 to November 2000. He previously served as our
Chief Financial Officer from our inception through May 1999.
Curtis K. Powell, 51, has been Senior Vice President – Contract Origination since June 2001. Previously, he was
our Senior Vice President – Marketing, from April 1995. He joined us in January 1993 as an independent marketing
representative until being appointed Regional Vice President of Marketing for Southern California in
November 1994. From June 1985 through January 1993, Mr. Powell was in the retail automobile sales and leasing
business.
Robert E. Riedl, 44, has been Senior Vice President - Chief Investment Officer since April 2006. Mr. Riedl was
Senior Vice President - Chief Financial Officer from August 2003 until assuming his current position. Mr. Riedl
joined the Company as Senior Vice President - Risk Management in January 2003. Previously, Mr. Riedl was a
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, 40, has been Senior Vice President - Servicing since May 2005, and prior to that was
Senior Vice President - Asset Recovery since January 2003. He joined us in January 1995 as a loan officer, held a
series of successively more responsible positions, and was promoted to Vice President - Asset Recovery in
June 1999. Mr. Terry was previously a branch manager with Norwest Financial from 1990 to October 1994.
Teri L. Clements, 45, has been the Senior Vice President of Originations since April 2007. Prior to that, she held
the position of Vice President of Originations since August 1998. She joined the Company in June 1991 as an
Operations Specialist. Previously, Ms. Clements held an administrative position at Greco & Associates.
Jayne E. Holland, 46, has been the Senior Vice President of Operations since April 2007. Prior to that, she held the
position of Vice President of Operations since June 1999 and has been with the company since 1993. Ms. Holland
was previously the Assistant Vice President of Operations for Far Western Bank from 1986 through 1990, and has
been in the auto finance industry since 1981.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
The Company’s Common Stock is traded on the Nasdaq Global Market, under the symbol "CPSS." The following
table sets forth the high and low sale prices as reported by Nasdaq for our Common Stock for the periods shown.
As of March 7, 2008, there were 63 holders of record of the Company’s Common Stock. To date, we have not
declared or paid any dividends on our Common Stock. The payment of future dividends, if any, on our Common Stock
is within the discretion of the Board of Directors and will depend upon our income, capital requirements and financial
condition, and other relevant factors. The instruments governing our outstanding debt place certain restrictions on the
payment of dividends. We do not intend to declare any dividends on our Common Stock in the foreseeable future, but
instead intend to retain any cash flow for use in our operations.
The table below presents information regarding outstanding options to purchase our Common Stock as of December
31, 2007:
21
HighLowJanuary 1 - March 31, 2006…………………………………….…………………….8.505.30April 1 - June 30, 2006………………………………………….…………………...8.846.04July 1 - September 30, 2006…………………………………...…………………….7.535.08October 1 - December 31, 2006……………………………….…………………….7.465.30January 1 - March 31, 2007…………………………………….…………………….7.775.25April 1 - June 30, 2007………………………………………….…………………...7.215.49July 1 - September 30, 2007…………………………………...…………………….6.754.28October 1 - December 31, 2007……………………………….…………………….6.203.00Number of securitiesWeighted averageNumber ofto be issued uponexercise price ofsecurities remainingexercise of outstandingoutstandingavailable for futureoptions, warrantsoptions, warrantsissuance under equityPlan categoryand rightsand rightscompensation plansEquity compensation plans$approved by security holders…………..$6,196,299 4.47$ 760,000 Equity compensation plans not $approved by security holders…………..$- - - Total6,196,299 4.47$ 760,000
Issuer Purchases of Equity Securities in the Fourth Quarter
(1) Each monthly period is the calendar month.
(2) Through December 31, 2007, our board of directors had authorized the purchase of up to $27.5 million of our outstanding
securities, which program was first announced in our annual report for the year 2002, filed on March 26, 2003. All purchases
described in the table above were under the plan announced in March 2003, which has no fixed expiration date. On January
30, 2008, the board of director’s authorized the purchase of an additional $5 million of our securities.
Item 6. Selected Financial Data
The following table presents our selected consolidated financial data and operating data as of and for the dates
indicated. The data under the captions "Statement of Operations Data" and "Balance Sheet Data" have been derived
from our audited and unaudited consolidated financial statements. The remainder is derived from other records of
ours.
You should read the selected consolidated financial data together with "Management’s Discussion and Analysis of
Financial Condition and Results of Operations" and our audited and unaudited financial statements and notes thereto
that are included in this report.
22
Total Number ofApproximate DollarTotalShares Purchased asValue of Shares thatNumber ofAveragePart of PubliclyMay Yet be PurchasedSharesPrice PaidAnnounced Plans orUnder the Plans orPeriod(1)Purchasedper SharePrograms(2)ProgramsOctober 2007…………..$25,500 4.89$ 25,500 2,180,365$ November 2007………$220,380 4.27 220,380 1,238,575 December 2007………..$67,810 3.50 67,810 1,001,237 Total313,690 4.16$ 313,690
(1) The impairment loss was related to our analysis and estimate of the expected ultimate performance of our
previously securitized pools that were held by our non-consolidated subsidiaries and the residual interest in
securitizations. The impairment loss was a result of the actual net loss and prepayment rates exceeding our
previous estimates for the automobile contracts held by our non-consolidated subsidiaries.
(2) Income (loss) before income tax benefit divided by weighted average shares outstanding-basic. Included for
illustrative purposes because some of the periods presented include significant income tax benefits while other
periods have neither income tax benefit nor expense.
(3) Income (loss) before income tax benefit divided by weighted average shares outstanding-diluted. Included for
illustrative purposes because some of the periods presented include significant income tax benefits while other
periods have neither income tax benefit nor expense.
23
(dollars in thousands, except per share data)20072006200520042003Statement of Operations DataRevenues: Interest income ………………………………………370,265$ 263,566$ 171,834$ 105,818$ 58,164$ Servicing fees …………………………………………1,218 2,894 6,647 12,480 17,058 Net gain on sale of contracts …………………………- - - - 10,421 Other income …………………………………………23,067 12,403 15,216 14,394 19,343 Total revenues ………………………………………394,550 278,863 193,697 132,692 104,986 Expenses: Employee costs ………………………………………..46,716 38,483 40,384 38,173 37,141 General and administrative ……………………………47,416 42,011 39,285 33,936 31,581 Interest expense ……………………………………….139,189 93,112 51,669 32,147 23,861 Provision for credit losses ……………………………. 137,272 92,057 58,987 32,574 11,390 Impairment loss on residual assets (1) ……………….- - - 11,750 4,052 Total expenses ……………………………………..370,593 265,663 190,325 148,580 108,025 Income (loss) before income tax expense (benefit) …………………23,957 13,200 3,372 (15,888) (3,039) Income tax expense (benefit) ………………………………………..10,099 (26,355) - - (3,434) Net income (loss) ………………………………………….13,858$ 39,555$ 3,372$ (15,888)$ 395$ Earnings (loss) per share-basic ……………………………0.66$ 1.82$ 0.16$ (0.75)$ 0.02$ Earnings (loss) per share-diluted …………………………0.61$ 1.64$ 0.14$ (0.75)$ 0.02$ Pre-tax income (loss) per share-basic (2) ………………..1.15$ 0.61$ 0.16$ (0.75)$ (0.15)$ Pre-tax income (loss) per share-diluted (3) ………………1.06$ 0.55$ 0.14$ (0.75)$ (0.14)$ Weighted average shares outstanding-basic …………….20,880 21,759 21,627 21,111 20,263 Weighted average shares outstanding-diluted …………..22,595 24,052 23,513 21,111 21,578 Balance Sheet DataTotal assets ……………………………………………….2,282,813$ 1,728,594$ 1,155,144$ 766,599$ 492,470$ Cash and cash equivalents ………………………………..20,880 14,215 17,789 14,366 33,209 Restricted cash and equivalents ………………………….170,341 193,001 157,662 125,113 67,277 Finance receivables, net …………………………………..1,967,866 1,401,414 913,576 550,191 266,189 Residual interest in securitizations ……………………….2,274 13,795 25,220 50,430 111,702 Warehouse lines of credit …………………………………235,925 72,950 35,350 34,279 33,709 Residual interest financing ………………………………..70,000 31,378 43,745 22,204 - Securitization trust debt …………………………………..1,798,302 1,442,995 924,026 542,815 245,118 Long-term debt …………………………………………….28,134 38,574 58,655 74,829 102,465 Shareholders' equity ……………………………………….114,355 111,512 73,589 69,920 82,160 As of and For the Year Ended December 31,
(1) Represents automobile contracts not purchased directly from dealers, but acquired as a result of our acquisitions
of TFC in 2003 and of certain assets of SeaWest in 2004.
(2) Receivables related to the SeaWest third party portfolio, on which we earn only a servicing fee.
(3) Excludes receivables related to the SeaWest third party portfolio.
(4) Total expenses excluding provision for credit losses, interest expense and impairment loss on residual assets.
(5) For further information regarding delinquencies and the managed portfolio, see the table captioned "Delinquency
Experience," in Item 1, Part I of this report and the notes to that table.
(6) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the
liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of
the charge-off, including some recoveries which have been classified as other income in the accompanying
financial statements. For further information regarding charge-offs, see the table captioned "Net Charge-Off
Experience," in Item I, Part I of this report and the notes to that table.
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(dollars in thousands, except per share data)20072006200520042003Contract Purchases/SecuritizationsAutomobile contract purchases………………………….1,282,311$ 1,019,018$ 691,252$ 447,232$ 357,320$ Automobile contract acquisitions (1)…………………….- - - 74,901 152,143 Automobile contracts securitized - structured as sales………………………………………………….- - - - 254,436 Automobile contracts securitized - structured as secured financings…………………………………..1,118,097 957,681 674,421 479,369 140,288 Managed Portfolio DataContracts held by consolidated subsidiaries…………….2,125,755$ 1,527,285$ 1,000,597$ 619,794$ 315,598$ Contracts held by non-consolidated subsidiaries…………..- 34,850 103,130 233,621 425,534 SeaWest third party portfolio (2)…………………………422 3,770 18,018 53,463 - Total managed portfolio……………………………………2,126,177$ 1,565,905$ 1,121,745$ 906,878$ 741,132$ Average managed portfolio……………………………….1,906,605 1,376,781 997,697 861,262 662,382 Weighted average fixed effective interest rate (total managed portfolio) (3)………………………..18.2%18.5%18.6%19.2%19.7%Core operating expense (% of average managed portfolio) (4)…………………4.9%5.8%8.0%8.4%10.4%Allowance for loan losses………………………………..100,138$ 79,380$ 57,728$ 42,615$ 35,889$ Allowance for loan losses (% of total contracts held by consolidated subsidiaries)………………………4.7%5.2%5.8%6.9%11.4%Total delinquencies (3) (5)……………………………………..4.7%4.0%3.8%4.0%4.7%Total delinquencies and repossessions (3) (5)…………………………….6.3%5.5%5.0%5.6%6.2%Net charge-offs (3) (6)……………………………………5.3%4.5%5.3%7.8%6.8%As of and For the Year Ended December 31,
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements
and notes thereto and other information included or incorporated by reference herein.
Overview
We are a specialty finance company engaged in purchasing and servicing new and used retail automobile contracts
originated primarily by franchised automobile dealerships and, to a lesser extent, by select independent dealers of
used automobiles in the United States. We serve as an alternative source of financing for dealers, facilitating sales to
sub-prime customers who have limited credit history, low income or past credit problems and who otherwise might
not be able to obtain financing from traditional sources. We are headquartered in Irvine, California and have three
additional servicing branches in Virginia, Florida and Illinois.
On March 8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger. On May 20, 2003, we
acquired TFC Enterprises, Inc. and its subsidiaries in a second merger. Each merger was accounted for as a
purchase. MFN Financial Corporation and its subsidiaries and TFC Enterprises, Inc. and its subsidiaries were
engaged in businesses similar to ours: buying automobile contracts from dealers and servicing those automobile
contracts. MFN Financial Corporation and its subsidiaries ceased acquiring automobile contracts in May 2002; TFC
continues to acquire automobile contracts under its "TFC programs," which provide financing exclusively for
vehicle purchases by members of the United States Armed Forces.
On April 2, 2004, we purchased a portfolio of automobile contracts and certain other assets from
SeaWest Financial Corporation and its subsidiaries. In addition, we were named the successor servicer of three term
securitization transactions originally sponsored by SeaWest. We do not offer financing programs similar to those
previously offered by SeaWest.
From inception through June 2003, we generated revenue primarily from the gains recognized on the sale or
securitization of automobile contracts, servicing fees earned on automobile contracts sold, interest earned on
residuals interests retained in securitizations, and interest earned on finance receivables. Since July 2003, we have
not recognized any gains from the sale of automobile contracts. Instead, since July 2003 our revenues have been
derived from interest on finance receivables and, to a lesser extent, servicing fees and interest earned on residual
interests in securitizations.
Securitization and Warehouse Credit Facilities
Generally
Throughout the periods for which information is presented in this report, we have purchased automobile contracts
with the intention of financing them on a long-term basis through securitizations, and on an interim basis through
our warehouse credit facilities. All such financings have involved identification of specific automobile contracts,
sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of
asset-backed securities to fund the transactions. Depending on the structure, these transactions may be accounted for
under generally accepted accounting principles as sales of the automobile contracts or as secured financings.
When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with
us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on
our consolidated balance sheet. We then periodically: (i) recognize interest and fee income on the contracts,
(ii) recognize interest expense on the securities issued in the transaction, and (iii) record as expense a provision for
credit losses on the contracts. Since July 2003, all of our securitizations have been structured in this fashion.
When structured to be treated as a sale for accounting purposes, the assets and liabilities of the special-purpose
subsidiary are not consolidated with us. Accordingly, the transaction removes the sold automobile contracts from
our consolidated balance sheet, the related debt does not appear as our debt, and our consolidated balance sheet
shows, as an asset, a retained residual interest in the sold automobile contracts. The residual interest represents the
discounted value of what we expect will be the excess of future collections on the automobile contracts over
principal and interest due on the asset-backed securities. That residual interest appears on our consolidated balance
sheet as "residual interest in securitizations," and the determination of its value is dependent on our estimates of the
future performance of the sold automobile contracts. Since July 2003, none of our securitizations have been
structured to be treated as a sale for accounting purposes.
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Credit Risk Retained
Whether a sale of automobile contracts in connection with a securitization or warehouse credit facility is treated as
a secured financing or as a sale for financial accounting purposes, the related special-purpose subsidiary may be
unable to release excess cash to us if the credit performance of the related automobile contracts falls short of
pre-determined standards. Such releases represent a material portion of the cash that we use to fund our operations.
An unexpected deterioration in the performance of such automobile contracts could therefore have a material
adverse effect on both our liquidity and our results of operations, regardless of whether such automobile contracts
are treated for financial accounting purposes as having been sold or as having been financed. For estimation of the
magnitude of such risk, it may be appropriate to look to the size of our "managed portfolio," which represents both
financed and sold automobile contracts as to which such credit risk is retained. Our managed portfolio as of
December 31, 2007 was approximately $2,126.2 million (this amount includes $422,000 of automobile contracts
securitized by SeaWest, on which we earn only servicing fees and have no credit risk).
Critical Accounting Policies
We believe that our accounting policies related to (a) Allowance for Finance Credit Losses, (b) Amortization of
Deferred Originations Costs and Acquisition Fees (c) Residual Interest in Securitizations and Gain on Sale of
Automobile Contracts and (d) Income Taxes are the most critical to understanding and evaluating our reported
financial results. Such policies are described below.
Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, we use a loss
allowance methodology commonly referred to as "static pooling," which stratifies our finance receivable portfolio
into separately identified pools based on the period of origination. Using analytical and formula driven techniques,
we estimate an allowance for finance credit losses, which we believe is adequate for probable credit losses that can
be reasonably estimated in our portfolio of automobile contracts. Provision for losses is charged to our consolidated
statement of operations. Net losses incurred on finance receivables are charged to the allowance. We evaluate the
adequacy of the allowance by examining current delinquencies, the characteristics of the portfolio, prospective
liquidation values of the underlying collateral and general economic and market conditions. As circumstances
change, our level of provisioning and/or allowance may change as well.
Amortization of Deferred Originations Costs and Acquisition Fees
Upon purchase of a contract from a dealer, we generally either charge or advance the dealer an acquisition fee. In
addition, we incur certain direct costs associated with originations of our contracts. All such acquisition fees and
direct costs are applied to the carrying value of finance receivables and are accreted into earnings as an adjustment
to the yield over the estimated life of the contract using the interest method, in accordance with Statement of
Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases.
Term Securitizations
Our term securitization structure has generally been as follows:
We sell automobile contracts we acquire to a wholly-owned special purpose subsidiary, which has been
established for the limited purpose of buying and reselling our automobile contracts. The special-purpose subsidiary
then transfers the same automobile contracts to another entity, typically a statutory trust. The trust issues interest-
bearing asset-backed securities, in a principal amount equal to or less than the aggregate principal balance of the
automobile contracts. We typically sell these automobile contracts to the trust at face value and without recourse,
except that representations and warranties similar to those provided by the dealer to us are provided by us to the
trust. One or more investors purchase the asset-backed securities issued by the trust; the proceeds from the sale of
the asset-backed securities are then used to purchase the automobile contracts from us. We may retain or sell
subordinated asset-backed securities issued by the trust or by a related entity. We purchase external credit
enhancement in the form of a financial guaranty insurance policy, guaranteeing timely payment of interest and
ultimate payment of principal on the senior asset-backed securities, from an insurance company. In addition, we
structure our securitizations to include internal credit enhancement for the benefit of the insurance company and the
investors (i) in the form of an initial cash deposit to an account ("spread account") held by the trust, (ii) in the form
of overcollateralization of the senior asset-backed securities, where the principal balance of the senior asset-backed
securities issued is less than the principal balance of the automobile contracts, (iii) in the form of subordinated asset-
backed securities, or (iv) some combination of such internal credit enhancements. The agreements governing the
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securitization transactions require that the initial level of internal credit enhancement be supplemented by a portion
of collections from the automobile contracts until the level of internal 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 automobile contracts. The specified levels at which the internal credit
enhancement is to be maintained will vary depending on the performance of the portfolios of automobile contracts
held by the trusts and on other conditions, and may also be varied by agreement among us, our special purpose
subsidiary, the insurance company and the trustee. Such levels have increased and decreased from time to time
based on performance of the various portfolios, and have also varied from one transaction to another. The
agreements governing the securitizations generally grant us the option to repurchase the sold automobile contracts
from the trust when the aggregate outstanding balance of the automobile 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 those treated as
secured financings in that the trust to which our special-purpose subsidiaries sold the automobile contracts met the
definition of a "qualified special-purpose entity" under Statement of Financial Accounting Standards No. 140
("SFAS 140"). As a result, assets and liabilities of those trusts are not consolidated into our consolidated balance
sheet.
Our warehouse credit facility structures are similar to the above, except that (i) our special-purpose subsidiaries
that purchase the automobile contracts pledge the automobile contracts to secure promissory notes that they issue,
(ii) no increase in the required amount of internal credit enhancement is contemplated, and (iii) we do not purchase
financial guaranty insurance. The primary agreements for our two warehouse facilities provide for an advance rate
of up to 83% of eligible automobile contracts and aggregate borrowings of up to $400 million. In January and
February 2007, both warehouse lines were amended to provide for an advance of up to 93% of the aggregate
principal balance of eligible automobile contracts and aggregate borrowings of up to $425 million. The 2007
amendments relating to the 93% advance rate and the additional $25 million in borrowings have since expired and
we have entered into a series of short-term extensions with the related lenders as we discuss longer term extensions.
There can be no assurance as to the terms, if any, on which we may be able to agree to longer term extensions;
however, we expect that those terms will include (i) a decreased advance rate, and (ii) and increased interest rate.
Upon each sale of automobile contracts in a transaction structured as a secured financing for financial accounting
purposes, whether a term securitization or a warehouse financing, we retain on our consolidated balance sheet the
related automobile contracts as assets and record the asset-backed notes issued in the transaction as indebtedness.
Under the prior securitizations and warehouse credit facilities structured as sales for financial accounting purposes,
we removed from our consolidated balance sheet the automobile contracts sold and added to our consolidated
balance sheet (i) the cash received, if any, and (ii) the estimated fair value of the ownership interest that we retained
in the automobile contracts sold in the transaction. That retained or residual interest consisted of (a) the cash held in
the spread account, if any, (b) overcollateralization, if any, (c) subordinated asset-backed securities retained, if any,
and (d) receivables from the trust, which include the net interest receivables. Net interest receivables represent the
estimated discounted cash flows to be received from the trust in the future, net of principal and interest payable with
respect to the asset-backed notes, the premium paid to the insurance company, and certain other expenses. The
excess of the cash received and the assets we retained over the carrying value of the automobile contracts sold, less
transaction costs, equaled the net gain on sale of automobile contracts we recorded.
We receive periodic base servicing fees for the servicing and collection of the automobile contracts. (Under our
current securitization structure, such servicing fees are included in interest income from the automobile contracts).
In addition, we are entitled to the cash flows from the trusts that represent collections on the automobile contracts in
excess of the amounts required to pay principal and interest on the asset-backed securities, base servicing fees, and
certain other fees and expenses (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 such notes equal to the aggregate
principal balance of the related automobile contracts (excluding those automobile 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 asset-backed
securities is reduced to the specified percentage. Such accelerated principal payment is said to create
overcollateralization of the asset-backed notes.
If the amount of cash required for payment of fees, expenses, 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
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account or the required overcollateralization level, the excess is released to us. If the spread account and
overcollateralization is not at the required level, then the excess cash collected is retained in the trust until the
specified level is achieved. Although spread account balances are held by the trusts on behalf of our special-purpose
subsidiaries as the owner of the residual interests (in the case of securitization transactions structured as sales for
financial accounting purposes) or the trusts (in the case of securitization transactions structured as secured
financings for financial accounting purposes), we are restricted in use of the cash in the spread accounts. Cash held
in the various spread accounts is invested in high quality, liquid investment securities, as specified in the
securitization agreements. The interest rate payable on the automobile contracts is significantly greater than the
interest rate on the asset-backed notes. As a result, the residual interests described above historically have been a
significant asset of ours.
In all of our term securitizations and warehouse credit facilities, whether treated as secured financings or as sales,
we have sold the automobile contracts (through a subsidiary) to the securitization entity. The difference between the
two structures is that in securitizations that are treated as secured financings we report the assets and liabilities of the
securitization trust on our consolidated balance sheet. Under both structures, recourse to us by holders of the asset-
backed securities and by the trust, for failure of the automobile contract obligors to make payments on a timely
basis, is limited to the automobile contracts included in the securitizations or warehouse credit facilities, the spread
accounts and our retained interests in the respective trusts.
Since the third quarter of 2003, we have conducted 22 term securitizations. Of these 22, 17 were quarterly
securitizations of automobile contracts that we purchased from automobile dealers under our regular programs. In
addition, in March 2004 and November 2005, we completed securitizations of our retained interests in other
securitizations that we and our affiliates previously sponsored. The debt from the March 2004 transaction was repaid
in August 2005, and the debt from the November 2005 transaction was repaid in May 2007. Also, in June 2004, we
completed a securitization of automobile contracts purchased in the SeaWest asset acquisition and under our TFC
programs. Further, in December 2005 and June 2007, we completed securitizations that included automobile
contracts purchased under the TFC programs, automobile contracts purchased under the CPS programs and
automobile contracts we repurchased upon termination of prior securitizations of our MFN and TFC subsidiaries.
All such securitizations since the third quarter of 2003 have been structured as secured financings.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between
the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including scheduled reversals
of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In
the event we were to determine that we would be able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce
the provision for income taxes.
In determining the possible realization of deferred tax assets, we consider future taxable income from future
operations exclusive of reversing temporary differences and tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.
In June 2006, the FASB issued Financial Interpretation (―FIN‖) No. 48, ―Accounting for Uncertainty in Income
Taxes,‖ which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, ―Accounting for Income Taxes.‖ FIN No. 48 provides that a tax benefit from an
uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized
upon the adoption of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007. As a result of the implementation of Interpretation 48, we recognized approximately a $1.1 million
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increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007,
balance of retained earnings.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations. Accrued interest and penalties are included within the related
tax liability line in the consolidated balance sheet.
Uncertainty of Capital Markets
We are dependent upon the continued availability of warehouse credit facilities and access to long-term financing
through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have
completed 47 term securitizations comprising approximately $6.1 billion in contracts. We conducted four term
securitizations in 2006 and four in 2007, including our most recent in September 2007. However, within the period
of approximately four months prior to the filing of this report, we have observed unprecedented adverse changes in
the market for securitized pools of automobile contracts. These changes include reduced liquidity, increased
financial guaranty premiums and reduced demand for asset-backed securities, including for securities carrying a
financial guaranty and for securities backed by sub-prime automobile receivables. We believe that these adverse
changes in the capital markets are primarily the result of widespread defaults of sub-prime mortgages securing a
variety of term securitizations and related financial instruments, including instruments carrying financial guarantees
similar to those we typically obtain for our own term securitizations.
We have not securitized a pool of receivables since September 2007. As a result, we are approaching the limits of
our warehouse credit facilities, as discussed below. We have engaged an investment banker to securitize our
receivables prior to reaching those limits; however, there is no assurance that we will be able to do so. We expect the
structure of our next securitization to include substantially greater credit enhancement than recent past
securitizations, including larger spread accounts, greater over-collateralization, a greater portion of subordinated
bonds, or a combination of any or all of such forms of enhancement. All such forms of greater credit enhancement
are likely to reduce the amount of cash available to us, both at inception of the securitization, and over the life of the
transaction. Moreover, due to current conditions in the capital markets, we believe that any securitization
transactions that we may execute during 2008 are likely to include substantially higher costs to us in the form of
higher premiums for financial guaranty insurance, higher interest rates paid on the bonds sold by the securitization
trust and greater discounts given to the purchasers of subordinated bonds.
The adverse changes that have taken place in the market to date have resulted in a substantial extension of the
period during which our automobile contracts are financed through our warehouse credit facilities, which has
burdened our financing capabilities, and has caused us to curtail our purchase of such automobile contracts. If the
current adverse circumstances that have affected the capital markets preclude us from completing a securitization of
our receivables, we may exhaust the capacity of our warehouse credit facilities which would cause us to further
curtail or cease our purchases of new automobile contracts. Further adverse changes in the capital markets might
result in our inability to securitize automobile contracts which could lead to a material adverse effect on our
operations.
If we were unable to securitize a pool of receivables by May 2008, we would likely be in default under the terms
of our two revolving warehouse facilities. The defaults would arise because a significant portion of the collateral
securing those facilities (pledged automobile contracts) would have been held for more than 180 days and would no
longer be eligible for inclusion in each facilities computed "borrowing base." The result would be a reduction in the
amount that we would be allowed to borrow under those facilities, without a corresponding reduction in the amount
of indebtedness outstanding. We would expect the warehouse facilities to be in default, as the outstanding
indebtedness exceeded the permitted amount. In the event of such a default, and assuming no waiver or modification
of the underlying agreements, the warehouse lenders would be entitled (1) to receive a default rate of interest, (2) to
accelerate the maturity of the outstanding indebtedness, and then to apply all cashflows attributable to the pledged
collateral toward accelerated payment of the debt, (3) to terminate us as servicer of the pledged contracts, and (4) to
sell the pledged contracts and to apply the proceeds to the debt. We may choose to sell in whole-loan sale
transactions some portion of the most seasoned contracts pledged to the warehouse facilities which would postpone
a likely default from May 2008 until some future period. There is no assurance that we will be able to complete such
whole-loan sales.
If such circumstances caused both warehouse facilities to be unavailable to us, our failure to maintain an available
warehouse facility would be a default under two of our 19 outstanding securitization transactions, which are the two
that have issued asset-backed securities guaranteed by MBIA Insurance Corporation, and which are named CPS
Auto Receivables Trust 2006-B and CPS Auto Receivables Trust 2007-A. Such a default, unless waived, would give
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MBIA certain rights, including (1) assessing a default insurance premium, (2) trapping excess cash to be retained in
the restricted cash spread accounts related to those trusts, and (3) terminating our appointment as servicer of the
related contracts.
If we were to be terminated as servicer of two or more securitized pools that termination would in turn be a default
under our combined term and revolving residual interest financing facility. Any such default, unless waived, would
permit the residual interest lender to declare all amounts then outstanding immediately due and payable, which
would result in cash releases from securitizations pledged to the combined term and residual interest facility being
diverted to pay principal and interest due thereunder. Such a diversion of cash to pay down the residual interest
facility would significantly decrease the cash available to us to conduct operations and would likely cause us to
significantly curtail, if not cease altogether, further purchases of contracts. In any case, the revolving portion of the
combined facility matures in July 2008, at which time we intend either to negotiate a renewal with the residual
interest lender or to obtain other long-term financing to repay that debt. There can be no assurance that we will be
able to do either.
If a default under one or both of the revolving warehouse facilities occurs, and one or both lenders exercised their
option to sell the related contracts to satisfy the warehouse debt, we may incur a loss on such sale of the contracts. If
the loss were significant, and together with our other results from operations were to result in a significant operating
loss for a quarter, such loss could result in an event of default under agreements related to five others of our 19
outstanding securitization transactions, which are those that have issued asset-backed securities guaranteed by XL
Capital Assurance Inc. Such a default, unless waived, would give XL Capital certain rights, including (1) assessing a
default insurance premium, (2) trapping excess cash to be retained in the restricted cash spread accounts related to
those trusts, and (3) terminating our appointment as servicer of the related contracts. However, we believe that
transfers of servicing of securitized sub-prime automobile portfolios are rare and would likely have a negative effect
on the performance of the portfolios.
Our financing structures are complex. Our warehouse, securitization and residual interest financings all employ
bankruptcy-remote, wholly-owned, special purpose entities which serve to isolate pledged assets and the related debt
from the parent entity, Consumer Portfolio Services, Inc. One effect of these structures is to limit lenders' and
insurers' recourse to rights related to their respective collateral. Such rights include termination of CPS as servicer of
the related collateral, and foreclosure sale of the related collateral.
If we were unable to securitize a pool of receivables within some 30 to 60 days following this filing and one or
more of the events of default and related actions described above should occur, our sources of liquidity would be
materially impaired. In that event, we would attempt to reduce our uses of cash by a corresponding amount,
principally by significantly curtailing, or by ceasing altogether, to purchase automobile contracts. When we choose
to reduce purchases of automobile contracts, as we have recently done as a result of the uncertainty in the capital
markets, we do so by (1) tightening our contract purchase criteria, resulting in more selective purchases, (2)
withdrawing from selected geographic markets, and (3) terminating selected marketing representatives and dealer
relationships.
Although we believe that such reductions in contract purchases would allow us to continue operations even in the
face of such events of default and related actions as are described above, a sufficiently steep decrease in our
purchases of automobile contracts would result in a decrease in the size of our portfolio of automobile contracts.
Such a decrease in portfolio size, together with the effect of some or all of the possible actions associated with the
events of default described above, could have a material adverse effect on our cash flows and results of operations.
However, continuing cashflows otherwise available to us would be sufficient to meet our remaining operating needs
in the near term.
Results of Operations
Comparison of Operating Results for the Year Ended December 31, 2007 with the Year Ended December 31, 2006
Revenues. During the year ended December 31, 2007, revenues were $394.6 million, an increase of $115.7
million, or 41.5%, from the prior year revenue of $278.9 million. The primary reason for the increase in revenues is
an increase in interest income. Interest income for the year ended December 31, 2007 increased $106.7 million, or
40.5%, to $370.3 million from $263.6 million in the prior year. The primary reason for the increase in interest
income is the increase in finance receivables held by consolidated subsidiaries (resulting in an increase of
$109.4 million in interest income) and the increase in interest earned on cash deposits (including restricted cash
deposits) of $2.8 million. These increases were partially offset by the decline in the balance of the portfolios of
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automobile contracts we acquired in the MFN, TFC and SeaWest transactions (in the aggregate, resulting in a
decrease of $2.2 million in interest income), and a decrease in interest income on our residual asset of $2.1 million.
Servicing fees totaling $1.2 million in the year ended December 31, 2007 decreased $1.7 million, or 57.9%, from
$2.9 million in the prior year. The decrease in servicing fees is the result of the change in securitization structure and
the consequent decline in our managed portfolio held by non-consolidated subsidiaries. As a result of the decision to
structure future securitizations as secured financings, our managed portfolio held by non-consolidated subsidiaries is
zero, and future servicing fee revenue is anticipated to be nominal. As of December 31, 2007 and 2006, our
managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:
At December 31, 2007, we were generating income and fees on a managed portfolio with an outstanding principal
balance of $2,126.2 million (this amount includes $422,000 of automobile contracts securitized by SeaWest, on
which we earn only servicing fees), compared to a managed portfolio with an outstanding principal balance of
$1,565.9 million as of December 31, 2006. At December 31, 2007 and 2006, the managed portfolio composition was
as follows:
Other income increased $10.7 million, or 86.0%, to $23.1 million in the year ended December 31, 2007 from
$12.4 million during the prior year. The year over year increase is the result of a variety of factors. Current year
other income includes $6.2 million resulting from an increase in the carrying value of our residual interest in
securitizations (a $5.0 million increase over the increase in carrying value for the prior year). The carrying value
was increased primarily as a result of the underlying receivables having incurred fewer losses than we had
previously estimated, which in turn resulted in actual cash flows exceeding cash flows that were estimated in our
valuation of the residual asset at December 31, 2006. We do not expect that future cash flows will significantly
exceed the estimates we are currently using for the valuation of our residual interest. The current year period also
includes proceeds of $1.8 million from the sale of certain charged off receivables acquired in the MFN, TFC and
SeaWest acquisitions. There was no sale of charged off receivables in 2006. In addition, we experienced increases
in convenience fees charged to obligors for certain transaction types (an increase of $1.3 million) and $1.0 million in
recoveries on a note to a third party that we had previously written off. We also experienced increased revenue on
our direct mail services (an increase of $1.6 million). These direct mail services are provided to our dealers and
consist of customized solicitations targeted to prospective vehicle purchasers, in proximity to the dealer, who appear
to meet our credit criteria. These increases to other income were somewhat offset by decreases in recoveries on
MFN and certain other automobile contracts (a decrease of $1.2 million) compared to the prior year.
Expenses. Our operating expenses consist primarily of provisions for credit losses, interest expense, employee
costs and general and administrative expenses. Provisions for credit losses and interest expense are significantly
affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of
finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are
incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins
31
%%Total Managed Portfolio Owned by Consolidated Subsidiaries……..……….$2,125.8 100.0%$1,527.3 97.5%Owned by Non-Consolidated Subsidiaries…….$- 0.0%34.8 2.2%SeaWest Third Party Portfolio……………...……………$0.4 0.0%3.8 0.2%Total……………………………….…………………….$2,126.2 100.0%$1,565.9 100.0%Amount($ in millions)AmountDecember 31, 2006December 31, 2007%%Originating EntityCPS……………………………………….………………..$2,062.8 97.0%$1,496.5 95.6%TFC………………………………..……………………….$62.0 3.0%60.9 3.9%MFN………………………………...…………………….$0.0 0.0%0.2 0.0%SeaWest……………………………….…………………….$1.0 0.0%4.5 0.3%SeaWest Third Party Portfolio……………..…………………$0.4 0.0%3.8 0.2%Total………………………………….……………………….$2,126.2 100.0%$1,565.9 100.0%Amount($ in millions)AmountDecember 31, 2006December 31, 2007
and net income include changes in the automobile and automobile finance market environments, and
macroeconomic factors such as interest rates and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to
the accounting treatment of outstanding warrants and stock options, and are one of our most significant operating
expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications
and automobile contracts processed and serviced.
Other operating expenses consist primarily of facilities expenses, telephone and other communication services,
credit services, computer services, marketing and advertising expenses, and depreciation and amortization.
Total operating expenses were $370.6 million for the year ended December 31, 2007, compared to $265.7 million
for the prior year, an increase of $104.9 million, or 39.5%. The increase is primarily due to increases in provision for
credit losses and interest expense, which increased by $45.2 million and $46.1 million, or 49.1% and 49.5%,
respectively. Both interest expense and provision for credit losses are directly affected by the growth in our portfolio
of automobile contracts held by consolidated affiliates.
Employee costs increased by 21.4% to $46.7 million during the year ended December 31, 2007, representing
12.6% of total operating expenses, from $38.5 million for the prior year, or 14.5% of total operating expenses. The
decrease as a percentage of total operating expenses reflects the higher total of operating expenses, primarily a result
of the increased provision for credit losses and interest expense. The increase in employee costs is the result of
additions to our staff, generally throughout all areas of the Company, to accommodate greater volumes of contract
purchases and the resulting higher balance of our managed portfolio. As of December 31, 2007 we had 997
employees compared to 789 employees at December 31, 2006.
General and administrative expenses increased by 7.6% to $25.0 million and represented 6.7% of total operating
expenses in the year ending December 31, 2007, as compared to the prior year when general and administrative
expenses represented 8.7% of total operating expenses. The decrease as a percentage of total operating expenses
reflects the higher operating expenses primarily a result of the provision for credit losses and interest expense.
Interest expense for the year ended December 31, 2007 increased $46.1 million, or 49.5%, to $139.2 million,
compared to $93.1 million in the previous year. The increase is primarily the result of changes in the amount and
composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust
debt increased by $40.9 million in 2007 compared to the prior year. We also experienced increases in warehouse
interest expense and residual interest financing interest expenses of $5.1 million and $1.1million, respectively. A
portion of the increase in interest expense can also be attributed to a gradual increase in market interest rates during
2007. Increases in interest expense for securitization trust debt, warehouse and residual interest financing were
somewhat offset by a decrease of $1.0 million in interest expense for subordinated debt.
Marketing expenses consist primarily of commission-based compensation paid to our employee marketing
representatives and increased by $4.1 million, or 29.3%, to $18.1 million, compared to $14.0 million in the previous
year and represented 4.9% of total operating expenses. The increase is primarily due to the increase in automobile
contracts we purchased during the year ended December 31, 2007 as compared to the prior year. During the year
ended December 31, 2007, we purchased 83,246 automobile contracts aggregating $1,282.3 million, compared to
66,504 automobile contracts aggregating $1,019.0 million in the prior year.
Occupancy expenses decreased slightly by $219,000 or 5.5%, to $3.8 million compared to $4.0 million in the
previous year and represented 1.0% of total operating expenses.
Depreciation and amortization expenses decreased by $253,000, or 31.6%, to $547,000 from $800,000 in the
previous year.
For the year ended December 31, 2007, we recorded tax expense of $10.1 million or 42.2% of income before
income taxes. For the year ended December 31, 2006, we recorded an income tax benefit of $41.8 million related to
the reversal of a portion of the valuation allowance against deferred tax assets, offset by current income tax paid or
then payable of $20.2 million, less $4.8 million in deferred tax benefit. As of December 31, 2007, we had remaining
deferred tax assets of $68.6 million, partially offset by a valuation allowance of $9.8 million related to federal and
state net operating losses and other timing differences, leaving a net deferred tax asset of $58.8 million.
Comparison of Operating Results for the Year Ended December 31, 2006 with the Year Ended December 31, 2005
Revenues. During the year ended December 31, 2006, revenues were $278.9 million, an increase of $85.2 million,
or 44.0%, from the prior year revenue of $193.7 million. The primary reason for the increase in revenues is an
32
increase in interest income. Interest income for the year ended December 31, 2006 increased $91.7 million, or
53.4%, to $263.6 million from $171.8 million in the prior year. The primary reason for the increase in interest
income is the increase in finance receivables held by consolidated subsidiaries (resulting in an increase of
$102.4 million in interest income). This increase was partially offset by the decline in the balance of the portfolios
of automobile contracts we acquired in the MFN, TFC and SeaWest transactions (in the aggregate, resulting in a
decrease of $10.9 million in interest income). In addition, interest income on our residual asset increased by
$318,000.
Servicing fees totaling $2.9 million in the year ended December 31, 2006 decreased $3.8 million, or 56.5%, from
$6.6 million in the prior year. The decrease in servicing fees is the result of the change in securitization structure and
the consequent decline in our managed portfolio held by non-consolidated subsidiaries. As a result of the decision to
structure future securitizations as secured financings, our 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, 2006 and 2005, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and
other third parties was as follows:
At December 31, 2006, we were generating income and fees on a managed portfolio with an outstanding principal
balance of $1,565.9 million (this amount includes $3.8 million of automobile contracts securitized by SeaWest, on
which we earn only servicing fees), compared to a managed portfolio with an outstanding principal balance of
$1,121.7 million as of December 31, 2005. As the portfolios of automobile contracts acquired in the MFN merger,
TFC merger, and SeaWest transaction decrease, the portfolio of automobile contracts that we purchased directly
from automobile dealers continues to expand. At December 31, 2006 and 2005, the managed portfolio composition
was as follows:
Other income decreased $2.8 million, or 18.5%, to $12.4 million in the year ended December 31, 2006 from
$15.2 million during the prior year. The year over year decrease is the result of a variety of factors. Current year
other income includes $1.2 million resulting from an increase in the carrying value of our residual interest in
securitizations. The carrying value was increased primarily as a result of the underlying receivables having incurred
fewer losses than we had previously estimated. The prior year period included proceeds of $2.4 million from the
sale of certain charged off receivables acquired in the MFN, TFC and SeaWest acquisitions. In addition, we
experienced decreases in recoveries on MFN and certain other automobile contracts (a decrease of $638,000)
compared to the same prior year and decreased revenue on our direct mail services (a decrease of $752,000). These
direct mail services are provided to our dealers and consist of customized solicitations targeted to prospective
vehicle purchasers, in proximity to the dealer, who appear to meet our credit criteria. We also experienced increases
in convenience fees charged to obligors for certain transaction types (an increase of $690,000).
Expenses. Our operating expenses consist primarily of provisions for credit losses, interest expense, employee
costs and general and administrative expenses. Provisions for credit losses and interest expense are significantly
33
%%Total Managed Portfolio Owned by Consolidated Subsidiaries……..……….$1,527.3 97.5%$1,000.6 89.2%Owned by Non-Consolidated Subsidiaries…….$34.8 2.2%103.1 9.2%SeaWest Third Party Portfolio……………...……………$3.8 0.2%18.0 1.6%Total……………………………….…………………….$1,565.9 100.0%$1,121.7 100.0%Amount($ in millions)AmountDecember 31, 2005December 31, 2006%%Originating EntityCPS……………………………………….………………..$1,496.5 95.6%$1,017.3 90.7%TFC………………………………..……………………….$60.9 3.9%68.6 6.1%MFN………………………………...…………………….$0.2 0.0%2.5 0.2%SeaWest……………………………….…………………….$4.5 0.3%15.3 1.4%SeaWest Third Party Portfolio……………..…………………$3.8 0.2%18.0 1.6%Total………………………………….……………………….$1,565.9 100.0%$1,121.7 100.0%Amount($ in millions)AmountDecember 31, 2005December 31, 2006
affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of
finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are
incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins
and net income include changes in the automobile and automobile finance market environments, and
macroeconomic factors such as interest rates and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to
the accounting treatment of outstanding warrants and stock options, and are one of our most significant operating
expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications
and automobile contracts processed and serviced.
Other operating expenses consist primarily of facilities expenses, telephone and other communication services,
credit services, computer services, marketing and advertising expenses, and depreciation and amortization.
Total operating expenses were $265.7 million for the year ended December 31, 2006, compared to $190.3 million
for the prior year, an increase of $75.3 million, or 39.6%. The increase is primarily due to increases in provision for
credit losses and interest expense, which increased by $33.1 million and $41.4 million, or 56.1% and 80.2%,
respectively. Both interest expense and provision for credit losses are directly affected by the growth in our portfolio
of automobile contracts held by consolidated affiliates.
Employee costs decreased slightly to $38.5 million during the year ended December 31, 2006, representing 14.5%
of total operating expenses, from $40.4 million for the prior year, or 21.2% of total operating expenses. During the
year ended December 31, 2006, we deferred $2.9 million of direct employee costs associated with the purchase of
automobile contracts in the period, in accordance with Statement of Financial Accounting Standard No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases (SFAS 91). Prior to 2006, we have not deferred and amortized such costs as our analyses indicated
that the effect of such deferral and amortization would not have been material. However, due to continued increases
in volumes of automobile contract purchases and refinements in our methodology to measure direct costs associated
with automobile contract purchases, our estimate of direct costs has increased, resulting in the need to defer such
costs and amortize them over the lives of the related automobile contracts as an adjustment to the yield in
accordance with SFAS 91. 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 increased slightly to $23.2 million and represented 8.7% of total operating
expenses in the year ending December 31, 2006, as compared to the prior year when general and administrative
expenses represented 12.1% of total operating expenses. The decrease as a percentage of total operating expenses
reflects the higher operating expenses primarily a result of the provision for credit losses and interest expense.
Interest expense for the year ended December 31, 2006 increased $41.4 million, or 80.2%, to $93.1 million,
compared to $51.7 million in the previous year. The increase is primarily the result of changes in the amount and
composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust
debt increased by $40.5 million in 2006 compared to the prior year. We also experienced increases in warehouse
interest expense and residual interest financing interest expenses of $2.7 million and $2.7 million, respectively. A
portion of the increase in interest expense can also be attributed to a gradual increase in market interest rates during
2006. Increases in interest expense for securitization trust debt, warehouse and residual interest financing were
somewhat offset by a decrease of $4.5 million in interest expense for subordinated debt.
Marketing expenses consist primarily of commission-based compensation paid to our employee marketing
representatives and increased by $2.0 million, or 16.9%, to $14.0 million, compared to $12.0 million in the previous
year and represented 5.3% of total operating expenses. The increase is primarily due to the increase in automobile
contracts we purchased during the year ended December 31, 2006 as compared to the prior year. During the year
ended December 31, 2006, we purchased 66,504 automobile contracts aggregating $1,019.0 million, compared to
46,666 automobile contracts aggregating $691.3 million in the prior year.
Occupancy expenses increased by $583,000 or 17.1%, to $4.0 million compared to $3.4 million in the previous
year and represented 1.5% of total operating expenses.
Depreciation and amortization expenses increased by $10,000, or 1.3%, to $800,000 from $790,000 in the
previous year.
During the year ended December 31, 2006, we recorded an income tax benefit of $41.8 million related to the
reversal of a portion of the valuation allowance against deferred tax assets, offset by current income tax paid or
34
currently payable of $20.2 million, less $4.8 million in deferred tax benefit. As of December 31, 2006, we had
remaining deferred tax assets of $64.1 million, partially offset by a valuation allowance of $9.4 million related to
federal and state net operating losses and other timing differences, leaving a net deferred tax asset of $54.7 million.
Liquidity and Capital Resources
Liquidity
Our business requires substantial cash to support purchases of automobile contracts and other operating activities.
Our primary sources of cash have been cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities, servicing fees on portfolios of
automobile contracts previously sold in securitization transactions or serviced for third parties, customer payments
of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash
from securitized portfolios of automobile contracts in which we have retained a residual ownership interest and from
the spread accounts associated with such pools. Our primary uses of cash have been the purchases of automobile
contracts, repayment of amounts borrowed under warehouse credit facilities and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of
spread accounts and initial overcollateralization, if any, and the increase of credit enhancement to required levels in
securitization transactions, and income taxes. There can be no assurance that internally generated cash will be
sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of
securitized pools (which determines the level of releases from those portfolios and their related spread accounts), the
rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to purchase, sell,
and borrow against automobile contracts.
Net cash provided by operating activities for the years ended December 31, 2007, 2006 and 2005 was
$153.4 million, $92.4 million and $69.2 million, respectively. Cash from operating activities is generally provided
by net income from our operations. The increase in 2007 vs. 2006, and 2006 vs. 2005, is due in part to our increased
net earnings before the significant increase in the provision for credit losses.
Net cash used in investing activities for the years ended December 31, 2007, 2006 and 2005, was $665.4 million,
$603.7 million, and $444.2 million, respectively. Cash used in investing activities generally relates to purchases of
automobile contracts. Purchases of finance receivables held for investment were $1,282.3 million, $1,019.0 million
and $691.3 million in 2007, 2006 and 2005, respectively. Net cash used in investing activities is also affected by
changes in the amounts of restricted cash and equivalents, which in turn, is affected by the timing and structure of
our asset-backed securitization transactions. In December of 2006 and 2005, we completed securitization
transactions which included a pre-funding component that resulted in specific restricted cash deposits of $70.3
million and $58.1 million at December 31, 2006 and 2005, respectively. In December 2007, we did not complete a
securitization transaction with a pre-funding component and, as such, there was no corresponding restricted cash
deposit at December 31, 2007.
Net cash provided by financing activities for the year ended December 31, 2007, was $518.6 million compared
with $507.7 million for the year ended December 31, 2006 and $378.4 million for the year ended December 31,
2005. Cash used or provided by financing activities is primarily attributable to the issuance or repayment of debt.
We issued $1,035.9 million of securitization trust debt in 2007 as compared to $1,003.6 million in 2006 and
$662.4 million in 2005. Issuances of securitization debt were offset by repayments of $685.9 million, $487.7
million and $282.6 million in 2007, 2006 and 2005, respectively.
We purchase automobile contracts from dealers for a cash price approximating their principal amount, adjusted for
an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile
contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse
credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to
finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed
under revolving warehouse credit facilities. As of December 31, 2007, we had $425 million in warehouse credit
capacity, in the form of two $200 million facilities, and one $25 million subordinated facility. One $200 million
facility provides funding for automobile contracts purchased under the TFC programs while both warehouse
facilities provide funding for automobile contracts purchased under the CPS programs. The subordinated facility
was established on January 12, 2007 and was scheduled to expire on January 12, 2008. We have entered into
successive short-term extensions as we discuss longer term arrangements with the subordinated lenders and other
prospective lenders.
35
The first of two warehouse facilities mentioned above is structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable funding note issued by our consolidated
subsidiary Page Three Funding, LLC. This facility was established on November 15, 2005, and expires on
November 14, 2008, although it is renewable with the mutual agreement of the parties. On November 8, 2006 the
facility was increased from $150 million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other conditions and covenants. On January 12, 2007
the facility was amended to allow for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate is subject to the lender’s valuation of the collateral which, in turn, is affected
by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our term securitizations. Senior notes
under this facility accrue interest at a rate of one-month LIBOR plus 2.50% per annum while the subordinated notes
accrue interest at a rate of one-month LIBOR plus 5.50% per annum. At December 31, 2007, $103.2 million was
outstanding under this facility.
The second of two warehouse facilities is similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note issued by our consolidated subsidiary
Page Funding LLC. This facility was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for automobile contracts purchased
under the TFC programs, in addition to our CPS programs. The available credit under the facility was increased
again to $200 million on August 31, 2005. In April 2006, the terms of this facility were amended to allow advances
to us of up to 80% of the principal balance of automobile contracts that we purchase under our CPS programs, and
of up to 70% of the principal balance of automobile contracts that we purchase under our TFC programs, in all
events subject to collateral tests and certain other conditions and covenants. On June 30, 2006, the terms of this
facility were amended to allow advances to us of up to 83% of the principal balance of automobile contracts that we
purchase under our CPS programs, in all events subject to collateral tests and certain other conditions and covenants.
In February 2007 the facility was amended to allow for the issuance of subordinated notes resulting in an increase of
the maximum advance rate to 93%. The advance rate is subject to the lender’s valuation of the collateral which, in
turn, is affected by factors such as the credit performance of our managed portfolio and the terms and conditions of
our term securitizations, including the expected yields for bonds issued in our term securitizations. Senior notes
under this facility accrue interest at a rate of one-month LIBOR plus 2.00% per annum while the subordinated notes
accrue interest at a rate of one-month LIBOR plus 5.50% per annum. The facility expires on September 30, 2008,
unless renewed by us and the lender before that time. At December 31, 2007, $132.7 million was outstanding under
this facility. In January 2008, the interest rate on the subordinated notes increased to one-month LIBOR plus 12%.
The balance outstanding under these warehouse facilities generally will increase as we purchase additional
automobile contracts, until we effect a securitization utilizing automobile contracts warehoused in the facilities, at
which time the balance outstanding will decrease.
We securitized $1,118.1 million of automobile contracts in four private placement transactions during the year
ended December 31, 2007, as compared to $957.7 million of automobile contracts in four private placement
transactions during the year ended December 31, 2006. All of these transactions were structured as secured
financings and, therefore, resulted in no gain on sale.
In November 2005, we completed a securitization whereby a wholly-owned bankruptcy remote consolidated
subsidiary of ours issued $45.8 million of asset-backed notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million outstanding on this facility and in May 2007 the notes
were fully repaid. In December 2006 we entered into a $35 million residual credit facility that was secured by our
retained interests in additional term securitizations. At December 31, 2006, there was $12.2 million outstanding
under this facility. In July 2007, we established a combination term and revolving residual credit facility and used a
portion of our initial draw under that facility to repay our remaining outstanding debt under the December 2006 $35
million residual facility.
Under the combination term and revolving residual credit facility, we have used and intend to use eligible residual
interests in securitizations as collateral for floating rate borrowings. The amount that we may borrow is computed
using an agreed valuation methodology of the residuals, subject to an overall maximum principal amount of $120
million, represented by (i) a $60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60
million Class A-2 term note (the ―term note‖). The term note has been fully drawn and is due in July 2009. As of
December 31, 2007, we have drawn $10 million on the revolving note. The facility’s revolving feature expires in
July 2008.
36
In our annual report on Form 10-K for December 31, 2006, we identified as one of our capital requirements our
obligation to repay $25.0 million of outstanding senior secured debt by its maturity date of May 31, 2007. In July
2007, we used a portion of the term note under the combination term and revolving residual credit facility to repay
our remaining outstanding senior secured debt, after having been partially repaid and amended with respect to the
maturity date during the preceding quarter.
Cash released to us from trusts and their related spread accounts related to the portfolio owned by consolidated
subsidiaries for the years ended December 31, 2007, 2006 and 2005 was $2.7 million, $16.5 million and
$23.1 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 structure of the credit
enhancement and the relative size, seasoning and performance of the various pools of automobile contracts
securitized that make up our managed portfolio to which the respective spread accounts are related. The trend in our
recent securitizations has been towards credit enhancements that require a lower proportion of spread account cash
and a greater proportion of over collateralization. This trend has led to somewhat lower levels of restricted cash and
releases from trusts relative to the size of our managed portfolio.
The acquisition of automobile contracts for subsequent sale in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and their related spread accounts either
release cash to us or capture cash from collections on securitized automobile contracts. We may be limited in our
ability to purchase automobile contracts due to limits on our capital. As of December 31, 2007, we had unrestricted
cash on hand of $20.9 million and available capacity from our warehouse credit facilities of $189.1 million.
Warehouse capacity is subject to the availability of suitable automobile contracts to serve as collateral and of
sufficient cash to fund the portion of such automobile contracts purchase price not advanced under the warehouse
facilities. Our plans to manage the need for liquidity include the completion of additional securitizations that would
provide additional credit availability from the warehouse credit facilities, and matching our levels of automobile
contract purchases to our availability of cash. There can be no assurance that we will be able to complete
securitizations on favorable economic terms or that we will be able to complete securitizations at all. If we are
unable to complete such securitizations, we may be unable to purchase automobile contracts and interest income and
other portfolio related income would decrease.
Our primary means of ensuring that our cash demands do not exceed our cash resources is to match our levels of
automobile contract purchases to our availability of cash. Our ability to adjust the quantity of automobile contracts
that we purchase and securitize 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 automobile contract purchases can be
maintained or increased. While the specific terms and mechanics of each spread account vary among transactions,
our securitization agreements generally provide that we will receive excess cash flows only if the amount of credit
enhancement has reached specified levels and/or the delinquency, defaults or net losses related to the automobile
contracts in the pool are below certain predetermined levels. In the event delinquencies, defaults or net losses on the
automobile contracts exceed such levels, the terms of the securitization: (i) may require increased credit
enhancement to be accumulated for the particular pool; (ii) may restrict the distribution to us of excess cash flows
associated with other pools; or (iii) in certain circumstances, may permit the insurers to require the transfer of
servicing on some or all of the automobile contracts to another servicer. There can be no assurance that collections
from the related trusts will continue to generate sufficient cash.
Certain of our 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. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain
creditors to declare a default if a default occurred under a different facility.
The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are
terminable by the respective insurance companies upon defined events of default, and, in some cases, at the will of
the insurance company. Were an insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our liquidity and results of operations,
depending on the number and value of the terminated agreements. Our note insurers continue to extend our term as
servicer on a monthly and/or quarterly basis, pursuant to the servicing agreements.
37
Contractual Obligations
The following table summarizes our material contractual obligations as of December 31, 2007 (dollars in
thousands):
(1) Securitization trust debt, in the aggregate amount of $1,798.3 million as of December 31, 2007, 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 $714.4
million in 2008, $530.9 million in 2009, $324.5 million in 2010, $168.7 million in 2011, $57.3 million in 2012,
and $2.5 million in 2013.
(2) Long-term debt includes residual interest debt and subordinated renewable notes.
Warehouse Credit Facilities
The terms on which credit has been available to us for purchase of automobile contracts have varied over the three
years 2005-2007 and through December 31, 2007, as shown in the following summary of our warehouse credit
facilities:
Facility in Use from June 2004 to present. In June 2004, we (through our subsidiary Page Funding LLC) entered
into a floating rate variable note purchase facility. Up to $200.0 million of senior notes may be outstanding under
this facility at any time subject to certain collateral tests and other conditions. We use funds derived from this
facility to purchase automobile contracts under the CPS programs and TFC programs, which are pledged to secure
the notes. The collateral tests and other conditions generally allow us to borrow up to approximately 93% of the
principal balance of automobile contracts that we purchase under our CPS programs (up to 83.0% in the form of
senior notes and the remainder in the form of subordinated notes), and of up to 70% of the principal balance of
automobile contracts that we purchase under our TFC programs. The advance rate is subject to the lender’s
valuation of the collateral which, in turn, is affected by factors such as the credit performance of our managed
portfolio and the terms and conditions of our term securitizations, including the expected yields required for bonds
issued in our term securitizations. Senior notes issued under this facility accrue interest at one-month LIBOR plus
2.00% per annum while the subordinated notes accrue interest at one-month LIBOR plus 5.50% per annum. The
balance of notes outstanding related to this facility at December 31, 2006 was $132.7 million. Subsequent to
December 31, 2007, the interest rate on the subordinated notes increased to one-month LIBOR plus 12%.
Facility in Use from November 2005 to present. In November 2005, we (through our subsidiary Page Three
Funding LLC) entered into a floating rate variable note purchase facility. Up to $200 million of notes may be
outstanding under this facility at any time subject to certain collateral tests and other conditions. We use funds
derived from this facility to purchase automobile contracts under the CPS programs, which are pledged to secure the
notes. The collateral tests and other conditions generally allow us to borrow up to approximately 93.0% of the
principal balance of the automobile contracts (up to 83.0% in the form of senior notes and the remainder in the form
of subordinated notes). The advance rate is subject to the lender’s valuation of the collateral which, in turn, is
affected by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields require for bonds issued in our term securtizations. Senior notes issued
under this facility accrue interest at one-month LIBOR plus 2.50% per annum while the subordinated notes accrue
interest at one-month LIBOR plus 5.50% per annum. The balance of notes outstanding related to this facility at
December 31, 2006 was $103.2 million. Subsequent to December 31, 2007, the interest rate on the subordinated
notes increased to one-month LIBOR plus 12%.
Capital Resources
Securitization trust debt is repaid from collections on the related receivables, and becomes due in accordance with
its terms as the principal amount of the related receivables is reduced. Although the securitization trust debt also has
alternative final maturity dates, those dates are significantly later than the dates at which repayment of the related
receivables is anticipated, and at no time in our history have any of our sponsored asset-backed securities reached
those alternative final maturities.
38
Long Term Debt (2)…………..………..$98,133 $18,351 $78,389 $1,363 $30 Operating Leases…………………………………….$6,956 $3,172 $2,290 $1,248 $246 YearsMore than5 YearsPayment Due by Period (1)Less thanTotal1 Year1 to 3Years4 to 5
The acquisition of automobile contracts for subsequent transfer in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, when those transactions take place, results in a continuing
need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract
purchases, the required level of initial credit enhancement in securitizations, and the extent to which the trusts and
related spread accounts either release cash to us or capture cash from collections on securitized automobile
contracts. We plan to adjust our levels of automobile contract purchases so as to match anticipated releases of cash
from the trusts and related spread accounts with our capital requirements.
Capitalization
Over the period from January 1, 2005 through December 31, 2007 we have managed our capitalization by issuing
and refinancing debt as summarized in the following table:
Residual Interest Financing. In March 2004, one of our wholly-owned bankruptcy remote consolidated
subsidiaries issued $44.0 million of asset-backed notes secured by our retained interests in eight term securitization
transactions. The notes were repaid in full in August 2005. In November 2005, we completed a similar
securitization in which a wholly-owned bankruptcy remote consolidated subsidiary of ours issued $45.8 million of
asset-backed notes secured by our retained interests in 10 term securitization transactions. Those notes were repaid
in full in May 2007. In December 2006, we entered into a $35 million residual credit facility that is secured by our
retained interests in more recent term securitizations. We repaid this facility in full in July 2007 in conjunction with
the establishment of a combination term and revolving residual credit facility. Under the combination term and
revolving residual credit facility, we have used and intend to use eligible residual interests in securitizations as
collateral for floating rate borrowings. The amount that we may borrow is computed using an agreed valuation
methodology of the residuals, subject to an overall maximum principal amount of $120 million, represented by (i) a
$60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60 million term note (the ―term
note‖). The term note has been fully drawn and is due in July 2009. As of December 31, 2007, we have drawn $10
million on the revolving note. The advance rate under the revolving note is subject to the lender’s valuation of each
39
RESIDUAL INTEREST FINANCING:Beginning balance………………………..………….. $31,378 $43,745 $22,204 Issuances…………………………………..…….. 85,860 13,667 45,800 Payments…………………………………..…….(47,238) (26,034) (24,259) Ending balance………………………………...……..$70,000 $31,378 $43,745 SECURITIZATION TRUST DEBT:Beginning balance……………………………...…….. $1,442,995 $924,026 $542,815 Issuances…………………………………………..1,035,864 1,003,645 662,350 Payments………………………...……………….(680,557) (484,676) (281,139) Ending balance……………………..………………..$1,798,302 $1,442,995 $924,026 SENIOR SECURED DEBT, RELATED PARTY:Beginning balance……………………...…………….. $25,000 $40,000 $59,829 Issuances…………………………..…………….. Payments……………………………...………….(25,000) (15,000) (19,829) Ending balance……………………………...………..$$25,000 $40,000 SUBORDINATED DEBT:Beginning balance…………………………….……….. $$14,000 $15,000 Payments…………………………………….…….(14,000)(1,000)Ending balance………………………………….……..$$$14,000SUBORDINATED RENEWABLE NOTES:Beginning balance…………………..……………….. $13,574 $4,655 $ Issuances………………………..………………..17,664 9,985 4,685 Payments……………………………………...….(3,104) (1,066) (30)Ending balance…………………...…………………..$28,134$13,574$4,6552006Year Ended December 31,2007(Dollars in thousands)2005
residual interest pledged as collateral which, in turn, is primarily affected by the credit performance of the
underlying residual interests and their related contracts. The facility’s revolving feature expires in July 2008.
Securitization Trust Debt. Since the third quarter of 2003, we have for financial accounting purposes, treated
securitizations of automobile contracts as secured financings, and the asset-backed securities issued in such
securitizations remain on our balance sheet as securitization trust debt.
Senior Secured Debt. From 1998 to 2005, we entered into a series of financing transactions with Levine
Leichtman Capital Partners, II. In July 2007 we repaid the final amounts due under these financing transactions.
Subordinated Debt. In April 1997, we issued $20.0 million in subordinated participating equity notes due
April 2004, which we retired in the second quarter of 2004. In 1995, we issued $20.0 million of Rising Interest
Subordinated Redeemable Securities, or RISRS, due 2006. The RISRS included a sinking fund in their terms, and
we repaid in the first quarter of 2006 the $14.0 million that remained outstanding. In May 2003, in connection with
the acquisition of TFC, we assumed $6.3 million in principal amount of subordinated debt that TFC had outstanding.
We amortized this debt monthly and repaid it in full in June 2005.
Subordinated Renewable Notes Debt. In June 2005, we began issuing registered subordinated renewable notes in
an ongoing offering to the public. Upon maturity, the notes are automatically renewed for the same term as the
maturing notes, unless we elect not to have the notes renewed or unless the investor notifies us within 15 days after
the maturity date for his notes that he wants his notes repaid. Renewed notes bear interest at the rate we are offering
at that time to other investors with similar aggregate note portfolios. Based on the terms of the individual notes,
interest payments may be required monthly, quarterly, annually or upon maturity.
We must comply with certain affirmative and negative covenants related to debt facilities, which require, among
other things, that we maintain certain financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions, restricted payments and certain dividend restrictions. We were in compliance with all such covenants
as of December 31, 2007. In addition, certain securitization and non-securitization related debt contain cross-default
provisions that would allow certain creditors to declare default if a default occurred under a different facility.
Forward-looking Statements
This report on Form 10-K includes certain "forward-looking statements". Forward-looking statements may be
identified by the use of words such as "anticipates," "expects," "plans," "estimates," or words of like meaning. As to
the specifically identified forward-looking statements, factors that could affect charge-offs and recovery rates
include changes in the general economic climate, which could affect the willingness or ability of obligors to pay
pursuant to the terms of contracts, changes in laws respecting consumer finance, which could affect our ability to
enforce rights under contracts, and changes in the market for used vehicles, which could affect the levels of
recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current year include the
levels of cash releases from existing pools of contracts, which would affect our ability to purchase contracts, the
terms on which we are able to finance such purchases, the willingness of dealers to sell contracts to us on the terms
that it offers, and the terms on which we are able to complete term securitizations once contracts are acquired.
Factors that could affect our expenses in the current year include competitive conditions in the market for qualified
personnel, and interest rates (which affect the rates that we pay on Notes issued in its securitizations). The
statements concerning structuring securitization transactions as secured financings and the effects of such structures
on financial items and on future profitability also are forward-looking statements. Any change to the structure of our
securitization transaction could cause such forward-looking statements not to be accurate. Both the amount of the
effect of the change in structure on our profitability and the duration of the period in which our 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 we purchase and sell 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 our profitability.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157").
SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would
use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level
within the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, ―Effective
Date of FASB Statement No. 157‖, to partially defer FASB Statement No. 157 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
40
recurring basis. SFAS 157 is effective for us on January 1, 2008, except for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring basis for which our effective date is
January 1, 2009. We are in the process of evaluating SFAS No. 157 and do not believe it will have a significant
effect on our financial position or results of operations.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115. SFAS 159 permits an entity to choose to measure
many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective,
however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to
all entities with available for sale or trading securities. SFAS 159 is elective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. We are currently assessing this Statement to determine whether or
not we would elect to measure any financial instruments at their fair value.
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 our special purpose subsidiary do not appear as debt on
our consolidated balance sheet. See Critical Accounting Policies for a detailed discussion of our securitization
structure.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to interest rate risk during the period between when contracts are purchased from dealers and when
such contracts become part of a term securitization. Specifically, the interest rates on the warehouse facilities are
adjustable while the interest rates on the contracts are fixed. Historically, our term securitization facilities have had
fixed rates of interest. To mitigate some of this risk, we have in the past, and intend to continue to structure our
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 we sell the additional contracts to the Trust in amounts up to the balance of the pre-funded
escrow account. In pre-funded securitizations, we lock in the borrowing costs with respect to the contracts we
subsequently deliver to the Trust. However, we incur an expense in pre-funded securitizations equal to the
difference between the money market yields earned on the proceeds held in escrow prior to subsequent delivery of
contracts and the interest rate paid on the Notes outstanding, the amount as to which there can be no assurance.
The following table provides information on our interest rate-sensitive financial instruments by expected maturity
date as of December 31, 2007:
41
(1) Based on scheduled payments of finance receivables and excluding such components as deferred originations
costs and deferred acquisition fees.
Much of the information used to determine fair value is highly subjective. When applicable, readily available
market information has been utilized. However, for a significant portion of our financial instruments, active markets
do not exist. Therefore, considerable judgments were required in estimating fair value for certain items. The
subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics,
credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of 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.
Item 8. Financial Statements and Supplementary Data
This report includes Consolidated Financial Statements, notes thereto and an Independent Auditors’ Report, at the
pages indicated below, in the "Index to Financial Statements." Certain unaudited quarterly financial information is
included in the Notes to Consolidated Financial Statements, as Note 17.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of December 31, 2007 (the
"Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective (i) to ensure that
information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission; and (ii) to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is accumulated and communicated to our management,
including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
42
Assets:Finance receivables(1)……………………………$819,401 $629,958 $392,109 $205,507 $71,890 $6,889 $2,125,754 Weighted average fixed effective interest rate……………..$18.24%18.24%18.23%18.22%18.20%18.57%Liabilities:$Warehouse lines$ of credit……………………………………..$235,925 - - - - - 235,925 Weighted average variable effective interest rate……………..$7.35%Residual interest$ financing………………………………….$10,000 60,000 - - - - 70,000 Weighted average variable effective interest rate……………..$10.96%Securitization$ trust debt…………………………………..$714,382 530,879 324,500 168,722 57,326 2,493 1,786,263 Weighted average fixed effective interest rate……………..$5.62%5.70%5.81%5.94%6.01%6.44%Subordinated renewable notes8,351 8,098 9,341 950 1,274 119 28,133 Weighted average fixed effective interest rate……………..$10.18%12.13%14.10%11.69%13.91%10.03%20102008(In thousands)200920112012ThereafterFair Value
The certifications of our chief executive officer and chief financial officer required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Internal Control. Management’s Report on Internal Control over Financial Reporting is included in this
Annual Report, immediately below. During the fiscal quarter ended December 31, 2007, there were no changes in
our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. We are responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to
our management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with
respect to financial statement preparation and presentation.
Management, with the participation of the chief executive and chief financial officers, assessed the effectiveness of
our internal control over financial reporting as of December 31, 2007. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework. Based on this assessment, management, with the participation of the chief
executive and chief financial officers, believes that, as of December 31, 2007, our internal control over financial
reporting is effective based on those criteria.
The effectiveness of internal control over financial reporting as of December 31, 2007, has been audited by
McGladrey & Pullen, LLP, the independent registered public accounting firm that also audited our consolidated
financial statements. McGladrey & Pullen’s attestation report on our internal control over financial reporting is
included with the audited financial statements included herein.
Item 9B. Other Information
Not Applicable
Item 10. Directors and Executive Officers of the Registrant
PART III
Information regarding directors of the registrant is incorporated by reference to the registrant’s definitive proxy
statement for its annual meeting of shareholders to be held in 2008 (the "2008 Proxy Statement"). The 2008 Proxy
Statement will be filed not later than April 30, 2008. 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 2008 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Incorporated by reference to the 2008 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to the 2008 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to the 2008 Proxy Statement.
43
Item 15. Exhibits, Financial Statement Schedules
PART IV
The financial statements listed below under the caption "Index to Financial Statements" are filed as a part of this
report. No financial statement schedules are filed as the required information is inapplicable or the information is
presented in the Consolidated Financial Statements or the related notes. Separate financial statements of the
Company have been omitted as the Company is primarily an operating company and its subsidiaries are wholly
owned and do not have minority equity interests held by any person other than the Company in amounts that
together exceed 5% of the total consolidated assets as shown by the most recent year-end Consolidated Balance
Sheet.
The exhibits listed below are filed as part of this report, whether filed herewith or incorporated by reference to an
exhibit filed with the report identified in the parentheses following the description of such exhibit. Unless otherwise
indicated, each such identified report was filed by or with respect to the registrant.
Exhibit
Number
2.1
3.1
3.2
4.1
Description (“**” indicates compensatory plan or agreement.)
Agreement and Plan of Merger, dated as of November 18, 2001, by and among the Registrant, CPS
Mergersub, Inc. and MFN Financial Corporation. (Exhibit 2.1 to Form 8-K filed on November 19, 2001 by
MFN Financial Corporation)
Restated Articles of Incorporation (Exhibit 3.1 to Form S-2, No. 333-121913)
Amended and Restated Bylaws (Exhibit 3.2.1 to Form 8-K filed August 17, 2007)
Instruments defining the rights of holders of long-term debt of certain consolidated subsidiaries of the
registrant are omitted pursuant to the exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601
of Regulation S-K (17 CFR 229.601). The registrant agrees to provide copies of such instruments to the United
States Securities and Exchange Commission upon request.
4.2
Form of Indenture re Renewable Unsecured Subordinated Notes (―RUS Notes‖), (Exhibit 4.1 to Form S-2,
no. 333-121913)
4.2.1 Form of RUS Notes (Exhibit 4.2 to Form S-2, no. 333-121913)
4.23
4.24
Indenture dated as of June 1, 2007, respecting notes issued by CPS Auto Receivables Trust 2007-B (exhibit
4.23 to Form 8-K filed by the registrant on June 29, 2007)
Sale and Servicing Agreement dated as of June 1, 2007, related to notes issued by CPS Auto Receivables Trust
2007-B (exhibit 4.24 to Form 8-K filed by the registrant on June 29, 2007.)
4.25 Indenture dated as of September 1, 2007, respecting notes issued by CPS Auto Receivables Trust 2007-C
(exhibit 4.25 to Form 8-K filed by the registrant on November 2, 2007)
4.26 Sale and Servicing Agreement dated as of September 1, 2007, related to notes issued by CPS Auto Receivables
Trust 2007-C (exhibit 4.26 to Form 8-K filed by the registrant on November 2, 2007.)
10.1
1991 Stock Option Plan & forms of Option Agreements thereunder (Exhibit 10.19 to Form S-2, no. 333-
121913) **
10.2
1997 Long-Term Incentive Stock Plan ("1997 Plan") (Exhibit 10.20 to Form S-2, no. 333-121913) **
10.2.1 Form of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K filed March 13, 2006) **
10.4
Lease of Headquarters Building (Exhibit 10.22 to registrant's Form 10-Q filed Nov. 14, 1997)
10.5 Third Amended & Restated Sale and Servicing Agreement dated February 14, 2007 by and among Page
Funding LLC ("PFLLC"), the registrant and Wells Fargo Bank, N.A. ("WFBNA") (Exhibit 10.5 to registrant's
Form 10-K filed March 9, 2007)
10.5.1 Amendment dated March 30, 2007 to the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among Page Funding LLC ("PFLLC"), the registrant and Wells Fargo Bank, N.A.
("WFBNA") (Exhibit 10.5.3 to registrant's Form 10-Q filed July 23, 2007)
10.5.2 Amendment dated June 29, 2007 to the Third Amended & Restated Sale and Servicing Agreement dated
44
Exhibit
Number
Description (“**” indicates compensatory plan or agreement.)
February 14, 2007 by and among Page Funding LLC ("PFLLC"), the registrant and Wells Fargo Bank, N.A.
("WFBNA") (Exhibit 10.5.3 to registrant's Form 10-Q filed July 23, 2007)
10.5.3 Amendment dated September 30, 2007 to the Third Amended & Restated Sale and Servicing Agreement
dated February 14, 2007 by and among Page Funding LLC ("PFLLC"), the registrant and Wells Fargo Bank,
N.A. ("WFBNA") (Exhibit 10.5.3 to registrant's Form 10-Q filed November 6, 2007)
10.6 Second Amended & Restated Indenture dated as of February 14, 2007 by and between PFLLC and WFBNA
(Exhibit 10.6 to registrant's Form 10-K filed March 9, 2007)
10. 8 Second Amended & Restated Note Purchase Agreement dated as of February 14, 2007 by and among PFLLC,
UBS Real Estate Securities Inc. and WFBNA (Exhibit 10.8 to registrant's Form 10-K filed March 9, 2007)
10.10 Amended & Restated Sale and Servicing Agreement dated as of January 12, 2007, among Page Three Funding
LLC ("P3FLLC"), the registrant and WFBNA (Exhibit 10.10 to registrant's Form 10-K filed March 9, 2007)
10.11 Amended & Restated Indenture dated as of January 12, 2007 between P3FLLC and WFBNA (Exhibit 10.11 to
registrant's Form 10-K filed March 9, 2007)
10.12 Amended & Restated Note Purchase Agreement dated as of January 12, 2007 among P3FLLC, the registrant
and Bear, Stearns International Limited (Exhibit 10.12 to registrant's Form 10-K filed March 9, 2007)
10.14
2006 Long-Term Equity Incentive Plan (Appendix A to the registrant’s proxy statement for its 2006 annual
meeting of shareholder’s, filed on Schedule 14A on May 19, 2006)**
10.14.1 Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 10.14.1 to registrant's
Form 10-K filed March 9, 2007)**
14
21
23.1
31.1
31.2
32
Registrant’s Code of Ethics for Senior Financial Officers (Exhibit 14 to Form 10-K filed March 13, 2006)
List of subsidiaries of the registrant (filed herewith)
Consent of McGladrey & Pullen, LLP (filed herewith)
Rule 13a-14(a) certification by chief executive officer (filed herewith)
Rule 13a-14(a) certification by chief financial officer (filed herewith)
Section 1350 certification (filed herewith)
45
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CONSUMER PORTFOLIO SERVICES, INC. (registrant)
March 17, 2008
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 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
/s/ CHARLES E. BRADLEY, JR.
Charles E. Bradley, Jr., Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ CHRIS A. ADAMS
Chris A. Adams, Director
/s/ E. BRUCE FREDRIKSON
E. Bruce Fredrikson, Director
/s/ BRIAN J. RAYHILL
Brian J. Rayhill, Director
/s/ WILLIAM B. ROBERTS
William B. Roberts, Director
/s/ JOHN C. WARNER
John C. Warner, Director
/s/ GREGORY S. WASHER
Gregory S. Washer, Director
/s/ DANIEL S. WOOD
Daniel S. Wood, Director
/s/ JEFFREY P. FRITZ
Jeffrey P. Fritz, Sr. Vice President and Chief Financial Officer
(Principal Accounting Officer)
46
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm .........................................................................
Consolidated Balance Sheets as of December 31, 2007 and 2006 ..................................................................
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005 ................
Page
Reference
F-2
F-4
F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006,
and 2005 .....................................................................................................................................................
F-6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006, and
2005 ............................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005 ...............
F-7
F-8
Notes to Consolidated Financial Statements . .................................................................................................
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Consumer Portfolio Services, Inc.
We have audited the consolidated balance sheets of Consumer Portfolio Services, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive
income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting
for uncertain tax positions.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Consumer Portfolio Services, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14,
2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
The Company is currently marketing a pool of receivables for sale in a securitization. If the Company were
unsuccessful in completing this sale, advances on its two revolving credit facilities would likely exceed, in May
2008, the maximums allowed under those facilities. See Note 1 for a discussion of the potential consequences of
such an event.
/s/ McGladrey & Pullen, LLP
Irvine, California
March 17, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Consumer Portfolio Services, Inc.
We have audited Consumer Portfolio Services, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Consumer Portfolio Services, Inc.
and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Consumer Portfolio Services, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated
statements of operations, comprehensive income, shareholders’ equity and cashflows for each of the three years in
the period ended December 31, 2007 of Consumer Portfolio Services, Inc. and subsidiaries and our report dated
March 14, 2008 expressed an unqualified opinion and includes an explanatory paragraph regarding the potential
effect on the company if it is unsuccessful in completing a sale of a pool of receivables.
/s/ McGladrey & Pullen, LLP
Irvine, California
March 17, 2008
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
See accompanying Notes to Consolidated Financial Statements.
F-4
ASSETSCash and cash equivalents$20,880 $14,215 Restricted cash and equivalents170,341 193,001 Finance receivables2,068,004 1,480,794 Less: Allowance for finance credit losses(100,138) (79,380) Finance receivables, net1,967,866 1,401,414 Residual interest in securitizations2,274 13,795 Furniture and equipment, net1,500 824 Deferred financing costs 15,482 12,702 Deferred tax assets, net58,835 54,669 Accrued interest receivable24,099 17,043 Other assets21,536 20,931 $2,282,813 $1,728,594 LIABILITIES AND SHAREHOLDERS' EQUITYLiabilitiesAccounts payable and accrued expenses$18,391 $20,888 Warehouse lines of credit235,925 72,950 Income taxes payable17,706 10,297 Residual interest financing70,000 31,378 Securitization trust debt1,798,302 1,442,995 Senior secured debt, related party- 25,000 Subordinated renewable notes28,134 13,574 2,168,458 1,617,082 Commitments and contingenciesShareholders' EquityPreferred stock, $1 par value; authorized 5,000,000 shares; none issued- - Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued- - Common stock, no par value; authorized 30,000,000 shares; 19,525,042 and 21,504,688 shares issued and outstanding at December 31, 2007 and 2006, respectively55,216 64,438 Additional paid in capital, warrants794 794 Retained earnings60,794 48,031 Accumulated other comprehensive loss(2,449) (1,751) 114,355 111,512 $2,282,813 $1,728,594 December 31,December 31,20072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements
F-5
Revenues:Interest income $370,265 $263,566 $171,834 Servicing fees 1,218 2,894 6,647 Other income23,067 12,403 15,216 394,550 278,863 193,697 Expenses:Employee costs46,716 38,483 40,384 General and administrative 24,959 23,197 23,095 Interest137,543 87,510 44,148 Interest, related party1,646 5,602 7,521 Provision for credit losses137,272 92,057 58,987 Marketing18,147 14,031 12,000 Occupancy3,763 3,983 3,400 Depreciation and amortization547 800 790 370,593 265,663 190,325 Income before income tax expense (benefit)23,957 13,200 3,372 Income tax expense (benefit)10,099 (26,355) - Net income$13,858 $39,555 $3,372 Earnings per share: Basic $0.66 $1.82 $0.16 Diluted 0.61 1.64 0.14 Number of shares used in computingearnings per share: Basic 20,880 21,759 21,627 Diluted22,595 24,052 23,513 Year Ended December 31,200720062005
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
F-6
Net income$13,858 $39,555 $3,372 Other comprehensive income (loss); minimum pension liability, net of tax (698) 678 (1,412) Comprehensive income$13,160 $40,233 $1,960 Year Ended December 31,200720062005
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)
See accompanying Notes to Consolidated Financial Statements.
F-7
Balance at December 31, 200421,471 $66,283 $- $5,104 $(1,017) $(450) $69,920 Common stock issued upon exercise of options, including tax benefit415 1,311 - - - - 1,311 Purchase of common stock(199) (1,040) - - - - (1,040) Pension benefit obligation- - - - (1,412) - (1,412) Valuation of warrants issued- - 794 - - - 794 Deferred compensation on stock options- 194 - - - (194) - Amortization of stock compensation- - - - - 644 644 Net income- - - 3,372 - - 3,372 Balance at December 31, 200521,687 66,748 794 8,476 (2,429) - 73,589 Common stock issued upon exercise of options, including tax benefit553 2,254 - - - - 2,254 Purchase of common stock(735) (4,808) - - - - (4,808) Pension benefit obligation- - - - 678 - 678 Stock-based compensation- 244 - - - - 244 Net income- - - 39,555 - - 39,555 Balance at December 31, 200621,505 64,438 794 48,031 (1,751) - 111,512 Common stock issued upon exercise of options, including tax benefit337 1,356 - - - - 1,356 Purchase of common stock(2,317) (11,711) - - - - (11,711) Pension benefit obligation- - - - (698) - (698) Stock-based compensation- 1,133 - - - - 1,133 Adjustment to adopt FIN 48- - - (1,095) - - (1,095) Net income- - - 13,858 - - 13,858 Balance at December 31, 200719,525 $55,216 $794 $60,794 $(2,449) $- $114,355 AccumulatedLossPaid-inCapital,WarrantsAdditionalOtherSharesCommon StockAmountCompensationEarningsRetainedTotalComprehensiveDeferred
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
F-8
Cash flows from operating activities: Net income$13,858 $39,555 $3,372 Adjustments to reconcile net income to net cash provided by operating activities: Gain on write-up of residual asset(6,155) (1,200) - Accretion of deferred acquisition fees(16,761) (11,912) (10,851) Amortization of discount on Class B Notes5,316 3,005 1,486 Depreciation and amortization547 800 790 Amortization of deferred financing costs9,372 6,580 3,296 Provision for credit losses137,272 92,057 58,987 Share based compensation1,133 244 644 Interest income on residual assets(2,324) (5,656) (5,338) Cash received from residual interest in securitizations19,999 18,282 30,548 Impairment charge against non-auto finanace receivable assets- - 1,882 Changes in assets and liabilities: Payments on restructuring accrual(366) (633) (1,425) Accrued interest receivable(7,055) (6,113) (4,519) Other assets(994) (8,051) (1,059) Deferred tax assets, net(3,738) (47,138) (7,532) Accounts payable and accrued expenses3,311 12,629 (1,050) Net cash provided by operating activities (see Notes 1 and 18)153,415 92,449 69,231 Cash flows from investing activities: Purchases of finance receivables held for investment(1,282,312) (1,019,018) (691,252) Proceeds received on finance receivables held for investment595,347 451,037 279,730 Decreases (increases) in restricted cash and cash equivalents, net22,661 (35,338) (32,549) Purchase of furniture and equipment(1,087) (412) (166) Net cash used in investing activities (see Notes 1 and 18)(665,391) (603,731) (444,237) Cash flows from financing activities: Proceeds from issuance of securitization trust debt1,035,864 1,003,645 662,350 Proceeds from issuance of other debt103,523 23,652 50,485 Net proceeds from warehouse lines of credit162,975 37,599 1,071 Repayment of securitization trust debt(685,873) (487,681) (282,625) Repayment of senior secured debt, related party(25,000) (15,000) (19,829) Repayment of other debt(50,342) (41,266) (26,498) Payment of financing costs(12,151) (10,687) (6,796) Repurchase of common stock(11,711) (4,808) (1,040) Exercise of options and warrants1,118 1,555 1,311 Excess tax benefit related to option exercises238 699 - Net cash provided by financing activities518,641 507,708 378,429 Increase (decrease) in cash and cash equivalents6,665 (3,574) 3,423 Cash and cash equivalents at beginning of period14,215 17,789 14,366 Cash and cash equivalents at end of period$20,880 $14,215 $17,789 20072006Year Ended December 31,2005
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
F-9
Supplemental disclosure of cash flow information: Cash paid during the period for: Interest$121,631 $81,628 $45,929 Income taxes7,273 10,219 9,377 Supplemental disclosure of non-cash investing and financing activities: Pension benefit obligation, net698 (678) 1,412 Value of warrants issued- - 794 20072006Year Ended December 31,2005
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on March 8, 1991. CPS and its
subsidiaries (collectively, the "Company") specialize in purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by licensed motor vehicle dealers ("Dealers") located throughout
the United States. Dealers located in California, Texas, Florida and Ohio represented 10.4%, 9.2%, 8.4% and 6.2%,
respectively of contracts purchased during 2007 compared with 9.2%, 10.9%, 7.9% and 7.4%, respectively in 2006.
No other state had a concentration in excess of 6.2%. We specialize in contracts with obligors who generally would
not be expected to qualify for traditional financing, such as that provided by commercial banks or automobile
manufacturers’ captive finance companies.
We are subject to various regulations and laws as they relate to the extension of credit in consumer credit
transactions. Although we believe we are currently in material compliance with these regulation and laws, there can
be no assurance that we will be able to maintain such compliance. Failure to comply with such laws and regulations
could have a material adverse effect on the Company.
Acquisitions
On March 8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger (the "MFN Merger").
On May 20, 2003, we acquired TFC Enterprises, Inc. and its subsidiaries in a second merger (the "TFC Merger").
Each merger was accounted for as a purchase. MFN Financial Corporation and its subsidiaries ("MFN") and TFC
Enterprises, Inc. and its subsidiaries ("TFC") were engaged in similar businesses: buying contracts from Dealers,
financing those contracts through securitization transactions, and servicing those contracts. MFN ceased acquiring
contracts in March 2002; TFC continues to acquire contracts under its "TFC Programs."
On April 2, 2004, we purchased a portfolio of contracts and certain other assets (the "SeaWest Asset Acquisition")
from SeaWest Financial Corporation ("SeaWest"). In addition, we were named the successor servicer for three term
securitization transactions originally sponsored by SeaWest (the "SeaWest Third Party Portfolio"). We do not offer
financing programs similar to those previously offered by SeaWest.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Consumer Portfolio Services, Inc. and its wholly-
owned subsidiaries, certain of which are Special Purpose Subsidiaries ("SPS"), formed to accommodate the
structures under which we purchase and securitize our contracts. The Consolidated Financial Statements also include
the accounts of CPS Leasing, Inc., an 80% owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, we consider all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and due from
banks and money market accounts. Substantially all of our cash is deposited at two financial institutions. We
maintain cash due from banks in excess of the bank’s insured deposit limits. We do not believe we are exposed to
any significant credit risk on these deposits. As part of certain financial covenants related to debt facilities, we are
required to maintain a minimum unrestricted cash balance.
Reclassification Within the Consolidated Statement of Cash Flows
We have made a reclassification of an item within our consolidated statement of cash flows for the years ended
December 31, 2006 and 2005. The reclassification affects only the totals for net cash provided by operating
activities and net cash used in investing activities. There is no effect on the totals for net cash provided by financing
activities or on the net increase (or decrease) in cash and cash equivalents for the periods shown. The
reclassification does not affect our consolidated balance sheets, consolidated statements of operations or
consolidated statements shareholders’ equity.
The following table illustrates the effect of the reclassification:
F-10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See also Note 18 ―Reclassification within the Quarterly Consolidated Statements of Cash Flows‖.
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 contractual term of the receivables. 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.
Our portfolio of finance receivables consists of smaller-balance homogeneous contracts that are collectively
evaluated for impairment on a portfolio basis. We report delinquency on a contractual basis. Once a Contract
becomes greater than 90 days delinquent, we do not recognize additional interest income until the borrower under
the Contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a Contract
that is greater than 90 days delinquent 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, we use a loss
allowance methodology commonly referred to as "static pooling," which stratifies the finance receivable portfolio
into separately identified pools based on their period of origination, then uses historical performance of seasoned
pools to estimate future losses on current pools. Using analytical and formula driven techniques, we estimate an
allowance for finance credit losses, which we believe is adequate for probable credit losses that can be reasonably
estimated in our portfolio of finance receivable contracts. Provision for loss is charged to our Consolidated
Statement of Operations. Net losses incurred on finance receivables are charged to the allowance. We evaluate the
adequacy of the allowance by examining current delinquencies, the characteristics of the portfolio, the value of the
underlying collateral and historical loss trends. As conditions change, our level of provisioning and/or allowance
may change as well.
Charge Off Policy
Delinquent contracts for which the related financed vehicle has been repossessed are generally charged off at the
earliest of (1) the month in which the proceeds from the sale of the financed vehicle were received, (2) the month in
which 90 days have passed from the date of repossession or (3) the month in which the Contract becomes seven
scheduled payments past due (see Repossessed and Other Assets below). The amount charged off is the remaining
principal balance of the Contract, after the application of the net proceeds from the liquidation of the financed
vehicle. With respect to delinquent contracts for which the related financed vehicle has not been repossessed, the
F-11
Line item from consolidated statements of cash flowsCash flows from operating activities:Changes in assets and liabilities:Restricted cash and cash equivalents, net…………………………….$(35,338) $- $(32,549) $- Net cash provided by operating activities…………$57,111 $92,449 $36,682 $69,231 Cash flows from investing activities:Decreases (increases) in restricted cash and cash equivalents, net…………………..$- $(35,338) $- $(32,549) Net cash used in investing activities……………….$(568,393) $(603,731) $(411,688) $(444,237) (In thousands)December 31, 2006As Previously ReportedAs ReclassifiedDecember 31, 2006As Previously ReportedAs Reclassified
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining principal balance thereof is generally charged off no later than the end of the month that the Contract
becomes five scheduled payments past due for CPS Program receivables, and no later than the end of the month that
the Contract becomes seven scheduled payments past due for other receivables.
Contract Acquisition Fees and Originations Costs
Upon purchase of a Contract from a Dealer, we generally either charge or advance the Dealer an acquisition fee.
Dealer acquisition fees and deferred originations costs are applied to the carrying value of finance receivables and
are accreted into earnings as an adjustment to the yield over the estimated life of the Contract using the interest
method.
Repossessed and Other Assets
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to evade
contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th and 90th day past
the customer’s payment due date, but could occur sooner or later, depending on the specific circumstances. At the
time the vehicle is repossessed we stop accruing interest on the Contract, and reclassify the remaining Contract
balance to other assets at its estimated fair value less costs to sell. Included in other assets in the accompanying
balance sheets are repossessed vehicles pending sale of $11.5 million and $10.1 million at December 31, 2007 and
2006, respectively.
Included in Other Assets are non-finance receivable assets totaling $1.8 million as of December 31, 2006, net of a
valuation allowance of $1.9 million. The valuation allowance was established in 2005 and is included in general and
administrative expenses in the Company’s Consolidated Statement of Operations. Included in the $1.9 million
valuation allowance is $900,000 associated with related party receivables. These assets are no longer on the balance
sheet as of December 31, 2007.
Treatment of Securitizations
Prior to July 2003, dispositions of contracts in securitization transactions were structured as sales for financial
accounting purposes. As a result, gain on sale was recognized on those securitization transactions in which the
Company, or a wholly-owned, consolidated subsidiary of the Company, retained a residual interest in the contracts
that were sold to a wholly-owned, unconsolidated special purpose subsidiary. These securitization transactions
included "term" securitizations (the purchaser held the contracts for substantially their entire term) and "warehouse"
securitizations (which financed the acquisition of the contracts for future sale into term securitizations).
The line item "Residual interest in securitizations" on our Consolidated Balance Sheet represents the residual
interests in term securitizations completed prior to July 2003. This line represents the discounted sum of expected
future cash flows from recoveries on charge-offs from these securitization trusts. The terms of the securitizations
provide us the option to repurchase the underlying receivables from the trust and retire the related bonds. Such
repurchases are referred to as "clean-ups". When a clean-up takes place, we purchase the underlying receivables and
record them on the balance sheet and remove that portion of the residual interest that is attributable to the trust that is
terminated when the related bonds are retired. We conducted such clean-ups on the three remaining unconsolidated
trusts during 2007. The remaining portion of the residual interest at December 31, 2007 represents an estimate of
the future cash flows from recoveries on charge offs from clean-up securitizations and will remain on the balance
sheet for some time until those particular cash flows are realized but in no case later than 84 months from the
inception date of the term securitization .
All securitizations since July 2003 have been structured as secured financings. The warehouse securitizations are
accordingly reflected in the line items "Finance receivables" and "Warehouse lines of credit" on our Consolidated
Balance Sheet, and the term securitizations are reflected in the line items "Finance receivables" and "Securitization
trust debt."
Our term securitization structure has generally been as follows:
We sell contracts we acquire to a wholly-owned special purpose subsidiary ("SPS"), which has been established
for the limited purpose of buying and reselling our contracts. The SPS then transfers the same contracts to another
entity, typically a statutory trust ("Trust"). The Trust issues interest-bearing asset-backed securities ("Notes"), in a
principal amount equal to or less than the aggregate principal balance of the contracts. We typically sell these
contracts to the Trust at face value and without recourse, except that representations and warranties similar to those
F-12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provided by the Dealer to us are provided by us to the Trust. One or more investors purchase the Notes issued by the
Trust (the "Noteholders"); the proceeds from the sale of the Notes are then used to purchase the contracts from us.
We may retain or sell subordinated Notes issued by the Trust. We purchase a financial guaranty insurance policy,
guaranteeing timely payment of interest and ultimate payment of principal on the senior Notes, from an insurance
company (a "Note Insurer"). In addition, we provide "Credit Enhancement" for the benefit of the Note Insurer and
the Noteholders in three forms: (1) an initial cash deposit to a bank account (a "Spread Account") held by the Trust,
(2) overcollateralization of the Notes, where the principal balance of the Notes issued is less than the principal
balance of the contracts, and (3) in the form of subordinated Notes. The agreements governing the securitization
transactions (collectively referred to as the "Securitization Agreements") require that the initial level of Credit
Enhancement be supplemented by a portion of collections from the contracts until the level of Credit Enhancement
reaches specified levels which are then maintained. The specified levels are generally computed as a percentage of
the principal amount remaining unpaid under the related contracts. The specified levels at which the Credit
Enhancement is to be maintained will vary depending on the performance of the portfolios of contracts held by the
Trusts and on other conditions, and may also be varied by agreement among the Company, the SPS, the Note
Insurers and the trustee. Such levels have increased and decreased from time to time based on performance of the
various portfolios, and have also varied by Securitization Agreement. The Securitization Agreements generally grant
us the option to repurchase the sold contracts from the Trust (i.e., a "clean-up call") when the aggregate outstanding
balance of the contracts has amortized to a specified percentage of the initial aggregate balance.
Our warehouse securitization structures are similar to the above, except that (i) the SPS that purchases the
contracts pledges the contracts to secure promissory notes that it issues, (ii) no increase in the required amount of
Credit Enhancement is contemplated, and (iii) the Company does not purchase financial guaranty insurance. Upon
each sale of contracts in a securitization structured as a secured financing, we retain on our Consolidated Balance
Sheet the contracts securitized as assets and record the Notes issued in the transaction as indebtedness.
Under the prior securitizations structured as sales for financial accounting purposes, we removed from our
Consolidated Balance Sheet the contracts sold and added to our Consolidated Balance Sheet (i) the cash received, if
any, and (ii) the estimated fair value of the ownership interest that we retained in contracts sold in the securitization.
That retained or residual interest (the "Residual") consists of (a) the cash held in the Spread Account, if any, (b)
overcollateralization, if any, (c) subordinated Notes retained, if any, and (d) receivables from the Trust, which
include the net interest receivables ("NIRs"). NIRs represent the estimated discounted cash flows to be received from
the Trust in the future, net of principal and interest payable with respect to the Notes, the premium paid to the Note
Insurer, and certain other expenses.
We recognize gains or losses attributable to the changes in the estimated fair value of the Residuals. Gains in fair
value are recognized as other income in the income statement with losses being recorded as an impairment loss in
the income statement. We are not aware of an active market for the purchase or sale of interests such as the
Residuals; accordingly, we determine the estimated fair value of the Residuals by discounting the amount of
anticipated cash flows that we estimate will be released to us in the future (the cash out method), using a discount
rate that we believe is appropriate for the risks involved. The anticipated cash flows may include collections from
both current and charged off receivables. We have used an effective pre-tax discount rate of 14% per annum for cash
flows from current receivables and 25% for cash flows from charged-off receivables.
We receive periodic base servicing fees for the servicing and collection of the contracts. In addition, we are
entitled to the cash flows from the Trusts that represent collections on the contracts in excess of the amounts
required to pay principal and interest on the Notes, the base servicing fees, and the premium paid to the Note
Insurer, and certain other fees (such as trustee and custodial fees). Required principal payments on the Notes are
generally defined as the payments sufficient to keep the principal balance of the Notes equal to the aggregate
principal balance of the related contracts (excluding those contracts that have been charged off), or a pre-determined
percentage of such balance. Where that percentage is less than 100%, the related Securitization Agreements require
accelerated payment of principal until the principal balance of the Notes is reduced to the specified percentage. Such
accelerated principal payment is said to create "overcollateralization" of the Notes.
If the amount of cash required for payment of fees, interest and principal 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 us. If the total Credit Enhancement amount is not at the
required level, then the excess cash collected is retained in the Trust until the specified level is achieved. Cash in the
F-13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Spread Accounts is restricted from our use. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. In determining the value of the
Residuals, we have estimated the future rates of prepayments, delinquencies, defaults, default loss severity, and
recovery rates, as all of these factors affect the amount and timing of the estimated cash flows. Our estimates are
based on historical performance of comparable contracts.
Following a securitization that is structured as a sale for financial accounting purposes, interest income is
recognized on the balance of the Residuals. In addition, we will recognize as a gain additional revenue from the
Residuals if the actual performance of the contracts is better than our estimate of the value of the residual. If the
actual performance of the contracts were worse than our estimate, then a downward adjustment to the carrying value
of the Residuals and a related impairment charge would be required. In a securitization structured as a secured
financing for financial accounting purposes, interest income is recognized when accrued under the terms of the
related contracts and, therefore, presents less potential for fluctuations in performance when compared to the
approach used in a transaction structured as a sale for financial accounting purposes.
In all our term securitizations, whether treated as secured financings or as sales, we have transferred the
receivables (through a subsidiary) to the securitization Trust. The difference between the two structures is that in
securitizations that are treated as secured financings we report the assets and liabilities of the securitization Trust on
our Consolidated Balance Sheet. Under both structures the Noteholders’ and the related securitization Trusts’
recourse to us for failure of the contract obligors to make payments on a timely basis is limited to our Finance
receivables, Spread Accounts and Residuals.
Servicing
We consider the contractual servicing fee received on our managed portfolio held by non-consolidated subsidiaries
to be equal to adequate compensation. As a result, no servicing asset or liability has been recognized. Servicing fees
received on the managed portfolio held by non-consolidated subsidiaries are reported as income when earned.
Servicing fees received on the managed portfolio held by consolidated subsidiaries are included in interest income
when earned. Servicing costs are charged to expense as incurred. Servicing fees receivable, which are included in
Other Assets in the accompanying balance sheets, represent fees earned but not yet remitted to us by the trustee.
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation. We calculate depreciation using the
straight-line method over the estimated useful lives of the assets, which range from three to five years. Assets held
under capital leases and leasehold improvements are amortized over the lesser of the estimated useful lives of the
assets or the related lease terms. Amortization expense on assets acquired under capital lease is included with
depreciation expense on Company owned assets.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of carrying amount or fair value less costs to sell.
Other Income
Other Income consists primarily of gains recognized on our Residual interest in securitizations, recoveries on
previously charged off CPS and MFN contracts, fees paid to us by Dealers for certain direct mail services we
provide and proceeds from the sale of previously charged-off receivables to independent third parties. The gain
recognized related to the Residual interest was $6.2 million for 2007 and $1.2 million for 2006. There were no gains
recognized in 2005. The recoveries on the charged-off CPS contracts relate to contracts from previously
unconsolidated trusts and MFN contracts acquired in the MFN acquisition. These recoveries totaled $3.0 million,
$4.3 million and $4.9 million for the years ended 2007, 2006 and 2005, respectively. The direct mail revenues were
$5.3 million, $3.8 million and $4.5 million for 2007, 2006 and 2005, respectively. The proceeds from the sale of
previously charged-off receivables to independent third parties were $1.8 million in 2007 and $2.7 million in 2005.
F-14
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
The following table illustrates the computation of basic and diluted earnings per share:
Incremental shares of 1,539,000, 950,000 and 639,000 related to stock options have been excluded from the
diluted earnings per share calculation for the year ended December 31, 2007, 2006 and 2005, respectively, because
the effect is anti-dilutive.
Deferral and Amortization of Debt Issuance Costs
Costs related to the issuance of debt are deferred and amortized using the interest method over the contractual or
expected term of the related debt.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state
franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes,
under which deferred income taxes are recognized for the future tax consequences attributable to the differences
between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. We have estimated a valuation
allowance against that portion of the deferred tax asset whose utilization in future periods is not more than likely.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), ―Accounting for Uncertainty in Income Taxes‖.
Fin 48 is an interpretation of ―Statement of Financial Accounting Standards No. 109‖, which provides criteria for the
recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain
tax position may be recognized if it is ―more likely than not‖ that the position is sustainable based solely on its
technical merits. We adopted FIN 48 on January 1, 2007.
Purchases of Company Stock
We record purchases of our own common stock at cost and treat the shares as retired.
Stock Option Plan
Effective January 1, 2006, we adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing
the modified prospective approach. Under the modified prospective approach, Employee Costs include all share
based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Prior periods were not restated to reflect the effect of adopting the new
standard.
Prior to the adoption of SFAS 123(R) we accounted 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. For the periods prior to the adoption of SFAS 123(R) we have provided the pro
F-15
Numerator:Numerator for basic and diluted earnings per share………..……..…$13,858 $39,555 $3,372 Denominator:Denominator for basic earnings per share - weighted average number of common shares outstanding during the year……………………...…...……………..$20,880 21,759 21,627 Incremental common shares attributable to exercise of outstanding options and warrants……………………………..…...…..$1,715 2,293 1,886 Denominator for diluted earnings per share………………………...………...………..$22,595 24,052 23,513 Basic earnings per share……………………..….….………….........$0.66 $1.82 $0.16 Diluted earnings per share…………….……………..………..............$0.61 $1.64 $0.14 (In thousands, except per share data)200720062005
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
forma net income (loss), pro forma earnings (loss) per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123.
In December 2005, the Compensation Committee of the Board of Directors approved accelerated vesting of all the
outstanding stock options. Options to purchase 2,113,998 shares of our common stock, which would otherwise have
vested from time to time through 2010, became immediately exercisable as a result of the acceleration of vesting.
The decision to accelerate the vesting of the options was made primarily to reduce non-cash compensation expenses
that would have been recorded in the income statement upon the adoption of SFAS 123(R) in January 2006. We
estimate that approximately $3.5 million of future non-cash compensation expense was eliminated as a result of the
acceleration of vesting.
At the time of the acceleration of vesting, we accounted for stock options in accordance with Accounting
Principals Board Opinion No. 25, Accounting for Stock Issued to Employees. Consequently, the acceleration of
vesting resulted in non-cash compensation charge of $427,000 for the year ended December 31, 2005.
The per share weighted-average fair value of stock options granted during the years ended December 31, 2007,
2006 and 2005, was $2.89, $3.39, and $3.07, respectively. That fair value was estimated using the Black-Scholes
option-pricing model using the weighted average assumptions noted in the following table. We estimate the
expected life of each option as the average of the vesting period and the contractual life of the option. The volatility
estimate is based on the historical volatility of our stock over the period that equals the expected life of the option.
Volatility assumptions ranged from 36% to 48% for 2007, 34% to 50% for 2006 and 51% to 63% for 2005. The
risk-free interest rate is based on the yield on a US Treasury bond with a maturity comparable to the expected life of
the option. The dividend yield is estimated to be zero based on our intention not to issue dividends for the
foreseeable future.
Prior to the adoption of SFAS 123(R) on January 1, 2006, compensation cost had been recognized for certain stock
options in the Consolidated Financial Statements in accordance with APB Opinion No. 25. Had we 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," our net income (loss)
and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, ―Fair Value Measurements‖ (―SFAS No. 157‖).
SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would
F-16
Expected life (years)…………………………………...…………………………...5.94 5.69 6.50 Risk-free interest rate…………………………………….……………………...4.54 %4.80 %4.32 %Volatility………………………………………….……………………………………….46 %47 %57 %Expected dividend yield……………………………..…………………………..- - - Year Ended December 31,2007200620052005Net income (loss) As reported……………………………………………...………...$3,372 Pro forma……………………………………………...……………..$(648) Earnings (loss) per share - basic As reported…………………………………..………………...$0.16 Pro forma…………………………………………..………………..$(0.03) Earnings (loss) per share - diluted As reported…………………………………………...……………...$0.14 Pro forma………………………………………………..…………..$(0.03) ( In thousands,share data)Year EndedDecember 31,except per
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level
within the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, ―Effective
Date of FASB Statement No. 157‖, to partially defer FASB Statement No. 157 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis. SFAS 157 is effective for us on January 1, 2008, except for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring basis for which our effective date is
January 1, 2009. We are in the process of evaluating SFAS No. 157 and do not believe it will have a significant
effect on our financial position or results of operations.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial
Liabilities – Including an Amendment of FASB Statement No. 115". SFAS 159 permits an entity to choose to
measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are
elective, however, the amendment to SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", applies to all entities with available for sale or trading securities. SFAS 159 is elective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently assessing this
statement to determine whether or not we would elect to measure any financial instruments at their fair value.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement 109" ("FIN 48"). FIN 48 establishes a single model to address accounting for
uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim
periods, disclosure and transition. Upon adoption as of January 1, 2007, we increased our existing reserves for
uncertain tax positions by $1.1 million, largely related to state income tax matters. The increase was recorded as a
cumulative effect adjustment to shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses
during the reported periods. Specifically, a number of estimates were made in connection with determining an
appropriate allowance for finance credit losses, valuing the Residuals, accreting discounts and acquisition fees,
amortizing deferred costs, the recording of deferred tax assets and reserves for uncertain tax positions. These are
material estimates that could be susceptible to changes in the near term and, accordingly, actual results could differ
from those estimates.
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year’s presentation with no
effect on previously reported earnings or shareholders’ equity.
Uncertainty of Capital Markets
We are dependent upon the continued availability of warehouse credit facilities and access to long-term financing
through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have
completed 47 term securitizations comprising approximately $6.1 billion in contracts. We conducted four term
securitizations in 2006 and four in 2007, including our most recent in September 2007. However, within the period
of approximately four months prior to the filing of this report, we have observed unprecedented adverse changes in
the market for securitized pools of automobile contracts. These changes include reduced liquidity, increased
financial guaranty premiums and reduced demand for asset-backed securities, including for securities carrying a
financial guaranty and for securities backed by sub-prime automobile receivables. We believe that these adverse
changes in the capital markets are primarily the result of widespread defaults of sub-prime mortgages securing a
variety of term securitizations and related financial instruments, including instruments carrying financial guarantees
similar to those we typically obtain for our own term securitizations.
We have not securitized a pool of receivables since September 2007. As a result, we are approaching the limits of
our warehouse credit facilities, as discussed below. We have engaged an investment banker to securitize our
receivables prior to reaching those limits; however, there is no assurance that we will be able to do so. We expect the
F-17
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
structure of our next securitization to include substantially greater credit enhancement than recent past
securitizations, including larger spread accounts, greater over-collateralization, a greater portion of subordinated
bonds, or a combination of any or all of such forms of enhancement. All such forms of greater credit enhancement
are likely to reduce the amount of cash available to us, both at inception of the securitization, and over the life of the
transaction. Moreover, due to current conditions in the capital markets, we believe that any securitization
transactions that we may execute during 2008 are likely to include substantially higher costs to us in the form of
higher premiums for financial guaranty insurance, higher interest rates paid on the bonds sold by the securitization
trust and greater discounts given to the purchasers of subordinated bonds.
The adverse changes that have taken place in the market to date have resulted in a substantial extension of the
period during which our automobile contracts are financed through our warehouse credit facilities, which has
burdened our financing capabilities, and has caused us to curtail our purchase of such automobile contracts. If the
current adverse circumstances that have affected the capital markets preclude us from completing a securitization of
our receivables, we may exhaust the capacity of our warehouse credit facilities which would cause us to further
curtail or cease our purchases of new automobile contracts. Further adverse changes in the capital markets might
result in our inability to securitize automobile contracts which could lead to a material adverse effect on our
operations.
If we were unable to securitize a pool of receivables by May 2008, we would likely be in default under the terms
of our two revolving warehouse facilities. The defaults would arise because a significant portion of the collateral
securing those facilities (pledged automobile contracts) would have been held for more than 180 days and would no
longer be eligible for inclusion in each facilities computed "borrowing base." The result would be a reduction in the
amount that we would be allowed to borrow under those facilities, without a corresponding reduction in the amount
of indebtedness outstanding. We would expect the warehouse facilities to be in default, as the outstanding
indebtedness exceeded the permitted amount. In the event of such a default, and assuming no waiver or modification
of the underlying agreements, the warehouse lenders would be entitled (1) to receive a default rate of interest, (2) to
accelerate the maturity of the outstanding indebtedness, and then to apply all cashflows attributable to the pledged
collateral toward accelerated payment of the debt, (3) to terminate us as servicer of the pledged contracts, and (4) to
sell the pledged contracts and to apply the proceeds to the debt. We may choose to sell in whole-loan sale
transactions some portion of the most seasoned contracts pledged to the warehouse facilities which would postpone
a likely default from May 2008 until some future period. There is no assurance that we will be able to complete such
whole-loan sales.
If such circumstances caused both warehouse facilities to be unavailable to us, our failure to maintain an available
warehouse facility would be a default under two of our 19 outstanding securitization transactions, which are the two
that have issued asset-backed securities guaranteed by MBIA Insurance Corporation, and which are named CPS
Auto Receivables Trust 2006-B and CPS Auto Receivables Trust 2007-A. Such a default, unless waived, would give
MBIA certain rights, including (1) assessing a default insurance premium, (2) trapping excess cash to be retained in
the restricted cash spread accounts related to those trusts, and (3) terminating our appointment as servicer of the
related contracts.
If we were to be terminated as servicer of two or more securitized pools that termination would in turn be a default
under our combined term and revolving residual interest financing facility. Any such default, unless waived, would
permit the residual interest lender to declare all amounts then outstanding immediately due and payable, which
would result in cash releases from securitizations pledged to the combined term and residual interest facility being
diverted to pay principal and interest due thereunder. Such a diversion of cash to pay down the residual interest
facility would significantly decrease the cash available to us to conduct operations and would likely cause us to
significantly curtail, if not cease altogether, further purchases of contracts. In any case, the revolving portion of the
combined facility matures in July 2008, at which time we intend either to negotiate a renewal with the residual
interest lender or to obtain other long-term financing to repay that debt. There can be no assurance that we will be
able to do either.
If a default under one or both of the revolving warehouse facilities occurs, and one or both lenders exercised their
option to sell the related contracts to satisfy the warehouse debt, we may incur a loss on such sale of the contracts. If
the loss were significant, and together with our other results from operations were to result in a significant operating
loss for a quarter, such loss could result in an event of default under agreements related to five others of our 19
outstanding securitization transactions, which are those that have issued asset-backed securities guaranteed by XL
Capital Assurance Inc. Such a default, unless waived, would give XL Capital certain rights, including (1) assessing a
F-18
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
default insurance premium, (2) trapping excess cash to be retained in the restricted cash spread accounts related to
those trusts, and (3) terminating our appointment as servicer of the related contracts. However, we believe that
transfers of servicing of securitized sub-prime automobile portfolios are rare and would likely have a negative effect
on the performance of the portfolios.
Our financing structures are complex. Our warehouse, securitization and residual interest financings all employ
bankruptcy-remote, wholly-owned, special purpose entities which serve to isolate pledged assets and the related debt
from the parent entity, Consumer Portfolio Services, Inc. One effect of these structures is to limit lenders' and
insurers' recourse to rights related to their respective collateral. Such rights include termination of CPS as servicer of
the related collateral, and foreclosure sale of the related collateral.
If we were unable to securitize a pool of receivables within some 30 to 60 days following this filing and one or
more of the events of default and related actions described above should occur, our sources of liquidity would be
materially impaired. In that event, we would attempt to reduce our uses of cash by a corresponding amount,
principally by significantly curtailing, or by ceasing altogether, to purchase automobile contracts. When we choose
to reduce purchases of automobile contracts, as we have recently done as a result of the uncertainty in the capital
markets, we do so by (1) tightening our contract purchase criteria, resulting in more selective purchases, (2)
withdrawing from selected geographic markets, and (3) terminating selected marketing representatives and dealer
relationships.
Although we believe that such reductions in contract purchases would allow us to continue operations even in the
face of such events of default and related actions as are described above, a sufficiently steep decrease in our
purchases of automobile contracts would result in a decrease in the size of our portfolio of automobile contracts.
Such a decrease in portfolio size, together with the effect of some or all of the possible actions associated with the
events of default described above, could have a material adverse effect on our cash flows and results of operations.
However, continuing cashflows otherwise available to us would be sufficient to meet our remaining operating needs
in the near term.
(2) Restricted Cash
Restricted cash is comprised of the following components:
Certain of our financing agreements require that we establish cash reserves for the benefit of the other parties to
the agreements, in case those parties are subject to any claims or exposure.
(3) Finance Receivables
The following table presents the components of Finance Receivables, net of unearned interest:
F-19
Securitization trust accounts……………………….….………$170,191 $192,851 Other…………………………………………………….………$150 150 Total restricted cash…………………………………...…………$170,341 $193,001 20072006December 31,(In thousands)Finance Receivables Automobile Simple Interest………………………………………………...………………….$2,077,542 $1,474,126 Pre-compute, net of unearned interest…………………………………………….….14,350 29,251 Finance Receivables, net of unearned interest…………………………...……….2,091,892 1,503,377 Less: Unearned acquisition fees and discounts…………………………………..…...(23,888) (22,583) Finance Receivables…………………………………………………………..……….$2,068,004 $1,480,794 (In thousands)December 31,2007December 31,2006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finance receivables totaling $28.5 million and $12.2 million at December 31, 2007 and 2006, respectively, have
been placed on non-accrual status as a result of their delinquency status.
The following table presents a summary of the activity for the allowance for credit losses, for the years ended
December 31, 2007, 2006 and 2005:
Excluded from finance receivables are contracts that were previously classified as finance receivables but were
reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table
presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory
that is not included in the allowance for credit losses.
(4) Residual Interest in Securitizations
The following table presents the components of the residual interest in securitizations:
The key economic assumptions used in measuring all residual interest in securitizations as of December 31, 2006
are cumulative prepayment speeds ranging from 23% to 32% and cumulative net credit losses ranging from 12% to
15%. As of December 31, 2007 we have exercised our clean-up call option on all unconsolidated securitization
transactions that were outstanding as of December 31, 2006. The remaining residual asset relates to an estimate of
cash flows from charged off receivables related to our securitizations from 2001 to 2003, for which we have used a
discount rate of 25%, which is consistent with previous periods.
The effect of a 20% adverse change to the fair value of residual cash flows at December 31, 2007 would
result in a decrease of $98,000 to the value of the asset recorded.
F-20
Balance at beginning of year……………...……….……………………...……………$79,380 $57,728 $42,615 Provision for credit losses………………………….………………..………….……..$137,272 92,057 58,987 Charge-offs………………………………….………………….…………...…………………$(140,963) (88,335) (55,978) Recoveries…………………………………………………………...…………………..$24,449 17,930 12,104 Balance at end of year…….………………………………………...……………….$100,138 $79,380 $57,728 (In thousands)20072006December 31,2005Gross balance of repossessions in inventory……………...……….……………………...……………$33,380 $22,970 Allowance for losses on repossessed inventory………………………………….………………….…………...…………………$(21,849) (12,862) Net repossessed inventory included in other assets…….………………………………………...……………….$11,531 $10,108 (In thousands)20072006December 31,Cash, commercial paper, United States government securities and other qualifying investments (Spread Accounts)…………………...……..$$Receivables from Trusts (NIRs) and recoveries of previously charged-off receivables………………………………………………………...………………...……..$2,274 $808 Overcollateralization…………………………………………………..……….....................................$- $3,000 Residual interest in securitizations………………………………...…………...….$2,274 $13,795 December 31,- 9,987 (In thousands)20072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the cash flows received from (paid to) our unconsolidated securitization Trusts:
(5) Furniture and Equipment
The following table presents the components of furniture and equipment:
Depreciation expense totaled $406,000, $667,000 and $654,000 for the years ended December 31, 2007, 2006 and
2005, respectively.
(6) Restructuring Accruals
MFN Merger
In connection with the MFN Merger in 2002, we subsequently terminated the MFN origination activities and
consolidated certain activities of MFN. In connection with these changes, we recognized certain liabilities related to
the costs to exit these activities and terminate the affected employees of MFN. These activities included service
departments such as accounting, finance, human resources, information technology, administration, payroll and
executive management. Of these liabilities recognized at the merger date in the amount of $6.2 million, none of
these liabilities remain outstanding at December 31, 2007 compared with $366,000 outstanding at December 31,
2006.
TFC Merger
In connection with the TFC Merger in 2003, we consolidated certain activities of CPS and TFC. As a result of this
consolidation, we recognized certain liabilities related to the costs to integrate and terminate affected employees of
TFC. These activities included service departments such as accounting, finance, human resources, information
technology, administration, payroll and executive management. The total liabilities recognized at the time of the
merger was $4.5 million. As of December 31, 2006, none of these liabilities remain outstanding.
(7) Securitization Trust Debt
We have completed a number of term securitization transactions that are structured as secured borrowings for
financial accounting purposes. The debt issued in these transactions is shown on our consolidated balance sheets as
―Securitization trust debt,‖ and the components of such debt are summarized in the following table:
F-21
Releases of cash from Spread Accounts…………………...…...$10,641 $5,565 $7,420 Servicing Fees received………………………………….………….405 2,435 4,490 Purchase of delinquent or foreclosed assets…………………..…….(1,384) (9,068) (22,682) Repurchase of trust assets…………………………………...……...(23,359) (8,064) (9,658) For the Year Ended December 31,200720062005(In thousands)Furniture and fixtures…………………………….…..$3,996 $3,846 Computer and telephone equipment……………………………..…..$5,680 5,107 Leasing assets………………………………..……….$673 673 Leasehold improvements………………………….….$1,085 666 Other fixed assets………………………….………….$17 71 11,451 10,363 Less: accumulated depreciation and amortization……….$(9,951) (9,539) $1,500 $824 December 31,20072006(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________
(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 $714.4 million in 2008, $530.9 million in 2009, $324.5 million in 2010, $168.7 million in 2011,
$57.3 million in 2012, and $2.5 million in 2013.
All of the securitization trust debt was issued in private placement transactions to qualified institutional investors.
The debt was issued through wholly-owned, bankruptcy remote subsidiaries of CPS, TFC or MFN, and is secured
by the assets of such subsidiaries, but not by other assets of the Company. Principal and interest payments on the
senior notes are guaranteed by financial guaranty insurance policies.
The terms of the various Securitization Agreements related to the issuance of the securitization trust debt require
that certain delinquency and credit loss criteria be met with respect to the collateral pool, and require that we
maintain minimum levels of liquidity and net worth and not exceed maximum leverage levels and maximum
financial losses. We were in compliance with all such covenants as of December 31, 2007.
We are responsible for the administration and collection of the contracts. The Securitization Agreements also
require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings or to be
applied to make payments on the securitization trust debt. As of December 31, 2007, restricted cash under the
various agreements totaled approximately $170.2 million. Interest expense on the securitization trust debt is
composed of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of
borrowing include facility fees, insurance premiums, amortization of transaction costs, and amortization of discounts
given on the notes at the time of issuance. Deferred financing costs related to the securitization trust debt are
amortized using the interest method. Accordingly, the effective cost of borrowing of the securitization trust debt is
greater than the stated rate of interest.
The wholly-owned, bankruptcy remote subsidiaries of CPS, MFN and TFC were formed to facilitate the above
asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our
warehouse lines of credit. Bankruptcy remote refers to a legal structure in which it is expected that the applicable
F-22
WeightedFinalAverageScheduledInterest Rate atPaymentDecember 31,SeriesDate (1)2007CPS 2003-CMarch 2010$5,771$87,500$5,683$14,8153.57%CPS 2003-DOctober 20106,81575,0006,69515,1913.91%CPS 2004-AOctober 20109,67582,0949,84921,6084.32%PCR 2004-1N/A- 76,257- 8,097- CPS 2004-BFebruary 201114,83496,36914,93729,4374.17%CPS 2004-CApril 201118,626100,00018,76335,4804.24%CPS 2004-DDecember 201126,209120,00025,99447,3844.44%CPS 2005-AOctober 201136,457137,50034,15462,6105.30%CPS 2005-BFebruary 201242,748130,62539,00870,9334.68%CPS 2005-CMay 201272,759183,30067,834117,4345.11%CPS 2005-TFCJuly 201225,66672,52524,65445,4445.76%CPS 2005-DJuly 201263,007145,00061,857100,6155.68%CPS 2006-ANovember 2012122,912245,000120,667195,8225.30%CPS 2006-BJanuary 2013147,589257,500144,941224,4786.30%CPS 2006-CJuly 2013162,565247,500159,308236,1395.62%CPS 2006-DAugust 2013162,961220,000159,384217,5085.61%CPS 2007-ANovember 2013239,038290,000233,092N/A5.61%CPS 2007-TFCDecember 201385,894113,29384,685N/A5.79%CPS 2007-BJanuary 2014283,173314,999277,878N/A5.99%CPS 2007-CMay 2014314,065327,499308,919N/A5.99%$1,840,764$3,321,961$1,798,302$1,442,9952007ReceivablesPledged atDecember 31,(Dollars in thousands)OutstandingOutstandingPrincipal atPrincipal at2007December 31,2006InitialPrincipalDecember 31,
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The terms of our debt outstanding at December 31, 2007 and 2006 are summarized below:
Residual interest financing
Notes secured by our residual interests in securitizations. The
notes outstanding at December 31, 2006 were paid off in July
2007 and replaced with a new $120 million residual financing
facility. This facility, a combined $60 million term facility and
a $60 million revolving residual credit facility, is secured by
residual interests in 16 securitizations. The $60 million term
note was drawn in July 2007, is outstanding at December 31,
2007, and is due in July 2009. It bears interest at 6.5% over
LIBOR. The $60 million revolving facility has an outstanding
balance of $10 million and is due in July 2008. It bears interest
at 5.5% over LIBOR.
Senior secured debt, related party
Notes payable to Levine Leichtman Capital Partners II, L.P.
(―LLCP‖). The notes consisted of separate term notes that
each accrue interest at 11.75% per annum, required monthly
interest payments and were due in June and July 2007, after
having been amended from higher rates and earlier maturities.
We incurred issuance and amendment fees aggregating $1.3
million in relation to these notes.
Subordinated renewable notes
Notes bearing interest ranging from 6.00% to 14.91%, with a
weighted average rate of 12.23%, and with maturities from
January 2008 to December 2017 with a weighted average
maturity of July 2010. We began issuing the notes in June
2005 and incurred issuance costs of $250,000. Payments are
made monthly, quarterly, annually or upon maturity based on
the terms of the individual notes.
December 31,
2007
2006
(In thousands)
$70,000
$31,378
--
25,000
28,134
$98,134
13,574
$69,952
The outstanding debt on our two warehouse facilities was $235.9 million and $73.0 million as of December 31,
2007 and 2006, respectively. See Note 16 for a discussion of our warehouse lines of credit.
The costs incurred in conjunction with the above debt are recorded as deferred financing costs on the
accompanying balance sheets and is more fully described in Note 1.
We must comply with certain affirmative and negative covenants related to debt facilities, which require, among
other things, that we maintain certain financial ratios related to liquidity, net worth, capitalization and maximum
financial losses. Further covenants include matters relating to investments, acquisitions, restricted payments and
certain dividend restrictions.
F-23
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the contractual and expected maturity amounts of debt as of December 31, 2007:
(9) Shareholders’ Equity
Common Stock
Holders of common stock are entitled to such dividends as our Board of Directors, in its discretion, may declare
out of funds available, subject to the terms of any outstanding shares of preferred stock and other restrictions. In the
event of liquidation of the Company, holders of common stock are entitled to receive, pro rata, all of the assets of
the Company available for distribution, after payment of any liquidation preference to the holders of outstanding
shares of preferred stock. Holders of the shares of common stock have no conversion or preemptive or other
subscription rights and there are no redemption or sinking fund provisions applicable to the common stock.
We are required to comply with various operating and financial covenants defined in the agreements governing the
warehouse lines of credit, senior debt, residual interest financing and subordinated debt. The covenants restrict the
payment of certain distributions, including dividends (See Note 8.).
Included in compensation expense for the years ended December 31, 2007, 2006, and 2005, is $1.1 million,
$244,000, and $644,000 related to the amortization of deferred compensation expense and valuation of stock
options.
Stock Purchases
At four different times between 2000 and 2007, our Board of Directors, authorized us to purchase a total of up to
$27.5 million of our securities. As of December 31, 2007, we had purchased $5.0 million in principal amount of the
debt securities, and $21.5 million of our common stock, representing 5,417,592 shares.
Options and Warrants
In July 1997, the Company adopted and its shareholders approved the 1997 Long-Term Incentive Plan (the ―1997
Plan‖) pursuant to which our Board of Directors may grant stock options, restricted stock and stock appreciation
rights to employees, directors or employees of entities in which we have a controlling or significant equity interest.
Options that have been granted under the 1997 Plan have been granted at an exercise price equal to (or greater than)
the stock’s fair market value at the date of the grant, with terms of 10 years and vesting generally over five years.
Subsequent amendments to the 1997 Plan have increased the aggregate maximum 6,900,000 shares. There are no
shares available for grant in the 1997 Plan as of December 31, 2007.
In 2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term Equity Incentive Plan (the
―2006 Plan‖) pursuant to which our Board of Directors, or a duly-authorized committee thereof, may grant stock
options, restricted stock, restricted stock units and stock appreciation rights to our employees or our subsidiaries, to
directors of the Company, and to individuals acting as consultants to the Company or its subsidiaries. In June 2007,
the shareholders of the Company approved an amendment to the 2006 Plan to increase the maximum number of
shares that may be subject to awards under the 2006 Plan from 1,500,000 to 3,000,000. Options that have been
granted under the 2006 Plan have been granted at an exercise price equal to (or greater than) the stock’s fair market
value at the date of the grant, with terms of 10 years and vesting generally over five years.
F-24
Contractual maturity dateResidual interest financingRenewable subordinated notesTotal2008…………………………$10,000$ 8,351$ 18,351$ 2009………………………$60,000 8,098 68,098 2010……………………..$- 9,341 9,341 2011…………………………..$- 950 950 2012……………………$- 1,274 1,274 Thereafter………………..$- 120 120 70,000$ 28,134$ 98,134$ (In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), ―Share-Based
Payment, revised 2004‖ (―SFAS 123R‖), prospectively for all option awards granted, modified or settled after
January 1, 2006, using the modified prospective method. Under this method, we recognize compensation costs in the
financial statements for all share-based payments granted subsequent to January 1, 2006 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
For the year ended December 31, 2007, we recorded stock-based compensation costs in the amount of $1.1
million. As of December 31, 2007, unrecognized stock-based compensation costs to be recognized over future
periods equaled $4.2 million. This amount will be recognized as expense over a weighted-average period of 4.1
years.
At December 31, 2007, the aggregate intrinsic value of options outstanding and exercisable was $2.7 million. The
total intrinsic value of options exercised was $1.0 million, $2.2 million, and $1.3 million for the years ended
December 31, 2007, 2006, and 2005, respectively. New shares were issued for all options exercised during the years
ended December 31, 2007, 2006 and 2005. At December 31, 2007, there were a total of 760,000 additional shares
available for grant under the 2006 Plan.
Stock option activity for the year ended December 31, 2007 is as follows:
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, 2007, 2006 and 2005, was $2.91, $3.39,
and $2.77, respectively.
The per share weighted average fair value and exercise price of stock options granted whose exercise price was
above the market price of the stock on the grant date during the year ended December 31, 2007 was $2.53 and $5.00,
respectively. The per share weighted average fair value and exercise price of stock options granted whose exercise
price was above the market price of the stock on the grant date during the year ended December 31, 2005 was $3.61
and $6.00, respectively. We did not issue any stock options above the market price of the stock during the year
ended December 31, 2006.
We have not issued any stock options with an exercise price below the market price of the stock on the grant date.
Subsequent to December 31, 2007, our Board of Directors on January 30, 2008 granted a total of 555,000 stock
options to officers, managers and directors of the company at an exercise price of $3.18 per share, which was the
closing price of our stock on that day.
On August 4, 2005, we issued six-year warrants with respect to 272,000 shares of our common stock, in a
transaction exempted from the registration requirements of the Securities Act of 1933 as a transaction not involving
a public offering. The warrants are exercisable at $4.85 per share, and were issued to the lender’s nominee in
settlement of a claim against us that arose out of a loan of $500,000 made in September 1998. The Company and the
claimant dispute whether the loan was to us or to Stanwich Financial Services Corp. (―Stanwich‖). We received in
exchange for the warrants an assignment of the lender’s claim in bankruptcy against Stanwich, as well as a release
of all claims against us. We estimated the value of the warrants to be $794,000 using a Black-Scholes model,
assuming a risk-free interest rate of 3.41%, a six-year life and stock price volatility of 63%. We included the value
of the warrant, net of a previously recorded accrual of $500,000, in general and administrative expense for the year
ended December 31, 2005.
F-25
Number ofShares(in thousands)Options outstanding at the beginning of period…………5,352 $4.11 N/A Granted………………………………………………1,235 5.78 N/A Exercised……………………………………………(336) 3.22 N/A Forefeited…………………………………………….(55) 6.78 N/AOptions outstanding at the end of period…………………..6,196 $4.47 6.85 yearsOptions exercisable at the end of period……………………4,319 $3.75 6.05 yearsWeightedRemainingContractual TermAverageWeightedExercise PriceAverage
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Interest Income
The following table presents the components of interest income:
(11) Income Taxes
Income taxes consist of the following:
Income tax expense/(benefit) for the years ended December 31, 2007, 2006 and 2005, differs from the amount
determined by applying the statutory federal rate of 35% to income before income taxes as follows:
F-26
Interest on finance receivables……………………...…………..$358,862 $251,609 $163,552 Residual interest income …………………….……………….…….$2,324 5,656 5,338 Other interest income……………..…………………..………..$9,079 6,301 2,944 Net interest income………………..…………………….………..$370,265 $263,566 $171,834 Year Ended December 31,(In thousands)200720062005Current federal tax expense………………………………………………...……………………………….$10,385 $19,036 $5,340 Current state tax expense………………………………………………...……………………………….$2,200 1,193 1,687 Deferred federal tax (benefit)………………………………………………...……………………………….$(2,538) (9,660) (3,537) Deferred state tax expense (benefit)………………………………………………...……………………………….$52 4,877 (2,114) Change in valuation allowance……………………..…………….$- (41,801) (1,376) Income tax expense (benefit)………………………………..………….$10,099 $(26,355) $- Year Ended December 31,(In thousands)200720062005Expense at federal tax rate………………………...……………………….$8,385 $4,620 $1,180 State taxes, net of federal income tax benefit……………………………………….$1,458 5,585 (277) Other adjustments to tax reserve…………………………………………………..………..$(110) 5,136 - Effect of change in state tax rate…………………………………………………..………..$- 486 - Valuation allowance……………………………….………………………………………………..$- (41,801) (1,376) Stock-based compensation……………………………….………………………………………………..$279 47 - Other…………………………………………………..…………………………………………………………$87 (428) 473 $10,099 $(26,355) $- Year Ended December 31,(In thousands)200720062005
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, 2007 and 2006 are as follows:
As part of the MFN and TFC Mergers, CPS acquired certain net operating losses and built-in loss assets.
Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code
(―IRC‖) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation
(that is, a corporation with a net operating loss (―NOL‖) carryforward, credit carryforward, or certain built-in losses
(―BILs‖)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership
change.
In determining the possible future realization of deferred tax assets, we have considered the taxes paid in the
current and prior years that may be available to recapture as well as future taxable income from the following
sources: (a) reversal of taxable temporary differences; (b) future operations exclusive of reversing temporary
differences; and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire. During the year ended December 31, 2007, the
Company determined that deferred tax assets totaling approximately $9.8 million, which were subject to a 100%
valuation allowance at December 31, 2006, were permanently not available for future utilization. As a result, the
deferred tax assets and the related valuation allowance were adjusted with no impact on the net deferred tax assets
recorded or to the provision for income taxes.
As of December 31, 2007, we had net operating loss carryforwards for state income tax purposes of $30.3 million.
The state net operating losses expire through 2013-2014.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits including interest and
penalties for the year:
Included in the balance of unrecognized tax benefits at December 31, 2007, are $7.4 million of tax benefits that, if
recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at
F-27
Deferred Tax Assets:Finance receivables…………………………………….…………….$37,812 $30,777 Accrued liabilities…………………………………….…………….$728 1,297 Furniture and equipment………………………………...………..$417 524 NOL carryforwards and BILs………………………...…………..$19,547 21,321 Pension Accrual……………………………………...………………..$123 - Other……………………………………………...……………….$208 846 Total deferred tax assets………………………….………………$58,835 54,765 Deferred Tax Liabilities:$Pension Accrual……………………………….……………..$- (96) Total deferred tax liabilities……………………..…………………$- (96) $ Net deferred tax asset……………….…………………$58,835 $54,669 December 31,20072006(In thousands)Unrecognized tax benefit - opening balance………………………………………………...……………………………….$11,612 Gross increases - tax positions in prior period………………………………………………...……………………………….$1,357 Gross decreases - tax positions in prior period………………………………………………...……………………………….$(965) Gross increases - tax positions in current period………………………………………………...……………………………….$1,279 Settlements………………………………………………...……………………….$(119) Lapse of statute of limitations……………………..…………….$(884) Unrecognized tax benefit - ending balance………………………………………………...……………………………….$12,280 (In thousands)2007
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 are $1.3 million of tax benefits that, if recognized, would result in adjustments to other tax
accounts, primarily deferred taxes.
We recognized potential interest and penalties related to unrecognized tax benefits as income tax expense. Related
to the uncertain tax benefits noted above, we accrued penalties of $0.3 million and gross interest of $1.5 million
during 2007 and in total, as of December 31, 2007, have recognized a liability for penalties of $1.2 million and gross
interest of $2.4 million.
We do not anticipate a significant change in unrecognized tax positions within the coming year. In addition, we
believe that it is reasonably possible that none of our currently remaining unrecognized tax positions, each of which
are individually insignificant, may be recognized by the end of 2008 as a result of a lapse of the statute of
limitations.
We are subject to taxation in the US and various states and foreign jurisdictions. The Company’s tax years for
2001, 2002, 2003, 2004, 2005, and 2006 are subject to examination by the tax authorities. With few exceptions, we
are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2001.
(12) Related Party Transactions
Loans to Officers to Exercise Certain Stock Options
During 2002, our Board of Directors approved a program under which officers of the Company were advanced
amounts sufficient to enable them to exercise certain of their outstanding options. Such loans were available for a
limited period of time, and available only to exercise previously repriced options. The loans accrue interest at a rate
of 5.50% per annum, and were due in 2007. At December 31, 2007 and 2006, there was $383,000 and $407,000,
respectively outstanding related to these loans. Such amounts have been recorded as contra-equity within common
stock in the Shareholders’ Equity section of our Consolidated Balance Sheet.
Director Purchase of Retail Note
In December 2007, one of our directors purchased a $4 million subordinated renewable note pursuant to our
ongoing program of issuing such notes to the public. The note was purchased through the registered agent and
under the same terms and conditions, including the interest rate, that were offered to other purchasers at the time the
note was issued.
(13) Commitments and Contingencies
Leases
The Company leases its facilities and certain computer equipment under non-cancelable operating leases, which
expire through 2013. Future minimum lease payments at December 31, 2007, under these leases are due during the
years ended December 31 as follows:
Rent expense for the years ended December 31, 2007, 2006 and 2005, was $4.0 million, $3.9 million, and
$3.4 million, respectively.
Our facility leases contain certain rental concessions and escalating rental payments, which are recognized as
adjustments to rental expense and are amortized on a straight-line basis over the terms of the leases.
During 2007, 2006 and 2005, we received $113,000, $194,000 and $482,000, respectively, of sublease income,
which is included in occupancy expense.
F-28
2008………………………………………………………………….……………...…....$3,172 2009……………………………………………………………..……………...…………..$1,300 2010…………………………………...……………………….…………………...………$990 2011…………………………………...……………………….…………………...………$671 2012…………………………………...……………………….…………………...………$577 Thereafter…………………………………...……………………….…………………...………$246 Total minimum lease payments………………………………….………………………..$6,956 Amount(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
Stanwich Litigation. CPS was for some time a defendant in a class action (the ―Stanwich Case‖) brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the ―Settlement Payments‖) pursuant to earlier settlements of claims, generally personal injury
claims, against unrelated defendants. Stanwich Financial Services Corp. (―Stanwich‖), an affiliate of the former
chairman of the board of directors of CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich
defaulted on its payment obligations to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy
Code, in the federal bankruptcy court in Connecticut. By February 2005, CPS had settled all claims brought against
it in the Stanwich Case.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for indemnity
against the Company in a separate action, which is now pending in federal district court in Rhode Island. The
Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has filed a separate
action against Mr. Pardee's Rhode Island attorneys, in the same court. The litigation between Mr. Pardee and CPS is
stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.
CPS has reached an agreement in principle with the representative of creditors in the Stanwich bankruptcy to
resolve the adversary action. Under the agreement in principle, CPS would pay the bankruptcy estate $625,000 and
abandon its claims against the estate, while the estate would abandon its adversary action against Mr. Pardee. The
bankruptcy court has rejected that proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon appeal, CPS would expect that the agreement
would result in (i) limitation of its exposure to Mr. Pardee to no more than some portion of his attorneys fees
incurred and (ii) stays in Rhode Island being lifted, causing those cases to become active again. CPS is unable to
predict whether the ruling of the bankruptcy court will be sustained or overturned on appeal.
The reader should consider that an adverse judgment against CPS in the Rhode Island case for indemnification, if
in an amount materially in excess of any liability already recorded in respect thereof, could have a material adverse
effect.
Other Litigation. In December 2006 an individual resident of Ohio, Agborebot Bate-Eya, filed a purported class
counterclaim to a collection lawsuit brought by SeaWest Financial Corp. ("SeaWest") in Ohio state court. The
counterclaim alleged that a form notice sent by SeaWest to counterplaintiff in December 2000, and used then and at
other times, was not compliant with Ohio law. In August 2007, the counterplaintiff added the Company as an
additional defendant, noting that the Company in April 2004 had purchased from SeaWest a number of consumer
receivables, including that of the counterplaintiff. The Company has filed a motion to dismiss the counterclaim, and
believes that its no more than tenuous connection to the counterplaintiff will protect it from any material liability or
expense. There can be no assurance, however, as to the outcome of contested litigation, including this case.
The Company has recorded a liability as of December 31, 2007 that it believes represents a sufficient allowance
for legal contingencies. Any adverse judgment against the Company, if in an amount materially in excess of the
recorded liability, could have a material adverse effect on the financial position of the Company. The Company is
involved in various other legal matters arising in the normal course of business. Management believes that any
liability as a result of those matters would not have a material effect on the Company’s financial position.
(14) Employee Benefits
The Company sponsors a pretax savings and profit sharing plan (the ―401(k) Plan‖) qualified under Section 401(k)
of the Internal Revenue Code. Under the 401(k) Plan, eligible employees are able to contribute up to 15% of their
compensation (subject to stricter limitation in the case of highly compensated employees). We may, at our
discretion, match 100% of employees’ contributions up to $1,500 per employee per calendar year. Our contributions
to the 401(k) Plan were $674,000, $520,000 and $439,000 for the year ended December 31, 2007, 2006 and 2005,
respectively.
We also sponsor the MFN Financial Corporation Pension Plan (the ―Plan‖). The Plan benefits were frozen June
30, 2001.
In September 2006, the FASB issued SFAS No. 158, ―Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)‖ (―SFAS No. 158‖).
SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to
F-29
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position,
(b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs
or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to
SFAS No. 87, ―Employers’ Accounting for Pensions‖, or SFAS No. 106, ―Employers’ Accounting for
Postretirement Benefits Other Than Pensions‖, (c) measure defined benefit plan assets and obligations as of the date
of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 was adopted by the Company
in the fourth quarter of 2006. The adoption did not have a significant effect on our financial position or results of
operations. The disclosure requirements of this standard are included herein.
The following tables set forth the plan’s benefit obligations, fair value of plan assets, and amounts recognized at
December 31, 2007 and 2006:
The accumulated benefit obligation for the plan was $15.0 million and $15.5 million at December 31, 2007 and
2006, respectively.
Additional Information
Weighted average assumptions used to determine benefit obligations and cost at December 31, 2007 and 2006
were as follows:
F-30
Change in Projected Benefit ObligationProjected benefit obligation, beginning of year………………………………….……………………….………..$15,456 $15,799 Service cost…………………………………………………………………………………………………..……$- - Interest cost…………………………………………………………………………………………….………$881 876 Actuarial gain……………………………………………………………….………………….………………..$(723) (494) Benefits paid……………………………………………………………………………………..…………….$(645) (725) Projected benefit obligation, end of year…………………………………………………………………….….$14,969 $15,456 December 31,20072006(In thousands)Change in Plan Assets20072006Fair value of plan assets, beginning of year……………………………………………………………..……..$15,696 $13,812 Return on assets…………………………………………………………………………………………..……….$(543) 1,770 Employer contribution………………………………………………………………………..…………………..$200 900 Expenses………………………………………………………………………..…………………..$(65) (61) Benefits paid…………………………………………………………………………………………….…………..$(645) (725) Fair value of plan assets, end of year…..………………………………………………………...……….$14,643 $15,696 December 31,Benefit Obligation Recognized in Other Comprehensive IncomeNet loss (gain)……………………………………………………………………..………………….…..$1,126 $(1,223) Prior service cost (credit)…………………………………………………………………………...……………………..……$- - Amortization of prior service cost…………………………………………………….…………………………..………….$- - Net amount recognized in other comprehensive income……………..…..……………………………………………………...……………..…………….$1,126 $(1,223) December 31,20072006(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our overall expected long-term rate of return on assets is 8.50% per annum as of December 31, 2007. The
expected long-term rate of return is based on the weighted average of historical returns on individual asset
categories, which are described in more detail below.
The weighted average asset allocation of our pension benefits at December 31, 2007 and 2006 were as
follows:
F-31
20072006Weighted average assumptions used to determine benefit obligationsDiscount rate………………………………………………………………………………………….……….………..6.45%5.88%Weighted average assumptions used to determine net periodic benefit costDiscount rate………………………………………………………………………………………….……….………..5.88%5.50%Expected return on plan assets……………………………………………………………...……………………..……..8.50%8.50%December, 31Amounts recognized on Consolidated Balance SheetOther assets……………………………………………………………………………………………..……….....$- $240 Other liabilities…….…………………………………………………………..…………..………$(326) - Net amount recognized……………………………………………………………………………………………$(326) $240 December 31,20072006(In thousands)Amounts recognized in accumulated other comprehensive income consists of:Net loss (gain)……………………………………………………………………………………………..……….....$3,964 $2,838 Unrecognized transition asset………………..……………………………………………………...………………….………$- - Net amount recognized……………………………………………………………………………………………$3,964 $2,838 Components of net periodic benefit costInterest Cost………………………………………………………………………..……………………………$881 $876 Expected return on assets…………………………………………………………...……………………………..$(1,312) (1,149) Amortization of transition asset………………………………..…………………………………………$- (10) Amortization of net loss...……………………………………………………………………..………………….$71 179 Net periodic benefit cost..……………..…..……………………………….……….………………….…….$(360) $(104) 20072006Weighted Average Asset Allocation at Year-EndAsset CategoryEquity securities……………………………………………………………………...………………….$77%79%Debt securities……………………………………………………….…………………………$23%21% Total………………………………………………………………………………………………...…………………..$100%100%December 31,
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our investment policies and strategies for the pension benefits plan utilize a target allocation of 75% equity
securities and 25% fixed income securities. Our investment goals are to maximize returns subject to specific risk
management policies. We address risk management and diversification by the use of a professional investment
advisor and several sub-advisors which invest in domestic and international equity securities and domestic fixed
income securities. Each sub-advisor focuses its investments within a specific sector of the equity or fixed income
market. For the sub-advisors focused on the equity markets, the sectors are differentiated by the market
capitalization and the relative valuation of the underlying issuer. For the sub-advisors focused on the fixed income
markets, the sectors are differentiated by the credit quality and the maturity of the underlying fixed income
investment. The investments made by the sub-advisors are readily marketable and can be sold to fund benefit
payment obligations as they become payable.
(15) Fair Value of Financial Instruments
The following summary presents a description of the methodologies and assumptions used to estimate the fair
value of our financial instruments. Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for a significant portion of our financial
instruments, active markets do not exist. Therefore, considerable judgments were required in estimating fair value
for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows,
risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 2007 and 2006, 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, 2007 and 2006, were as follows:
Cash, Cash Equivalents and Restricted Cash
The carrying value equals fair value.
F-32
Cash FlowsExpected Benefit Payouts (In thousands)2008………………………………………………………………………………...…………………………………$584 2009……………………………………………………………………………………………………...………$590 2010…………………………………………………………………………...………………………………………$610 2011…………………………………………………………………………...………………………………………$687 2012…………………………………………………………………………...………………………………………$728 Years 2013 - 2017…………………………………………………………………………..………………………………$4,490 Anticipated Contributions in 2008……………………………………………..…………………………………..$- CarryingFinancial InstrumentCash and cash equivalents………………………………………….……………..$20,880 $20,880 $14,215 $14,215 Restricted cash and equivalents……………………………….…………….$170,341 170,341 $193,001 193,001 Finance receivables, net…………………….………………….$1,967,866 1,967,866 $1,401,414 1,401,414 Residual interest in securitizations………...…………………$2,274 2,274 $13,795 13,795 Accrued interest receivable…………….……………………………….$24,099 24,099 $17,043 17,043 Note receivable and accrued interest…………………………...………………$- - $2,371 2,371 Warehouse lines of credit……………………...……………….$235,925 235,925 $72,950 72,950 Notes payable……………………………..…………………$- - $45 45 Accrued interest payable…………………….$6,740 6,740 3,870 3,870 Residual interest financing………………..…………………$70,000 70,000 $31,378 31,378 Securitization trust debt……………...………………..$1,798,302 1,786,263 $1,442,995 1,441,881 Senior secured debt………………….……………..$- - $25,000 25,000 Subordinated renewable notes……………………………...…………….$28,134 28,134 $13,574 13,574 ValueDecember 31,20072006ValueValue(In thousands)Carrying Fair ValueFair
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 we believe reflects
the estimated credit, interest rate and prepayment risks associated with similar types of instruments.
Accrued Interest Receivable and Payable
The carrying value approximates fair value because the related interest rates are estimated to reflect current market
conditions for similar types of instruments.
Note Receivable
The fair value is estimated by discounting future cash flows using credit and discount rates that we believe reflects
the estimated credit and interest rate risks associated with similar types of instruments.
Warehouse Lines of Credit, Notes Payable, Residual Interest Financing, and Senior Secured Debt and Subordinated
Renewable Notes
The carrying value approximates fair value because the related interest rates are estimated to reflect current market
conditions for similar types of secured instruments.
Securitization Trust Debt
The fair value is estimated by discounting future cash flows using interest rates that we believe reflects the current
market rates.
(16) Liquidity
Our business requires substantial cash to support purchases of automobile contracts and other operating activities.
Our primary sources of cash have been cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities, servicing fees on portfolios of
automobile contracts previously sold in securitization transactions or serviced for third parties, customer payments
of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash
from securitized portfolios of automobile contracts in which we have retained a residual ownership interest and from
the spread accounts associated with such pools. Our primary uses of cash have been the purchases of automobile
contracts, repayment of amounts borrowed under warehouse credit facilities and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of
spread accounts and initial overcollateralization, if any, and the increase of credit enhancement to required levels in
securitization transactions, and income taxes. There can be no assurance that internally generated cash will be
sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of
securitized pools (which determines the level of releases from those portfolios and their related spread accounts), the
rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to purchase, sell,
and borrow against automobile contracts.
Net cash provided by operating activities for the years ended December 31, 2007, 2006 and 2005 was
$153.4 million, $92.4 million and $69.2 million, respectively. Cash from operating activities is generally provided
by net income from our operations. The increase in 2007 vs. 2006, and 2006 vs. 2005, is due in part to our increased
net earnings before the significant increase in the provision for credit losses.
Net cash used in investing activities for the years ended December 31, 2007, 2006 and 2005, was $665.4 million,
$603.7 million, and $444.2 million, respectively. Cash used in investing activities generally relates to purchases of
automobile contracts. Purchases of finance receivables held for investment were $1,282.3 million, $1,019.0 million
and $691.3 million in 2007, 2006 and 2005, respectively. Net cash used in investing activities is also affected by
changes in the amounts of restricted cash and equivalents, which in turn, is affected by the timing and structure of
our asset-backed securitization transactions. In December of 2006 and 2005, we completed securitization
transactions which included a pre-funding component that resulted in specific restricted cash deposits of $70.3
million and $58.1 million at December 31, 2006 and 2005, respectively. In December 2007, we did not complete a
F-33
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securitization transaction with a pre-funding component and, as such, there was no corresponding restricted cash
deposit at December 31, 2007.
Net cash provided by financing activities for the year ended December 31, 2007, was $518.6 million compared
with $507.7 million for the year ended December 31, 2006 and $378.4 million for the year ended December 31,
2005. Cash used or provided by financing activities is primarily attributable to the issuance or repayment of debt.
We issued $1,035.9 million of securitization trust debt in 2007 as compared to $1,003.6 million in 2006 and
$662.4 million in 2005. Issuances of securitization debt were offset by repayments of $685.9 million, $487.7
million and $282.6 million in 2007, 2006 and 2005, respectively.
We purchase automobile contracts from dealers for a cash price approximating their principal amount, adjusted for
an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile
contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse
credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to
finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed
under revolving warehouse credit facilities. As of December 31, 2007, we had $425 million in warehouse credit
capacity, in the form of two $200 million facilities, and one $25 million subordinated facility. One $200 million
facility provides funding for automobile contracts purchased under the TFC programs while both warehouse
facilities provide funding for automobile contracts purchased under the CPS programs. The subordinated facility
was established on January 12, 2007 and was scheduled to expire on January 12, 2008. We have entered into
successive short-term extensions as we discuss longer term arrangements with the subordinated lenders and other
prospective lenders.
The first of two warehouse facilities mentioned above is structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable funding note issued by our consolidated
subsidiary Page Three Funding, LLC. This facility was established on November 15, 2005, and expires on
November 14, 2008, although it is renewable with the mutual agreement of the parties. On November 8, 2006 the
facility was increased from $150 million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other conditions and covenants. On January 12, 2007
the facility was amended to allow for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate is subject to the lender’s valuation of the collateral which, in turn, is affected
by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our term securitizations. Senior notes
under this facility accrue interest at a rate of one-month LIBOR plus 2.50% per annum while the subordinated notes
accrue interest at a rate of one-month LIBOR plus 5.50% per annum. At December 31, 2007, $103.2 million was
outstanding under this facility.
The second of two warehouse facilities is similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note issued by our consolidated subsidiary
Page Funding LLC. This facility was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for automobile contracts purchased
under the TFC programs, in addition to our CPS programs. The available credit under the facility was increased
again to $200 million on August 31, 2005. In April 2006, the terms of this facility were amended to allow advances
to us of up to 80% of the principal balance of automobile contracts that we purchase under our CPS programs, and
of up to 70% of the principal balance of automobile contracts that we purchase under our TFC programs, in all
events subject to collateral tests and certain other conditions and covenants. On June 30, 2006, the terms of this
facility were amended to allow advances to us of up to 83% of the principal balance of automobile contracts that we
purchase under our CPS programs, in all events subject to collateral tests and certain other conditions and covenants.
In February 2007 the facility was amended to allow for the issuance of subordinated notes resulting in an increase of
the maximum advance rate to 93%. The advance rate is subject to the lender’s valuation of the collateral which, in
turn, is affected by factors such as the credit performance of our managed portfolio and the terms and conditions of
our term securitizations, including the expected yields for bonds issued in our term securitizations. Senior notes
under this facility accrue interest at a rate of one-month LIBOR plus 2.00% per annum while the subordinated notes
accrue interest at a rate of one-month LIBOR plus 5.50% per annum. The facility expires on September 30, 2008,
unless renewed by us and the lender before that time. At December 31, 2007, $132.7 million was outstanding under
this facility. In January 2008, the interest rate on the subordinated notes increased to one-month LIBOR plus 12%.
F-34
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The balance outstanding under these warehouse facilities generally will increase as we purchase additional
automobile contracts, until we effect a securitization utilizing automobile contracts warehoused in the facilities, at
which time the balance outstanding will decrease.
We securitized $1,118.1 million of automobile contracts in four private placement transactions during the year
ended December 31, 2007, as compared to $957.7 million of automobile contracts in four private placement
transactions during the year ended December 31, 2006. All of these transactions were structured as secured
financings and, therefore, resulted in no gain on sale.
In November 2005, we completed a securitization whereby a wholly-owned bankruptcy remote consolidated
subsidiary of ours issued $45.8 million of asset-backed notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million outstanding on this facility and in May 2007 the notes
were fully repaid. In December 2006 we entered into a $35 million residual credit facility that was secured by our
retained interests in additional term securitizations. At December 31, 2006, there was $12.2 million outstanding
under this facility. In July 2007, we established a combination term and revolving residual credit facility and used a
portion of our initial draw under that facility to repay our remaining outstanding debt under the December 2006 $35
million residual facility.
Under the combination term and revolving residual credit facility, we have used and intend to use eligible residual
interests in securitizations as collateral for floating rate borrowings. The amount that we may borrow is computed
using an agreed valuation methodology of the residuals, subject to an overall maximum principal amount of $120
million, represented by (i) a $60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60
million Class A-2 term note (the ―term note‖). The term note has been fully drawn and is due in July 2009. As of
December 31, 2007, we have drawn $10 million on the revolving note. The facility’s revolving feature expires in
July 2008.
In our annual report on Form 10-K for December 31, 2006, we identified as one of our capital requirements our
obligation to repay $25.0 million of outstanding senior secured debt by its maturity date of May 31, 2007. In July
2007, we used a portion of the term note under the combination term and revolving residual credit facility to repay
our remaining outstanding senior secured debt, after having been partially repaid and amended with respect to the
maturity date during the preceding quarter.
Cash released to us from trusts and their related spread accounts related to the portfolio owned by consolidated
subsidiaries for the years ended December 31, 2007, 2006 and 2005 was $2.7 million, $16.5 million and
$23.1 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 structure of the credit
enhancement and the relative size, seasoning and performance of the various pools of automobile contracts
securitized that make up our managed portfolio to which the respective spread accounts are related. The trend in our
recent securitizations has been towards credit enhancements that require a lower proportion of spread account cash
and a greater proportion of over collateralization. This trend has led to somewhat lower levels of restricted cash and
releases from trusts relative to the size of our managed portfolio.
The acquisition of automobile contracts for subsequent sale in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and their related spread accounts either
release cash to us or capture cash from collections on securitized automobile contracts. We may be limited in our
ability to purchase automobile contracts due to limits on our capital. As of December 31, 2007, we had unrestricted
cash on hand of $20.9 million and available capacity from our warehouse credit facilities of $189.1 million.
Warehouse capacity is subject to the availability of suitable automobile contracts to serve as collateral and of
sufficient cash to fund the portion of such automobile contracts purchase price not advanced under the warehouse
facilities. Our plans to manage the need for liquidity include the completion of additional securitizations that would
provide additional credit availability from the warehouse credit facilities, and matching our levels of automobile
contract purchases to our availability of cash. There can be no assurance that we will be able to complete
securitizations on favorable economic terms or that we will be able to complete securitizations at all. If we are
unable to complete such securitizations, we may be unable to purchase automobile contracts and interest income and
other portfolio related income would decrease.
F-35
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our primary means of ensuring that our cash demands do not exceed our cash resources is to match our levels of
automobile contract purchases to our availability of cash. Our ability to adjust the quantity of automobile contracts
that we purchase and securitize 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 automobile contract purchases can be
maintained or increased. While the specific terms and mechanics of each spread account vary among transactions,
our securitization agreements generally provide that we will receive excess cash flows only if the amount of credit
enhancement has reached specified levels and/or the delinquency, defaults or net losses related to the automobile
contracts in the pool are below certain predetermined levels. In the event delinquencies, defaults or net losses on the
automobile contracts exceed such levels, the terms of the securitization: (i) may require increased credit
enhancement to be accumulated for the particular pool; (ii) may restrict the distribution to us of excess cash flows
associated with other pools; or (iii) in certain circumstances, may permit the insurers to require the transfer of
servicing on some or all of the automobile contracts to another servicer. There can be no assurance that collections
from the related trusts will continue to generate sufficient cash.
Certain of our 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. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain
creditors to declare a default if a default occurred under a different facility.
The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are
terminable by the respective insurance companies upon defined events of default, and, in some cases, at the will of
the insurance company. Were an insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our liquidity and results of operations,
depending on the number and value of the terminated agreements. Our note insurers continue to extend our term as
servicer on a monthly and/or quarterly basis, pursuant to the servicing agreements.
(17) Selected Quarterly Data (Unaudited)
F-36
2007Revenues…………………………………………………...…………………………………….$86,495 $95,800 $102,755 $109,501 Income before income taxes………….…………...………………………………..$5,410 $6,237 $6,340 $5,970 Net income……………………………………...…………………………………………………$3,231 $3,488 $3,677 $3,462 Income per share:$$$$ Basic……………………………………….………….………………………………………..$0.15 $0.16 $0.18 $0.18 Diluted………………………………………………..………...…………………………………$0.14 $0.15 $0.16 $0.17 2006$$$$Revenues…………………………………………………...…………………………………….$58,024 $67,233 $73,713 $79,893 Income before income taxes………….…………...………………………………..$1,790 $2,627 $4,265 $4,518 Net income……………………………………...…………………………………………………$1,790 $2,627 $4,265 $30,873 Income per share:$$$$ Basic……………………………………….………….………………………………………..$0.08 $0.12 $0.20 $1.43 Diluted………………………………………………..………...…………………………………$0.07 $0.11 $0.18 $1.30 $$$$QuarterEndedMarch 31,QuarterEndedJune 30,(In thousands, except per share data)QuarterEndedSeptember 30,QuarterEndedDecember 31,
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Reclassification Within the Quarterly Consolidated Statements of Cash Flows
We have made a reclassification of an item within our consolidated statement of cash flows for the years ended
December 31, 2007 and 2006. The reclassification affects only the totals for net cash provided by operating
activities and net cash used in investing activities. There is no effect on the totals for net cash provided by financing
activities or on the net increase (or decrease) in cash for the periods shown. The reclassification does not affect our
consolidated balance sheets, consolidated statements of operations or consolidated statements of shareholders’
equity for any of the periods. The following table sets fourth the effects of the reclassification for the quarterly
consolidated statements of cash flows for the quarters in 2007 and 2006.
F-37
Line item from consolidated statements of cash flowsCash flows from operating activities:Changes in assets and liabilities:Restricted cash and cash equivalents, net…………………………$(36,574) $- $(54,326) $- $(65,058) $- Net cash provided by (used in) operating activities…………………………………………..$(6,033) $30,541 $13,399 $67,725 $52,133 $117,191 Cash flows from investing activities:Decreases (increases) in restricted cash and cash equivalents, net……………………..$- $(36,574) $- $(54,326) $- $(65,058) Net cash used in investing activities………………….$(194,232) $(230,806) $(398,127) $(452,453) $(584,507) $(649,565) Cash flows from operating activities:Changes in assets and liabilities:Restricted cash and cash equivalents, net…………………..$(51,192) $- $(43,490) $- $(39,412) $- Net cash provided by (used in) operating activities…………………………………………..$(33,499) $17,693 $(10,642) $32,848 $22,856 $62,268 Cash flows from investing activities:Decreases (increases) in restricted cash and cash equivalents, net……………………$- $(51,192) $- $(43,490) $- $(39,412) Net cash used in investing activities………………..$(153,849) $(205,041) $(314,046) $(357,536) $(448,669) $(488,081) As Reclassified As Previously ReportedNine Months Ended September 30, 2006Six Months Ended Nine Months Ended June 30, 2007June 30, 2006 As Reclassified As Previously Reported(In thousands)September 30, 2007Three Months Ended Six Months Ended As ReclassifiedAs Previously ReportedAs ReclassifiedAs Previously ReportedAs Previously ReportedAs Reclassified As Reclassified As Previously ReportedMarch 31, 2006Three Months Ended March 31, 2007