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, 2008
Commission file number: 001-14116
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
33-0459135
(I.R.S. Employer Identification No.)
19500 Jamboree 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, a non-accelerated filer or a
smaller reporting company. See the definitions of "large accelerated filer‖,‖accelerated filer" and ―smaller reporting
company‖ in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
The aggregate market value of the 16,412,115 shares of the registrant’s common stock held by non-affiliates as of the
date of filing of this report, based upon the closing price of the registrant’s common stock of $1.47 per share reported by
Nasdaq as of June 30, 2008, was approximately $24,125,809. For purposes of this computation, a registrant sponsored
pension plan and all directors and executive officers are deemed to be affiliates. Such determination is not an admission
that such plan, directors and executive officers are, in fact, affiliates of the registrant. The number of shares of the
registrant's Common Stock outstanding on March 20, 2009 was 18,899,999.
The proxy statement for registrant’s 2009 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 .......................................................................................................................................... 11
Item 1B. Unresolved Staff Comments ................................................................................................................ 19
Item 2.
Property ................................................................................................................................................ 19
Item 3.
Legal Proceedings ................................................................................................................................ 19
Item 4.
Submission of Matters to a Vote of Security Holders .......................................................................... 20
Item 4A. Executive Officers of the Registrant .................................................................................................... 20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities .............................................................................................................................. 22
Item 6.
Selected Financial Data ........................................................................................................................ 23
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations ........... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................. 42
Item 8.
Financial Statements and Supplementary Data .................................................................................... 43
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 43
Item 9A. Controls and Procedures ....................................................................................................................... 43
Item 9B. Other Information ................................................................................................................................. 44
PART III
Item 10. Directors and Executive Officers of the Registrant .............................................................................. 44
Item 11. Executive Compensation ...................................................................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................. 44
Item 13. Certain Relationships and Related Transactions, and Director Independence ..................................... 44
Item 14.
Principal Accountant Fees and Services............................................................................................... 44
PART IV
Item 15. Exhibits, Financial Statement Schedules .............................................................................................. 45
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, (ii) purchased immaterial
amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) originated ourselves an immaterial
amount of vehicle purchase money loans by lending money directly to consumers. In this report, we refer to all of
such contracts and loans as "automobile contracts."
We were incorporated and began our operations in March 1991. From inception through December 31, 2008, we
have purchased a total of approximately $8.7 billion of automobile contracts from dealers. In addition, we obtained
a total of approximately $605.0 million of automobile contracts in mergers and acquisitions we made in 2002, 2003
and 2004. During 2008, unlike recent prior years, our managed portfolio decreased from the previous year due to
our strategy of decreasing contract purchases to conserve our liquidity in response to adverse economic conditions,
as discussed further below. Our total managed portfolio, net of unearned interest on pre-computed automobile
contracts, was approximately $1,664.1 million at December 31, 2008 compared to $2,162.2 million at December 31,
2007, $1,565.9 million as of December 31, 2006 and $1,122.0 million as of December 31, 2005.
We are headquartered in Irvine, California, where most operational and administrative functions are centralized.
All credit and underwriting functions are performed in our California headquarters, and we service our automobile
contracts from our California headquarters and from three servicing branches in Virginia, Florida and Illinois.
We direct our marketing efforts primarily to dealers, rather than to consumers. We establish relationships with
dealers through our employee marketing representatives who contact a prospective dealer to explain our automobile
contract purchase programs, and thereafter provide dealer training and support services. The marketing
representatives are obligated to represent our financing program exclusively. Our marketing representatives present
the dealer with a marketing package, which includes our promotional material containing the terms offered by us for
the purchase of automobile contracts, a copy of our standard-form dealer agreement, and required documentation
relating to automobile contracts. As of December 31, 2008, we had 36 marketing representatives and we were
actively receiving applications from 364 dealers in 43 states. Current levels of marketing representatives and dealers
are a significant reduction from December 31, 2007 when we had 134 marketing representatives and were actively
receiving applications from 10,255 dealers. During 2008 and thereafter, we significantly reduced our presence in
the marketplace in response to economic conditions as discussed further below. As of December 31, 2008,
approximately 82% of our dealers are franchised new car dealers that sell both new and used cars and the remainder
are independent used car dealers. For the year ended December 31, 2008, approximately 88% of the automobile
contracts purchased under our programs consisted of financing for used cars and 12% consisted of financing for new
cars, as compared to 84% financing for used cars and 16% for new cars in the year ended December 31, 2007. We
purchase contracts in our own name (―CPS‖) and, until July 2008, also purchased contracts in the name of our
wholly-owned subsidiary, The Finance Company ("TFC"). Programs marketed under the CPS name serve a wide
range of sub-prime customers, primarily through franchised new car dealers. Our TFC program served vehicle
purchasers enlisted in the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we
suspended contract purchases under our TFC program.
We purchase automobile contracts with the intention of financing them on a long-term basis through
securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose
entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.
Depending on the structure of the securitization, the transaction may be treated, for financial accounting purposes, as
a sale of the contracts or as a secured financing.
Historically, we have depended upon the availability of short-term warehouse credit facilities and access to long-
term financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since
1994, we have completed 49 term securitizations of approximately $6.6 billion in contracts. We conducted four term
1
securitizations in 2006, four in 2007, and two in 2008. From July 2003 through April 2008 all of our securitizations
were structured as secured financings. The second of our two securitization transactions in 2008 (completed in
September 2008) was in substance a sale of the related contracts, and is treated as a sale for financial accounting
purposes.
Since the fourth quarter of 2007, we have observed unprecedented adverse changes in the market for securitized
pools of automobile contracts. These changes include reduced liquidity, and reduced demand for asset-backed
securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime
receivables. Moreover, many of the firms that previously provided financial guarantees, which were an integral part
of our securitizations, are no longer offering such guarantees. As of December 31, 2008, we have no available
warehouse credit facilities and no immediate plans to complete a term securitization. The adverse changes that have
taken place in the market over the last 18 months have caused us to seek to conserve liquidity by reducing our
purchases of automobile contracts to nominal levels. If the current adverse circumstances that have affected the
capital markets should continue or worsen, we may curtail further or cease our purchases of new automobile
contracts, which could lead to a material adverse effect on our operations.
Sub-Prime Auto Finance Industry
Automobile financing is the second largest consumer finance market in the United States. The automobile finance
industry can be divided into two principal segments: a prime credit market and a sub-prime credit market.
Traditional automobile finance companies, such as commercial banks, savings institutions, credit unions and captive
finance companies of automobile manufacturers, generally lend to the most creditworthy, or so-called prime,
borrowers. The sub-prime automobile credit market, in which we operate, provides financing to less creditworthy
borrowers, at higher interest rates.
Historically, traditional lenders have not served the sub-prime market or have done so through programs that were
not consistently available. Independent companies specializing in sub-prime automobile financing and subsidiaries
of larger financial services companies currently compete in this segment of the automobile finance market, which
we believe remains highly fragmented, with no single company having a dominant position in the market.
Current economic conditions have negatively affected many aspects of our industry. First, as stated above, there is
little demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile
receivables. Second, lenders who previously provided short-term warehouse financing for sub-prime automobile
finance companies such as ours are reluctant to provide such short-term financing due to the uncertainty regarding
the prospects of obtaining long-term financing through the issuance of asset-backed securities. In addition, many
capital market participants such as investment banks, financial guaranty providers and institutional investors who
previously played a role in the sub-prime auto finance industry have withdrawn from the industry, or in some cases,
have ceased to do business. Finally, the broad economic weakness and increasing unemployment has made many of
the obligors under our receivables less willing or able to pay, resulting in higher delinquency, charge-offs and losses.
Each of these factors has adversely affected our results of operations. Should existing economic conditions worsen,
both our ability to purchase new contracts and the performance of our existing managed portfolio may be impaired,
which, in turn, could have a further material adverse effect on our results of operations.
Our Operations
Our automobile financing programs are designed to serve sub-prime customers, who generally have limited credit
histories, low incomes or past credit problems. Because we serve customers who are unable to meet certain credit
standards, we incur greater risks, and generally receive interest rates higher than those charged in the prime credit
market. We also sustain a higher level of credit losses because we provide financing in a relatively high risk market.
Originations
When a retail automobile buyer elects to obtain financing from a dealer, the dealer takes a credit application to
submit to its financing sources. Typically, a dealer will submit the buyer's application to more than one financing
source for review. We believe the dealer’s decision to choose a financing source is based primarily on: (i) the
monthly payment made available to the dealer's customer; (ii) the purchase price offered to the dealer for the
contract; (iii) the timeliness, consistency and predictability of response; (iv) funding turnaround time; and (v) any
conditions to purchase. Dealers can send credit applications to us by entering the necessary data on our website, by
fax, or through one of several third-party application aggregators. For the year ended December 31, 2008, we
received approximately 78% of all applications through DealerTrack (the industry leading dealership application
2
aggregator), 11% via our website and 11% via fax or other aggregators. Our automated application decisioning
system produced our response within minutes to about 95% 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, 2008, no dealer
accounted for more than 1% of the total number of automobile contracts we purchased. The following table sets
forth the geographical sources of the automobile contracts purchased by us (based on the addresses of the customers
as stated on our records) during the years ended December 31, 2008 and 2007. The 18,707 contracts purchased in
the year 2008 is not indicative of our rate of contract purchases in the year 2009 through the date of this report. See
"Management's Discussion and Analysis."
(1) Automobile contracts purchased by TFC are not included because such purchases accounted for less than 10%
of the total purchases during the year and are not representative of automobile contracts purchased under our
CPS programs.
(2) Percentages may not total to 100.0% due to rounding.
We purchase automobile contracts under our programs from dealers at a price generally computed as the total
amount financed under the automobile contracts, adjusted for an acquisition fee, which may either increase or
decrease the automobile contract purchase price paid by us. The amount of the acquisition fee, and whether it results
in an increase or decrease to the automobile contract purchase price, is based on the perceived credit risk of and, in
some cases, the interest rate on the automobile contract. For the years ended December 31, 2008, 2007 and 2006,
the average acquisition fee charged per automobile contract purchased under our CPS programs was $592, $209 and
$241, respectively, or 3.9%, 1.4% and 1.6%, respectively, of the amount financed. In 2008 and subsequently, we
increased our acquisition fees as a part of our strategy to conserve liquidity by decreasing new contract purchases.
We offer seven different financing programs to our dealership customers, and price each program according to the
relative credit risk. Our programs cover a wide band of the credit spectrum and are labeled as follows:
3
NumberPercent (2)NumberPercent (2)California2,166 11.6%8,358 10.4%Florida1,744 9.3%6,774 8.4%Texas1,320 7.1%7,408 9.2%Pennsylvania1,301 7.0%4,967 6.2%Ohio1,286 6.9%4,990 6.2%New York1,271 6.8%4,087 5.1%Michigan745 4.0%3,229 4.0%Louisiana723 3.9%3,006 3.7%Illinois697 3.7%3,164 3.9%Maryland684 3.7%2,779 3.4%Kentucky594 3.2%2,797 3.5%North Carolina543 2.9%3,748 4.7%New Jersey505 2.7%2,030 2.5%Indiana471 2.5%2,165 2.7%Virginia428 2.3%2,091 2.6%Georgia379 2.0%2,263 2.8%Other States3,850 20.6%16,725 20.8%Total18,707 100.0%80,581 100.0%December 31, 2007December 31, 2008Contracts Purchased During the Year Ended (1)
First Time Buyer – This program accommodates an applicant who has limited significant past credit history,
such as a previous auto loan. Since the applicant has little or no credit history, the contract interest rate and dealer
acquisition fees tend to be higher, and the loan amount, loan-to-value ratio, down payment and payment-to-income
ratio requirements tend to be more restrictive compared to our other programs.
Mercury / Delta – This program accommodates an applicant who may have had significant past non-performing
credit including recent derogatory credit. As a result, the contract interest rate and dealer acquisition fees tend to
be higher, and the loan amount, loan-to-value ratio, down payment, payment-to-income ratio and income
requirements tend to be more restrictive compared to our other programs.
Standard – This program accommodates an applicant who may have significant past non-performing credit, but
who has also exhibited some performing credit in their history. The contract interest rate and dealer acquisition
fees are comparable to the First Time Buyer and Mercury/Delta programs, but the loan amount, loan-to-value
ratio, down payment, payment-to-income ratio and income requirements are somewhat less restrictive.
Alpha – This program accommodates applicants who may have a discharged bankruptcy, but who have also
exhibited performing credit. In addition, the program allows for homeowners who may have had other significant
non-performing credit in the past. The contract interest rate and dealer acquisition fees are lower than the Standard
program, and the loan-to-value ratio, down payment, payment-to-income ratio and income requirements are
somewhat less restrictive.
Alpha Plus – This program accommodates applicants with past non-performing credit, but with a stronger
history of recent performing credit, including auto related credit, and higher incomes than the Alpha program.
Contract interest rates and dealer acquisition fees are lower than the Alpha program.
Super Alpha – This program accommodates applicants with past non-performing credit, but with a somewhat
stronger history of recent performing credit, including auto related credit, and higher incomes than the Alpha Plus
program. Contract interest rates and dealer acquisition fees are lower, and the maximum loan amount is somewhat
higher, than the Alpha Plus program.
Preferred - This program accommodates applicants with past non-performing credit, but who meet a certain
minimum FICO score threshold. Other requirements include a somewhat stronger history of recent performing
credit than the Super Alpha program. Contract interest rates and dealer acquisition fees are lower than the Super
Alpha program.
Our upper credit tier products, which are our Preferred, Super Alpha, Alpha Plus and Alpha programs, accounted
for approximately 76% of our new contract originations in 2008 and 2007, measured by aggregate amount financed.
The following table identifies the credit program, sorted from highest to lowest credit quality, under which we
purchased automobile contracts during the years ended December 31, 2008, 2007 and 2006.
(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,
4
Amount FinancedPercent (2)Amount FinancedPercent (2)Amount FinancedPercent (2)Preferred13,211$ 4.7%55,717$ 4.5%30,700$ 3.1%Super Alpha33,726 11.9%153,410 12.3%120,118 12.2%Alpha Plus50,823 18.0%215,248 17.3%178,371 18.1%Alpha 123,933 43.9%523,259 42.0%444,775 45.0%Standard15,332 5.4%116,424 9.3%85,190 8.6%Mercury / Delta25,635 9.1%104,990 8.4%77,481 7.8%First Time Buyer19,695 7.0%77,283 6.2%50,893 5.2%282,355$ 100.0%1,246,330$ 100.0%987,528$ 100.0%Contracts Purchased During the Year Ended (1)(dollars in thousands)December 31, 2008December 31, 2007December 31, 2006
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 lending money directly to consumers in January 2008, on terms similar to those that we offer through
dealers, though without a down payment requirement and with more restrictive loan-to-value and credit score
requirements. In October 2008 we suspended purchases of loans from other lenders and direct lending to
consumers. There can be no assurance as to whether or not we will recommence these programs, the extent to
which we may make such loans, or as to their future performance.
Underwriting
To be eligible for purchase by us, an automobile contract must have been originated by a dealer that has entered
into a dealer agreement to sell automobile contracts to us. The automobile contract must be secured by a first
priority lien on a new or used automobile, light truck or passenger van and must meet our underwriting criteria. In
addition, each automobile contract requires the customer to maintain physical damage insurance covering the
financed vehicle and naming us as a loss payee. We may, nonetheless, suffer a loss upon theft or physical damage of
any financed vehicle if the customer fails to maintain insurance as required by the automobile contract and is unable
to pay for repairs to or replacement of the vehicle or is otherwise unable to fulfill his or her obligations under the
automobile contract.
We believe that our underwriting criteria enable us to evaluate effectively the creditworthiness of sub-prime
customers and the adequacy of the financed vehicle as security for an automobile contract. The underwriting criteria
include standards for price, term, amount of down payment, installment payment and interest rate; mileage, age and
type of vehicle; principal amount of the automobile contract in relation to the value of the vehicle; customer income
level, employment and residence stability, credit history and debt service ability, as well as other factors.
Specifically, the underwriting guidelines for our CPS programs generally limit the maximum principal amount of a
purchased automobile contract to 115% of wholesale book value in the case of used vehicles or to 115% of the
manufacturer's invoice in the case of new vehicles, plus, in each case, sales tax, licensing and, when the customer
purchases such additional items, a service contract or a credit life or disability policy. We generally do not finance
vehicles that are more than eight model years old or have in excess of 99,999 miles. Under most of our programs,
the maximum term of a purchased contract is 72 months; a shorter maximum term may be applicable based on the
mileage and age of the vehicle. Automobile contracts with the maximum term of 72 months may be purchased if the
customer is among the more creditworthy of our obligors and the vehicle is generally not more than four model
years old and has less than 45,000 miles. Automobile contract purchase criteria are subject to change from time to
time as circumstances may warrant. In 2008 we made our contract purchase criteria more restrictive as part of our
strategy to decrease new contract purchases in order to conserve liquidity. Upon receiving the vehicle and customer
information with the customer's application, our underwriters verify the customer's employment, income, residency,
and credit information by contacting various parties noted on the customer's application, credit information bureaus
and other sources. In addition, prior to purchasing an automobile contract, we contact each customer by telephone to
confirm that the customer understands and agrees to the terms of the related automobile contract. During this
"welcome call," we also ask the customer a series of open ended questions about his application and the contract,
which may uncover potential misrepresentations.
Credit Scoring. We use proprietary scoring models to assign each automobile contract several "credit scores" at
the time the application is received from the dealer and the customer's credit information is retrieved from the credit
reporting agencies. The credit scores are based on a variety of parameters including the customer's credit history,
employment and residence stability, income, and monthly payment amount. Once a vehicle is selected by the
customer and a proposed deal structure is provided to us by the dealer, our scores will then consider the loan-to-
value ratio, payment-to-income ratio and the sales price and make of the vehicle. We have developed the credit
scores utilizing statistical risk management techniques and historical performance data from our managed portfolio.
We believe this improves our allocation of credit evaluation resources, enhances our competitiveness in the
marketplace and manages the risk inherent in the sub-prime market.
Characteristics of Contracts. All of the automobile contracts purchased by us are fully amortizing and provide for
level payments over the term of the automobile contract. All automobile contracts may be prepaid at any time
without penalty. The average original principal amount financed, under the CPS programs and in the year ended
5
December 31, 2008, was $15,094, with an average original term of 62 months and an average down payment
amount of 12.2%. Based on information contained in customer applications for this 12-month period, the retail
purchase price of the related automobiles averaged $15,335 (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 41 years of age, with approximately $43,075
in average annual household income and an average of six years history with his or her current employer. Because
our TFC programs were directed towards enlisted military personnel, contracts purchased under the TFC programs
tended to have smaller balances and the purchasers were generally younger and had 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 by the time of sale of the related automobile contract to us, and that all necessary steps
have been taken to obtain a perfected first priority security interest in each financed vehicle in favor of us under the
laws of the state in which the financed vehicle is registered.
Servicing and Collection
We currently service all automobile contracts that we own as well as those automobile contracts that are included
in portfolios that we have sold in securitizations or service for third parties. We organize our servicing activities
based on the tasks performed by our personnel. Our servicing activities consist of mailing monthly billing
statements; collecting, accounting for and posting of all payments received; responding to customer inquiries; taking
all necessary action to maintain the security interest granted in the financed vehicle or other collateral; investigating
delinquencies; communicating with the customer to obtain timely payments; repossessing and liquidating the
collateral when necessary; collecting deficiency balances; and generally monitoring each automobile contract and
the related collateral. We are typically entitled to receive a base monthly servicing fee equal to 2.5% per annum
computed as a percentage of the declining outstanding principal balance of the non-charged-off automobile contracts
in the securitization pools. The servicing fee is included in interest income for those securitization transactions that
are treated as financings.
Collection Procedures. We believe that our ability to monitor performance and collect payments owed from
sub-prime customers is primarily a function of our collection approach and support systems. We believe that if
payment problems are identified early and our collection staff works closely with customers to address these
problems, it is possible to correct many problems before they deteriorate further. To this end, we utilize pro-active
collection procedures, which include making early and frequent contact with delinquent customers; educating
customers as to the importance of maintaining good credit; and employing a consultative and customer service
approach to assist the customer in meeting his or her obligations, which includes attempting to identify the
underlying causes of delinquency and cure them whenever possible. In support of our collection activities, we
maintain a computerized collection system specifically designed to service automobile contracts with sub-prime
customers and similar consumer obligations.
We attempt to make telephonic contact with delinquent customers from one to 29 days after their monthly
payment due date, depending on our proprietary behavioral assessment of the customer’s likelihood of payment
during early stages of delinquency. Our contact priorities may be based on the customers' physical location, stage of
delinquency, size of balance or other parameters. Our collectors inquire of the customer the reason for the
delinquency and when we can expect to receive the payment. The collector will attempt to get the customer to make
an electronic payment over the phone or a promise for the payment for a time generally not to exceed one week from
the date of the call. If the customer makes such a promise, the account is routed to a promise queue and is not
contacted until the outcome of the promise is known. If the payment is made by the promise date and the account is
no longer delinquent, the account is routed out of the collection system. If the payment is not made, or if the
payment is made, but the account remains delinquent, the account is returned to the queue for subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer is uncooperative or attempts to evade
contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th and 90th day past
the customer's payment due date, but could occur sooner or later, depending on the specific circumstances. At the
time the vehicle is repossessed we will stop accruing interest on this automobile contract, and reclassify the
remaining automobile contract balance to other assets. In addition we will apply a specific reserve to this automobile
contract so that the net balance represents the estimated fair value less costs to sell.
If we elect to repossess the vehicle, we assign the task to an independent local repossession service. Such services
are licensed and/or bonded as required by law. When the vehicle is recovered, the repossessor delivers it to a
wholesale automobile auction, where it is kept until sold. Financed vehicles that have been repossessed are generally
6
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 certain contracts we have serviced for third-parties on which
we earn servicing fees only, and have no credit risk). While the broad economic weakness and increasing
unemployment over the last year has resulted in higher delinquencies and net charge-offs, the increase in the
percentage levels for 2008 is also partially attributable to the decrease in the size and the increase in the average age
of our managed portfolio.
7
(1) All amounts and percentages are based on the amount remaining to be repaid on each automobile contract,
including, for pre-computed automobile contracts, any unearned interest. The information in the table
represents the gross principal amount of all automobile contracts we purchased, including automobile
contracts we subsequently sold in securitization transactions that we continue to service. The table does not
include certain contracts we have serviced for third-parties on which we earn servicing fees only, and have no
credit risk.
(2) We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually
due payment by the following due date, which date may have been extended within limits specified in the
servicing agreements. The period of delinquency is based on the number of days payments are contractually
past due. Automobile contracts less than 31 days delinquent are not included.
(3) Amount in repossession represents the contract balance on financed vehicles that have been repossessed but not
yet liquidated. This amount is not netted with the specific reserve to arrive at the estimated asset value less costs
to sell.
(4) The aging categories shown in the tables reflect the effect of extensions.
Extensions
We may offer a customer an extension, under which the customer agrees with us to move past due payments to the
end of the automobile contract term. In such cases the customer must sign an agreement for the extension, and may
pay a fee representing partial payment of accrued interest. Our policies, and contractual arrangements for our
warehouse and securitization transactions, limit the number of extensions that may be granted. In general, a
customer may arrange for an extension no more than once every 12 months, not to exceed four extensions over the
life of the contract.
If a customer is granted such an extension, the date next due is advanced. Subsequent delinquency aging
classifications would be based on the future payment performance of the automobile contract.
8
AmountAmountDelinquency Experience (Dollars in thousands)Gross servicing portfolio (1).….145,564$1,665,036168,260$2,128,656126,574$1,568,329Period of delinquency (2).31-60 days……….………….3,73339,798.4,22748,1343,27537,32861-90 days……….………….2,37626,549.2,37027,8771,36714,90391+ days………..………………2,42427,243.2,03924,8881,03510,301Total delinquencies (2)…..……..8,53393,590.8,636100,8995,67762,532Amount in repossession (3)……4,26249,357.3,04933,4002,14824,135Total delinquencies and. amount in repossession (2)...….12,795$142,94711,685$134,2997,825$86,667Delinquencies as a percentage. of gross servicing portfolio...….5.9 %5.6 %.5.1 %4.7 %4.5 %4.0 %.Total delinquencies and. amount in repossession as a . percentage of gross servicing. portfolio……………….…8.8 %8.6 %.6.9 %6.3 %6.2 %5.5 %Extension ExperienceContracts with one extension (4)30,160$354,330.21,555$251,06712,318$128,386Contracts with two or more. extensions (4)……...……….8,63988,9884,37738,2643,18324,978Total contracts with extensions38,799$443,31825,932$289,33115,501$153,364December 31, 2008Number of ContractsDecember 31, 2006Number ofDelinquency Experience (1)ContractsNumber ofContractsAmountDecember 31, 2007
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile
contract, net of unearned income on pre-computed automobile contracts. The information in the table
represents all automobile contracts serviced by us, excluding certain contracts we have serviced for third-
parties on which we earn servicing fees only, and have no credit risk.
(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the
liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date
of charge-off, including some recoveries which have been classified as other income in the accompanying
financial statements.
Securitization of Automobile Contracts
We purchase automobile contracts with the intention of financing them on a long-term basis through
securitizations. All such securitizations have involved identification of specific automobile contracts, sale of those
automobile contracts (and associated rights) to a special purpose subsidiary, and issuance of asset−backed securities
to fund the transactions. Upon the securitization of a portfolio of automobile contracts, we retain the obligation to
service the contracts, and receive a monthly fee for doing so. We have been a regular issuer of asset-backed
securities since 1994, completing 49 securitizations totaling over $6.6 billion through December 31, 2008.
Depending on the structure of the securitization, the transaction may be treated as a sale of the automobile contracts
or as a secured financing for financial accounting purposes. From July 2003 through April 2008, we have structured
our securitizations as secured financings rather than as sales of contracts. In September 2008, we sold automobile
contracts using a securitization structure.
When structured to be treated as a secured financing, the subsidiary is consolidated and, accordingly, the
automobile contracts and the related securitization trust debt appear as assets and liabilities, respectively, on our
consolidated balance sheet. We then recognize interest income on the contracts and interest expense on the securities
issued in the securitization and record as expense a provision for probable credit losses on the contracts.
When structured to be treated as a sale, the subsidiary is not consolidated. Accordingly, the securitization removes
the sold automobile contracts from our consolidated balance sheet, the related debt does not appear as our debt, and
our consolidated balance sheet shows, as an asset, a retained residual interest in the sold automobile contracts. The
residual interest represents the discounted value of what we expect will be the excess of future collections on the
automobile contracts over principal and interest due on the asset-backed securities. That residual interest appears on
our consolidated balance sheet as "residual interest in securitizations," and the determination of its value is
dependent on our estimates of the future performance of the sold automobile contracts.
Historically, prior to a securitization transaction, we funded our automobile contract purchases primarily with
proceeds from warehouse credit facilities. As of December 31, 2007, we had $425 million in warehouse credit
capacity, in the form of two $200 million senior facilities and one $25 million subordinated facility. Both
warehouse credit facilities provided funding for automobile contracts purchased under the CPS programs, while one
facility also provided funding for automobile contracts purchased under the TFC programs. Up to 93% of the
principal balance of the automobile contracts was advanced to us under these facilities, subject to collateral tests and
certain other conditions and covenants. In April 2008, the subordinated facility expired and the subordinated lenders
were fully repaid. In November 2008, one of the two senior facilities expired and the lender was fully repaid. The
remaining warehouse facility was amended in December 2008 to eliminate further advances and to provide for
repayment from proceeds collected under the related pledged receivables, and certain other scheduled principal
reductions until its maturity in September 2009. Long-term financing for the automobile contract purchases has
historically been achieved through securitization transactions. The proceeds from such securitization transactions
were used primarily to repay the warehouse credit facilities.
In a securitization and in our warehouse credit facilities, we are required to make certain representations and
warranties, which are generally similar to the representations and warranties made by dealers in connection with our
purchase of the automobile contracts. If we breach any of our representations or warranties, we will be obligated to
repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid interest. We
9
CPS, MFN, TFC and SeaWest CombinedAverage servicing portfolio outstanding………………………….....……….$1,934,003 $1,905,162 $1,367,935 Net charge-offs as a percentage of average$servicing portfolio (2)…….………………………..……………………..$7.7 %5.3 %4.5 %(Dollars in thousands)Year Ended December 31,200820072006
may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract
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, 2008 was approximately $1.7 billion.
Competition
The automobile financing business is highly competitive. We compete with a number of national, regional and
local finance companies with operations similar to ours. In addition, competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings and loan associations, leasing
companies, credit unions providing retail loan financing and lease financing for new and used vehicles, and captive
finance companies affiliated with major automobile manufacturers such as General Motors Acceptance Corporation,
Ford Motor Credit Corporation, Chrysler Finance and Nissan Motors Acceptance Corporation. Many of our
competitors and potential competitors possess substantially greater financial, marketing, technical, personnel and
other resources than we do. Moreover, our future profitability will be directly related to the availability and cost of
our capital in relation to the availability and cost of capital to our competitors. Our competitors and potential
competitors include far larger, more established companies that have access to capital markets for unsecured
commercial paper and investment grade-rated debt instruments and to other funding sources that may be unavailable
to us. Many of these companies also have long-standing relationships with dealers and may provide other financing
to dealers, including floor plan financing for the dealers' purchase of automobiles from manufacturers, which we do
not offer.
We believe that the principal competitive factors affecting a dealer's decision to offer automobile contracts for sale
to a particular financing source are the purchase price offered for the automobile contracts, the timeliness of the
response to the dealer upon submission of the initial application, the reasonableness of the financing source's
underwriting guidelines and documentation requests, the predictability and timeliness of purchases and the financial
stability of the funding source. While we believe that we can obtain from dealers sufficient automobile contracts for
purchase at attractive prices by consistently applying reasonable underwriting criteria and making timely purchases
of qualifying automobile contracts, there can be no assurance that we will do so.
Regulation
Several federal and state consumer protection laws, including the federal Truth-In-Lending Act, the federal
Equal Credit Opportunity Act, the federal Fair Debt Collection Practices Act and the Federal Trade Commission
Act, regulate the extension of credit in consumer credit transactions. These laws mandate certain disclosures with
respect to finance charges on automobile contracts and impose certain other restrictions on dealers. In many states, a
license is required to engage in the business of purchasing automobile contracts from dealers. In addition, laws in a
number of states impose limitations on the amount of finance charges that may be charged by dealers on credit sales.
The so-called Lemon Laws enacted by various states provide certain rights to purchasers with respect to automobiles
that fail to satisfy express warranties. The application of Lemon Laws or violation of such other federal and state
laws may give rise to a claim or defense of a customer against a dealer and its assignees, including us and purchasers
of automobile contracts from us. The dealer agreement contains representations by the dealer that, as of the date of
assignment of automobile contracts, no such claims or defenses have been asserted or threatened with respect to the
automobile contracts and that all requirements of such federal and state laws have been complied with in all material
respects. Although a dealer would be obligated to repurchase automobile contracts that involve a breach of such
warranty, there can be no assurance that the dealer will have the financial resources to satisfy its repurchase
obligations. Certain of these laws also regulate our servicing activities, including our methods of collection.
Although we believe that we are currently in material compliance with applicable statutes and regulations, there
can be no assurance that we will be able to maintain such compliance. The past or future failure to comply with such
statutes and regulations could have a material adverse effect upon us. Furthermore, the adoption of additional
statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations or the
10
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, 2008, we had 681 employees. The breakdown of the employees is as follows: 8 are senior
management personnel, 529 are collections personnel, 20 are automobile contract origination personnel, 56 are
marketing personnel (36 of whom are marketing representatives), 49 are operations and systems personnel, and 19
are administrative personnel. We believe that our relations with our employees are good. We are not a party to any
collective bargaining agreement.
Item 1A.
RISK FACTORS
Our business, operating results and financial condition could be adversely affected by any of the following specific
risks. The trading price of our common stock could decline due to any of these risks and other industry risks. In
addition to the risks described below, we may encounter risks that are not currently known to us or that we currently
deem immaterial, which may also impair our business operations and the value of our common stock.
Risks Related to Our Business
We Require a Substantial Amount of Cash to Service Our Substantial Debt.
To service our existing substantial indebtedness, we require a significant amount of cash. Our ability to generate
cash depends on many factors, including our successful financial and operating performance. Our financial and
operational performance depends upon a number of factors, many of which are beyond our control. These factors
include, without limitation:
the economic and competitive conditions in the asset-backed securities market;
the performance of our current and future automobile contracts;
the performance of our residual interests from our securitizations and warehouse credit facilities;
any operating difficulties or pricing pressures we may experience;
our ability to obtain credit enhancement for our securitizations;
our ability to establish and maintain dealer relationships;
the passage of laws or regulations that affect us adversely;
our ability to compete with our competitors; and
our ability to acquire and finance automobile contracts.
Depending upon the outcome of one or more of these factors, we may not be able to generate sufficient cash flow
from operations or obtain sufficient funding to satisfy all of our obligations. We presently find that funding in the
asset-backed securities market is difficult to secure, that the credit performance of our automobile contracts has been
adversely affected by general economic conditions, and that adverse effects on performance of our automobile
contracts held in securitization pools result in an adverse effect on performance of residual interests. Such factors
may result in our being unable to pay our debts timely or as agreed. If we were unable to pay our debts, we would
be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. These alternative strategies might not be feasible at the time, might
prove inadequate or could require the prior consent of our lenders.
We Need Substantial Liquidity to Operate Our Business.
We have historically funded our operations principally through internally generated cash flows, sales of debt and
equity securities, including through securitizations and warehouse credit facilities, borrowings under senior
subordinated debt agreements and sales of subordinated notes. However, we may not be able to obtain sufficient
funding for our future operations from such sources. As of the date of this report, we have access to no active
warehouse credit facilities. If we are unable to access the capital markets or obtain other acceptable financing, our
results of operations, financial condition and cash flows would be materially and adversely affected. We require a
substantial amount of cash liquidity to operate our business. Among other things, we use such cash liquidity to:
acquire automobile contracts;
11
fund overcollateralization in warehouse credit facilities and securitizations;
pay securitization fees and expenses;
fund spread accounts in connection with securitizations;
satisfy working capital requirements and pay operating expenses;
pay taxes; and
pay interest expense.
We have to date matched our liquidity needs to our available sources of funding by reducing to nominal levels our
acquisition of new automobile contracts. There can be no assurance that we will continue to be successful with that
strategy.
Our Results of Operations Will Depend on Our Ability to Secure and Maintain Adequate Credit and
Warehouse Financing on Favorable Terms.
We have historically depended on warehouse credit facilities to finance our purchases of automobile contracts,
although we have no warehouse financing available to us at this time. Our business strategy requires that warehouse
credit facilities be available in order to purchase significant volumes of receivables.
Historically, our primary sources of day-to-day liquidity were our warehouse credit facilities, in which we sold and
contributed automobile contracts, as often as twice a week, to special-purpose subsidiaries, where they were
"warehoused" until they were securitized, at which time funds advanced under one or more warehouse credit
facilities were repaid from the proceeds of the securitizations. The special-purpose subsidiaries obtained the funds
to purchase these contracts by pledging the contracts to a trustee for the benefit of senior warehouse lenders, who
advanced funds to our special-purpose subsidiaries based on the dollar amount of the contracts pledged. Through
November 2008, we depended substantially on two warehouse credit facilities: (i) a $200 million warehouse credit
facility, which we established in November 2005 and expired by its terms in November 2008; and (ii) a $200 million
warehouse credit facility, which we established in June 2004 and which was amended in December 2008 to
eliminate future advances and to provide for repayment of the related debt from the cash collections on the related
pledged contracts, and certain other principal reductions until its maturity in September 2009.
As stated elsewhere in this report, we have observed adverse changes in the market for securitized pools of
automobile contracts. If we are unable to arrange new warehousing on acceptable terms, our results of operations,
financial condition and cash flows could be materially and adversely affected.
Our Results of Operations Will Depend on Our Ability to Securitize Our Portfolio of Automobile Contracts.
Historically we have depended upon our ability to obtain permanent financing for pools of automobile contracts by
conducting term securitization transactions. By "permanent financing" we mean financing that extends to cover the
full term during which the underlying contracts are outstanding and requires repayment as the underlying contracts
are repaid or charged off. By contrast, our warehouse credit facilities permitted us to borrow against the value of
such receivables only for limited periods of time. Our past practice and future plan has been and is to repay loans
made to us under our warehouse credit facilities with the proceeds of securitizations. There can be no assurance that
any securitization transaction will be available on terms acceptable to us, or at all. The timing of any securitization
transaction is affected by a number of factors beyond our control, any of which could cause substantial delays,
including, without limitation:
market conditions;
the approval by all parties of the terms of the securitization;
the availability of credit enhancement on acceptable terms; and
our ability to acquire a sufficient number of automobile contracts for securitization.
As stated elsewhere in this report, we have observed adverse changes in the market for securitized pools of
automobile contracts, which has made permanent financing in the form of securitization transactions difficult to
obtain and more costly than in prior periods. These changes include reduced liquidity and reduced demand for
asset-backed securities, particularly for securities carrying a financial guaranty or for securities backed by sub-prime
automobile receivables. Should we chose not to securitize automobile contracts in the future or do so on more
costly terms prevalent in current market conditions, we could expect a further material adverse effect on our results
of operations.
12
Our Results of Operations Will Depend on Cash Flows from Our Residual Interests in Our Securitization
Program and Our Warehouse Credit Facilities.
When we finance our automobile contracts through securitizations and warehouse credit facilities, we receive cash
and a residual interest in the assets financed. Those financed assets are owned by the special-purpose subsidiary that
is formed for the related securitization. This residual interest represents the right to receive the future cash flows to
be generated by the automobile contracts in excess of (i) the interest and principal paid to investors on the
indebtedness issued in connection with the financing, (ii) the costs of servicing the contracts and (iii) certain other
costs incurred in connection with completing and maintaining the securitization or warehouse credit facility. We
sometimes refer to these future cash flows as "excess spread cash flows."
Under the financial structures we have used to date in our securitizations and warehouse credit facilities, excess
spread cash flows that would otherwise be paid to the holder of the residual interest are first used to increase
overcollateralization or are retained in a spread account within the securitization trusts or the warehouse facility to
provide liquidity and credit enhancement for the related securities.
While the specific terms and mechanics vary among transactions, our securitization and warehousing agreements
generally provide that we will receive excess spread cash flows only if the amount of overcollateralization and
spread account balances have reached specified levels and/or the delinquency, defaults or net losses related to the
contracts in the automobile contract pools are below certain predetermined levels. In the event delinquencies,
defaults or net losses on contracts exceed these levels, the terms of the securitization or warehouse credit facility:
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.
We typically retain residual interests or use them as collateral to borrow cash. In any case, the future excess spread
cash flow received in respect of the residual interests is integral to the financing of our operations. The amount of
cash received from residual interests depends in large part on how well our portfolio of securitized and warehoused
automobile contracts performs. If our portfolio of securitized and warehoused automobile contracts has higher
delinquency and loss ratios than expected, then the amount of money realized from our retained residual interests, or
the amount of money we could obtain from the sale or other financing of our residual interests, would be reduced.
Such higher than expected losses have been incurred, which has had an adverse effect on our operations, financial
condition and cash flows. Should losses continue to rise, we would expect further material adverse effects on our
results of operations, financial condition and cash flows.
If We Are Unable to Obtain Credit Enhancement for Our Securitizations Upon Favorable Terms, Our
Results of Operations Would Be Impaired.
In our securitizations, we historically have utilized credit enhancement in the form of one or more financial
guaranty insurance policies issued by financial guaranty insurance companies. Each of these policies
unconditionally and irrevocably guarantees certain interest and principal payments on the senior classes of the
securities issued in our securitizations. These guarantees enabled these securities to achieve the highest credit rating
available. This form of credit enhancement reduced the costs of our securitizations relative to alternative forms of
credit enhancement available to us at the time. Such financial guaranty insurance policies are not at present available
to us. Due to significantly reduced investor demand for securities carrying such a financial guaranty, it is likely that
this form of credit enhancement, even if it were again to become available to us, would not be economic for us in the
future. As we pursue future securitizations, we may not be able to obtain:
credit enhancement in any form on terms acceptable to us, or at all; or
similar ratings for senior classes of securities to be issued in future securitizations.
Based on indications from market participants as to reduced investor comfort with credit ratings and financial
guarantees, we believe that even if we were unable to obtain such enhancements or such ratings, we would expect to
incur increased interest expense. Such increased interest expense would adversely affect our results of operations.
13
If We Are Unable to Successfully Compete With Our Competitors, Our Results of Operations May Be
Impaired.
The automobile financing business is highly competitive. We compete with a number of national, regional and
local finance companies. In addition, competitors or potential competitors include other types of financial services
companies, such as commercial banks, savings and loan associations, leasing companies, credit unions providing
retail loan financing and lease financing for new and used vehicles and captive finance companies affiliated with
major automobile manufacturers such as General Motors Acceptance Corporation and Ford Motor Credit
Corporation. Many of our competitors and potential competitors possess substantially greater financial, marketing,
technical, personnel and other resources than we do, including greater access to capital markets for unsecured
commercial paper and investment grade rated debt instruments, and to other funding sources which may be
unavailable to us. Moreover, our future profitability will be directly related to the availability and cost of our capital
relative to that of our competitors. Many of these companies also have long-standing relationships with automobile
dealers and may provide other financing to dealers, including floor plan financing for the dealers' purchases of
automobiles from manufacturers, which we do not offer. There can be no assurance that we will be able to continue
to compete successfully and, as a result, we may not be able to purchase contracts from dealers at a price acceptable
to us, which could result in reductions in our revenues or the cash flows available to us.
If Our Dealers Do Not Submit a Sufficient Number of Suitable Automobile Contracts to Us for Purchase, Our
Results of Operations May Be Impaired.
We are dependent upon establishing and maintaining relationships with a large number of unaffiliated automobile
dealers to supply us with automobile contracts. During the year ended December 31, 2008, no dealer accounted for
more than 1.0% of the contracts we purchased. The agreements we have with dealers to purchase contracts do not
require dealers to submit a minimum number of contracts for purchase. The failure of dealers to submit contracts
that meet our underwriting criteria could result in reductions in our revenues or the cash flows available to us, and,
therefore, could have an adverse effect on our results of operations.
If a Significant Number of Our Automobile Contracts Experience Defaults, Our Results of Operations May
Be Impaired.
We specialize in the purchase and servicing of contracts to finance automobile purchases by sub-prime customers,
those who have limited credit history, low income, or past credit problems. Such contracts entail a higher risk of
non-performance, higher delinquencies and higher losses than contracts with more creditworthy customers. While
we believe that our pricing of the automobile contracts and the underwriting criteria and collection methods we
employ enable us to control, to a degree, the higher risks inherent in contracts with sub-prime customers, no
assurance can be given that such pricing, criteria and methods will afford adequate protection against such risks. We
have experienced increases in the delinquency of, and credit losses on, our contracts.
If automobile contracts that we purchase and hold experience defaults to a greater extent than we have anticipated,
this could materially and adversely affect our results of operations, financial condition, cash flows and liquidity. Our
results of operations, financial condition, cash flows and liquidity, depend, to a material extent, on the performance
of automobile contracts that we purchase, warehouse and securitize. A portion of the automobile contracts acquired
by us will default or prepay. In the event of payment default, the collateral value of the vehicle securing an
automobile contract realized by us in a repossession will most likely not cover the outstanding principal balance on
that contract and the related costs of recovery. We maintain an allowance for credit losses on automobile contracts
held on our balance sheet, which reflects our estimates of probable credit losses that can be reasonably estimated for
securitizations that are accounted for as financings and warehoused contracts. If the allowance is inadequate, then
we would recognize the losses in excess of the allowance as an expense and our results of operations could be
adversely affected. In addition, under the terms of our warehouse credit facilities, we are not able to borrow against
defaulted automobile contracts, including contracts that are, at the time of default, funded under our warehouse
credit facilities, which will reduce the overcollateralization of those warehouse credit facilities and possibly reduce
the amount of cash flows available to us.
If We Lose Servicing Rights on Our Portfolio of Automobile Contracts, Our Results of Operations Would Be
Impaired.
We are entitled to receive servicing fees only while we act as servicer under the applicable sale and servicing
agreements governing our warehouse facilities and securitizations. Under such agreements, we may be terminated as
servicer upon the occurrence of certain events, including:
our failure generally to observe and perform covenants and agreements applicable to us;
certain bankruptcy events involving us; or
14
the occurrence of certain events of default under the documents governing the facilities.
We have receieved waivers regarding the potential breach of certain covenants relating to minimum net worth and
maintenance of active warehouse credit facilities. Without such waivers, certain credit enhancement providers
would have had the right to terminate us as servicer with respect to certain of outstanding securitization pools.
Although such rights have been waived, such waivers are temporary, and there can be no assurance as to their future
extension. We do, however, believe that we will obtain such future extensions because it is generally not in the
interest of any party to the securitization transaction to transfer servicing. Nevertheless, there can be no assurance as
to our belief being correct. The loss of our servicing rights could materially and adversely affect our results of
operations, financial condition and cash flows. Our results of operations, financial condition and cash flows, would
be materially and adversely affected if we were to be terminated as servicer with respect to a material portion of the
automobile contracts for which we are receiving servicing fees.
If We Lose Key Personnel, Our Results of Operations May Be Impaired.
Our senior management team averages thirteen years of service with us. Charles E. Bradley, Jr., our President and
CEO, has been our President since our formation in 1991. Our future operating results depend in significant part
upon the continued service of our key senior management personnel, none of whom is bound by an employment
agreement. Our future operating results also depend in part upon our ability to attract and retain qualified
management, technical, sales and support personnel for our operations. Competition for such personnel is intense.
We cannot assure you that we will be successful in attracting or retaining such personnel. Reductions in force
implemented in 2008 may have reduced employee loyalty, which may in turn result in decreased employee
performance. Conversely, adverse general economic conditions may have had a countervailing effect. The loss of
any key employee, the failure of any key employee to perform in his or her current position or our inability to attract
and retain skilled employees, as needed, could materially and adversely affect our results of operations, financial
condition and cash flows.
If We Fail to Comply with Regulations, Our Results of Operations May Be Impaired.
Failure to materially comply with all laws and regulations applicable to us could materially and adversely affect
our ability to operate our business. Our business is subject to numerous federal and state consumer protection laws
and regulations, which, among other things:
require us to obtain and maintain certain licenses and qualifications;
limit the interest rates, fees and other charges we are allowed to charge;
limit or prescribe certain other terms of our automobile contracts;
require specific disclosures to our customers;
define our rights to repossess and sell collateral; and
maintain safeguards designed to protect the security and confidentiality of customer information.
We believe that we are in compliance in all material respects with all such laws and regulations, and that such laws
and regulations have had no material adverse effect on our ability to operate our business. However, we may be
materially and adversely affected if we fail to comply with:
applicable laws and regulations;
changes in existing laws or regulations;
changes in the interpretation of existing laws or regulations; or
any additional laws or regulations that may be enacted in the future.
If We Experience Unfavorable Litigation Results, Our Results of Operations May Be Impaired.
Unfavorable outcomes in any of our current or future litigation proceedings could materially and adversely affect
our results of operations, financial conditions and cash flows. As a consumer finance company, we are subject to
various consumer claims and litigation seeking damages and statutory penalties based upon, among other things,
disclosure inaccuracies and wrongful repossession, which could take the form of a plaintiff's class action complaint.
We, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed
by consumers principally against dealers. We are also subject to other litigation common to the automobile industry
and businesses in general. The damages and penalties claimed by consumers and others in these types of matters can
be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and
punitive damages.
15
While we intend to vigorously defend ourselves against such proceedings, there is a chance that our results of
operations, financial condition and cash flows could be materially and adversely affected by unfavorable outcomes.
If We Experience Problems with Our Originations, Accounting or Collection Systems, Our Results of
Operations May Be Impaired.
We are dependent on our receivables originations, accounting and collection systems to service our portfolio of
automobile contracts. Such systems are vulnerable to damage or interruption from natural disasters, power loss,
telecommunication failures, terrorist attacks, computer viruses and other events. A significant number of our
systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Our systems are
also subject to break-ins, sabotage and intentional acts of vandalism by internal employees and contractors as well as
third parties. Despite any precautions we may take, such problems could result in interruptions in our services,
which could harm our reputation and financial condition. We do not carry business interruption insurance sufficient
to compensate us for losses that may result from interruptions in our service as a result of system failures. Such
systems problems could materially and adversely affect our results of operations, financial conditions and cash
flows.
We Have Substantial Indebtedness.
We have and will continue to have a substantial amount of indebtedness. At December 31, 2008, we had
approximately $1,527.3 million of debt outstanding. Such debt consisted primarily of $1,404.2 million of
securitization trust debt, and also included $9.9 million of warehouse indebtedness, $67.3 million of residual interest
financing, $20.1 million of senior secured related party debt and $25.7 million owed under a subordinated notes
program. We are also currently offering the subordinated notes to the public on a continuous basis, and such notes
have maturities that range from three months to ten years.
Our substantial indebtedness could adversely affect our financial condition by, among other things:
increasing our vulnerability to general adverse economic and industry conditions;
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,
thereby reducing amounts available for working capital, capital expenditures and other general corporate
purposes;
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 facility, term securitizations and our other outstanding debt impose significant
operating and financial restrictions on us and our subsidiaries and require us to meet certain financial tests. These
restrictions may have an adverse effect on our business activities, results of operations and financial condition.
These restrictions may also significantly limit or prohibit us from engaging in certain transactions, including the
following:
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
16
engaging in transactions with our affiliates outside the normal course of business.
These restrictions may limit our ability to obtain additional sources of capital, which may limit our ability to
generate earnings. In addition, the failure to comply with any of the covenants of one or more of our debt
agreements could cause a default under other debt agreements that may be outstanding from time to time. A default,
if not waived, could result in acceleration of the related indebtedness, in which case such debt would become
immediately due and payable. A continuing default or acceleration of one or more of our credit facilities or any
other debt agreement, would likely cause a default under other debt agreements that otherwise would not be in
default, in which case all such related indebtedness could be accelerated. If this occurs, we may not be able to repay
our debt or borrow sufficient funds to refinance our indebtedness. Even if any new financing is available, it may not
be on terms that are acceptable to us or it may not be sufficient to refinance all of our indebtedness as it becomes
due.
In addition, the transaction documents for our securitizations restrict our securitization subsidiaries from declaring
or making payment to us of (i) any dividend or other distribution on or in respect of any shares of their capital stock,
or (ii) any payment on account of the purchase, redemption, retirement or acquisition of any option, warrant or other
right to acquire shares of their capital stock unless (in each case) at the time of such declaration or payment (and
after giving effect thereto) no amount payable under any transaction document with respect to the related
securitization is then due and owing, but unpaid. These restrictions may limit our ability to receive distributions in
respect of the residual interests from our securitization facilities, which may limit our ability to generate earnings.
Risks Related to General Factors
If The Economy of All or Certain Regions of the United States Continues to Slow Down or the Current
Recession Worsens, Our Results of Operations May Be Impaired.
Our business is directly related to sales of new and used automobiles, which are sensitive to employment rates,
prevailing interest rates and other domestic economic conditions. Delinquencies, repossessions and losses generally
increase during economic slowdowns or recessions. Because of our focus on sub-prime customers, the actual rates
of delinquencies, repossessions and losses on our automobile contracts could be higher under adverse economic
conditions than those experienced in the automobile finance industry in general, particularly in the states of Texas,
California, Ohio, Florida, Pennsylvania and Louisiana, states in which our automobile contracts are geographically
concentrated. Any sustained period of economic slowdown or recession could adversely affect our ability to acquire
suitable contracts, or to securitize pools of such contracts. The timing of any economic changes is uncertain, and
weakness in the economy could have an adverse effect on our business and that of the dealers from which we
purchase contracts and result in reductions in our revenues or the cash flows available to us.
Our Results Of Operations May Be Impaired As a Result of Natural Disasters.
Our automobile contracts are geographically concentrated in the states of Texas, California, Ohio, Florida,
Pennsylvania, and Louisiana. Several of such states are particularly susceptible to natural disasters: earthquake in the
case of California, and hurricanes and flooding in the states of Florida, Texas and Louisiana. Natural disasters, in
those states or others, could cause a material number of our vehicle purchasers to lose their jobs, or could damage or
destroy vehicles that secure our automobile contracts. In either case, such events could result in our receiving
reduced collections on our automobile contracts, and could thus result in reductions in our revenues or the cash
flows available to us.
If an Increase in Interest Rates Results in a Decrease in Our Cash Flow from Excess Spread, Our Results of
Operations May Be Impaired.
Our profitability is largely determined by the difference, or "spread," between the effective interest rate received
by us on the automobile contracts that we acquire and the interest rates payable under our warehouse credit facilities
and on the asset-backed securities issued in our securitizations. Recent disruptions in the market for asset-backed
securities are likely to result in an increase in the interest rates we would pay on asset-backed securities that we may
issue in future securitizations. Although we have the ability to partially offset increases in our cost of funds by
increasing fees we charge to dealers when purchasing contracts, or by demanding higher interest rates on contracts
we purchase, there is no assurance that such actions will materially offset increases in interest we pay to finance our
managed portfolio.
Several factors affect our ability to manage interest rate risk. Specifically, we are subject to interest rate risk during
the period between when automobile contracts are purchased from dealers and when such contracts are sold and
financed in a securitization. Interest rates on our warehouse credit facilities are adjustable while the interest rates on
17
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 have historically held automobile contracts in the warehouse credit facilities for less than four months.
To mitigate, but not eliminate, the long-term risk relating to interest rates payable by us in securitizations, we have
in the past, and intend to continue to, structure some of our securitization transactions to include pre-funding
structures, whereby the amount of securities issued exceeds the amount of contracts initially sold into the
securitization. In pre-funding, the proceeds from the pre-funded portion are held in an escrow account until we sell
the additional contracts into the securitization in amounts up to the balance of the pre-funded escrow account. In pre-
funded securitizations, we effectively lock in our borrowing costs with respect to the contracts we subsequently sell
into the securitization. However, we incur an expense in pre-funded securitizations equal to the difference between
the money market yields earned on the proceeds held in escrow prior to subsequent delivery of contracts and the
interest rate paid on the securities issued in the securitization. The amount of such expense may vary. Despite these
mitigation strategies, an increase in prevailing interest rates would cause us to receive less excess spread cash flows
on automobile contracts, and thus could adversely affect our earnings and cash flows.
The Effects Of Terrorism And Military Action May Impair Our Results of Operations.
The long-term economic impact of the events of September 11, 2001, possible future terrorist attacks or other
incidents and related military action, or current or future military action by United States forces in Iraq and other
regions, could have a material adverse effect on general economic conditions, consumer confidence, and market
liquidity in the United States. No assurance can be given as to the effect of these events on the performance of our
automobile contracts. Any adverse effect resulting from these events could materially affect our results of
operations, financial condition and cash flows. In addition, activation of a substantial number of U.S. military
reservists or members of the National Guard may significantly increase the proportion of contracts whose interest
rates are reduced by the application of the Servicemembers' Civil Relief Act, which provides, generally, that an
obligor who is covered by that act may not be charged interest on the related contract in excess of 6% annually
during the period of the obligor's active duty.
Risks Related to Our Common Stock
Our Common Stock Is Thinly-Traded.
Our stock is thinly-traded, which means investors will have limited opportunities to sell their shares of common
stock in the open market. Limited trading of our common stock also contributes to more volatile price fluctuations.
Because there historically has been low trading volume in our common stock, there can be no assurance that our
stock price will not decline as additional shares are sold in the public market. As of December 31, 2008, all of our
directors and executive officers beneficially owned 3,297,165 shares of our common stock, or approximately 17%.
Our Common Stock May Be Delisted.
Our stock is trading at less than one dollar per share, which is the minimum price required for continued listing on
the Nasdaq Stock Market. Enforcement of such minimum price has been suspended since October 16, 2008.
Although there has been an extension of the suspension period (through July 20, 2009), there can be no assurance as
to whether the minimum price rule will continue to be suspended. If our common shares continue to trade at a price
below the Nasdaq minimum and the rule is reinstated, we would be required to take steps to increase the price, or
suffer delisting from the Nasdaq Stock Market. The most likely step to increase the trading price would be a reverse
split of outstanding shares, which would result in each existing shareholder receiving one new share in exchange for
some larger number of local shares.
We Do Not Intend to Pay Dividends on Our Common Stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future
earnings and do not expect to pay any dividends in the foreseeable future. See "Dividend Policy".
18
Forward-Looking Statements
Discussions of certain matters contained in this report may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among
other things, expectations of the business environment in which we operate, projections of future performance,
perceived opportunities in the market and statements regarding our mission and vision. You can generally identify
forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect,"
"anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and
achievements may differ materially from the results, performance and achievements expressed or implied in such
forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such
a difference, including the following:
changes in general economic conditions;
changes in interest rates;
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 90,000 square feet of
general office space from an unaffiliated lessor. The annual base rent is approximately $2.5 million, increasing to
approximately $2.7 million through 2016.
In March 1997, the Company established a branch collection facility in Chesapeake, Virginia. The Company
leases approximately 28,000 square feet of general office space in Chesapeake, Virginia, at a base rent that is
approximately $525,000 per year, increasing to approximately $571,000 through 2012.
The remaining two regional servicing centers occupy a total of approximately 41,000 square feet of leased space in
Maitland, Florida; and Westchester, Illinois. The termination dates of such leases range from 2011 to 2013.
Item 3. Legal Proceedings
Stanwich Litigation. CPS was for some time a defendant in a class action (the "Stanwich Case") brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the "Settlement Payments") pursuant to earlier settlements of claims, generally personal injury
claims, against unrelated defendants. Stanwich
Financial Services Corp. ("Stanwich"), which was an affiliate of the former chairman of the board of directors of
CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich defaulted on its payment obligations
to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy Code, in the federal bankruptcy court
in Connecticut. At December 31, 2004, CPS was a defendant only in a cross-claim brought by one of the other
defendants in the case, Bankers Trust Company, which asserted a claim of contractual indemnity against CPS.
By February 2005, CPS had settled all claims brought against it in the Stanwich Case.
19
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for indemnity
against the Company in a separate action, which is now pending in federal district court in Rhode Island. The
Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has filed a separate
action against Mr. Pardee's Rhode Island attorneys, in the same court. The litigation between Mr. Pardee and CPS is
stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.
CPS has reached an agreement in principle with the representative of creditors in the Stanwich bankruptcy to
resolve the adversary action. Under the agreement in principle, CPS was to pay the bankruptcy estate $625,000 and
abandon its claims against the estate, while the estate would abandon its adversary action against Mr. Pardee. The
bankruptcy court has rejected that proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon appeal, CPS would expect that the agreement
would result in (i) limitation of its exposure to Mr. Pardee to no more than some portion of his attorneys fees
incurred and (ii) stays in Rhode Island being lifted, causing those cases to become active again. CPS is unable to
predict whether the ruling of the bankruptcy court will be sustained or overturned on appeal.
The reader should consider that an adverse judgment against CPS in the Rhode Island case for indemnification, if
in an amount materially in excess of any liability already recorded in respect thereof, could have a material adverse
effect on our financial condition.
Other Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance
activities and practices, both continuing and discontinued. We believe that there are substantive legal defenses to
such claims, and intend to defend them vigorously. There can be no assurance, however, as to their outcomes. We
have recorded a liability as of December 31, 2008 that we believe represents a sufficient allowance for legal
contingencies. Any adverse judgment against us, if in an amount materially in excess of the recorded liability, could
have a material adverse effect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our shareholders during the fourth quarter of 2008.
Item 4A. Executive Officers of the Registrant
Charles E. Bradley, Jr., 49, has been our President and a director since our formation in March 1991, and was
elected Chairman of the Board of Directors in July 2001. In January 1992, Mr. Bradley was appointed
Chief Executive Officer. From April 1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr. Bradley, Jr. was an associate of
The Harding Group, a private investment banking firm. Mr. Bradley does not currently serve on the board of
directors of any other publicly-traded companies.
Mark A. Creatura, 49, has been Senior Vice President – General Counsel since October 1996. From October 1993
through October 1996, he was Vice President and General Counsel at Urethane Technologies, Inc., a polyurethane
chemicals formulator. Mr. Creatura was previously engaged in the private practice of law with the Los Angeles law
firm of Troy & Gould Professional Corporation, from October 1985 through October 1993.
Jeffrey P. Fritz, 49, has been Senior Vice President - Chief Financial Officer since April 2006. He was Senior
Vice President - Accounting from August 2004 through March 2006. He served as a consultant to us from May 2004
to August 2004. Previously, he was the Chief Financial Officer of SeaWest Financial Corp. from February 2003 to
May 2004, and the Chief Financial Officer of AFCO Auto Finance from April 2002 to February 2003. He practiced
public accounting with Glenn M. Gelman & Associates from March 2001 to April 2002 and was Chief Financial
Officer of Credit Services Group, Inc. from May 1999 to November 2000. He previously served as our
Chief Financial Officer from our inception through May 1999.
Curtis K. Powell, 52, has been Senior Vice President – Contract Origination since June 2001. Previously, he was
our Senior Vice President – Marketing, from April 1995. He joined us in January 1993 as an independent marketing
representative until being appointed Regional Vice President of Marketing for Southern California in
November 1994. From June 1985 through January 1993, Mr. Powell was in the retail automobile sales and leasing
business.
Robert E. Riedl, 45, has been Senior Vice President - Chief Investment Officer since April 2006. Mr. Riedl was
Senior Vice President - Chief Financial Officer from August 2003 until assuming his current position. Mr. Riedl
joined the Company as Senior Vice President - Risk Management in January 2003. Previously, Mr. Riedl was a
20
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, 41, has been Senior Vice President - Servicing since May 2005, and prior to that was
Senior Vice President - Asset Recovery since January 2003. He joined us in January 1995 as a loan officer, held a
series of successively more responsible positions, and was promoted to Vice President - Asset Recovery in
June 1999. Mr. Terry was previously a branch manager with Norwest Financial from 1990 to October 1994.
Teri L. Clements, 46, has been the Senior Vice President of Originations since April 2008. Prior to that, she held
the position of Vice President of Originations since August 1998. She joined the Company in June 1991 as an
Operations Specialist. Previously, Ms. Clements held an administrative position at Greco & Associates.
Jayne E. Holland, 47, has been the Senior Vice President of Operations since April 2008. Prior to that, she held the
position of Vice President of Operations since June 1999 and has been with the company since 1993. Ms. Holland
was previously the Assistant Vice President of Operations for Far Western Bank from 1986 through 1990, and has
been in the auto finance industry since 1981.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
The Company’s Common Stock is traded on the Nasdaq Global Market, under the symbol "CPSS." The following
table sets forth the high and low sale prices as reported by Nasdaq for our Common Stock for the periods shown.
As of March 25, 2009, there were 60 holders of record of the Company’s Common Stock. To date, we have not
declared or paid any dividends on our Common Stock. The payment of future dividends, if any, on our Common Stock
is within the discretion of the Board of Directors and will depend upon our income, capital requirements and financial
condition, and other relevant factors. The instruments governing our outstanding debt place certain restrictions on the
payment of dividends. We do not intend to declare any dividends on our Common Stock in the foreseeable future, but
instead intend to retain any cash flow for use in our operations.
The table below presents information regarding outstanding options to purchase our Common Stock as of December
31, 2008:
22
HighLowJanuary 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……………………………….…………………….6.203.00January 1 - March 31, 2008…………………………………….…………………….3.612.11April 1 - June 30, 2008………………………………………….…………………...3.181.13July 1 - September 30, 2008…………………………………...…………………….2.851.22October 1 - December 31, 2008……………………………….…………………….2.580.37Number 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…………..$10,940,308 2.99$ 2,435,000 Equity compensation plans not $approved by security holders…………..$- - - Total10,940,308 2.99$ 2,435,000
Issuer Purchases of Equity Securities in the Fourth Quarter
(1) Each monthly period is the calendar month.
(2) Through December 31, 2008, our board of directors had authorized the purchase of up to $32.5 million of our outstanding
securities, which program was first announced in our annual report for the year 2002, filed on March 26, 2003. All purchases
described in the table above were under the plan announced in March 2003, which has no fixed expiration date.
Item 6. Selected Financial Data
The following table presents our selected consolidated financial data and operating data as of and for the dates
indicated. The data under the captions "Statement of Operations Data" and "Balance Sheet Data" have been derived
from our audited and unaudited consolidated financial statements. The remainder is derived from other records of
ours.
You should read the selected consolidated financial data together with "Management’s Discussion and Analysis of
Financial Condition and Results of Operations" and our audited and unaudited financial statements and notes thereto
that are included in this report.
23
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 2008………….$113,315 1.99$ 113,315 2,406,297$ November 2008………….$65,729 0.92 65,729 2,345,790 December 2008………….$75,923 0.81 75,923 2,284,542 Total254,967 1.36$ 254,967
(1) The impairment loss was related to our analysis and estimate of the expected ultimate performance of our
previously securitized pools that were held by our non-consolidated subsidiaries and the residual interest in
securitizations. The impairment loss was a result of the actual net loss and prepayment rates exceeding our
previous estimates for the automobile contracts held by our non-consolidated subsidiaries.
(2) Income (loss) before income tax benefit divided by weighted average shares outstanding-basic. Included for
illustrative purposes because some of the periods presented include significant income tax benefits while other
periods have neither income tax benefit nor expense.
(3) Income (loss) before income tax benefit divided by weighted average shares outstanding-diluted. Included for
illustrative purposes because some of the periods presented include significant income tax benefits while other
periods have neither income tax benefit nor expense.
24
(dollars in thousands, except per share data)20082007200620052004Statement of Operations DataRevenues: Interest income ………………………………………351,551$ 370,265$ 263,566$ 171,834$ 105,818$ Servicing fees …………………………………………2,064 1,218 2,894 6,647 12,480 Other income …………………………………………14,796 23,067 12,403 15,216 14,394 Total revenues ………………………………………368,411 394,550 278,863 193,697 132,692 Expenses: Employee costs ………………………………………..48,874 46,716 38,483 40,384 38,173 General and administrative ……………………………44,368 47,416 42,011 39,285 33,936 Interest expense ……………………………………….156,253 139,189 93,112 51,669 32,147 Provision for credit losses ……………………………. 148,408 137,272 92,057 58,987 32,574 Loss on sale of receivables ……………………………. 13,963 Impairment loss on residual assets (1) ……………….- - - - 11,750 Total expenses ……………………………………..411,866 370,593 265,663 190,325 148,580 Income (loss) before income tax expense (benefit) …………………(43,455) 23,957 13,200 3,372 (15,888) Income tax expense (benefit) ………………………………………..(17,364) 10,099 (26,355) - - Net income (loss) ………………………………………….(26,091)$ 13,858$ 39,555$ 3,372$ (15,888)$ Earnings (loss) per share-basic ……………………………(1.36)$ 0.66$ 1.82$ 0.16$ (0.75)$ Earnings (loss) per share-diluted …………………………(1.36)$ 0.61$ 1.64$ 0.14$ (0.75)$ Pre-tax income (loss) per share-basic (2) ………………..(2.26)$ 1.15$ 0.61$ 0.16$ (0.75)$ Pre-tax income (loss) per share-diluted (3) ………………(2.26)$ 1.06$ 0.55$ 0.14$ (0.75)$ Weighted average shares outstanding-basic …………….19,230 20,880 21,759 21,627 21,111 Weighted average shares outstanding-diluted …………..19,230 22,595 24,052 23,513 21,111 Balance Sheet DataTotal assets ……………………………………………….1,638,807$ 2,282,813$ 1,728,594$ 1,155,144$ 766,599$ Cash and cash equivalents ………………………………..22,084 20,880 14,215 17,789 14,366 Restricted cash and equivalents ………………………….153,479 170,341 193,001 157,662 125,113 Finance receivables, net …………………………………..1,339,307 1,967,866 1,401,414 913,576 550,191 Residual interest in securitizations ……………………….3,582 2,274 13,795 25,220 50,430 Warehouse lines of credit …………………………………9,919 235,925 72,950 35,350 34,279 Residual interest financing ………………………………..67,300 70,000 31,378 43,745 22,204 Securitization trust debt …………………………………..1,404,211 1,798,302 1,442,995 924,026 542,815 Long-term debt …………………………………………….45,826 28,134 38,574 58,655 74,829 Shareholders' equity ……………………………………….89,849 114,355 111,512 73,589 69,920 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 acquisition
of certain assets of SeaWest in 2004.
(2) Receivables related to the SeaWest third party portfolio, on which we earn only a servicing fee.
(3) Excludes receivables related to the SeaWest third party portfolio.
(4) Total expenses excluding provision for credit losses, interest expense, loss on sale of receivables and impairment
loss on residual assets.
(5) For further information regarding delinquencies and the managed portfolio, see the table captioned "Delinquency
Experience," in Item 1, Part I of this report and the notes to that table.
(6) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the
liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of
the charge-off, including some recoveries which have been classified as other income in the accompanying
financial statements. For further information regarding charge-offs, see the table captioned "Net Charge-Off
Experience," in Item I, Part I of this report and the notes to that table.
25
(dollars in thousands, except per share data)20082007200620052004Contract Purchases/SecuritizationsAutomobile contract purchases………………………….296,817$ 1,282,311$ 1,019,018$ 691,252$ 447,232$ Automobile contract acquisitions (1)…………………….- - - - 74,901 Automobile contracts securitized - structured as sales………………………………………………….198,662 - - - - Automobile contracts securitized - structured as secured financings…………………………………..310,360 1,118,097 957,681 674,421 479,369 Managed Portfolio DataContracts held by consolidated subsidiaries…………….1,477,810$ 2,125,755$ 1,527,285$ 1,000,597$ 619,794$ Contracts held by non-consolidated subsidiaries…………..186,233 - 34,850 103,130 233,621 SeaWest third party portfolio (2)…………………………79 422 3,770 18,018 53,463 Total managed portfolio……………………………………1,664,122$ 2,126,177$ 1,565,905$ 1,121,745$ 906,878$ Average managed portfolio……………………………….1,934,003 1,906,605 1,376,781 997,697 861,262 Weighted average fixed effective interest rate (total managed portfolio) (3)………………………..18.0%18.2%18.5%18.6%19.2%Core operating expense (% of average managed portfolio) (4)…………………4.8%4.9%5.8%8.0%8.4%Allowance for loan losses………………………………..78,036$ 100,138$ 79,380$ 57,728$ 42,615$ Allowance for loan losses (% of total contracts held by consolidated subsidiaries)………………………5.3%4.7%5.2%5.8%6.9%Total delinquencies (3) (5)……………………………………..5.6%4.7%4.0%3.8%4.0%Total delinquencies and repossessions (3) (5)…………………………….8.6%6.3%5.5%5.0%5.6%Net charge-offs (3) (6)……………………………………7.7%5.3%4.5%5.3%7.8%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 retail automobile contracts originated
primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States
in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract
purchases, we provide indirect financing to the customers of dealers who have limited credit histories, low incomes
or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for
dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources,
such as commercial banks, credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also (i)
acquired installment purchase contracts in three merger and acquisition transactions, (ii) purchased immaterial
amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) originated ourselves an immaterial
amount of vehicle purchase money loans by lending money directly to consumers. In this report, we refer to all of
such contracts and loans as "automobile contracts."
We were incorporated and began our operations in March 1991. From inception through December 31, 2008, we
have purchased a total of approximately $8.7 billion of automobile contracts from dealers. In addition, we obtained
a total of approximately $605.0 million of automobile contracts in mergers and acquisitions we made in 2002, 2003
and 2004. During 2008, unlike recent prior years, our managed portfolio decreased from the previous year due to
our strategy of decreasing contract purchases to conserve our liquidity in response to adverse economic conditions
as discussed further below. Our total managed portfolio, net of unearned interest on pre-computed automobile
contracts, was approximately $1,664.1 million at December 31, 2008 compared to $2,162.2 million at December 31,
2007, $1,565.9 million as of December 31, 2006 and $1,122.0 million as of December 31, 2005.
We are headquartered in Irvine, California, where most operational and administrative functions are centralized.
All credit and underwriting functions are performed in our California headquarters, and we service our automobile
contracts from our California headquarters and from three servicing branches in Virginia, Florida and Illinois.
We purchase contracts in our own name (―CPS‖) and, until July 2008, also in the name of our wholly-owned
subsidiary, TFC. Programs marketed under the CPS name are intended to serve a wide range of sub-prime
customers, primarily through franchised new car dealers. Our TFC program served vehicle purchasers enlisted in
the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we suspended contract
purchases under our TFC program.
We purchase automobile contracts with the intention of financing them on a long-term basis through
securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose
entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.
Depending on the structure of the securitization, the transaction may be treated, for financial accounting purposes, as
a sale of the contracts or as a secured financing.
Securitization and Warehouse Credit Facilities
Generally
Throughout the periods for which information is presented in this report, we have purchased automobile contracts
with the intention of financing them on a long-term basis through securitizations, and on an interim basis through
our warehouse credit facilities. All such financings have involved identification of specific automobile contracts,
sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of
asset-backed securities to fund the transactions. Depending on the structure, these transactions may be accounted for
under generally accepted accounting principles as sales of the automobile contracts or as secured financings.
When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with
us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on
our consolidated balance sheet. We then periodically: (i) recognize interest and fee income on the contracts,
(ii) recognize interest expense on the securities issued in the transaction, and (iii) record as expense a provision for
credit losses on the contracts. From July 2003 through April 2008, all of our securitizations were structured in this
manner. In September 2008, we securitized automobile contracts in a transaction that was in substance a sale, that
26
was treated as a sale for accounting purposes, and in which we retained a residual interest in the sold automobile
contracts.
When structured to be treated as a sale for accounting purposes, the assets and liabilities of the special-purpose
subsidiary are not consolidated with us. Accordingly, the transaction removes the sold automobile contracts from
our consolidated balance sheet, the related debt does not appear as our debt, and our consolidated balance sheet
shows, as an asset, a retained residual interest in the sold automobile contracts. The residual interest represents the
discounted value of what we expect will be the excess of future collections on the automobile contracts over
principal and interest due on the asset-backed securities. That residual interest appears on our consolidated balance
sheet as "residual interest in securitizations," and the determination of its value is dependent on our estimates of the
future performance of the sold automobile contracts. Of our managed portfolio outstanding at December 31, 2008,
only our September 2008 securitization was structured to be treated as a sale for accounting purposes.
Credit Risk Retained
Whether a sale of automobile contracts in connection with a securitization or warehouse credit facility is treated as
a secured financing or as a sale for financial accounting purposes, the related special-purpose subsidiary may be
unable to release excess cash to us if the credit performance of the related automobile contracts falls short of
pre-determined standards. Such releases represent a material portion of the cash that we use to fund our operations.
An unexpected deterioration in the performance of such automobile contracts could therefore have a material
adverse effect on both our liquidity and our results of operations, regardless of whether such automobile contracts
are treated for financial accounting purposes as having been sold or as having been financed. For estimation of the
magnitude of such risk, it may be appropriate to look to the size of our "managed portfolio," which represents both
financed and sold automobile contracts as to which such credit risk is retained. Our managed portfolio as of
December 31, 2008 was approximately $1,664.1 million.
Critical Accounting Policies
We believe that our accounting policies related to (a) Allowance for Finance Credit Losses, (b) Amortization of
Deferred Originations Costs and Acquisition Fees, (c) Residual Interest in Securitizations and Gain on Sale of
Automobile Contracts and (d) Income Taxes are the most critical to understanding and evaluating our reported
financial results. Such policies are described below.
Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, we use a loss
allowance methodology commonly referred to as "static pooling," which stratifies our finance receivable portfolio
into separately identified pools based on the period of origination. Using analytical and formula driven techniques,
we estimate an allowance for finance credit losses, which we believe is adequate for probable credit losses that can
be reasonably estimated in our portfolio of automobile contracts. Provision for losses is charged to our consolidated
statement of operations. Net losses incurred on finance receivables are charged to the allowance. We evaluate the
adequacy of the allowance by examining current delinquencies, the characteristics of the portfolio, prospective
liquidation values of the underlying collateral and general economic and market conditions. As circumstances
change, our level of provisioning and/or allowance may change as well. We observed deterioration in performance
of automobile contracts held in our portfolio in 2008, which we attribute to a general recession that began in
December 2007, and which appears to be continuing through the date of this report. Accordingly, we increased our
provision for credit losses in the fourth quarter of 2008.
Amortization of Deferred Originations Costs and Acquisition Fees
Upon purchase of a contract from a dealer, we generally either charge or advance the dealer an acquisition fee. In
addition, we incur certain direct costs associated with originations of our contracts. All such acquisition fees and
direct costs are applied to the carrying value of finance receivables and are accreted into earnings as an adjustment
to the yield over the estimated life of the contract using the interest method, in accordance with Statement of
Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases.
Term Securitizations
Our term securitization structure has generally been as follows:
We sell automobile contracts we acquire to a wholly-owned special purpose subsidiary, which has been
established for the limited purpose of buying and reselling our automobile contracts. The special-purpose subsidiary
27
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. Historically we have purchased
external credit enhancement for most of our term securitizations 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 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.
Our September 2008 securitization was in substance a sale of the underlying receivables, and is treated as a sale
for financial accounting purposes. It differs from those treated as secured financings in that the trust to which our
special-purpose subsidiaries sold the automobile contracts met the definition of a "qualified special-purpose entity"
under Statement of Financial Accounting Standards No. 140 ("SFAS 140"). As a result, assets and liabilities of those
trusts are not consolidated into our consolidated balance sheet.
Historically, our warehouse credit facility structures were similar to the above, except that (i) our special-purpose
subsidiaries that purchased the automobile contracts pledged the automobile contracts to secure promissory notes
that they issued, (ii) no increase in the required amount of internal credit enhancement was contemplated, and (iii)
we did not purchase financial guaranty insurance. Through November 2008, we depended substantially on two
warehouse credit facilities: (i) a $200 million warehouse credit facility, which we established in November 2005 and
expired by its terms in November 2008; and (ii) a $200 million warehouse credit facility, which we established in
June 2004 and which was amended in December 2008 to eliminate future advances and to provide for repayment of
the related notes from the cash collections on the underlying pledged contracts, and certain other principal
reductions until its maturity in September 2009.
Upon each sale of automobile contracts in a transaction structured as a secured financing for financial accounting
purposes, whether a term securitization or a warehouse financing, we retain on our consolidated balance sheet the
related automobile contracts as assets and record the asset-backed notes issued in the transaction as indebtedness.
Under the September 2008 securitization and other term securitizations completed prior to July 2003 that were
structured as sales for financial accounting purposes, we removed from our consolidated balance sheet the
automobile contracts sold and added to our consolidated balance sheet (i) the cash received, if any, and (ii) the
estimated fair value of the ownership interest that we retained in the automobile contracts sold in the transaction.
That retained or residual interest consisted of (a) the cash held in the spread account, if any, (b) overcollateralization,
if any, (c) asset-backed securities retained, if any, and (d) receivables from the trust, which include the net interest
receivables. Net interest receivables represent the estimated discounted cash flows to be received from the trust in
the future, net of principal and interest payable with respect to the asset-backed notes, the premium paid to the
insurance company, if any, and certain other expenses. The excess of the cash received and the assets we retained
over the carrying value of the automobile contracts sold, less transaction costs, equaled the net gain on sale of
automobile contracts we recorded.
We receive periodic base servicing fees for the servicing and collection of the automobile contracts. (Under our
securitization structures treated as secured financings for financial accounting purposes, such servicing fees are
28
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 asset-backed 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 on the senior asset-backed
notes exceeds the amount collected during the collection period, the shortfall is withdrawn from the spread account,
if any. If the cash collected during the period exceeds the amount necessary for the above allocations plus required
principal payments on the subordinated asset-backed notes, and there is no shortfall in the related spread account or
the required overcollateralization level, the excess is released to us. If the spread account and overcollateralization is
not at the required level, then the excess cash collected is retained in the trust until the specified level is achieved.
Although spread account balances are held by the trusts on behalf of our special-purpose subsidiaries as the owner
of the residual interests (in the case of securitization transactions structured as sales for financial accounting
purposes) or the trusts (in the case of securitization transactions structured as secured financings for financial
accounting purposes), we are restricted in use of the cash in the spread accounts. Cash held in the various spread
accounts is invested in high quality, liquid investment securities, as specified in the securitization agreements. The
interest rate payable on the automobile contracts is significantly greater than the interest rate on the asset-backed
notes. As a result, the residual interests described above historically have been a significant asset of ours.
In all of our term securitizations and warehouse credit facilities, whether treated as secured financings or as sales,
we have sold the automobile contracts (through a subsidiary) to the securitization entity. The difference between the
two structures is that in securitizations that are treated as secured financings we report the assets and liabilities of the
securitization trust on our consolidated balance sheet. Under both structures, recourse to us by holders of the asset-
backed securities and by the trust, for failure of the automobile contract obligors to make payments on a timely
basis, is limited to the automobile contracts included in the securitizations or warehouse credit facilities, the spread
accounts and our retained interests in the respective trusts.
Since the third quarter of 2003, we have conducted 24 term securitizations. Of these 24, 19 were periodic
(generally quarterly) securitizations of automobile contracts that we purchased from automobile dealers under our
regular programs. In addition, in March 2004 and November 2005, we completed securitizations of our retained
interests in other securitizations that we and our affiliates previously sponsored. The debt from the March 2004
transaction was repaid in August 2005, and the debt from the November 2005 transaction was repaid in May 2007.
Also, in June 2004, we completed a securitization of automobile contracts purchased in the SeaWest asset
acquisition and under our TFC programs. Further, in December 2005 and May 2007 we completed securitizations
that included automobile contracts purchased under the TFC programs, automobile contracts purchased under the
CPS programs and automobile contracts we repurchased upon termination of prior securitizations of our MFN and
TFC subsidiaries. Since July 2003 all such securitizations have been structured as secured financings, except that
our September 2008 securitization was in substance a sale of the underlying receivables, and is treated as a sale for
financial accounting purposes
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between
the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date. Deferred tax assets are recognized subject to
management’s judgment that realization is more likely than not. Although realization is not assured, we believe that
the realization of the recognized net deferred tax asset of $52.7 million is more likely than not based on expectations
as to future taxable income in the jurisdictions in which we operate and available tax planning strategies that could
be implemented if necessary to prevent a carryforward from expiring. Our net deferred tax asset of $52.7 million is
net of a valuation allowance of $1.0 million and consists of approximately $48.8 million of net U.S. federal deferred
tax assets and $3.9 million of net state deferred tax assets. The major components of the deferred tax asset are $27.4
million in net operating loss carryforwards and built in losses and $22.2 million in net deductions which have not yet
29
been taken on a tax return. We estimate that we would need to generate approximately $127.5 million of taxable
income during the applicable carryforward periods to realize fully our federal and state deferred tax assets.
As a result of the losses incurred in 2008, we are in a three-year cumulative pretax loss position at December 31,
2008. A cumulative loss position is considered significant negative evidence in assessing the realizability of a
deferred tax asset. However, we have concluded that there is sufficient positive evidence to overcome this negative
evidence. First, we recognized a $14.0 million loss on the September 2008 securitization that was structured as a
sale for financial accounting purposes. Since our inception in 1991, we have completed 49 securitizations of
approximately $6.6 billion in contracts and have never recognized a loss until the September 2008 securitization.
We view this securitization as an anomaly created by the unusual and adverse market conditions at the time.
Without the $14.0 million loss on the September 2008 securitization, we would not be in a three-year cumulative
loss position at December 31, 2008. Moreover, from 2003 through 2007, we generated approximately $107.0
million in taxable income. Finally, we forecast sufficient taxable income in the carryforward period to fully realize
our deferred tax assets, exclusive of tax planning strategies, even under stressed scenarios.
Nevertheless, the amount of the deferred tax asset considered realizable, however, could be significantly reduced
in the future if adverse developments cause us to lower our estimates of future taxable income during the
carryforward period. Based upon the foregoing discussion, as well as tax planning opportunities and other factors
discussed below, we have concluded that the U.S. and state net operating loss carryforward periods provide enough
time to utilize the deferred tax assets pertaining to the existing net operating loss carryforwards and any net
operating loss that would be created by the reversal of the future net deductions which have not yet been taken on a
tax return. Regarding the estimate of future taxable income, we have projected pretax earnings based upon our core
business that we intend to conduct going forward. Our core business has produced strong earnings in the past, even
with intermittent loss periods resulting from economic cycles not unlike, although not as severe, as the current
economic downturn. We have already taken steps to reduce our cost structure and have adjusted the contract interest
rates and purchase prices applicable to our purchases of automobile contracts from dealers. We appear to be able to
increase our acquisition fees and reduce our purchase prices because of lessened competition for our services.
Taking these items into account, we project generating sufficient pretax earnings within the carryforward period to
realize our deferred tax assets. We have also examined tax planning strategies available to us in accordance with
SFAS 109 which would be employed, if necessary, to prevent a carryforward from expiring. Our projection of
sufficient earnings is a forward-looking statement, and there can be no assurance that our projections of such
earnings will be correct. Factors discussed under "Risk Factors," and in particular under the subheading "Risk
Factors -- Forward-Looking Statements" may affect whether such projections prove to be correct.
In June 2006, the FASB issued Financial Interpretation No. 48 (―FIN 48‖), ―Accounting for Uncertainty in Income
Taxes,‖ which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, ―Accounting for Income Taxes.‖ FIN 48 provides that a tax benefit from an
uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized
upon the adoption of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we
recognized an increase of approximately $1.1 million in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007, balance of retained earnings.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations. Accrued interest and penalties are included within the related
tax liability line in the consolidated balance sheet.
Uncertainty of Capital Markets and General Economic Conditions
Historically, we have depended upon the availability of warehouse credit facilities and access to long-term
financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we
have completed 49 term securitizations of approximately $6.6 billion in contracts. We conducted four term
securitizations in 2006, four in 2007, and two in 2008. From July 2003 through April 2008 all of our securitizations
were structured as secured financings. The second of our two securitization transactions in 2008 (completed in
September 2008) was in substance a sale of the related contracts, and is treated as a sale for financial accounting
purposes.
30
Since the fourth quarter of 2007, we have observed unprecedented adverse changes in the market for securitized
pools of automobile contracts. These changes include reduced liquidity, and reduced demand for asset-backed
securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime automobile
receivables. Moreover, many of the firms that previously provided financial guarantees, which were an integral part
of our securitizations, are no longer offering such guarantees. As of December 31, 2008, we have no available
warehouse credit facilities and no immediate plans to complete a term securitization. The adverse changes that have
taken place in the market over the last 18 months have caused us to seek to conserve liquidity by reducing our
purchases of automobile contracts to nominal levels. If the current adverse circumstances that have affected the
capital markets should continue or worsen, we may curtail further or cease our purchases of new automobile
contracts, which could lead to a material adverse effect on our operations.
Current economic conditions have negatively affected many aspects of our industry. First, as stated above, there is
little demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile
receivables. Second, lenders who previously provided short term warehouse financing for sub-prime automobile
finance companies such as ours are reluctant to provide such short-term financing due to the uncertainty regarding
the prospects of obtaining long-term financing through the issuance of asset-backed securities. In addition, many
capital market participants such as investment banks, financial guaranty providers and institutional investors who
previously played a role in the sub-prime auto finance industry have withdrawn from the industry, or in some cases,
have ceased to do business. Finally, the broad economic weakness and increasing unemployment has made many of
the obligors under our receivables less willing or able to pay, resulting in higher delinquency, charge-offs and losses.
Each of these factors has adversely affected our results of operations. Should existing economic conditions worsen,
both our ability to purchase new contracts and the performance of our existing managed portfolio may be impaired,
which, in turn, could have a further material adverse effect on our results of operations.
Results of Operations
Comparison of Operating Results for the Year Ended December 31, 2008 with the Year Ended December 31, 2007
Revenues. During the year ended December 31, 2008, revenues were $368.4 million, a decrease of $26.1 million,
or 6.6%, from the prior year revenue of $394.6 million. The primary reason for the decrease in revenues is a
decrease in interest income. Interest income for the year ended December 31, 2008 decreased $18.7 million, or
5.1%, to $351.6 million from $370.3 million in the prior year. The primary reason for the decrease in interest
income is the decrease in finance receivables held by consolidated subsidiaries. At December 31, 2008 the
aggregate outstanding balance of finance receivables held by consolidated subsidiaries was $1,477.8 million
compared to $2,125.7 million at December 31, 2007, resulting in a decrease of $12.3 million in interest income. We
also experienced decreases in interest earned on cash deposits (including restricted cash deposits) of $4.7 million,
and a decrease in interest income on our residual interest in securitizations of $1.7 million.
Servicing fees totaling $2.1 million in the year ended December 31, 2008 increased $845,000, or 69.3%, from $1.2
million in the prior year. The increase in servicing fees is the result our September 2008 securitization that was
structured as a sale for financial accounting purposes and on which we earn a base servicing fee. During 2008 we
also earned base servicing fees on the SeaWest Third Party Portfolio, which has declined to an immaterial amount as
of December 31, 2008. As of December 31, 2008 and 2007, our managed portfolio owned by consolidated vs. non-
consolidated subsidiaries and other third parties was as follows:
At December 31, 2008, we were generating income and fees on a managed portfolio with an outstanding principal
balance of $1,664.1 million compared to a managed portfolio with an outstanding principal balance of $2,126.2
million as of December 31, 2007. At December 31, 2008 and 2007, the managed portfolio composition was as
follows:
31
%%Total Managed Portfolio Owned by Consolidated Subsidiaries……..……….$1,477.8 88.8%$2,125.8 100.0%Owned by Non-Consolidated Subsidiaries…….$186.2 11.2%- 0.0%SeaWest Third Party Portfolio……………...……………$0.1 0.0%0.4 0.0%Total……………………………….…………………….$1,664.1 100.0%$2,126.2 100.0%Amount($ in millions)AmountDecember 31, 2007December 31, 2008
Other income decreased $8.3 million, or 35.9%, to $14.8 million in the year ended December 31, 2008 from
$23.1 million during the prior year. The year-over-year decrease is the result of a variety of factors. Current year
other income includes $178,000 resulting from an increase in the carrying value of our residual interest in
securitizations, compared to $6.2 million of such increases in 2007. The carrying value was increased primarily as a
result of the underlying receivables having incurred fewer losses than we had previously estimated, which in turn
resulted in actual cash flows exceeding estimated cash flows. The prior year period also included proceeds of $1.8
million from the sale of certain charged off receivables acquired in the MFN, TFC and SeaWest acquisitions. There
was no sale of charged off receivables in 2008. In addition, in 2007 we realized $1.0 million in recoveries on a note
payable by a third party that we had previously written off. Decreases to other income were somewhat offset by
increases of $1.7 million in convenience fees charged to our customers for web-based and other electronic
payments.
Expenses. Our operating expenses consist primarily of provisions for credit losses, interest expense, employee
costs and general and administrative expenses. Provisions for credit losses and interest expense are significantly
affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of
finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are
incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins
and net income include changes in the automobile and automobile finance market environments, and
macroeconomic factors such as interest rates and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to
the accounting treatment of outstanding warrants and stock options, and are one of our most significant operating
expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications
and automobile contracts processed and serviced.
Other operating expenses consist primarily of facilities expenses, telephone and other communication services,
credit services, computer services, marketing and advertising expenses, and depreciation and amortization.
Total operating expenses were $411.9 million for the year ended December 31, 2008, compared to $370.6 million
for the prior year, an increase of $41.3 million, or 11.1%. The increase is primarily due to increases in provision for
credit losses and interest expense, which increased by $11.1 million and $16.2 million, or 8.1% and 11.7%,
respectively. In addition, we recognized a loss on sale of receivables of $14.0 million in conjunction with our
September 2008 securitization.
In September 2008, we securitized $198.7 million of our receivables in a transaction that is treated as a sale of the
receivables for financial accounting purposes. The terms of the September 2008 securitization provide for us (1) to
continue servicing the sold portfolio, (2) to retain a 5.0% interest in the bonds issued by the trust to which we sold
the receivables and (3) to earn additional compensation contingent upon (a) the return to the holders of the senior
bonds issued by the trust reaching certain targets or (b) ―lifetime‖ cumulative net charge-offs on the receivables
being below a pre-determined level. We recognized a loss on the sale of $14.0 million. We used a portion of the
proceeds of the sale to reduce substantially the amounts outstanding under our warehouse credit facilities.
Employee costs increased by 4.6% to $48.9 million during the year ended December 31, 2008, representing 11.9%
of total operating expenses, from $46.7 million for the prior year, or 12.6% of total operating expenses. The
decrease as a percentage of total operating expenses reflects the higher total of operating expenses, primarily a result
of the increased provision for credit losses and interest expense. In the recent years prior to 2008, we generally had
regular increases in our numbers of employees to accommodate increasing volumes of contract purchases and the
size of our total managed portfolio. As we gradually reduced our new contract purchases in 2008, however, we also
32
%%Originating EntityCPS……………………………………….………………..$1,619.6 97.3%$2,062.8 97.0%TFC………………………………..……………………….$44.3 3.0%62.0 3.0%MFN………………………………...…………………….$0.0 0.0%0.0 0.0%SeaWest……………………………….…………………….$0.1 0.0%1.0 0.0%SeaWest Third Party Portfolio……………..…………………$0.1 0.0%0.4 0.0%Total………………………………….……………………….$1,664.1 100.0%$2,126.2 100.0%Amount($ in millions)AmountDecember 31, 2007December 31, 2008
reduced total employees, primarily in the areas of contract originations and marketing. As of December 31, 2008 we
had 681 employees, compared to 997 employees at December 31, 2007.
General and administrative expenses increased by 18.2% to $29.5 million and represented 7.2% of total operating
expenses in the year ending December 31, 2008, as compared to the prior year when general and administrative
include
expenses represented 6.7% of
telecommunications costs, postage and delivery costs and other costs associate with servicing our managed
portfolio.
total operating expenses. General and administrative expenses
Interest expense for the year ended December 31, 2008 increased $17.1 million, or 12.3%, to $156.3 million,
compared to $139.2 million in the previous year. The increase is primarily the result of changes in the amount and
composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust
debt increased by $12.6 million in 2008 compared to the prior year. We also experienced increases in senior secured
and subordinated debt interest expense and residual interest financing interest expenses of $2.2 million and $4.0
million, respectively. In June and July 2008 we issued $10 million and $15 million, respectively, in new senior
secured debt. In addition, in July 2008 we amended our residual interest financing facility, which resulted in a
higher rate of interest and allows us the option to extend the maturity if certain conditions are met. Increases in
interest expense for securitization trust debt, subordinated debt and residual interest financing were somewhat offset
by a decrease of $1.8 million in interest expense for warehouse financing. Throughout 2008, we gradually reduced
new contract purchases, resulting in lower amounts outstanding under our warehouse facilities compared to the prior
year.
Marketing expenses consist primarily of commission-based compensation paid to our employee marketing
representatives. These expenses decreased by $7.9 million, or 43.7%, to $10.2 million, compared to $18.1 million in
the previous year and represented 2.5% of total operating expenses. The decrease is primarily due to the decrease in
automobile contracts we purchased during the year ended December 31, 2008 as compared to the prior year. During
the year ended December 31, 2008, we purchased 19,772 automobile contracts aggregating $296.8 million,
compared to 83,246 automobile contracts aggregating $1,282.3 million in the prior year.
Occupancy expenses increased by $341,000 or 9.1%, to $4.1 million compared to $3.8 million in the previous year
and represented 1.0% of total operating expenses.
Depreciation and amortization expenses decreased by $10,000, or 1.9%, to $537,000 from $547,000 in the
previous year.
For the year ended December 31, 2008, we recorded a tax benefit of $17.4 million or 40.0% of loss before income
taxes. For the year ended December 31, 2007, we recorded income tax expense of $10.1 million.
Comparison of Operating Results for the Year Ended December 31, 2007 with the Year Ended December 31, 2006
Revenues. During the year ended December 31, 2007, revenues were $394.6 million, an increase of $115.7
million, or 41.5%, from the prior year revenue of $278.9 million. The primary reason for the increase in revenues is
an increase in interest income. Interest income for the year ended December 31, 2007 increased $106.7 million, or
40.5%, to $370.3 million from $263.6 million in the prior year. The primary reason for the increase in interest
income is the increase in finance receivables held by consolidated subsidiaries (resulting in an increase of
$109.4 million in interest income) and the increase in interest earned on cash deposits (including restricted cash
deposits) of $2.8 million. These increases were partially offset by the decline in the balance of the portfolios of
automobile contracts we acquired in the MFN, TFC and SeaWest transactions (in the aggregate, resulting in a
decrease of $2.2 million in interest income), and a decrease in interest income on our residual interest in
securitizations of $2.1 million.
Servicing fees totaling $1.2 million in the year ended December 31, 2007 decreased $1.7 million, or 57.9%, from
$2.9 million in the prior year. The decrease in servicing fees is the result of the change in securitization structure and
the consequent decline in our managed portfolio held by non-consolidated subsidiaries. As of December 31, 2007
and 2006, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties
was as follows:
33
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 payable by a third party that we had previously written off. We also experienced increased
revenue on our direct mail services (an increase of $1.6 million). These direct mail services are provided to our
dealers and consist of customized solicitations targeted to prospective vehicle purchasers, in proximity to the dealer,
who appear to meet our credit criteria. These increases to other income were somewhat offset by decreases in
recoveries on MFN and certain other automobile contracts (a decrease of $1.2 million) compared to the prior year.
Expenses. Our operating expenses consist primarily of provisions for credit losses, interest expense, employee
costs and general and administrative expenses. Provisions for credit losses and interest expense are significantly
affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of
finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are
incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins
and net income include changes in the automobile and automobile finance market environments, and
macroeconomic factors such as interest rates and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to
the accounting treatment of outstanding warrants and stock options, and are one of our most significant operating
expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications
and automobile contracts processed and serviced.
Other operating expenses consist primarily of facilities expenses, telephone and other communication services,
credit services, computer services, marketing and advertising expenses, and depreciation and amortization.
34
%%Total 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
Total operating expenses were $370.6 million for the year ended December 31, 2007, compared to $265.7 million
for the prior year, an increase of $104.9 million, or 39.5%. The increase is primarily due to increases in provision for
credit losses and interest expense, which increased by $45.2 million and $46.1 million, or 49.1% and 49.5%,
respectively. Both interest expense and provision for credit losses are directly affected by the growth in our portfolio
of automobile contracts held by consolidated affiliates.
Employee costs increased by 21.4% to $46.7 million during the year ended December 31, 2007, representing
12.6% of total operating expenses, from $38.5 million for the prior year, or 14.5% of total operating expenses. The
decrease as a percentage of total operating expenses reflects the higher total of operating expenses, primarily a result
of the increased provision for credit losses and interest expense. The increase in employee costs is the result of
additions to our staff, generally throughout all areas of the Company, to accommodate greater volumes of contract
purchases and the resulting higher balance of our managed portfolio. As of December 31, 2007 we had 997
employees compared to 789 employees at December 31, 2006.
General and administrative expenses increased by 7.6% to $25.0 million and represented 6.7% of total operating
expenses in the year ending December 31, 2007, as compared to the prior year when general and administrative
expenses represented 8.7% of total operating expenses. The decrease as a percentage of total operating expenses
reflects the higher operating expenses primarily a result of the provision for credit losses and interest expense.
Interest expense for the year ended December 31, 2007 increased $46.1 million, or 49.5%, to $139.2 million,
compared to $93.1 million in the previous year. The increase is primarily the result of changes in the amount and
composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust
debt increased by $40.9 million in 2007 compared to the prior year. We also experienced increases in warehouse
interest expense and residual interest financing interest expenses of $5.1 million and $1.1 million, respectively. A
portion of the increase in interest expense can also be attributed to a gradual increase in market interest rates during
2007. Increases in interest expense for securitization trust debt, warehouse and residual interest financing were
somewhat offset by a decrease of $1.0 million in interest expense for subordinated debt.
Marketing expenses consist primarily of commission-based compensation paid to our employee marketing
representatives and increased by $4.1 million, or 29.3%, to $18.1 million, compared to $14.0 million in the previous
year and represented 4.9% of total operating expenses. The increase is primarily due to the increase in automobile
contracts we purchased during the year ended December 31, 2007 as compared to the prior year. During the year
ended December 31, 2007, we purchased 83,246 automobile contracts aggregating $1,282.3 million, compared to
66,504 automobile contracts aggregating $1,019.0 million in the prior year.
Occupancy expenses decreased slightly by $219,000 or 5.5%, to $3.8 million compared to $4.0 million in the
previous year and represented 1.0% of total operating expenses.
Depreciation and amortization expenses decreased by $253,000, or 31.6%, to $547,000 from $800,000 in the
previous year.
For the year ended December 31, 2007, we recorded tax expense of $10.1 million or 42.2% of income before
income taxes. For the year ended December 31, 2006, we recorded an income tax benefit of $41.8 million related to
the reversal of a portion of the valuation allowance against deferred tax assets, offset by current income tax paid or
then payable of $20.2 million, less $4.8 million in deferred tax benefit. As of December 31, 2007, we had remaining
deferred tax assets of $68.6 million, partially offset by a valuation allowance of $9.8 million related to federal and
state net operating losses and other timing differences, leaving a net deferred tax asset of $58.8 million.
Liquidity and Capital Resources
Liquidity
Our business requires substantial cash to support purchases of automobile contracts and other operating activities.
Our primary sources of cash have been cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities, servicing fees on portfolios of
automobile contracts previously sold in securitization transactions or serviced for third parties, customer payments
of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash
from securitized portfolios of automobile contracts in which we have retained a residual ownership interest and from
the spread accounts associated with such pools. Our primary uses of cash have been the purchases of automobile
contracts, repayment of amounts borrowed under warehouse credit facilities and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of
spread accounts and initial overcollateralization, if any, and the increase of credit enhancement to required levels in
35
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, 2008, 2007 and 2006 was
$124.9 million, $153.4 million and $92.4 million, respectively. Cash from operating activities is generally provided
by our results from operations.
Net cash provided by investing activities for the year ended December 31, 2008 was $657.6 million compared to
net cash used in investment activities of $665.4 million and $603.7 million for 2007 and 2006, respectively. Cash
used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables
held for investment were $296.8 million, $1,282.3 million and $1,019.0 million in 2008, 2007 and 2006,
respectively. The significant decrease in contract purchases in 2008 compared to prior periods together with onging
significant proceeds received on finance receivables held for investment resulted in net cash provided by investing
activities in 2008 compared to net cash used by investing activities in 2007. Net cash used in investing activities is
also affected by changes in the amounts of restricted cash and equivalents, which in turn, is affected by the timing
and structure of our asset-backed securitization transactions. In December 2006, we completed a securitization
transaction which included a pre-funding component that resulted in specific restricted cash deposits of $70.3
million at December 31, 2006. In December 2008 and 2007, we did not complete a securitization transaction with a
pre-funding component and, as such, there was no corresponding restricted cash deposit at December 31, 2008 or
2007.
Net cash used by financing activities for the year ended December 31, 2008, was $781.4 million compared with
net cash provided by financing activities $518.6 million and $507.7 million for the years ended December 31, 2007
and 2006, respectively. Cash used or provided by financing activities is primarily attributable to the issuance or
repayment of debt. We issued $285.4 million of securitization trust debt in 2008 as compared to $1,035.9 million in
2007. Issuances of securitization debt were offset by repayments of $693.3 million, $685.9 million and $487.7
million in 2008, 2007 and 2006, respectively.
We purchase automobile contracts from dealers for a cash price approximating their principal amount, adjusted for
an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile
contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse
credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to
finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed
under revolving warehouse credit facilities. At December 31, 2007, we had $425 million in warehouse credit
capacity, in the form of two $200 million senior facilities, and one $25 million subordinated facility. One $200
million facility provided funding for automobile contracts purchased under the TFC programs while both warehouse
facilities provided funding for automobile contracts purchased under the CPS programs. The subordinated facility
was established on January 12, 2007 and expired by its terms in April 2008.
The first of two warehouse facilities mentioned above was provided by an affiliate of Bear, Stearns and was
structured to allow us to fund a portion of the purchase price of automobile contracts by drawing against a floating
rate variable funding note issued by our consolidated subsidiary Page Three Funding, LLC. This facility was
established on November 15, 2005, and expired on November 6, 2008. On November 8, 2006 the facility was
increased from $150 million to $200 million and the maximum advance rate was increased to 83% from 80% of
eligible contracts, subject to collateral tests and certain other conditions and covenants. On January 12, 2007 the
facility was amended to allow for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate was subject to the lender’s valuation of the collateral which, in turn, was
affected by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our term securitizations. Senior notes
under this facility accrued interest at a rate of one-month LIBOR plus 2.50% per annum while the subordinated
notes accrued interest at a rate of one-month LIBOR plus 5.50% per annum.
The second of two warehouse facilities was provided by an affiliate of UBS AG and was similarly structured to
allow us to fund a portion of the purchase price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Funding LLC. This facility was entered into on June 30,
2004. On June 29, 2005 the facility was increased from $100 million to $125 million and further amended to provide
for funding for automobile contracts purchased under the TFC programs, in addition to our CPS programs. The
36
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 was subject to
the lender’s valuation of the collateral which, in turn, was affected by factors such as the credit performance of our
managed portfolio and the terms and conditions of our term securitizations, including the expected yields for bonds
issued in our term securitizations. Senior notes under this facility accrue interest at a rate of one-month LIBOR plus
9.85% per annum. The facility was amended in December 2008 which eliminated future advances and provided for
repayment of the notes from proceeds collected on the underlying pledged receivables, plus certain future scheduled
principal reductions until its maturity in September 2009. At December 31, 2008, $9.9 million was outstanding
under this facility.
We securitized $509.0 million in auto contracts in two private placement transactions in 2008 as compared to
$1,118.1 million of automobile contracts in four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in 2006. All but one of these transactions were
structured as secured financings and, therefore, resulted in no gain or loss on sale. The September 2008 transaction
was structured as a sale for financial accounting purposes and resulted in a loss on sale of $14.0 million.
In November 2005, we completed a securitization in which a wholly-owned bankruptcy remote consolidated
subsidiary of ours issued $45.8 million of asset-backed notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million outstanding on this facility and in May 2007 the notes
were fully repaid. In December 2006 we entered into a $35 million residual credit facility that was secured by our
retained interests in additional term securitizations. At December 31, 2006, there was $12.2 million outstanding
under this facility. In July 2007, we established a combination term and revolving residual credit facility and used a
portion of our initial draw under that facility to repay our remaining outstanding debt under the December 2006 $35
million residual facility.
Under the combination term and revolving residual credit facility, we have used eligible residual interests in
securitizations as collateral for floating rate borrowings. The amount that we were able to borrow was computed
using an agreed valuation methodology of the residuals, subject to an overall maximum principal amount of $120
million, represented by (i) a $60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60
million Class A-2 term note (the ―term note‖). The term note was fully drawn in July 2007 and was due in July
2009. As of July 2008, we had drawn $26.8 million on the revolving note. The facility’s revolving feature expired
in July 2008. On July 10, 2008 we amended the terms of the combination term and revolving residual credit facility,
(i) eliminating the revolving feature and increasing the interest rate, (ii) consolidating the amounts then owing on the
Class A-1 note with the Class A-2 note, (iii) establishing an amortization schedule for principal reductions on the
Class A-2 note, and (iv) providing for an extension, at our option if certain conditions are met, of the Class A-2 note
maturity from June 2009 to June 2010. In conjunction with the amendment, we reduced the principal amount
outstanding to $70 million by delivering to the lender (i) warrants valued as being equivalent to 2,500,000 common
shares, or $4,071,429 and (ii) cash of $12,765,244. The warrants represent the right to purchase 2,500,000 CPS
common shares at a nominal exercise price, at any time prior to July 10, 2018. As of December 31, 2008 the
aggregate indebtedness under this facility was $67.3 million.
On June 30, 2008, we entered into a series of agreements pursuant to which a lender purchased a $10 million five-
year, fixed rate, senior secured note from us. The indebtedness is secured by substantially all of our assets, though
not by the assets of our special-purpose financing subsidiaries. In July 2008, in conjunction with the amendment of
the combination term and revolving residual credit facility as discussed above, the lender purchased an additional
$15 million note with substantially the same terms as the $10 million note. Pursuant to the June 30, 2008 securities
purchase agreement, we issued to the lender 1,225,000 shares of common stock. In addition, we issued the lender
two warrants: (i) warrants that we refer to as the FMV Warrants, which are exercisable for 1,564,324 shares of our
common stock, at an exercise price of $2.4672 per share, and (ii) warrants that we refer to as the N Warrants, which
are exercisable for 283,985 shares of our common stock, at a nominal exercise price. Both the FMV Warrants and
the N Warrants are exercisable in whole or in part and at any time up to and including June 30, 2018. We valued the
warrants using the Black-Scholes valuation model and recorded their value as a liability on our balance sheet
37
because the terms of the warrants also included a provision whereby the lender could require us to purchase the
warrants for cash. That provision was eliminated by mutual agreement in September 2008.
The acquisition of automobile contracts for subsequent sale in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and their related spread accounts either
release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile contracts.
We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital.
As of December 31, 2008, we had unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a securitization. Our plans to manage our liquidity include
maintaining our rate of automobile contract purchases at a merely nominal level, and, wherever appropriate,
reducing our operating costs. There can be no assurance that we will be able to obtain future warehouse financing or
to complete securitizations on favorable economic terms or that we will be able to complete securitizations at all. If
we are unable to complete such securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income would decrease.
Our liquidity will also be affected by releases of cash from the trusts established with our securitizations. While
the specific terms and mechanics of each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the amount of credit enhancement has
reached specified levels and/or the delinquency, defaults or net losses related to the automobile contracts in the pool
are below certain predetermined levels. In the event delinquencies, defaults or net losses on the automobile contracts
exceed such levels, the terms of the securitization: (i) may require increased credit enhancement to be accumulated
for the particular pool; (ii) may restrict the distribution to us of excess cash flows associated with other pools; or (iii)
in certain circumstances, may permit the insurers to require the transfer of servicing on some or all of the automobile
contracts to another servicer. There can be no assurance that collections from the related trusts will continue to
generate sufficient cash. Moreover, most of our spread account balances are pledged as collateral to our residual
interest financing. As such, most of the current releases of cash from our securitization trusts are directed to pay the
obligations of our residual interest financing.
Certain of our securitization transactions and our warehouse credit facility contain various financial covenants
requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of
liquidity and net worth and not exceeding maximum leverage levels and maximum financial losses. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain
creditors to declare a default if a default occurred under a different facility.
The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are
terminable by the respective insurance companies upon defined events of default, and, in some cases, at the will of
the insurance company. We have received waivers regarding the potential breach of certain such covenants relating
to minimum net worth, financial loss in any one period and maintenance of active warehouse credit facilities.
Without such waivers, certain credit enhancement providers would have had the right to terminate us as servicer
with respect to certain of our outstanding securitization pools. Although such rights have been waived, such waivers
are temporary, and there can be no assurance as to their future extension. We do, however, believe that we will
obtain such future extensions because it is generally not in the interest of any party to the securitization transaction
to transfer servicing. Nevertheless, there can be no assurance as to our belief being correct. Were an insurance
company in the future to exercise its option to terminate such agreements, such a termination could have a material
adverse effect on our liquidity and results of operations, depending on the number and value of the terminated
agreements. Our note insurers continue to extend our term as servicer on a monthly and/or quarterly basis, pursuant
to the servicing agreements.
Contractual Obligations
The following table summarizes our material contractual obligations as of December 31, 2008 (dollars in
thousands):
38
(1) Securitization trust debt, in the aggregate amount of $1,404.2 million as of December 31, 2008, is omitted from
this table because it becomes due as and when the related receivables balance is reduced by payments and
charge-offs. Expected payments, which will depend on the performance of such receivables, as to which there
can be no assurance, are $639.4 million in 2009, $422.2 million in 2010, $235.9 million in 2011, $90.0 million
in 2012, $16.7 million in 2013.
(2) Long-term debt includes residual interest debt, senior secured debt and subordinated renewable notes.
Warehouse Credit Facilities
The terms on which credit has been available to us for purchase of automobile contracts have varied over the three
years 2006-2008 and through December 31, 2008, as shown in the following summary of our warehouse credit
facilities:
Facility in Use from June 2004 to present. In June 2004, we (through our subsidiary Page Funding LLC) entered
into a floating rate variable note purchase facility. Up to $200.0 million of borrowing capacity under this facility
was available at any time subject to certain collateral tests and other conditions. We used funds derived from this
facility to purchase automobile contracts under the CPS programs and TFC programs, which were pledged to secure
the notes. The collateral tests and other conditions generally allowed us to borrow up to approximately 93% of the
principal balance of automobile contracts that we purchased under our CPS programs (up to 83.0% in the form of
senior notes and the remainder in the form of subordinated notes), and of up to 70% of the principal balance of
automobile contracts that we purchased under our TFC programs. The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the credit performance of our managed
portfolio and the terms and conditions of our term securitizations, including the expected yields required for bonds
issued in our term securitizations. The facility was amended in December 2008 which eliminated future advances
and provided for repayment of the notes from proceeds collected on the underlying pledged receivables, plus certain
future scheduled principal reductions until its maturity in September 2009. Senior notes issued under this facility
accrue interest at one-month LIBOR plus 9.85% per annum. The balance of notes outstanding related to this facility
at December 31, 2008 was $9.9 million.
Facility in Use from November 2005 to November 2008. In November 2005, we (through our subsidiary Page
Three Funding LLC) entered into a floating rate variable note purchase facility. Up to $200 million of borrowing
capacity under this facility was available at any time subject to certain collateral tests and other conditions. We used
funds derived from this facility to purchase automobile contracts under the CPS programs, which were pledged to
secure the notes. The collateral tests and other conditions generally allowed us to borrow up to approximately
93.0% of the principal balance of the automobile contracts (up to 83.0% in the form of senior notes and the
remainder in the form of subordinated notes). The advance rate was subject to the lender’s valuation of the
collateral which, in turn, was affected by factors such as the credit performance of our managed portfolio and the
terms and conditions of our term securitizations, including the expected yields require for bonds issued in our term
securtizations. The facility expired by its terms in November 2008.
Capital Resources
Securitization trust debt is repaid from collections on the related receivables, and becomes due in accordance with
its terms as the principal amount of the related receivables is reduced. Although the securitization trust debt also has
alternative final maturity dates, those dates are significantly later than the dates at which repayment of the related
receivables is anticipated, and at no time in our history have any of our sponsored asset-backed securities reached
those alternative final maturities.
The acquisition of automobile contracts for subsequent transfer in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, when those transactions take place, results in a continuing
need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract
purchases, the required level of initial credit enhancement in securitizations, and the extent to which the trusts and
related spread accounts either release cash to us or capture cash from collections on securitized automobile
contracts. We plan to adjust our levels of automobile contract purchases so as to match anticipated releases of cash
39
Long Term Debt (2)…………..………..$113,126 $20,642 $70,065 $22,281 $138 Operating Leases…………………………………….$25,771 $3,985 $7,443 $6,728 $7,615 1 to 3Years4 to 5YearsMore than5 YearsPayment Due by Period (1)Less thanTotal1 Year
from the trusts and related spread accounts with our capital requirements. As we have already reduced such
purchases to nominal levels, we retain little ability to reduce purchases further to meet any additional capital
requirements.
Capitalization
Over the period from January 1, 2005 through December 31, 2008 we have managed our capitalization by issuing
and refinancing debt as summarized in the following table:
Residual Interest Financing. In November 2005, we completed a securitization in which a wholly-owned
bankruptcy remote consolidated subsidiary of ours issued $45.8 million of asset-backed notes secured by its retained
interest in 10 term securitization transactions. At December 31, 2006 there was $19.6 million outstanding on this
facility and in May 2007 the notes were fully repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term securitizations. At December 31, 2006,
there was $12.2 million outstanding under this facility. In July 2007, we established a combination term and
revolving residual credit facility and used a portion of our initial draw under that facility to repay our remaining
outstanding debt under the December 2006 $35 million residual facility.
Under the combination term and revolving residual credit facility, we have used eligible residual interests in
securitizations as collateral for floating rate borrowings. The amount that we were able to borrow was computed
using an agreed valuation methodology of the residuals, subject to an overall maximum principal amount of $120
million, represented by (i) a $60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60
million Class A-2 term note (the ―term note‖). The term note was fully drawn in July 2007 and was due in July
2009. As of July 2008, we had drawn $26.8 million on the revolving note. The facility’s revolving feature expired
in July 2008. On July 10, 2008 we amended the terms of the combination term and revolving residual credit facility,
(i) eliminating the revolving feature and increasing the interest rate, (ii) consolidating the amounts then owing on the
Class A-1 note with the Class A-2 note, (iii) establishing an amortization schedule for principal reductions on the
40
RESIDUAL INTEREST FINANCING:Beginning balance………………………..………….. $70,000 $31,378 $43,745 Issuances…………………………………..…….. 20,000 85,860 13,667 Payments…………………………………..…….(22,700) (47,238) (26,034) Ending balance………………………………...……..$67,300 $70,000 $31,378 SECURITIZATION TRUST DEBT:Beginning balance……………………………...…….. $1,798,302 $1,442,995 $924,026 Issuances…………………………………………..310,359 1,035,864 1,003,645 Payments………………………...……………….(704,450) (680,557) (484,676) Ending balance……………………..………………..$1,404,211 $1,798,302 $1,442,995 SENIOR SECURED DEBT, RELATED PARTY:Beginning balance……………………...…………….. $- $25,000 $40,000 Issuances…………………………..……………..20,105 Payments……………………………...………….- (25,000) (15,000) Ending balance……………………………...………..$20,105 $- $25,000 SUBORDINATED DEBT:Beginning balance…………………………….……….. $$$14,000 Payments…………………………………….…….(14,000)Ending balance………………………………….……..$$$SUBORDINATED RENEWABLE NOTES:Beginning balance…………………..……………….. $28,134 $13,574 $4,655 Issuances………………………..………………..4,183 17,664 9,985 Payments……………………………………...….(6,596) (3,104) (1,066) Ending balance…………………...…………………..$25,721$28,134$13,5742007Year Ended December 31,2008(Dollars in thousands)2006
Class A-2 note, and (iv) providing for an extension, at our option if certain conditions are met, of the Class A-2 note
maturity from June 2009 to June 2010. In conjunction with the amendment, we reduced the principal amount
outstanding to $70 million, by delivering to the lender (i) warrants valued as being equivalent to 2,500,000 common
shares, or $4,071,429 and (ii) cash of $12,765,244. The warrants represent the right to purchase 2,500,000 CPS
common shares at a nominal exercise price, at any time prior to July 10, 2018. As of December 31, 2008 the
aggregate indebtedness under this facility was $67.3 million.
Securitization Trust Debt. From July 2003 through April 2008, we have, for financial accounting purposes, treated
securitizations of automobile contracts as secured financings, and the asset-backed securities issued in such
securitizations remain on our balance sheet as securitization trust debt. Our most recent securitization, in September
2008, was structured as a sale for financial accounting purposes and the asset-backed securities issued in that
transaction are not on our balance sheet.
Senior Secured Debt. From 1998 to 2005, we entered into a series of financing transactions with Levine
Leichtman Capital Partners II, L.P. In July 2007 we repaid the final amounts due under these financing transactions.
On June 30, 2008, we entered into a series of agreements pursuant to which an affiliate of Levine Leichtman Capital
Partners purchased a $10 million five-year, fixed rate, senior secured note from us. The indebtedness is secured by
substantially all of our assets, though not by the assets of our special-purpose financing subsidiaries. In July 2008,
in conjunction with the amendment of the combination term and revolving residual credit facility as discussed
above, the lender purchased an additional $15 million note with substantially the same terms as the $10 million note.
Pursuant to the June 30, 2008 securities purchase agreement, we issued to the lender 1,225,000 shares of common
stock. In addition, we issued the lender two warrants: (i) warrants that we refer to as the FMV Warrants, which are
exercisable for 1,564,324 shares of our common stock, at an exercise price of $2.4672 per share, and (ii) warrants
that we refer to as the N Warrants, which are exercisable for 283,985 shares of our common stock, at a nominal
exercise price. Both the FMV Warrants and the N Warrants are exercisable in whole or in part and at any time up to
and including June 30, 2018. We valued the warrants using the Black-Scholes valuation model and recorded their
value as a liability on our balance sheet because the terms of the warrants also included a provision whereby the
lender could require us to purchase the warrants for cash. That provision was eliminated by mutual agreement in
September 2008.
Subordinated Renewable Notes Debt. In June 2005, we began issuing registered subordinated renewable notes
in an ongoing offering to the public. Upon maturity, the notes are automatically renewed for the same term as the
maturing notes, unless we elect not to have the notes renewed or unless the investor notifies us within 15 days after
the maturity date for his notes that he wants his notes repaid. Renewed notes bear interest at the rate we are offering
at that time to other investors with similar aggregate note portfolios. Based on the terms of the individual notes,
interest payments may be required monthly, quarterly, annually or upon maturity.
We must comply with certain affirmative and negative covenants related to debt facilities, which require, among
other things, that we maintain certain financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions, restricted payments and certain dividend restrictions. We were in compliance with all such covenants
as of December 31, 2008. In addition, certain securitization and non-securitization related debt contain cross-default
provisions that would allow certain creditors to declare default if a default occurred under a different facility.
Forward-looking Statements
This report on Form 10-K includes certain "forward-looking statements". Forward-looking statements may be
identified by the use of words such as "anticipates," "expects," "plans," "estimates," or words of like meaning. As to
the specifically identified forward-looking statements, factors that could affect charge-offs and recovery rates
include changes in the general economic climate, which could affect the willingness or ability of obligors to pay
pursuant to the terms of contracts, changes in laws respecting consumer finance, which could affect our ability to
enforce rights under contracts, and changes in the market for used vehicles, which could affect the levels of
recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current year include the
levels of cash releases from existing pools of contracts, which would affect our ability to purchase contracts, the
terms on which we are able to finance such purchases, the willingness of dealers to sell contracts to us on the terms
that it offers, and the terms on which we are able to complete term securitizations once contracts are acquired.
Factors that could affect our expenses in the current year include competitive conditions in the market for qualified
personnel, investor demand for asset-backed securities and interest rates (which affect the rates that we pay on asset-
backed securities issued in our securitizations). The statements concerning structuring securitization transactions as
secured financings and the effects of such structures on financial items and on future profitability also are forward-
41
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
recurring basis. SFAS 157 is effective for us on January 1, 2008, except for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring basis. For those excepted assets and
liabilities our effective date is January 1, 2009. The adoption of this statement did not have a material effect on our
financial position or results of operations.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value
measurements.. The three levels are defined as follows: Level 1 - inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the
valuation methodology are unobservable and significant to the fair value measurement.
In September 2008 we sold automobile contracts in a securitization that was structured as a sale. In that sale, we
retained certain assets that are measured at fair value. Following is a description of the valuation methodologies
used for the securities retained and the residual interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation hierarchy: The securities retained total $8.5 million of
notes and are classified as level 2 because there were similar notes sold in the transaction. We used the price at
which those similar notes were sold to value the securities retained. The residual interest in the cash flows totals
$2.5 million and is classified as level 3. We determined the value of that residual interest using a discounted cash
flow model that included estimates for prepayments and losses. We used a discount rate of 33% per annum. The
assumptions we used were based on historical performance of automobile contracts we had originated and serviced
in the past, adjusted for current market conditions.
Off-Balance Sheet Arrangements
From July 2003 through April 2008 all of our securitizationswere structured as secured financings for financial
accounting purposes. In September 2008, we securitized $198.7 million of our automobile contracts in a structure
that is treated as a sale of the receivables for financial accounting purposes. The terms of the September 2008
securitization provide for us (1) to continue servicing the sold portfolio, (2) to retain a 5.0% interest in the bonds
issued by the trust to which we sold the automobile contracts and (3) to earn additional compensation contingent
upon (a) the return to the holders of the senior bonds issued by the trust reaching certain targets or (b) ―lifetime‖
cumulative net charge-offs on the automobile contracts being below a pre-determined level. See "Critical
Accounting Policies" for a detailed discussion of our securitization structure.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to interest rate risk during the period between when contracts are purchased from dealers and when
such contracts become part of a term securitization. Specifically, the interest rate due on our warehouse credit
facility is adjustable while the interest rates on the contracts are fixed. Historically, our term securitization facilities
have had fixed rates of interest. To mitigate some of this risk, we have in the past, and intend to continue to structure
42
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.
Item 8. Financial Statements and Supplementary Data
This report includes Consolidated Financial Statements, notes thereto and an Independent Auditors’ Report, at the
pages indicated below, in the "Index to Financial Statements." Certain unaudited quarterly financial information is
included in the Notes to Consolidated Financial Statements, as Note 17.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of December 31, 2008 (the
"Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective (i) to ensure that
information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission; and (ii) to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is accumulated and communicated to our management,
including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
The certifications of our chief executive officer and chief financial officer required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Internal Control. Management’s Report on Internal Control over Financial Reporting is included in this
Annual Report, immediately below. During the fiscal quarter ended December 31, 2008, there were no changes in
our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. We are responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to
our management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with
respect to financial statement preparation and presentation.
Management, with the participation of the chief executive and chief financial officers, assessed the effectiveness of
our internal control over financial reporting as of December 31, 2008. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework. Based on this assessment, management, with the participation of the chief
executive and chief financial officers, believes that, as of December 31, 2008, our internal control over financial
reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securites and Exchange Commission that permit us to provide
only management’s report in this annual report.
43
Item 9B. Other Information
Not Applicable
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 2009 (the "2009 Proxy Statement"). The 2009 Proxy
Statement will be filed not later than April 30, 2009. Information regarding executive officers of the registrant
appears in Part I of this report, and is incorporated herein by reference.
Item 11. Executive Compensation
Incorporated by reference to the 2009 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Incorporated by reference to the 2009 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to the 2009 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to the 2009 Proxy Statement.
44
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 (filed herewith)
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.)
4.27
4.28
Indenture re Notes issued by CPS Auto Receivables Trust 2008-A (exhibit 4.27 to Form 8-K filed by the
registrant on April 15, 2008)
Sale and Servicing Agreement dated as of March 1, 2008, related to notes issued by CPS Auto Receivables
Trust 2008-A (exhibit 4.28 to Form 8-K filed by the registrant on April 15, 2008)
10.1
1991 Stock Option Plan & forms of Option Agreements thereunder (Exhibit 10.19 to Form S-2, no. 333-
121913) **
10.2
1997 Long-Term Incentive Stock Plan ("1997 Plan") (Exhibit 10.20 to Form S-2, no. 333-121913) **
10.2.1 Form of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K filed March 13, 2006) **
10.4
Lease of Headquarters Building (to be filed by amendment)
10.5 Third Amended & Restated Sale and Servicing Agreement dated February 14, 2007 by and among Page
Funding LLC ("PFLLC"), the registrant and Wells Fargo Bank, N.A. ("WFBNA") (Exhibit 10.5 to registrant's
Form 10-K filed March 9, 2007)
45
Exhibit
Number
Description (“**” indicates compensatory plan or agreement.)
10.5.1 Amendment dated March 30, 2007 to the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among PFLLC, the registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q
filed July 23, 2007)
10.5.2 Amendment dated June 29, 2007 to the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among PFLLC, the registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q
filed July 23, 2007)
10.5.3 Amendment dated September 30, 2007 to the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among PFLLC, the registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q
filed November 6, 2007)
10.5.4 Amendment dated as of February 15, 2008 to the Third Amended & Restated Sale and Servicing Agreement
dated February 14, 2007 by and among PFLLC, the registrant and WFBNA (filed herewith)
10.5.5 Amendment dated as of March 15, 2008 to the Third Amended & Restated Sale and Servicing Agreement
dated February 14, 2007 by and among PFLLC, the registrant and WFBNA (filed herewith)
10.6 Second Amended & Restated Indenture dated as of February 14, 2007 by and between PFLLC and WFBNA
(Exhibit 10.6 to registrant's Form 10-K filed March 9, 2007)
10. 8 Second Amended & Restated Note Purchase Agreement dated as of February 14, 2007 by and among PFLLC,
UBS Real Estate Securities Inc. and WFBNA (Exhibit 10.8 to registrant's Form 10-K filed March 9, 2007)
10.9
Omnibus Amendment Agreement containing Amendment dated as of September 30, 2008 to the Third
Amended & Restated Sale and Servicing Agreement dated February 14, 2007 by and among Page Funding
LLC ("PFLLC"), the registrant and Wells Fargo Bank, N.A. ("WFBNA"); and Amendment to Second
Amended & Restated Note Purchase Agreement dated as of February 14, 2007 by and among PFLLC, UBS
Real Estate Securities Inc. and WFBNA (to be filed by amendment)
10.9.1 Second Omnibus Amendment Agreement containing Amendment dated as of December 12, 2008 to the Third
Amended & Restated Sale and Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA; and Amendment to Second Amended & Restated Note Purchase Agreement dated as
of February 14, 2007 by and among PFLLC, UBS Real Estate Securities Inc. and WFBNA; and Amendment
to Second Amended & Restated Indenture dated as of February 14, 2007 by and between PFLLC and WFBNA
(to be filed by amendment)
10.10 Amended & Restated Sale and Servicing Agreement dated as of January 12, 2007, among Page Three Funding
LLC ("P3FLLC"), the registrant and WFBNA (Exhibit 10.10 to registrant's Form 10-K filed March 9, 2007)
10.10.1 Amendment dated as of February 15, 2008 to the Amended & Restated Sale and Servicing Agreement dated as
of January 12, 2007, among P3FLLC, the registrant and WFBNA (to be filed by amendment)
10.10.2 Amendment dated as of September 12, 2008 to the Amended & Restated Sale and Servicing Agreement dated
as of January 12, 2007, among P3FLLC, the registrant and WFBNA (to be filed by amendment)
10.11 Amended & Restated Indenture dated as of January 12, 2007 between P3FLLC and WFBNA (Exhibit 10.11 to
registrant's Form 10-K filed March 9, 2007)
10.12 Amended & Restated Note Purchase Agreement dated as of January 12, 2007 among P3FLLC, the registrant
and Bear, Stearns International Limited (Exhibit 10.12 to registrant's Form 10-K filed March 9, 2007)
10.14
2006 Long-Term Equity Incentive Plan as amended to date (filed herewith)
10.14.1 Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 10.14.1 to registrant's
Form 10-K filed March 9, 2007)**
10.15
Securities Purchase Agreement between the registrant and Levine Leichtman Capital Partners IV, L. P.
("LLCP"), relating to the sale of an aggregate of $25 million of Notes. (Incorporated by reference to exhibit
99.2 to Schedule 13D filed by LLCP on July 10, 2008)
10.15.1 Am. No. 1 dated July 10, 2008 to Securities Purchase Agreement dated June 30, 2008 between the registrant
and LLCP. (Exhibit 10.15.1 to registrant's Form 10-Q filed August 11, 2008)
46
Exhibit
Number
Description (“**” indicates compensatory plan or agreement.)
10.16 Registration Rights Agreement between the registrant and LLCP. (Incorporated by reference to exhibit 99.6 to
10.17
10.18
Schedule 13D filed by LLCP on July 10, 2008)
Investor Rights Agreement between the registrant and LLCP. (Incorporated by reference to exhibit 99.7 to
Schedule 13D filed by LLCP on July 10, 2008)
FMV Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to the FMV warrant appearing
as pages A-1 through A-13 of the preliminary proxy statement filed by the registrant on July 28, 2008.)
10.19 N Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to the FMV warrant appearing as
pages B-1 through B-13 of the preliminary proxy statement filed by the registrant on July 28, 2008.)
10.20 Amended and Restated Note Purchase Agreement dated July 10, 2008 among the registrant, its subsidiary
Folio Funding II, LLC, and Citigroup Financial Products Inc. (Exhibit 10.20 to registrant's Form 10-Q filed
August 11, 2008)
10.21 Amended and Restated Indenture dated July 10, 2008 among Folio Funding II, LLC, Citigroup Financial
Products Inc. and Wells Fargo Bank, N.A. (Exhibit 10.21 to registrant's Form 10-Q filed August 11, 2008)
10.22
Performance Guaranty dated July 10, 2008 issued by the registrant in favor of Citigroup Financial Products
Inc. (Exhibit 10.22 to registrant's Form 10-Q filed August 11, 2008)
10.23 Warrant dated July 10, 2008, issued to Citigroup Global Markets Inc. (Exhibit 10.23 to registrant's Form 10-Q
filed August 11, 2008)
10.24
Purchase and Sale Agreement re Motor Vehicle Contracts dated as of September 26, 2008 (Exhibit 10.24 to
Form 8-K/A filed by the registrant on November 7, 2008)
10.25 Transfer and Servicing Agreement dated as of September 26, 2008 (Exhibit 10.25 to Form 8-K/A filed by the
registrant on November 7, 2008)
14
21
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)
23.1a Consent of McGladrey & Pullen, LLP (filed herewith)
23.1b Consent of Crowe Horwath LLP (filed herewith)
31.1
31.2
32
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)
47
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 31, 2009
By:
/s/ CHARLES E. BRADLEY, JR.
Charles E. Bradley, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
March 31, 2009
/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)
48
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm – Crowe Horwath LLP ......................................
Report of Independent Registered Public Accounting Firm – McGladrey & Pullen, LLP ............................
Consolidated Balance Sheets as of December 31, 2008 and 2007 ..................................................................
Consolidated Statements of Operations for the years ended December 31, 2008, 2007, and 2006 ................
Page
Reference
F-2
F-3
F-4
F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007,
and 2006 .....................................................................................................................................................
F-6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007, and
2006 ............................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006 ...............
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 accompanying consolidated balance sheet of Consumer Portfolio Services, Inc. (the Company)
as of December 31, 2008, and the related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for the year ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Consumer Portfolio Services, Inc. as of December 31, 2008, and the results of its operations
and its cash flows for the year ended December 31, 2008 in conformity with U.S. generally accepted accounting
principles.
The Company is currently in compliance with debt covenants or has obtained waivers for all potential covenant
violations as of December 31, 2008. The waivers are temporary and will expire during 2009. See Note 1 for a
discussion of potential consequences associated with the potential failure to obtain renewed waivers.
Crowe Horwath LLP
Costa Mesa, California
March 31, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Consumer Portfolio Services, Inc.
We have audited the consolidated balance sheets of Consumer Portfolio Services, Inc. and subsidiaries (the
Company) as of December 31, 2007, and the related consolidated statements of operations, comprehensive income,
shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 2007, and the results of
their operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting
for uncertain tax positions.
/s/ McGladrey & Pullen, LLP
Irvine, California
March 17, 2008
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
See accompanying Notes to Consolidated Financial Statements.
F-4
ASSETSCash and cash equivalents$22,084 $20,880 Restricted cash and equivalents153,479 170,341 Finance receivables1,417,343 2,068,004 Less: Allowance for finance credit losses(78,036) (100,138) Finance receivables, net1,339,307 1,967,866 Residual interest in securitizations3,582 2,274 Furniture and equipment, net1,404 1,500 Deferred financing costs 8,954 15,482 Deferred tax assets, net52,727 58,835 Accrued interest receivable14,903 24,099 Other assets42,367 21,536 $1,638,807 $2,282,813 LIABILITIES AND SHAREHOLDERS' EQUITYLiabilitiesAccounts payable and accrued expenses$21,702 $18,391 Warehouse lines of credit9,919 235,925 Income taxes payable- 17,706 Residual interest financing67,300 70,000 Securitization trust debt1,404,211 1,798,302 Senior secured debt, related party20,105 - Subordinated renewable notes25,721 28,134 1,548,958 2,168,458 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 75,000,000 shares; 19,110,777 and 19,525,042 shares issued and outstanding at December 31, 2008 and 2007, respectively54,702 55,216 Additional paid in capital, warrants7,471 794 Retained earnings34,703 60,794 Accumulated other comprehensive loss(7,027) (2,449) 89,849 114,355 $1,638,807 $2,282,813 December 31,December 31,20082007
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 $351,551 $370,265 $263,566 Servicing fees 2,064 1,218 2,894 Other income14,796 23,067 12,403 368,411 394,550 278,863 Expenses:Employee costs48,874 46,716 38,483 General and administrative 29,506 24,959 23,197 Interest153,720 137,543 87,510 Interest, related party2,533 1,646 5,602 Provision for credit losses148,408 137,272 92,057 Loss on sale of receivables13,963 - - Marketing10,221 18,147 14,031 Occupancy4,104 3,763 3,983 Depreciation and amortization537 547 800 411,866 370,593 265,663 Income (loss) before income tax expense (benefit)(43,455) 23,957 13,200 Income tax expense (benefit)(17,364) 10,099 (26,355) Net income (loss)$(26,091) $13,858 $39,555 Earnings (loss) per share: Basic $(1.36) $0.66 $1.82 Diluted (1.36) 0.61 1.64 Number of shares used in computingearnings (loss) per share: Basic 19,230 20,880 21,759 Diluted19,230 22,595 24,052 Year Ended December 31,200820072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
F-6
Net income (loss)$(26,091) $13,858 $39,555 Other comprehensive income (loss); minimum pension liability, net of tax (4,578) (698) 678 Comprehensive income (loss)$(30,669) $13,160 $40,233 Year Ended December 31,200820072006
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, 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 Common stock issued upon exercise of options, including tax benefit70 144 - - - 144 Common stock issued upon issuance of debt1,225 1,801 - - - 1,801 Purchase of common stock(1,709) (3,717) - - - (3,717) Pension benefit obligation- - - - (4,578) (4,578) Valuation of warrants issued- - 6,677 - - 6,677 Stock-based compensation- 1,258 - - - 1,258 Net loss- - - (26,091) - (26,091) Balance at December 31, 200819,111 $54,702 $7,471 $34,703 $(7,027) $89,849 AccumulatedLossPaid-inCapital,WarrantsAdditionalOtherTotalComprehensiveSharesCommon StockAmountEarningsRetained
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
F-8
Cash flows from operating activities: Net income (loss)$(26,091) $13,858 $39,555 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on residual asset- (6,155) (1,200) Accretion of deferred acquisition fees(15,177) (16,761) (11,912) Amortization of discount on securitization notes13,868 5,316 3,005 Amortization of discount on senior secured debt, related party519 - - Depreciation and amortization537 547 800 Amortization of deferred financing costs10,490 9,372 6,580 Provision for credit losses148,408 137,272 92,057 Stock-based compensation expense1,258 1,133 244 Interest income on residual assets(979) (2,324) (5,656) Cash received from residual interest in securitizations2,123 19,999 18,282 Loss on sale of receivables13,963 - - Change in market value of warrants555 - - Changes in assets and liabilities: Payments on restructuring accrual- (366) (633) Accrued interest receivable9,195 (7,055) (6,113) Other assets(20,830) (994) (8,051) Deferred tax assets6,108 (11,147) (57,435) Accounts payable and accrued expenses(1,267) 3,311 12,629 Tax liabilities(17,706) 7,409 10,297 Net cash provided by operating activities124,974 153,415 92,449 Cash flows from investing activities: Purchases of finance receivables held for investment(296,817) (1,282,312) (1,019,018) Payments received on finance receivables held for investment775,730 595,347 451,037 Proceeds received from sale of receivables162,307 - - Decreases (increases) in restricted cash and cash equivalents, net16,862 22,661 (35,338) Purchase of furniture and equipment(442) (1,087) (412) Net cash provided by (used in) investing activities657,640 (665,391) (603,731) Cash flows from financing activities: Proceeds from issuance of securitization trust debt285,389 1,035,864 1,003,645 Proceeds from issuance of subordinated renewable notes4,183 103,523 23,652 Proceeds from issuance of senior secured debt, related party25,000 - - Proceeds from issuance of residual financing debt20,000 85,860 13,667 Payments on subordinated renewable notes(6,596) Net proceeds from (repayments to) warehouse lines of credit(388,311) 162,975 37,599 Repayment of residual financing debt(18,629) (47,238) (26,034) Repayment of securitization trust debt(693,348) (685,873) (487,681) Repayment of senior secured debt, related party- (25,000) (15,000) Repayment of other debt- (88,964) (28,899) Payment of financing costs(5,525) (12,151) (10,687) Repurchase of common stock(3,717) (11,711) (4,808) Exercise of options and warrants144 1,118 1,555 Excess tax benefit related to option exercises- 238 699 Net cash provided by (used in) financing activities(781,410) 518,641 507,708 Increase (decrease) in cash and cash equivalents1,204 6,665 (3,574) Cash and cash equivalents at beginning of period20,880 14,215 17,789 Cash and cash equivalents at end of period$22,084 $20,880 $14,215 20082007Year Ended December 31,2006
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 (received) during the period for: Interest$126,300 $121,631 $81,628 Income taxes(590) 7,273 10,219 Non-cash financing activities: Pension benefit obligation, net4,578 698 (677) Common stock issued in connection with new senior secured debt, related party1,801 - - Warrants issued in connection with residual financing and senior secured debt6,284 - - 20082007Year Ended December 31,2006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on March 8, 1991. CPS and its
subsidiaries (collectively, the "Company") specialize in purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by licensed motor vehicle dealers ("Dealers") located throughout
the United States. Dealers located in California, Florida, Texas and Pennsylvania represented 11.6%, 9.3%, 7.1%
and 7.0%, respectively, of contracts purchased during 2008 compared with 10.4%, 8.4%, 9.2% and 6.2%,
respectively in 2007. No other state had a concentration in excess of 6.9%. We specialize in contracts with obligors
who generally would not be expected to qualify for traditional financing, such as that provided by commercial banks
or automobile manufacturers’ captive finance companies.
We are subject to various regulations and laws as they relate to the extension of credit in consumer credit
transactions. Although we believe we are currently in material compliance with these regulations and laws, there can
be no assurance that we will be able to maintain such compliance. Failure to comply with such laws and regulations
could have a material adverse effect on the Company.
Acquisitions
On March 8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger (the "MFN Merger").
On May 20, 2003, we acquired TFC Enterprises, Inc. and its subsidiaries in a second merger (the "TFC Merger").
Each merger was accounted for as a purchase. MFN Financial Corporation and its subsidiaries ("MFN") and TFC
Enterprises, Inc. and its subsidiaries ("TFC") were engaged in similar businesses: buying contracts from Dealers,
financing those contracts through securitization transactions, and servicing those contracts. MFN ceased acquiring
contracts in March 2002; TFC acquired contracts under its "TFC Programs" until July 2008 when such purchases
were suspended.
On April 2, 2004, we purchased a portfolio of contracts and certain other assets (the "SeaWest Asset Acquisition")
from SeaWest Financial Corporation ("SeaWest"). In addition, we were named the successor servicer for three term
securitization transactions originally sponsored by SeaWest (the "SeaWest Third Party Portfolio"). We do not offer
financing programs similar to those previously offered by SeaWest.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Consumer Portfolio Services, Inc. and its wholly-
owned subsidiaries, certain of which are Special Purpose Subsidiaries ("SPS"), formed to accommodate the
structures under which we purchase and securitize our contracts. The Consolidated Financial Statements also include
the accounts of CPS Leasing, Inc., an 80% owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, we consider all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and due from
banks and money market accounts. Substantially all of our cash is deposited at two financial institutions. We
maintain cash due from banks in excess of the banks' insured deposit limits. We do not believe we are exposed to
any significant credit risk on these deposits. As part of certain financial covenants related to debt facilities, we are
required to maintain a minimum unrestricted cash balance.
Finance Receivables
Finance receivables, which we have the intent and ability to hold for the forseable future or until maturity or
payoff, are presented at cost. All finance receivable contracts are held for investment. Interest income is accrued on
the unpaid principal balance. Origination fees, net of certain direct origination costs, are deferred and recognized in
interest income using the level yield method without anticipating prepayments. Generally, payments received on
finance receivables are restricted to certain securitized pools, and the related contracts cannot be resold. Finance
receivables are charged off pursuant to the controlling documents of certain securitized pools, generally before they
become contractually delinquent five payments. Contracts that are deemed uncollectible prior to the maximum
delinquency period are charged off immediately. Management may authorize an extension of payment terms if
collection appears likely during the next calendar month.
F-10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our portfolio of finance receivables consists of small-balance homogeneous contracts that are collectively
evaluated for impairment on a portfolio basis. We report delinquency on a contractual basis. Once a Contract
becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the
Contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a Contract that is
greater than 90 days delinquent are first applied to accrued interest and then to principal reduction.
Finance Receivables Held for Sale
Finance receivables originated and intended for sale in the secondary market are carried at the lower of aggregate
cost or market. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. We had
no finance receivables held for sale at December 31, 2008 and 2007.
Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, we use a loss
allowance methodology commonly referred to as "static pooling," which stratifies the finance receivable portfolio
into separately identified pools based on their period of origination, then uses historical performance of seasoned
pools to estimate future losses on current pools. Historical loss experience is adjusted as necessary for current
economic conditions. Using analytical and formula driven techniques, we estimate an allowance for finance credit
losses, which we believe is adequate for probable credit losses that can be reasonably estimated in our portfolio of
finance receivable contracts. Such allowance for loss is charged to expense on a monthly basis. Net losses incurred
on finance receivables are charged to the allowance. We evaluate the adequacy of the allowance by examining
current delinquencies, the characteristics of the portfolio, the value of the underlying collateral and historical loss
trends. As conditions change, our level of provisioning and/or allowance may change as well.
Charge Off Policy
Delinquent contracts for which the related financed vehicle has been repossessed are generally charged off at the
earliest of (1) the month in which the proceeds from the sale of the financed vehicle were received, (2) the month in
which 90 days have passed from the date of repossession or (3) the month in which the Contract becomes seven
scheduled payments past due (see Repossessed and Other Assets below). The amount charged off is the remaining
principal balance of the Contract, after the application of the net proceeds from the liquidation of the financed
vehicle. With respect to delinquent contracts for which the related financed vehicle has not been repossessed, the
remaining principal balance thereof is generally charged off no later than the end of the month that the Contract
becomes five scheduled payments past due for CPS Program receivables, and no later than the end of the month that
the Contract becomes seven scheduled payments past due for other receivables.
Contract Acquisition Fees and Originations Costs
Upon purchase of a Contract from a Dealer, we generally either charge or advance the Dealer an acquisition fee.
Dealer acquisition fees and deferred originations costs are applied to the carrying value of finance receivables and
are accreted into earnings as an adjustment to the yield over the estimated life of the Contract using the interest
method.
Repossessed and Other Assets
If a Contract obligor fails to make or keep promises for payments, or if the obligor is uncooperative or attempts to
evade contact or hide the vehicle, a supervisor will review the collection activity relating to the account to determine
if repossession of the vehicle is warranted. Generally, such a decision will occur between the 45th and 90th day past
the obligor’s payment due date, but could occur sooner or later, depending on the specific circumstances. At the time
the vehicle is repossessed we stop accruing interest on the Contract, and reclassify the remaining Contract balance to
other assets at its estimated fair value less costs to sell. Included in other assets in the accompanying balance sheets
are repossessed vehicles pending sale of $14.8 million and $11.5 million at December 31, 2008 and 2007,
respectively.
In addition, other assets as of December 31, 2008 include 5% of the structured notes issued by our subsidiary in
connection with our $199 million whole loan sale completed in September 2008. These notes are held for
investment and earn interest at a rate of LIBOR plus 5%. The amount outstanding as of December 31, 2008 was $8.0
million.
F-11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Treatment of Securitizations
Prior to July 2003, dispositions of Contracts in securitization transactions were structured as sales for financial
accounting purposes. As a result, gain on sale was recognized on those securitization transactions in which the
Company, or a wholly-owned, consolidated subsidiary of the Company, retained a residual interest in the Contracts
that were sold to a wholly-owned, unconsolidated special purpose subsidiary. These securitization transactions
included "term" securitizations (the purchaser held the Contracts for substantially their entire term) and "warehouse"
securitizations (which financed the acquisition of the Contracts for future sale into term securitizations).
The line item "Residual interest in securitizations" on our Consolidated Balance Sheet represents the residual
interests in term securitizations completed prior to July 2003, together with our residual interest in our September
2008 transaction. This line represents the discounted sum of expected future cash flows from recoveries on charge-
offs from the pre-July 2003 securitization trusts plus the Residual (as defined below) from the September 2008
transaction. The terms of the securitizations provide us the option to repurchase the underlying receivables from the
trust and retire the related bonds. Such repurchases are referred to as "clean-ups". When a clean-up takes place, we
purchase the underlying receivables and record them on the balance sheet and remove that portion of the residual
interest that is attributable to the trust that is terminated when the related bonds are retired. We conducted such
clean-ups on the three remaining unconsolidated trusts during 2007. The remaining portion of the residual interest
at December 31, 2007 and 2008 represents an estimate of the future cash flows from recoveries on charge offs from
clean-up securitizations and will remain on the balance sheet for some time until those particular cash flows are
realized, but in no case later than 84 months from the inception date of the term securitization.
With the exception of the September 2008 transaction, all securitizations since July 2003 have been structured as
secured financings. The warehouse securitizations are accordingly reflected in the line items "Finance receivables"
and "Warehouse lines of credit" on our Consolidated Balance Sheet, and the term securitizations are reflected in the
line items "Finance receivables" and "Securitization trust debt."
Our term securitization structure has generally been as follows:
We sell Contracts we acquire to a wholly-owned special purpose subsidiary ("SPS"), which has been established
for the limited purpose of buying and reselling our contracts. The SPS then transfers the same Contracts to another
entity, typically a statutory trust ("Trust"). The Trust issues interest-bearing asset-backed securities ("Notes"), in a
principal amount equal to or less than the aggregate principal balance of the contracts. We typically sell these
contracts to the Trust at face value and without recourse, except that representations and warranties similar to those
provided by the Dealer to us are provided by us to the Trust. One or more investors purchase the Notes issued by the
Trust (the "Noteholders"); the proceeds from the sale of the Notes are then used to purchase the contracts from us.
We may retain or sell subordinated Notes issued by the Trust. Historically we have purchased a financial guaranty
insurance policy for most of our term securitizations, guaranteeing timely payment of interest and ultimate payment
of principal on the senior Notes, from an insurance company (a "Note Insurer"). In addition, we provide "Credit
Enhancement" for the benefit of the Note Insurer and the Noteholders in three forms: (1) an initial cash deposit to a
bank account (a "Spread Account") held by the Trust, (2) overcollateralization of the Notes, where the principal
balance of the Notes issued is less than the principal balance of the contracts, and (3) in the form of subordinated
Notes. The agreements governing the securitization transactions (collectively referred to as the "Securitization
Agreements") require that the initial level of Credit Enhancement be supplemented by a portion of collections from
the contracts until the level of Credit Enhancement reaches specified levels which are then maintained. The specified
levels are generally computed as a percentage of the principal amount remaining unpaid under the related contracts.
The specified levels at which the Credit Enhancement is to be maintained will vary depending on the performance of
the portfolios of contracts held by the Trusts and on other conditions, and may also be varied by agreement among
the Company, the SPS, the Note Insurers and the trustee. Such levels have increased and decreased from time to
time based on performance of the various portfolios, and have also varied by from one Trust to another. The
Securitization Agreements generally grant us the option to repurchase the sold contracts from the Trust (i.e., a
"clean-up call") when the aggregate outstanding balance of the contracts has amortized to a specified percentage of
the initial aggregate balance.
Our warehouse securitization structures are similar to the above, except that (i) the SPS that purchases the
contracts pledges the contracts to secure promissory notes that it issues, (ii) no increase in the required amount of
Credit Enhancement was contemplated, and (iii) we do not purchase financial guaranty insurance. Upon each sale of
contracts in a securitization structured as a secured financing, we retain as assets on our Consolidated Balance Sheet
the securitized contracts and record as indebtedness the Notes issued in the transaction.
F-12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the September 2008 securitization and other term securitizations completed prior to July 2003 (which were
structured as sales for financial accounting purposes), we removed from our Consolidated Balance Sheet the
contracts sold and added to our Consolidated Balance Sheet (i) the cash received, if any, and (ii) the estimated fair
value of the ownership interest that we retained in contracts sold in the securitization. That retained or residual
interest (the "Residual") consists of (a) the cash held in the Spread Account, if any, (b) overcollateralization, if any,
(c) Notes retained, if any, and (d) receivables from the Trust, which include the net interest receivables ("NIRs").
NIRs represent the estimated discounted cash flows to be received from the Trust in the future, net of principal and
interest payable with respect to the Notes, the premium paid to the Note Insurer, if any, and certain other expenses.
We recognize gains or losses attributable to any changes in the estimated fair value of the Residuals. Gains in fair
value are recognized as other income in the income statement, and losses are recorded as an impairment loss in the
income statement. We are not aware of an active market for the purchase or sale of interests such as the Residuals;
accordingly, we determine the estimated fair value of the Residuals by discounting the amount of anticipated cash
flows that we estimate will be released to us in the future (the cash out method), using a discount rate that we believe
is appropriate for the risks involved. The anticipated cash flows may include collections from both current and
charged off receivables. Historically we have used an effective pre-tax discount rate of 14% per annum for cash
flows from current receivables and of 25% per annum for cash flows from charged-off receivables. As a result of
changing market conditions as discussed below, we have used an effective pre-tax discount rate of 33% per annum
for the September 2008 Residual.
We receive periodic base servicing fees for the servicing and collection of the contracts. In addition, we are
entitled to the cash flows from the Trusts that represent collections on the contracts in excess of the amounts
required to pay principal and interest on the Notes, the base servicing fees, and the premium paid to the Note
Insurer, and certain other fees (such as trustee and custodial fees). Required principal payments on the Notes are
generally defined as the payments sufficient to keep the principal balance of the Notes equal to the aggregate
principal balance of the related contracts (excluding those contracts that have been charged off), or a pre-determined
percentage of such balance. Where that percentage is less than 100%, the related Securitization Agreements require
accelerated payment of principal until the principal balance of the Notes is reduced to the specified percentage. Such
accelerated principal payment is said to create "overcollateralization" of the Notes.
If the amount of cash required for payment of fees, interest and principal on the senior Notes exceeds the amount
collected during the collection period, the shortfall is withdrawn from the Spread Account, if any. If the cash
collected during the period exceeds the amount necessary for the above allocations plus required principal payments
on the subordinated Notes, if any, and there is no shortfall in the related Spread Account or other form of Credit
Enhancement, the excess is released to us. If the total Credit Enhancement amount is not at the required level, then
the excess cash collected is retained in the Trust until the specified level is achieved. Cash in the Spread Accounts is
restricted from our use. Cash held in the various Spread Accounts is invested in high quality, liquid investment
securities, as specified in the Securitization Agreements. In determining the value of the Residuals, we have
estimated the future rates of prepayments, delinquencies, defaults, default loss severity, and recovery rates, as all of
these factors affect the amount and timing of the estimated cash flows. Our estimates are based on historical
performance of comparable contracts.
Following a securitization that is structured as a sale for financial accounting purposes, we recognize interest
income on the balance of the Residuals. In addition, we will recognize additional revenue in other income if the
actual performance of the contracts related to the Residuals is better than our estimate of the value of the Residual. If
the actual performance of the contracts is worse than our estimate, then a downward adjustment to the carrying value
of the Residuals and a related impairment charge would be required. In a securitization structured as a secured
financing for financial accounting purposes, interest income is recognized when accrued under the terms of the
related contracts and, therefore, presents less potential for fluctuations in performance when compared to the
approach used in a transaction structured as a sale for financial accounting purposes.
In all our term securitizations, whether treated as secured financings or as sales, we have transferred the
receivables (through a subsidiary) to the securitization Trust. The difference between the two structures is that in
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.
F-13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Servicing
We consider the contractual servicing fee received on our managed portfolio held by non-consolidated subsidiaries
to be equal to adequate compensation. Additionally, we consider that these fees would fairly compensate a substitute
servicer, should one be required. As a result, no servicing asset or liability has been recognized. Servicing fees
received on the managed portfolio held by non-consolidated subsidiaries are reported as income when earned.
Servicing fees received on the managed portfolio held by consolidated subsidiaries are included in interest income
when earned. Servicing costs are charged to expense as incurred. Servicing fees receivable, which are included in
Other Assets in the accompanying balance sheets, represent fees earned but not yet remitted to us by the trustee.
Furniture and Equipment
Furniture and equipment are stated at cost net of accumulated depreciation. We calculate depreciation using the
straight-line method over the estimated useful lives of the assets, which range from three to five years. Assets held
under capital leases and leasehold improvements are amortized over the lesser of the estimated useful lives of the
assets or the related lease terms. Amortization expense on assets acquired under capital lease is included with
depreciation expense on owned assets.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of carrying amount or fair value less costs to sell.
Other Income
Other Income consists primarily of gains recognized on our Residual interest in securitizations, recoveries on
previously charged off contracts, convenience fees charged to obligors for certain types of payment transaction
methods, fees paid to us by Dealers for certain direct mail services we provide and proceeds from the sale of
previously charged-off receivables to independent third parties. The gain recognized related to the Residual interest
was $178,000 for 2008, $6.2 million for 2007 and $1.2 million for 2006. The recoveries on the charged-off CPS
contracts relate to contracts from previously unconsolidated trusts and MFN contracts acquired in the MFN
acquisition. These recoveries totaled $2.1 million, $3.0 million and $4.3 million for the years ended 2008, 2007 and
2006, respectively. The convenience fees charged to obligors were $6.0 million, $3.5 million and $2.1 million
for the same periods, respectively. The direct mail revenues were $5.3 million for 2008 and 2007 and $3.8 million
for 2006. The proceeds from the sale of previously charged-off receivables to independent third parties were $1.8
million in 2007. There were no sales of previously charged-off receivables in 2008 and 2006.
Earnings (Loss) Per Share
The following table illustrates the computation of basic and diluted earnings (loss) per share:
F-14
Numerator:Numerator for basic and diluted earnings (loss) per share………..……..…$(26,091) $13,858 $39,555 Denominator:Denominator for basic earnings (loss) per share - weighted average number of common shares outstanding during the year……………………...…...……………..$19,230 20,880 21,759 Incremental common shares attributable to exercise of outstanding options and warrants……………………………..…...…..$- 1,715 2,293 Denominator for diluted earnings (loss) per share………………………...………...………..$19,230 22,595 24,052 Basic earnings (loss) per share……………………..….….………….........$(1.36) $0.66 $1.82 Diluted earnings (loss) per share…………….……………..………..............$(1.36) $0.61 $1.64 (In thousands, except per share data)Year Ended December 31,200820072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incremental shares of 6,320,000, 1,539,000 and 950,000 related to stock options have been excluded from the
diluted earnings per share calculation for the year ended December 31, 2008, 2007 and 2006, respectively, because
the effect is anti-dilutive. The exercise prices of these stock options were greater than the average market price of
the Company’s common shares or the Company was in a net loss position and, therefore, the effect would be anti-
dilutive to earnings (loss) per share.
Deferral and Amortization of Debt Issuance Costs
Costs related to the issuance of debt are deferred and amortized using the interest method over the contractual or
expected term of the related debt.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state
franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes,
under which deferred income taxes are recognized for the future tax consequences attributable to the differences
between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. We have estimated a valuation
allowance against that portion of the deferred tax asset whose utilization in future periods is not more than likely.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), ―Accounting for Uncertainty in Income Taxes‖.
Fin 48 is an interpretation of ―Statement of Financial Accounting Standards No. 109‖, which provides criteria for the
recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain
tax position may be recognized if it is ―more likely than not‖ that the position is sustainable based solely on its
technical merits. We adopted FIN 48 on January 1, 2007.
Purchases of Company Stock
We record purchases of our own common stock at cost and treat the shares as retired.
Stock Option Plan
Effective January 1, 2006, we adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing
the modified prospective approach. Under the modified prospective approach, Employee Costs include all share
based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R).
The per share weighted-average fair value of stock options granted during the years ended December 31, 2008,
2007 and 2006, was $1.57, $2.89, and $3.39, respectively. That fair value was estimated using the Black-Scholes
option pricing model using the weighted average assumptions noted in the following table. We estimate the expected
life of each option as the average of the vesting period and the contractual life of the option. The volatility estimate
is based on the historical volatility of our stock over the period that equals the expected life of the option. Volatility
assumptions ranged from 43% to 50% for 2008, 36% to 48% for 2007 and 34% to 50% for 2006. The risk-free
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.
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
F-15
Expected life (years)…………………………………...…………………………...5.95 5.94 5.69 Risk-free interest rate…………………………………….……………………...3.21 %4.54 %4.80 %Volatility………………………………………….……………………………………….49 %46 %47 %Expected dividend yield……………………………..…………………………..- - - Year Ended December 31,200820072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, ―Effective
Date of FASB Statement No. 157‖, to partially defer FASB Statement No. 157 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis. SFAS 157 is effective for us on January 1, 2008, except for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring basis. For those excepted assets and
liabilities our effective date is January 1, 2009. The adoption of this statement did not have a material effect on our
financial position or results of operations. In October 2008, the FASB issued Staff Position (FSP) No. 157-3,
―Determining the Fair Value of a Financial Asset when the Market for that Asset is not Active‖. This FSP clarifies
the application of FAS 157 in a market that is not active. The effect of adoption was not material.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value
measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
In September 2008 we sold automobile contracts in a securitization that was structured as a sale. In that sale, we
retained certain assets that are measured at fair value. Following is a description of the valuation methodologies
used for the securities retained and the residual interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation hierarchy. The securities retained total $8.5 million of
notes and are classified as level 2 because there were similar assets sold in the transaction. We used the price at
which those similar notes were sold to value the securities retained. The residual interest in the cash flows totals
$2.5 million and is classified as level 3. We determined the value of that residual interest using a discounted cash
flow model that included estimates for prepayments and losses. We used a discount rate of 33% per annum. The
assumptions we used were based on historical performance of automobile contracts we had originated and serviced
in the past, adjusted for current market conditions.In February 2007, the FASB issued Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities. Effective January 1, 2008, the standard provides
companies with an option to report selected financial assets and liabilities at fair value and establishes presentation
and disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option
on any of its financial assets or liabilities on January 1, 2008.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded
at Fair Value through Earnings (―SAB 109‖). Previously, SAB 105, Application of Accounting Principles to Loan
Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes
SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should
be included in measuring fair value for all written loan commitments that are accounted for at fair value through
earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 was effective for derivative
loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The effect of adoption
was not material.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses
during the reported periods. Specifically, a number of estimates were made in connection with determining an
appropriate allowance for finance credit losses, valuing the Residuals, accreting discounts and acquisition fees,
amortizing deferred costs, the recording of deferred tax assets and reserves for uncertain tax positions. These are
material estimates that could be susceptible to changes in the near term and, accordingly, actual results could differ
from those estimates.
F-16
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year’s presentation with no
effect on previously reported earnings or shareholders’ equity.
Uncertainty of Capital Markets and General Economic Conditions
Historically, we have depended upon the availability of warehouse credit facilities and access to long-term
financing through the issuance of asset-backed securities collateralized by our automobile contracts. We conducted
four term securitizations in 2006, four in 2007, and two in 2008. From July 2003 through April 2008 all of our
securitizations were structured as secured financings. The second of our two securitization transactions in 2008
(completed in September 2008) was in substance a sale of the related contracts, and is treated as a sale for financial
accounting purposes.
Since the fourth quarter of 2007, we have observed unprecedented adverse changes in the market for securitized
pools of automobile contracts. These changes include reduced liquidity, and reduced demand for asset-backed
securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime automobile
receivables. Moreover, many of the firms that previously provided financial guarantees, which were an integral part
of our securitizations, are no longer offering such guarantees. As of December 31, 2008, we have no available
warehouse credit facilities and no immediate plans to complete a term securitization.
The adverse changes that have taken place in the market over the last 18 months have caused us to significantly
curtail our purchases of automobile contracts in order to conserve our capital. If the current adverse circumstances
that have affected the capital markets should continue or worsen, we may further curtail further or cease our
purchases of new automobile contracts, which could lead to a material adverse effect on our operations.
Current economic conditions have negatively affected many aspects of our industry. First, as stated above, there is
little demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile
receivables. Second, lenders who previously provided short-term warehouse financing for sub-prime automobile
finance companies such as ours are reluctant to provide such short-term financing due to the uncertainty regarding
the prospects of obtaining long-term financing through the issuance of asset-backed securities. In addition, many
capital market participants such as investment banks, financial guaranty providers and institutional investors who
previously played a role in the sub-prime auto finance industry have withdrawn from the industry, or in some cases,
have ceased to do business. Finally, the broad economic weakness and increasing unemployment has negatively
affected many of the obligors under our receivables, resulting in higher delinquency, charge-offs and losses. Each
of these factors has adversely affected our results of operations. Should existing economic conditions worsen, both
our ability to purchase new contracts and the performance of our existing managed portfolio may be impaired,
which, in turn, could have a further material adverse effect on our results of operations.
Financial Covenants
Certain of our securitization transactions and our warehouse credit facility contain various financial covenants
requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of
liquidity and net worth and not exceeding maximum leverage levels and maximum financial losses. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain
creditors to declare a default if a default occurred under a different facility.
The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are
terminable by the respective insurance companies upon defined events of default, and, in some cases, at the will of
the insurance company. We have received waivers regarding the potential breach of certain such covenants relating
to minimum net worth, financial loss in any one period and maintenance of active warehouse credit facilities.
Without such waivers, certain credit enhancement providers would have had the right to terminate us as servicer
with respect to certain of our outstanding securitization pools. Although such rights have been waived, such waivers
are temporary, and there can be no assurance as to their future extension. We do, however, believe that we will
obtain such future extensions because it is generally not in the interest of any party to the securitization transaction
to transfer servicing. Nevertheless, there can be no assurance as to our belief being correct. Were an insurance
company in the future to exercise its option to terminate such agreements, such a termination could have a material
adverse effect on our liquidity and results of operations, depending on the number and value of the terminated
F-17
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreements. Our note insurers continue to extend our term as servicer on a monthly and/or quarterly basis, pursuant
to the servicing agreements.
(2) Restricted Cash
Restricted cash consists of the following components:
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:
Finance receivables totaling $33.3 million and $28.5 million at December 31, 2008 and 2007, respectively, have
been placed on non-accrual status as a result of their delinquency status.
The following table presents a summary of the activity for the allowance for credit losses, for the years ended
December 31, 2008, 2007 and 2006:
Excluded from finance receivables are contracts that were previously classified as finance receivables but were
reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table
presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory
that is not included in the allowance for credit losses.
F-18
Securitization trust accounts……………………….….………$153,479 $170,191 Other…………………………………………………….………$- 150 Total restricted cash…………………………………...…………$153,479 $170,341 20082007December 31,(In thousands)Finance Receivables Automobile finance receivables, net of unearned interest…………………………...……….$1,430,227 $2,091,892 Less: Unearned acquisition fees and discounts…………………………………..…...(12,884) (23,888) Finance Receivables…………………………………………………………..……….$1,417,343 $2,068,004 (In thousands)December 31,2008December 31,2007Balance at beginning of year……………...……….……………………...……………$100,138 $79,380 $57,728 Provision for credit losses………………………….………………..………….……..$148,408 137,272 92,057 Charge-offs………………………………….………………….…………...…………………$(195,039) (140,963) (88,335) Recoveries…………………………………………………………...…………………..$30,400 24,449 17,930 Allowance attributable to receivables sold………………………………………….....$(5,871) - - Balance at end of year…….………………………………………...……………….$78,036 $100,138 $79,380 (In thousands)20082007December 31,2006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Residual Interest in Securitizations
As of December 31, 2008 we have exercised our clean-up call option on each of our unconsolidated securitization
transactions completed from 2001 to 2003. Residual assets of $935,000 and $2.3 million as of December 31, 2008
and 2007, respectively, remains, which represents our discounted estimate of cash flows from recoveries of
previously charged off receivables from these unconsolidated securitization transactions. We have used a discount
rate of 25%, which is consistent with previous periods. The effect of a 20% adverse change to the fair value of
residual cash flows at December 31, 2008 would result in a decrease of $109,000 to the value of the asset recorded.
During the third quarter we completed a structured loan sale in which we retained a residual interest. The residual
interest in the cash flows from this September 2008 transaction was $2.6 million as of December 31, 2008 and was
determined using a discounted cash flow model that included estimates for prepayments and losses. The discount
rate utilized was 33%. The assumptions utilized were based on our historical performance adjusted for current
market conditions.
(5) Furniture and Equipment
The following table presents the components of furniture and equipment:
Depreciation expense totaled $537,000, $406,000 and $667,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
(6) Securitization Trust Debt
We have completed a number of term securitization transactions that are structured as secured borrowings for
financial accounting purposes. The debt issued in these transactions is shown on our consolidated balance sheets as
―Securitization trust debt,‖ and the components of such debt are summarized in the following table:
F-19
Gross balance of repossessions in inventory……………...……….……………………...……………$47,452 $33,380 Allowance for losses on repossessed inventory………………………………….………………….…………...…………………$(32,690) (21,849) Net repossessed inventory included in other assets…….………………………………………...……………….$14,762 $11,531 (In thousands)20082007December 31,Furniture and fixtures…………………………….…..$4,128 $3,996 Computer and telephone equipment……………………………..…..$5,651 5,680 Leasing assets………………………………..……….$673 673 Leasehold improvements………………………….….$1,190 1,085 Other fixed assets………………………….………….$244 17 11,886 11,451 Less: accumulated depreciation and amortization……….$(10,482) (9,951) $1,404 $1,500 December 31,20082007(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 $639.4 million in 2009, $422.2 million in 2010, $235.9 million in 2011, $90.0 million in 2012,
$16.7 million in 2013.
All of the securitization trust debt was issued in private placement transactions to qualified institutional investors.
The debt was issued through wholly-owned, bankruptcy remote subsidiaries of CPS and is secured by the assets of
such subsidiaries, but not by other assets of the Company. Principal and interest payments on the senior notes are
guaranteed by financial guaranty insurance policies.
The terms of the various Securitization Agreements related to the issuance of the securitization trust debt require
that certain delinquency and credit loss criteria be met with respect to the collateral pool, and require that we
maintain minimum levels of liquidity and net worth and not exceed maximum leverage levels and maximum
financial losses. We were in compliance with all such covenants as of December 31, 2008, in some cases only after
giving effect to waivers of otherwise applicable standards.
We are responsible for the administration and collection of the contracts. The Securitization Agreements also
require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings or to be
applied to make payments on the securitization trust debt. As of December 31, 2008, restricted cash under the
various agreements totaled approximately $153.5 million. Interest expense on the securitization trust debt is
composed of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of
borrowing include facility fees, insurance premiums, amortization of transaction costs, and amortization of discounts
given on the notes at the time of issuance. Deferred financing costs related to the securitization trust debt are
amortized using the interest method. Accordingly, the effective cost of borrowing of the securitization trust debt is
greater than the stated rate of interest.
The wholly-owned, bankruptcy remote subsidiaries of CPS were formed to facilitate the above asset-backed
financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our warehouse line
F-20
WeightedFinalAverageScheduledInterest Rate atPaymentDecember 31,SeriesDate (1)2008CPS 2003-CMarch 2010$964$87,500$1,023$5,6833.57%CPS 2003-DOctober 20101,56875,0001,7046,6953.91%CPS 2004-AOctober 20102,99982,0943,2779,8494.32%CPS 2004-BFebruary 20115,82196,3696,19214,9374.17%CPS 2004-CApril 20117,964100,0008,22318,7634.24%CPS 2004-DDecember 201112,230120,00012,39525,9944.44%CPS 2005-AOctober 201118,517137,50017,58634,1545.30%CPS 2005-BFebruary 201223,455130,62521,99139,0084.67%CPS 2005-CMay 201241,170183,30039,47867,8345.13%CPS 2005-TFCJuly 201212,42572,52512,33324,6545.76%CPS 2005-DJuly 201237,016145,00036,54861,8575.69%CPS 2006-ANovember 201274,068245,00073,257120,6675.33%CPS 2006-BJanuary 201393,318257,50092,106144,9416.33%CPS 2006-CJuly 2013102,382247,500101,716159,3085.62%CPS 2006-DAugust 2013107,516220,000105,687159,3845.56%CPS 2007-ANovember 2013164,138290,000160,122233,0925.53%CPS 2007-TFCDecember 201351,157113,29351,11584,6855.77%CPS 2007-BJanuary 2014200,207314,999195,800277,8785.99%CPS 2007-CMay 2014232,744327,499228,478308,9196.05%CPS 2008-AOctober 2014254,931310,359235,180- 6.79%$1,444,590$3,556,063$1,404,211$1,798,302ReceivablesPledged atDecember 31,(Dollars in thousands)2008December 31,2007InitialPrincipal2008December 31,OutstandingOutstandingPrincipal atPrincipal at
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of credit. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be
included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged
as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax
purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of
these subsidiaries are available to pay other creditors of the Company or its affiliates.
(7) Debt
The terms of our debt outstanding at December 31, 2008 and 2007 are summarized below:
Residual interest financing
Notes secured by our residual interests in securitizations. The
terms of the $60 million term residual facility and the $60
million revolving residual credit facility were amended on July
10, 2008 to eliminate the revolving feature, increase the
interest rate, establish an amortization schedule for principal
reductions, and provide an extension of the maturity from June
2009 to June 2010 at our option if certain conditions are met.
The aggregate indebtedness under this facility was $67.3
million at December 31, 2008. It bears interest at 10.875% over
LIBOR.
Senior secured debt, related party
Notes payable to Levine Leichtman Capital Partners IV, L.P.
(―LLCP‖). The notes consisted of a $10 million term note and
a $15 million term note that each accrue interest at 16% per
annum and are due in June and July 2013. The amount
outstanding at December 31, 2008 is net of the unamortized
debt discount of $4.9 million relating to the valuation of
1,225,000 shares of stock, warrants to purchase 1,564,324
shares of our common stock at an exercise price of $2.4672,
warrants to purchase 283,985 of our common stock at an
exercise price of $0.01 and $1.4 million in cash paid to the
lender at issuance.
Subordinated renewable notes
Notes bearing interest ranging from 5.85% to 15.30%, with a
weighted average rate of 12.82%, and with maturities from
January 2009 to November 2018 with a weighted average
maturity of October 2011. We began issuing the notes in June
2005 and incurred issuance costs of $250,000. Payments are
made monthly, quarterly, annually or upon maturity based on
the terms of the individual notes.
December 31,
2008
2007
(In thousands)
$67,300
$70,000
20,105
--
25,721
$113,126
28,134
$98,134
The outstanding debt on our warehouse facility was $9.9 million as of December 31, 2008, compared to $235.9
million outstanding on our two warehouse facilities as of December 31, 2007. See Note 15 for a discussion of our
warehouse lines of credit.
The costs incurred in conjunction with the above debt are recorded as deferred financing costs on the
accompanying balance sheets and are more fully described in Note 1.
We must comply with certain affirmative and negative covenants related to debt facilities, which require, among
other things, that we maintain certain financial ratios related to liquidity, net worth, capitalization and maximum
F-21
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial losses. Further covenants include matters relating to investments, acquisitions, restricted payments and
certain dividend restrictions.
The following table summarizes the contractual and expected maturity amounts of debt as of December 31, 2008:
_________________________
(1) Assumes that we meet certain conditions that allow us to exercise our option to extend the maturity from June 2009 to
June 2010.
(2) The senior secured debt maturing in 2013 is shown net of unamortized debt discounts of $4.9 million. On a gross
basis the scheduled maturity of this debt in 2013 is $25 million.
(8) Shareholders’ Equity
Common Stock
Holders of common stock are entitled to such dividends as our Board of Directors, in its discretion, may declare
out of funds available, subject to the terms of any outstanding shares of preferred stock and other restrictions. In the
event of liquidation of the Company, holders of common stock are entitled to receive, pro rata, all of the assets of
the Company available for distribution, after payment of any liquidation preference to the holders of outstanding
shares of preferred stock. Holders of the shares of common stock have no conversion or preemptive or other
subscription rights and there are no redemption or sinking fund provisions applicable to the common stock.
We are required to comply with various operating and financial covenants defined in the agreements governing the
warehouse lines of credit, senior debt, residual interest financing and subordinated debt. The covenants restrict the
payment of certain distributions, including dividends (See Note 7).
Included in compensation expense for the years ended December 31, 2008, 2007, and 2006, is $1.3 million, $1.1
million and $244,000 related to the amortization of deferred compensation expense and valuation of stock options.
Stock Purchases
At four different times between 2000 and 2008, our Board of Directors, authorized us to purchase a total of up to
$32.5 million of our securities. As of December 31, 2008, we had purchased $5.0 million in principal amount of the
debt securities, and $25.3 million of our common stock, representing 7,126,657 shares.
Options and Warrants
In July 1997, the Company adopted and its shareholders approved the 1997 Long-Term Incentive Plan (the ―1997
Plan‖) pursuant to which our Board of Directors may grant stock options, restricted stock and stock appreciation
rights to employees, directors or employees of entities in which we have a controlling or significant equity interest.
Options that have been granted under the 1997 Plan have been granted at an exercise price equal to (or greater than)
the stock’s fair market value at the date of the grant, with terms generally of 10 years and vesting generally over five
years. Subsequent amendments to the 1997 Plan have increased the aggregate maximum 6,900,000 shares. There are
no shares available for grant in the 1997 Plan as of December 31, 2008.
In 2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term Equity Incentive Plan (the
―2006 Plan‖) pursuant to which our Board of Directors, or a duly-authorized committee thereof, may grant stock
F-22
Contractual maturity dateResidual interest financing (1)Senior secured debt (2)Subordinated renewable notesTotal2009………………………$10,370$ -$ 10,272$ 20,642$ 2010……………………..$56,930 - 10,349 67,279 2011…………………………..$- - 2,786 2,786 2012……………………$- - 1,660 1,660 2013……………………$- 20,105 516 20,621 Thereafter………………..$- - 138 138 67,300$ 20,105$ 25,721$ 113,126$ (In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options, restricted stock, restricted stock units and stock appreciation rights to our employees or our subsidiaries, to
directors of the Company, and to individuals acting as consultants to the Company or its subsidiaries. In June 2008,
the shareholders of the Company approved an amendment to the 2006 Plan to increase the maximum number of
shares that may be subject to awards under the 2006 Plan from 3,000,000 to 5,000,000. Options that have been
granted under the 2006 Plan have been granted at an exercise price equal to (or greater than) the stock’s fair market
value at the date of the grant, with terms generally of 10 years and vesting generally over five years.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), ―Share-Based
Payment, revised 2004‖ (―SFAS 123R‖), prospectively for all option awards granted, modified or settled after
January 1, 2006, using the modified prospective method. Under this method, we recognize compensation costs in the
financial statements for all share-based payments granted subsequent to January 1, 2006 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R).
For the year ended December 31, 2008, we recorded stock-based compensation costs in the amount of $1.3
million. As of December 31, 2008, unrecognized stock-based compensation costs to be recognized over future
periods equaled $4.2 million. This amount will be recognized as expense over a weighted-average period of 3.3
years.
At December 31, 2008, the options outstanding and exercisable had no intrinsic value. The total intrinsic value of
options exercised was $50,000, $1.0 million, and $2.2 million for the years ended December 31, 2008, 2007, and
2006, respectively. New shares were issued for all options exercised during the years ended December 31, 2008,
2007 and 2006. At December 31, 2008, there were a total of 2.4 million additional shares available for grant under
the 2006 Plan.
Stock option activity for the year ended December 31, 2008 is as follows:
The per share weighted average fair value of stock options granted whose exercise price was equal to the market
price of the stock on the grant date during the years ended December 31, 2008, 2007 and 2006, was $1.57, $2.91,
and $3.39, respectively.
The per share weighted average fair value and exercise price of stock options granted whose exercise price was
above the market price of the stock on the grant date during the year ended December 31, 2008 were $1.62 and
$3.37, respectively. The per share weighted average fair value and exercise price of stock options granted whose
exercise price was above the market price of the stock on the grant date during the year ended December 31, 2007
were $2.53 and $5.00, respectively. We did not issue any stock options above the market price of the stock during
the year ended December 31, 2006.
We have not issued any stock options with an exercise price below the market price of the stock on the grant date.
On June 30, 2008, we entered into a series of agreements pursuant to which a lender purchased a $10 million five-
year, fixed rate, senior secured note from us. In July 2008, in conjunction with the amendment of the combination
term and revolving residual credit facility as discussed above, the lender purchased an additional $15 million note
with substantially the same terms as the $10 million note. Pursuant to the June 30, 2008 securities purchase
agreement, we issued to the lender 1,225,000 shares of common stock. In addition, we issued the lender two
warrants: (i) warrants that we refer to as the FMV Warrants, which are exercisable for 1,564,324 shares of our
common stock, at an exercise price of $2.4672 per share, and (ii) warrants that we refer to as the N Warrants, which
F-23
Number ofShares(in thousands)Options outstanding at the beginning of period…………6,196 $4.47 N/A Granted………………………………………………575 3.18 N/A Exercised……………………………………………(70) 1.52 N/A Forfeited…………………………………………….(381) 5.01 N/AOptions outstanding at the end of period…………………..6,320 $4.35 6.04 yearsOptions exercisable at the end of period……………………4,643 $3.97 5.18 yearsWeightedRemainingContractual TermAverageWeightedExercise PriceAverage
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are exercisable for 283,985 shares of our common stock, at a nominal exercise price. Both the FMV Warrants and
the N Warrants are exercisable in whole or in part and at any time up to and including June 30, 2018. We valued the
warrants using the Black-Scholes valuation model.
In connection with the amendment to our residual credit facility discussed in Note 15, we issued warrants valued
as being equivalent to 2,500,000 common shares, or $4,071,429. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to July 10, 2018.
(9) Interest Income
The following table presents the components of interest income:
(10) Income Taxes
Income taxes consist of the following:
Income tax expense/(benefit) for the years ended December 31, 2008, 2007 and 2006, differs from the amount
determined by applying the statutory federal rate of 35% to income before income taxes as follows:
F-24
Interest on finance receivables……………………...…………..$346,594 $358,862 $251,609 Residual interest income …………………….……………….…….$606 2,324 5,656 Other interest income……………..…………………..………..$4,351 9,079 6,301 Net interest income………………..…………………….………..$351,551 $370,265 $263,566 Year Ended December 31,(In thousands)200820072006Current federal tax expense………………………………………………...……………………………….$(23,218) $10,385 $19,036 Current state tax expense………………………………………………...……………………………….$(178) 2,200 1,193 Deferred federal tax (benefit)………………………………………………...……………………………….$5,886 (2,538) (9,660) Deferred state tax expense (benefit)………………………………………………...……………………………….$(854) 52 4,877 Change in valuation allowance……………………..…………….$1,000 - (41,801) Income tax expense (benefit)………………………………..………….$(17,364) $10,099 $(26,355) Year Ended December 31,(In thousands)200820072006Expense at federal tax rate………………………...……………………….$(15,208) $8,385 $4,620 State taxes, net of federal income tax benefit……………………………………….$(319) 1,458 5,585 Other adjustments to tax reserve…………………………………………………..………..$(3,608) (110) 5,136 Effect of change in state tax rate…………………………………………………..………..$- - 486 Valuation allowance……………………………….………………………………………………..$1,000 - (41,801) Stock-based compensation……………………………….………………………………………………..$411 279 47 Other…………………………………………………..…………………………………………………………$360 87 (428) $(17,364) $10,099 $(26,355) Year Ended December 31,(In thousands)200820072006
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of
December 31, 2008 and 2007 are as follows:
As part of the MFN and TFC Mergers, CPS acquired certain net operating losses and built-in loss assets.
Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code
(―IRC‖) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation
(that is, a corporation with a net operating loss (―NOL‖) carryforward, credit carryforward, or certain built-in losses
(―BILs‖)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership
change.
In determining the possible future realization of deferred tax assets, we have considered the taxes paid in the
current and prior years that may be available to recapture, as well as future taxable income from the following
sources: (a) reversal of taxable temporary differences; (b) future operations exclusive of reversing temporary
differences; and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire. During the year ended December 31, 2007, the
Company determined that deferred tax assets totaling approximately $9.8 million, which were subject to a 100%
valuation allowance at December 31, 2006, were permanently not available for future utilization. As a result, the
deferred tax assets and the related valuation allowance were adjusted, with no effect on the net deferred tax assets
recorded or to the provision for income taxes. At December 31, 2008 we have established a $1.0 million valuation
allowance against that portion of the deferred tax asst whose utilization in future periods is not more than likely.
As of December 31, 2008, we had net operating loss carryforwards for federal and state income tax purposes of
$19.5 million and $91.8 million, respectively. The federal net operating losses begin to expire in 2028. The state net
operating losses begin to expire in 2013.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits including interest and
penalties for the year:
F-25
Deferred Tax Assets:Finance receivables…………………………………….…………….$22,187 $37,812 Accrued liabilities…………………………………….…………….$839 728 Furniture and equipment………………………………...………..$327 417 NOL carryforwards and BILs………………………...…………..$27,379 19,547 Pension Accrual……………………………………...………………..$2,877 123 Other……………………………………………...……………….$118 208 Total deferred tax assets………………………….………………$53,727 58,835 Valuation allowance……………………………………………...……………….$(1,000) - $52,727 58,835 $Deferred Tax Liabilities:$Pension Accrual……………………………….……………..$- - Total deferred tax liabilities……………………..…………………$- - $ Net deferred tax asset……………….…………………$52,727 $58,835 December 31,20082007(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the balance of unrecognized tax benefits at December 31, 2008, are $14.9 million of tax benefits that,
if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at
December 31, 2008 are $1.3 million of tax benefits that, if recognized, would result in adjustments to other tax
accounts, primarily deferred taxes.
We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. Related
to the uncertain tax benefits noted above, we accrued penalties of $0.2 million and gross interest of $0.2 million
during 2008 and in total, as of December 31, 2008, have recognized a liability for penalties of $0.6 million and gross
interest of $1.0 million.
We do not anticipate a significant change in unrecognized tax positions within the coming year. In addition, we
believe that it is reasonably possible that none of our currently remaining unrecognized tax positions, each of which
is individually insignificant, may be recognized by the end of 2008 as a result of a lapse of the statute of limitations.
We are subject to taxation in the US and various states and foreign jurisdictions. The Company’s tax years for
2001through 2007 are subject to examination by the tax authorities. With few exceptions, we are no longer subject
to U.S. federal, state, or local examinations by tax authorities for years before 2001.
(11) Related Party Transactions
Loans to Officers to Exercise Certain Stock Options
During 2002, our Board of Directors approved a program under which officers of the Company were advanced
amounts sufficient to enable them to exercise certain of their outstanding options. Such loans were available for a
limited period of time, and available only to exercise previously repriced options. The loans accrued interest at a rate
of 5.50% per annum, and were due in 2007. At December 31, 2007 there was $383,000 outstanding related to three
such loans. Such amounts were recorded as contra-equity within common stock in the Shareholders’ Equity section
of our Consolidated Balance Sheet. Two of the loans were paid off during 2008 with cash. The third loan was paid
off on August 5, 2008 through a transfer of 210,000 shares of company stock. This is reported in the consolidated
statement of shareholders equity in ―Purchase of common stock‖. At December 31, 2008 all loans have been repaid
and there are no amounts outstanding.
Director Purchase of Retail Note
In December 2007, one of our directors purchased a $4 million subordinated renewable note pursuant to our
ongoing program of issuing such notes to the public. The note was purchased through the registered agent and
under the same terms and conditions, including the interest rate, that were offered to other purchasers at the time the
note was issued. As of December 31, 2008, $4 million remains outstanding on this note.
(12) Commitments and Contingencies
Leases
The Company leases its facilities and certain computer equipment under non-cancelable operating leases, which
expire through 2016. Future minimum lease payments at December 31, 2008, under these leases are due during the
years ended December 31 as follows:
F-26
Unrecognized tax benefit - opening balance………………………………………………...……………………………….$12,280 $11,612 Gross increases - tax positions in prior period………………………………………………...……………………………….$- $1,357 Gross decreases - tax positions in prior period………………………………………………...……………………………….$(1,764) $(965) Gross increases - tax positions in current period………………………………………………...……………………………….$1,052 $1,279 Settlements………………………………………………...……………………….$- $(119) Lapse of statute of limitations……………………..…………….$(3,385) $(884) Unrecognized tax benefit - ending balance………………………………………………...……………………………….$8,183 $12,280 20082007(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for the years ended December 31, 2008, 2007 and 2006, was $4.2 million, $4.0 million, and
$3.9 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 and 2006, we received $113,000 and $194,000, respectively, of sublease income, which is included
in occupancy expense. We did not receive any sublease income in 2008.
Litigation
Stanwich Litigation. CPS was for some time a defendant in a class action (the ―Stanwich Case‖) brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that case were persons entitled to receive
regular payments (the ―Settlement Payments‖) pursuant to earlier settlements of claims, generally personal injury
claims, against unrelated defendants. Stanwich Financial Services Corp. (―Stanwich‖), an affiliate of the former
chairman of the board of directors of CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich
defaulted on its payment obligations to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy
Code, in the federal bankruptcy court in Connecticut. By February 2005, CPS had settled all claims brought against
it in the Stanwich Case.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee, asserted claims for indemnity
against the Company in a separate action, which is now pending in federal district court in Rhode Island. The
Company has filed counterclaims in the Rhode Island federal court against Mr. Pardee, and has filed a separate
action against Mr. Pardee's Rhode Island attorneys, in the same court. The litigation between Mr. Pardee and CPS is
stayed, awaiting resolution of an adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.
CPS has reached an agreement in principle with the representative of creditors in the Stanwich bankruptcy to
resolve the adversary action. Under the agreement in principle, CPS would pay the bankruptcy estate $625,000 and
abandon its claims against the estate, while the estate would abandon its adversary action against Mr. Pardee. The
bankruptcy court has rejected that proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon appeal, CPS would expect that the agreement
would result in (i) limitation of its exposure to Mr. Pardee to no more than some portion of his attorneys fees
incurred and (ii) stays in Rhode Island being lifted, causing those cases to become active again. CPS is unable to
predict whether the ruling of the bankruptcy court will be sustained or overturned on appeal.
The reader should consider that an adverse judgment against CPS in the Rhode Island case for indemnification, if
in an amount materially in excess of any liability already recorded in respect thereof, could have a material adverse
effect.
Other Litigation.
The Company has recorded a liability as of December 31, 2008 that it believes represents a sufficient allowance
for legal contingencies. Any adverse judgment against the Company, if in an amount materially in excess of the
recorded liability, could have a material adverse effect on the financial position of the Company. The Company is
involved in various other legal matters arising in the normal course of business. Management believes that any
liability as a result of those matters would not have a material effect on the Company’s financial position.
F-27
2009……………………………………………………………..……………...…………..$3,985 2010…………………………………...……………………….…………………...………$3,875 2011…………………………………...……………………….…………………...………$3,568 2012…………………………………...……………………….…………………...………$3,496 2013…………………………………...……………………….…………………...………$3,232 Thereafter…………………………………...……………………….…………………...………$7,615 Total minimum lease payments………………………………….………………………..$25,771 Amount(In thousands)
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Benefits
The Company sponsors a pretax savings and profit sharing plan (the ―401(k) Plan‖) qualified under Section 401(k)
of the Internal Revenue Code. Under the 401(k) Plan, eligible employees are able to contribute up to 15% of their
compensation (subject to stricter limitation in the case of highly compensated employees). We may, at our
discretion, match 100% of employees’ contributions up to $1,500 per employee per calendar year. Our contributions
to the 401(k) Plan were $672,000, $674,000 and $520,000 for the year ended December 31, 2008, 2007 and 2006,
respectively.
We also sponsor the MFN Financial Corporation Pension Plan (the ―Plan‖). The Plan benefits were frozen June
30, 2001.
In September 2006, the FASB issued SFAS No. 158, ―Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)‖ (―SFAS No. 158‖).
SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to
(a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position,
(b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs
or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to
SFAS No. 87, ―Employers’ Accounting for Pensions‖, or SFAS No. 106, ―Employers’ Accounting for
Postretirement Benefits Other Than Pensions,‖ (c) measure defined benefit plan assets and obligations as of the date
of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 was adopted by the Company
in the fourth quarter of 2006. The adoption did not have a significant effect on our financial position or results of
operations. The disclosure requirements of this standard are included herein.
The following tables set forth the plan’s benefit obligations, fair value of plan assets, and amounts recognized at
December 31, 2008 and 2007:
The accumulated benefit obligation for the plan was $16.1 million and $15.0 million at December 31, 2008 and
2007, respectively.
Additional Information
Weighted average assumptions used to determine benefit obligations and cost at December 31, 2008 and 2007
were as follows:
F-28
Change in Projected Benefit ObligationProjected benefit obligation, beginning of year………………………………….……………………….………..$14,969 $15,456 Service cost…………………………………………………………………………………………………..……$- - Interest cost…………………………………………………………………………………………….………$930 881 Actuarial gain (loss)……………………………………………………………….………………….………………..$837 (723) Benefits paid……………………………………………………………………………………..…………….$(651) (645) Projected benefit obligation, end of year…………………………………………………………………….….$16,085 $14,969 December 31,20082007(In thousands)Change in Plan Assets20082007Fair value of plan assets, beginning of year……………………………………………………………..……..$14,643 $15,696 Return on assets…………………………………………………………………………………………..……….$(5,418) (543) Employer contribution………………………………………………………………………..…………………..$- 200 Expenses………………………………………………………………………..…………………..$(59) (65) Benefits paid…………………………………………………………………………………………….…………..$(651) (645) Fair value of plan assets, end of year…..………………………………………………………...……….$8,515 $14,643 December 31,
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our overall expected long-term rate of return on assets is 8.50% per annum as of December 31, 2008. The
expected long-term rate of return is based on the weighted average of historical returns on individual asset
categories, which are described in more detail below.
The weighted average asset allocation of our pension benefits at December 31, 2008 and 2007 were as
follows:
Our investment policies and strategies for the pension benefits plan utilize a target allocation of 75% equity
securities and 25% fixed income securities. Our investment goals are to maximize returns subject to specific risk
F-29
20082007Weighted average assumptions used to determine benefit obligationsDiscount rate………………………………………………………………………………………….……….………..6.00%6.45%Weighted average assumptions used to determine net periodic benefit costDiscount rate………………………………………………………………………………………….……….………..6.45%5.88%Expected return on plan assets……………………………………………………………...……………………..……..8.50%8.50%December, 31Amounts recognized on Consolidated Balance SheetOther assets……………………………………………………………………………………………..……….....$- $- Other liabilities…….…………………………………………………………..…………..………$(7,570) (326) Net amount recognized……………………………………………………………………………………………$(7,570) $(326) Amounts recognized in accumulated other comprehensive income consists of:Net loss (gain)……………………………………………………………………………………………..……….....$11,347 $3,964 Unrecognized transition asset………………..……………………………………………………...………………….………$- - Net amount recognized……………………………………………………………………………………………$11,347 $3,964 Components of net periodic benefit costInterest Cost………………………………………………………………………..……………………………$930 $881 Expected return on assets…………………………………………………………...……………………………..$(1,222) (1,312) Amortization of transition asset………………………………..…………………………………………$- - Amortization of net loss...……………………………………………………………………..………………….$153 71 Net periodic benefit cost..……………..…..……………………………….……….………………….…….$(139) $(360) Benefit Obligation Recognized in Other Comprehensive IncomeNet loss (gain)……………………………………………………………………..………………….…..$7,383 $1,126 Prior service cost (credit)…………………………………………………………………………...……………………..……$- - Amortization of prior service cost…………………………………………………….…………………………..………….$- - Net amount recognized in other comprehensive income……………..…..……………………………………………………...……………..…………….$7,383 $1,126 December 31,20082007(In thousands)20082007Weighted Average Asset Allocation at Year-EndAsset CategoryEquity securities……………………………………………………………………...………………….$71%77%Debt securities……………………………………………………….…………………………$28%23%Cash and cash equivalents……………………………………………………….…………………………$1%0% Total………………………………………………………………………………………………...…………………..$100%100%December 31,
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(14) Fair Value of Financial Instruments
The following summary presents a description of the methodologies and assumptions used to estimate the fair
value of our financial instruments. Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for a significant portion of our financial
instruments, active markets do not exist. Therefore, considerable judgments were required in estimating fair value
for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows,
risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 2008 and 2007, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different. The estimated fair values of financial assets and
liabilities at December 31, 2008 and 2007, were as follows:
Cash, Cash Equivalents and Restricted Cash
The carrying value equals fair value.
F-30
Cash FlowsExpected Benefit Payouts (In thousands)2009……………………………………………………………………………………………………...………$564 2010…………………………………………………………………………...………………………………………$583 2011…………………………………………………………………………...………………………………………$663 2012…………………………………………………………………………...………………………………………$698 2013…………………………………………………………………………...………………………………………$757 Years 2014 - 2018…………………………………………………………………………..………………………………$4,584 Anticipated Contributions in 2009……………………………………………..…………………………………..$- CarryingFinancial InstrumentCash and cash equivalents………………………………………….……………..$22,084 $22,084 $20,880 $20,880 Restricted cash and equivalents……………………………….…………….$153,479 153,479 $170,341 170,341 Finance receivables, net…………………….………………….$1,339,307 1,312,148 $1,967,866 1,967,866 Residual interest in securitizations………...…………………$3,582 3,582 $2,274 2,274 Accrued interest receivable…………….……………………………….$14,903 14,903 $24,099 24,099 Warehouse lines of credit……………………...……………….$9,919 9,919 $235,925 235,925 Notes payable……………………………..…………………$- - $- - Accrued interest payable…………………….$5,605 5,605 6,740 6,740 Residual interest financing………………..…………………$67,300 67,300 $70,000 70,000 Securitization trust debt……………...………………..$1,404,211 1,378,271 $1,798,302 1,786,263 Senior secured debt………………….……………..$20,105 20,105 $- - Subordinated renewable notes……………………………...…………….$25,721 25,721 $28,134 28,134 December 31,20082007ValueValue(In thousands)Carrying Fair ValueFair Value
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finance Receivables, net
The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using
current rates at which similar receivables could be originated.
Residual Interest in Securitizations
The fair value is estimated by discounting future cash flows using credit and discount rates that we believe reflect
the estimated credit, interest rate and prepayment risks associated with similar types of instruments.
Accrued Interest Receivable and Payable
The carrying value approximates fair value because the related interest rates are estimated to reflect current market
conditions for similar types of instruments.
Warehouse Lines of Credit, Notes Payable, Residual Interest Financing, and Senior Secured Debt and Subordinated
Renewable Notes
The carrying value approximates fair value because the related interest rates are estimated to reflect current market
conditions for similar types of secured instruments.
Securitization Trust Debt
The fair value is estimated by discounting future cash flows using interest rates that we believe reflects the current
market rates.
(15) Liquidity
Our business requires substantial cash to support purchases of automobile contracts and other operating activities.
Our primary sources of cash have been cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities, servicing fees on portfolios of
automobile contracts previously sold in securitization transactions or serviced for third parties, customer payments
of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash
from securitized portfolios of automobile contracts in which we have retained a residual ownership interest and from
the spread accounts associated with such pools. Our primary uses of cash have been the purchases of automobile
contracts, repayment of amounts borrowed under warehouse credit facilities and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of
spread accounts and initial overcollateralization, if any, and the increase of credit enhancement to required levels in
securitization transactions, and income taxes. There can be no assurance that internally generated cash will be
sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of
securitized pools (which determines the level of releases from those portfolios and their related spread accounts), the
rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to purchase, sell,
and borrow against automobile contracts.
We purchase automobile contracts from dealers for a cash price approximating their principal amount, adjusted for
an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile
contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse
credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to
finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed
under revolving warehouse credit facilities. At December 31, 2007, we had $425 million in warehouse credit
capacity, in the form of two $200 million senior facilities, and one $25 million subordinated facility. One $200
million facility provided funding for automobile contracts purchased under the TFC programs while both warehouse
facilities provided funding for automobile contracts purchased under the CPS programs. The subordinated facility
was established on January 12, 2007 and expired by its terms in April 2008.
The first of two warehouse facilities mentioned above was provided by an affiliate of Bear, Stearns and was
structured to allow us to fund a portion of the purchase price of automobile contracts by drawing against a floating
rate variable funding note issued by our consolidated subsidiary Page Three Funding, LLC. This facility was
established on November 15, 2005, and expired on November 6, 2008. On November 8, 2006 the facility was
increased from $150 million to $200 million and the maximum advance rate was increased to 83% from 80% of
eligible contracts, subject to collateral tests and certain other conditions and covenants. On January 12, 2007 the
facility was amended to allow for the issuance of subordinated notes resulting in an increase of the maximum
F-31
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
advance rate to 93%. The advance rate was subject to the lender’s valuation of the collateral which, in turn, was
affected by factors such as the credit performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our term securitizations. Senior notes
under this facility accrued interest at a rate of one-month LIBOR plus 2.50% per annum while the subordinated
notes accrued interest at a rate of one-month LIBOR plus 5.50% per annum.
The second of two warehouse facilities was provided by an affiliate of UBS AG and was similarly structured to
allow us to fund a portion of the purchase price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Funding LLC. This facility was entered into on June 30,
2004. On June 29, 2005 the facility was increased from $100 million to $125 million and further amended to provide
for funding for automobile contracts purchased under the TFC programs, in addition to our CPS programs. The
available credit under the facility was increased again to $200 million on August 31, 2005. In April 2006, the terms
of this facility were amended to allow advances to us of up to 80% of the principal balance of automobile contracts
that we purchase under our CPS programs, and of up to 70% of the principal balance of automobile contracts that we
purchase under our TFC programs, in all events subject to collateral tests and certain other conditions and covenants.
On June 30, 2006, the terms of this facility were amended to allow advances to us of up to 83% of the principal
balance of automobile contracts that we purchase under our CPS programs, in all events subject to collateral tests
and certain other conditions and covenants. In February 2007 the facility was amended to allow for the issuance of
subordinated notes resulting in an increase of the maximum advance rate to 93%. The advance rate was subject to
the lender’s valuation of the collateral which, in turn, was affected by factors such as the credit performance of our
managed portfolio and the terms and conditions of our term securitizations, including the expected yields for bonds
issued in our term securitizations. Senior notes under this facility accrue interest at a rate of one-month LIBOR plus
9.85% per annum. The facility was amended in December 2008 which eliminated future advances and provided for
repayment of the notes from proceeds collected on the underlying pledged receivables, plus certain future scheduled
principal reductions until its maturity in September 2009. At December 31, 2008, $9.9 million was outstanding
under this facility.
We securitized $509.0 million in auto contracts in two private placement transactions in 2008 as compared to
$1,118.1 million of automobile contracts in four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in 2006. All but one of these transactions were
structured as secured financings and, therefore, resulted in no gain or loss on sale. The September 2008 transaction
was structured as a sale for financial accounting purposes and resulted in a loss on sale of $14.0 million.
In November 2005, we completed a securitization in which a wholly-owned bankruptcy remote consolidated
subsidiary of ours issued $45.8 million of asset-backed notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million outstanding on this facility and in May 2007 the notes
were fully repaid. In December 2006 we entered into a $35 million residual credit facility that was secured by our
retained interests in additional term securitizations. At December 31, 2006, there was $12.2 million outstanding
under this facility. In July 2007, we established a combination term and revolving residual credit facility and used a
portion of our initial draw under that facility to repay our remaining outstanding debt under the December 2006 $35
million residual facility.
Under the combination term and revolving residual credit facility, we have used eligible residual interests in
securitizations as collateral for floating rate borrowings. The amount that we were able to borrow was computed
using an agreed valuation methodology of the residuals, subject to an overall maximum principal amount of $120
million, represented by (i) a $60 million Class A-1 variable funding note (the ―revolving note‖), and (ii) a $60
million Class A-2 term note (the ―term note‖). The term note was fully drawn in July 2007 and was due in July
2009. As of July 2008, we had drawn $26.8 million on the revolving note. The facility’s revolving feature expired
in July 2008. On July 10, 2008 we amended the terms of the combination term and revolving residual credit facility,
(i) eliminating the revolving feature and increasing the interest rate, (ii) consolidating the amounts then owing on the
Class A-1 note with the Class A-2 note, (iii) establishing an amortization schedule for principal reductions on the
Class A-2 note, and (iv) providing for an extension, at our option if certain conditions are met, of the Class A-2 note
maturity from June 2009 to June 2010. In conjunction with the amendment, we reduced the principal amount
outstanding to $70 million by delivering to the lender (i) warrants valued as being equivalent to 2,500,000 common
shares, or $4,071,429 and (ii) cash of $12,765,244. The warrants represent the right to purchase 2,500,000 CPS
common shares at a nominal exercise price, at any time prior to July 10, 2018. As of December 31, 2008 the
aggregate indebtedness under this facility was $67.3 million.
F-32
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 30, 2008, we entered into a series of agreements pursuant to which a lender purchased a $10 million five-
year, fixed rate, senior secured note from us. The indebtedness is secured by substantially all of our assets, though
not by the assets of our special-purpose financing subsidiaries. In July 2008, in conjunction with the amendment of
the combination term and revolving residual credit facility as discussed above, the lender purchased an additional
$15 million note with substantially the same terms as the $10 million note. Pursuant to the June 30, 2008 securities
purchase agreement, we issued to the lender 1,225,000 shares of common stock. In addition, we issued the lender
two warrants: (i) warrants that we refer to as the FMV Warrants, which are exercisable for 1,564,324 shares of our
common stock, at an exercise price of $2.4672 per share, and (ii) warrants that we refer to as the N Warrants, which
are exercisable for 283,985 shares of our common stock, at a nominal exercise price. Both the FMV Warrants and
the N Warrants are exercisable in whole or in part and at any time up to and including June 30, 2018. We valued the
warrants using the Black-Scholes valuation model and recorded their value as a liability on our balance sheet
because the terms of the warrants also included a provision whereby the lender could require us to purchase the
warrants for cash. That provision was eliminated by mutual agreement in September 2008.
The acquisition of automobile contracts for subsequent sale in securitization transactions, and the need to fund
spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and their related spread accounts either
release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile contracts.
We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital.
As of December 31, 2008, we had unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a securitization. Our plans to manage our liquidity include
maintaining our rate of automobile contract purchases at a merely nominal level, and, wherever appropriate,
reducing our operating costs. There can be no assurance that we will be able to obtain future warehouse financing or
to complete securitizations on favorable economic terms or that we will be able to complete securitizations at all. If
we are unable to complete such securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income would decrease.
Our liquidity will also be affected by releases of cash from the trusts established with our securitizations. While
the specific terms and mechanics of each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the amount of credit enhancement has
reached specified levels and/or the delinquency, defaults or net losses related to the automobile contracts in the pool
are below certain predetermined levels. In the event delinquencies, defaults or net losses on the automobile contracts
exceed such levels, the terms of the securitization: (i) may require increased credit enhancement to be accumulated
for the particular pool; (ii) may restrict the distribution to us of excess cash flows associated with other pools; or (iii)
in certain circumstances, may permit the insurers to require the transfer of servicing on some or all of the automobile
contracts to another servicer. There can be no assurance that collections from the related trusts will continue to
generate sufficient cash. Moreover, most of our spread account balances are pledged as collateral to our residual
interest financing. As such, most of the current releases of cash from our securitization trusts are directed to pay the
obligations of our residual interest financing.
Certain of our securitization transactions and our warehouse credit facility contain various financial covenants
requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of
liquidity and net worth and not exceeding maximum leverage levels and maximum financial losses. In addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain
creditors to declare a default if a default occurred under a different facility.
The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are
terminable by the respective insurance companies upon defined events of default, and, in some cases, at the will of
the insurance company. We have received waivers regarding the potential breach of certain such covenants relating
to minimum net worth, financial loss in any one period and maintenance of active warehouse credit facilities.
Without such waivers, certain credit enhancement providers would have had the right to terminate us as servicer
with respect to certain of our outstanding securitization pools. Although such rights have been waived, such waivers
are temporary, and there can be no assurance as to their future extension. We do, however, believe that we will
obtain such future extensions because it is generally not in the interest of any party to the securitization transaction
F-33
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to transfer servicing. Nevertheless, there can be no assurance as to our belief being correct. Were an insurance
company in the future to exercise its option to terminate such agreements, such a termination could have a material
adverse effect on our liquidity and results of operations, depending on the number and value of the terminated
agreements. Our note insurers continue to extend our term as servicer on a monthly and/or quarterly basis, pursuant
to the servicing agreements.
F-34