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 (Abridged)
For the fiscal year ended December 31, 2009
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. [ X ]
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 15,473,224 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 $0.59 per share reported by
Nasdaq as of June 30, 2009, was approximately $9,129,202. 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 23, 2010 was 17,657,052.
This annual report to shareholders consists of selected portions of the information that we filed with the U.S. Securities and
Exchange Commission on its Form 10-K, together with a performance graph and director identification information, as set
forth in the table of contents below. We have omitted from this printed annual report those portions of our report on Form
10-K that are not required to be included in an annual report to shareholders. The entire report on Form 10-K may be
accessed at our website, www.consumerportfolio.com, and at the website of the Commission, www.sec.com.
TABLE OF CONTENTS
Items
description ........................................................................................................................................ page
1.
Business ................................................................................................................................................. 1
4A.
Executive Officers of the Registrant .................................................................................................... 10
--
5.
--
6.
7.
8.
Directors ............................................................................................................................................... 10
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities .................................................................................................................................. 11
Performance Graph .............................................................................................................................. 12
Selected Financial Data ........................................................................................................................ 13
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations ........... 15
Financial Statements and Supplementary Data .............................................................. (indexed below)
Index to Financial Statements
Report of Independent Registered Public Accounting Firm – Crowe Horwath LLP ................
Consolidated Balance Sheets as of December 31, 2009 and 2008............................................
F-1
F-2
F-3
Consolidated Statements of Operations for the years ended December 31, 2009 and
2008 .....................................................................................................................................
F-4
Consolidated Statements of Comprehensive Income/(Loss) for the years ended
December 31, 2009 and 2008 ..............................................................................................
F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31,
2009 and 2008 ......................................................................................................................
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and
2008 .....................................................................................................................................
Notes to Consolidated Financial Statements.............................................................................
F-7
F-9
ii
ITEM 1. BUSINESS
Overview
We are a specialty finance company. Our business is to purchase and service 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) directly originated 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, 2009, 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 in 2002, 2003 and 2004. In 2004 and 2009,
we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and owned by entities
not affiliated with us. During 2008 and 2009, 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 was approximately $1,194.7 million at December 31, 2009 compared
to $1,664.1 million at December 31, 2008, $2,162.2 million as of December 31, 2007 and $1,565.9 million as of December 31,
2006.
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. Marketing representatives may either be located in our
Irvine headquarters or, in some cases, work from their homes and support dealers in their geographic area and are obligated to
represent us 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, 2009, we had 15
marketing representatives and we were actively receiving applications from 1,583 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,
2009, approximately 89% of our dealers were franchised new car dealers that sell both new and used vehicles and the
remainder were independent used car dealers. For the year ended December 31, 2009, approximately 92% of the automobile
contracts purchased under our programs consisted of financing for used cars and 8% consisted of financing for new cars, as
compared to 88% financing for used cars and 12% for new cars in the year ended December 31, 2008. 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 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
1
of the related contracts, and is treated as a sale for financial accounting purposes. We did not conduct any securitization
transactions in 2009.
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. In November 2008, we lost the ability to draw against available warehouse facilities, causing us to conserve
liquidity by reducing our purchases of automobile contracts to nominal levels. However, in September 2009 we entered into a
$50 million revolving credit facility that allows advances against new purchases of automobile contracts. This facility has
provided us the liquidity to gradually increase our contract purchases from dealers. Moreover, during 2009 and to date in 2010
we have observed an increase in demand for asset-backed securities, including, securities backed by sub-prime automobile
receivables. Nevertheless, if the current adverse circumstances that have affected the capital markets should worsen, we may
again curtail 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 reduced
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, broad economic weakness
and increasing unemployment during 2008 and 2009 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; (v) any conditions to purchase; and (vi) the financial stability of the
financing source. 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, 2009, we received approximately 82% of
all applications through DealerTrack (the industry leading dealership application aggregator), 10% via our website and 8% via
fax or other aggregators. Our automated application decisioning system produced our response within minutes to about 94% of
those applications.
2
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, 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, 2009, no dealer accounted for more than
8% 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, 2009 and 2008. See "Management's Discussion and Analysis."
California
Pennsylvania
Florida
Texas
Other States
Total
Contracts Purchased During the Year Ended (1)
December 31, 2009
December 31, 2008
Number
154
49
44
40
308
595
Percent (2)
25.9%
8.2%
7.4%
6.7%
51.8%
100.0%
Number
2,166
1,301
1,744
1,320
12,176
18,707
Percent (2)
11.6%
7.0%
9.3%
7.1%
65.1%
100.0%
(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.
The following table sets forth the geographic concentrations of our outstanding managed portfolio as ofDecember 31, 2009
and 2008.
State based on obligor's residence
California
Texas
Florida
Illinois
All others
Total
December 31, 2009
December 31, 2008
Amount
Percent (1)
Amount
Percent (1)
$
$
$
$
$
$
145.9
127.6
89.5
73.4
758.3
1,194.7
($ in millions)
12.2% $
10.7%
7.5%
6.1%
63.5%
100.0% $
191.0
176.1
134.0
64.6
1,098.4
1,664.1
11.5%
10.6%
8.1%
3.9%
66.0%
100.0%
(1) 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, 2009, 2008 and 2007, the average acquisition fee charged per
automobile contract purchased under our CPS programs was $1,508, $592 and $209, respectively, or 11.7%, 3.9% and 1.4%,
respectively, of the amount financed. The significant increase in acquisition fees since 2007 reflects both our strategy to
conserve liquidity and also less competition in the marketplace for the types of sub-prime contracts that we typically purchase.
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:
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
3
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 77% of our new contract originations in 2009 and 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, 2009, 2008 and 2007.
December 31, 2009
December 31, 2007
Contracts Purchased During the Year Ended (1)
December 31, 2008
(dollars in thousands)
Amount
Financed
$
Amount
Financed
$
Preferred
Super Alpha
Alpha Plus
Alpha
Standard
Mercury / Delta
First Time Buyer
Amount
Financed
$
204
1,158
1,527
3,738
830
560
582
8,599
Percent (2)
2.4%
13.5%
17.8%
43.5%
9.7%
6.5%
6.8%
100.0%
13,211
33,726
50,823
123,933
15,332
25,635
19,695
282,355
Percent (2)
4.7%
11.9%
18.0%
43.9%
5.4%
9.1%
7.0%
100.0%
55,717
153,410
215,248
523,259
116,424
104,990
77,283
1,246,330
Percent (2)
4.5%
12.3%
17.3%
42.0%
9.3%
8.4%
6.2%
100.0%
$
$
$
(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 attempt to control misrepresentation regarding the customer's credit worthiness by carefully screening the automobile
contracts we purchase, by establishing and maintaining professional business relationships with dealers, and by including
certain representations and warranties by the dealer in the dealer agreement. Pursuant to the dealer agreement, we may require
the dealer to repurchase any automobile contract in the event that the dealer breaches its representations or warranties. There
can be no assurance, however, that any dealer will have the willingness or the financial resources to satisfy its repurchase
obligations to us.
4
In addition to our purchases of installment contracts from dealers, we purchased from 2006 through 2008 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
program, 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. Prior to purchasing an automobile contract, 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, 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 the specific dealer. 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, down payment amount 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 December 31, 2009, was $14,453,
with an average original term of 61 months and an average down payment amount of 14.3%. Based on information contained
in customer applications for this 12-month period, the retail purchase price of the related automobiles averaged $14,978 (which
excludes tax, license fees and any additional costs such as a maintenance contract) and the average age of the vehicle at the
time the automobile contract was purchased was three years. The average age of our customers is approximately 40, with
approximately $52,000 in average annual household income and an average of seven years tenure with his or her current
employer.
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
5
vehicle is registered. To the extent that we do not receive such state registration within three months of purchasing the
automobile contract, our dealer compliance group will work with the dealer in an attempt to rectify the situation. If these
efforts are unsuccessful, we generally will require the dealer to repurchase the automobile contract.
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 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
6
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 broad economic weakness and increasing unemployment experienced during 2008 and 2009 have resulted
in higher delinquencies and net charge-offs, the increase in the percentage levels is also partially attributable to the decrease in
the size and the increase in the average age of our managed portfolio.
Delinquency Experience
Gross servicing portfolio (1).….
Period of delinquency (2)
31-60 days……….………….
61-90 days……….………….
91+ days………..………………
Total delinquencies (2)…..……..
Amount in repossession (3)……
Total delinquencies and
amount in repossession (2)...….
Delinquencies as a percentage
of gross servicing portfolio...….
Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio……………….…
Extension Experience
Contracts with one extension (4)
Contracts with two or more
extensions (4)……...……….
Total contracts with extensions
December 31, 2009
December 31, 2008
December 31, 2007
Number of
Contracts
Amount
Number of
Contracts
Amount
Number of
Contracts
Amount
(Dollars in thousands)
111,105 $ 1,057,348
145,564 $
1,665,036
168,260 $
2,128,656
2,787
1,824
1,205
5,816
4,305
.
24,628 .
16,840 .
10,358 .
51,826 .
40,815 .
.
3,733
2,376
2,424
8,533
4,262
39,798
26,549
27,243
93,590
49,357
4,227
2,370
2,039
8,636
3,049
48,134
27,877
24,888
100,899
33,400
10,121 $
92,641
12,795 $
142,947
11,685 $
134,299
5.2
%
4.9
9.1
%
8.8
.
%
.
.
.
%
5.9
%
5.6
%
5.1
%
4.7
%
8.8
%
8.6
%
6.9
%
6.3
%
26,528 $
266,081 .
.
30,160 $
354,330
21,555 $
251,067
12,884
39,412 $
126,853
392,934
8,639
38,799 $
88,988
443,318
4,377
25,932 $
38,264
289,331
(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 delinquency aging categories shown in the tables reflect the effect of extensions.
Extensions
We may offer a customer an extension, under which the customer agrees with us to move past due payments to the end of the
automobile contract term. In such cases the customer must sign an agreement for the extension, and may pay a fee representing
partial payment of accrued interest. Our policies, and contractual arrangements for our warehouse and securitization
transactions, limit the number of extensions that may be granted. In general, a customer may arrange for an extension no more
than once every 12 months, not to exceed four extensions over the life of the contract.
If a customer is granted such an extension, the date next due is advanced. Subsequent delinquency aging classifications
would be based on the future payment performance of the automobile contract.
7
Net Charge Off Experience (1)
2009
Year Ended December 31,
2008
(Dollars in thousands)
2007
CPS, MFN, TFC and SeaWest Combined
Average servicing portfolio outstanding………………… $
Net charge-offs as a percentage of average
$
servicing portfolio (2)…….………………………..………$
1,319,106
$
1,934,003
$
1,905,162
11.0
%
7.7
%
5.3
%
(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, 2009. 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
structured our securitizations as secured financings rather than as sales of contracts. The second of our two securitizations
completed in 2008 (September 2008) was in substance a sale of the related contracts, and is treated as a sale for financial
accounting purposes.
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 lenders were fully repaid in September 2009. In September 2009 we entered into a new $50 million two-
year credit facility that allows advances against new purchases of finance receivables. 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
8
automobile contracts. If we breach any of our representations or warranties, we will be obligated to repurchase the automobile
contract at a price equal to the principal balance plus accrued and unpaid interest. We may then be entitled under the terms of
our dealer agreement to require the selling dealer to repurchase the contract 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, 2009 was approximately $1.2 billion, including $137.1 million of
receivables on which we earn only servicing fees.
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 monthly payment amount made available to the dealer’s customer, 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 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 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
9
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, 2009, we had 525 employees. The breakdown of the employees is as follows: 9 are senior management
personnel; 421 are collections personnel; 20 are automobile contract origination personnel; 27 are marketing personnel (15 of
whom are marketing representatives); 33 are operations and systems personnel; and 15 are administrative personnel. We
believe that our relations with our employees are good. We are not a party to any collective bargaining agreement.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Charles E. Bradley, Jr., 50, 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.
Teri L. Clements, 47, has been the Senior Vice President of Originations since April 2007. Prior to that, she held the position
of Vice President of Originations since August 1998. She joined the Company in June 1991 as an Operations Specialist.
Previously, Ms. Clements held an administrative position at Greco & Associates.
Mark A. Creatura, 50, 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, 50, 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.
Robert E. Riedl, 46, has been Senior Vice President - Chief Investment Officer since April 2006. Mr. Riedl was Senior Vice
President - Chief Financial Officer from August 2003 until assuming his current position. Mr. Riedl joined the Company as
Senior Vice President - Risk Management in January 2003. Previously, Mr. Riedl was a Principal at Northwest Capital
Appreciation ("NCA"), a middle market private equity firm, from 2000 to 2002. For a year prior to joining Northwest Capital,
Mr. Riedl served as Senior Vice President for one of NCA's portfolio companies, SLP Capital. Mr. Riedl was an investment
banker for ContiFinancial Services Corporation from 1995 until joining SLP Capital in 1999.
Michael L. Lavin, 37, has been Senior Vice President – Legal since May 2009. Prior to that, he was our Vice President –
Legal since joining the Company in November 2001. Mr. Lavin was previously engaged as a law clerk and an associate with
the San Diego law firm (now defunct) of Edwards, Sooy & Byron from 1996 through 2000 and then as an associate with the
Orange County firm of Trachtman & Trachman from 2000 through 2001. Mr. Lavin also clerked for the San Diego District
Attorney’s office and Orange County Public Defender’s office.
Christopher Terry, 42, has been Senior Vice President - Servicing since May 2005, and prior to that was Senior Vice
President - Asset Recovery from 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.
DIRECTORS
Our directors and their principal occupations are as follows: Charles E. Bradley, Jr., chief executive officer of Consumer
Portfolio Services, Inc.; Chris A. Adams, owner and chief executive of Latrobe Pattern Company and K Castings Inc., which
are firms engaged in the business of fabricating metal parts; Brian J. Rayhill, a practicing attorney in New York state; William
B. Roberts, president of Monmouth Capital Corp., an investment firm that specializes in management buyouts; Gregory S.
Washer, owner and president of Clean Fun Promotional Marketing LLC, a promotional marketing company; and Daniel S.
Wood, retired president of Carclo Technical Plastics, a manufacturer of custom injection moldings.
10
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.
January 1 - March 31, 2008…………………………………….………$
April 1 - June 30, 2008………………………………………….……….
July 1 - September 30, 2008…………………………………...……… .
October 1 - December 31, 2008……………………………….……… .
January 1 - March 31, 2009…………………………………….……….
April 1 - June 30, 2009………………………………………….……….
July 1 - September 30, 2009…………………………………...……… .
October 1 - December 31, 2009……………………………….……… .
High
3.61
3.18
2.85
2.58
0.80
1.15
1.65
1.30
$
Low
2.11
1.13
1.22
0.37
0.25
0.40
0.46
0.95
As of March 24, 2010, there were 58 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 restrictions on our 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,
2009:
Number of Securities
to be Issued Upon
Exercise of
Weighted-Average
Exercise Price of
Plan Category
Outstanding Options Outstanding Options
Plans approved by stockholders
Plans not approved by stockholders
Total
6,873,899
None
6,873,899
$1.62
N/A
$1.62
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (excluding securities
reflected in first column)
1,410,500
N/A
1,410,500
Issuer Purchases of Equity Securities in the Fourth Quarter
Total
Number of
Shares
Purchased
163,296
108,675
119,647
391,618
Period(1)
October 2009…… $
November 2009……$
December 2009……$
Total
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(2)
Average
Price Paid
per Share
$
$
1.26
1.27
1.13
1.22
163,296
108,675
119,647
391,618
Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Plans or
Programs
$
1,558,658
1,420,833
1,285,469
(1) Each monthly period is the calendar month.
(2) Through December 31, 2009, 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.
11
PERFORMANCE GRAPH
The following graph compares the yearly change in the Company's cumulative total shareholder return on its common stock
from December 31, 2004 through December 31, 2009, with (i) the cumulative total return of the Center for Research in
Security Prices ("CRSP") Index for the Nasdaq Stock Market (U.S. Companies), and (ii) the cumulative total return of the
CRSP Index for Nasdaq Financial Stocks. The graph assumes $100 was invested on December 31, 2004 in the Company's
common stock, and in each of the two indices shown, and that all dividends were reinvested. Data are presented for the last
trading day in each of the Company's fiscal years.
Comparison of Cumulative Total Return among Consumer Portfolio Services, Inc., Nasdaq Stock Market (U.S. Companies)
and Nasdaq Financial Stocks (U.S. & Foreign).
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100 on December 31, 2004
160
140
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
2009
Consumer Portfolio Services, Inc.
NASDAQ Stock Market (US Companies)
NASDAQ Financial Index
Consumer Portfolio Services, Inc.
NASDAQ Stock Market (US)
NASDAQ Financial Index
Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009
24.02
84.29
77.25
68.78
121.67
100.00
100.00
118.03
102.13
133.67
112.18
8.11
58.63
105.82
100.00
102.38
117.71
73.77
12
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.
(dollars in thousands, except per share data)
2009
As of and
For the Year Ended December 31,
2007
2006
2008
2005
Statement of Operations Data
Revenues:
Interest income ………………………………………
Servicing fees …………………………………………
Other income …………………………………………
Total revenues ………………………………………
Expenses:
Employee costs ………………………………………..
General and administrative ……………………………
Interest expense ……………………………………….
Provision for credit losses …………………………….
Loss on sale of receivables …………………………….
Total expenses ……………………………………..
Income (loss) before income tax expense (benefit) ……………
Income tax expense (benefit) ……………………………………
Net income (loss) ………………………………………….
$
208,196
4,640
11,059
223,895
37,306
32,217
111,768
92,011
-
273,302
(49,407)
7,800
(57,207)
$
351,551
2,064
14,796
368,411
$
370,265
1,218
23,067
394,550
$
263,566
2,894
12,403
278,863
$
171,834
6,647
15,216
193,697
48,874
44,368
156,253
148,408
13,963
411,866
(43,455)
(17,364)
(26,091)
$
46,716
47,416
139,189
137,272
38,483
42,011
93,112
92,057
40,384
39,285
51,669
58,987
370,593
23,957
10,099
13,858
$
265,663
13,200
(26,355)
39,555
$
190,325
3,372
-
3,372
$
$
Earnings (loss) per share-basic ……………………………
Earnings (loss) per share-diluted …………………………
Pre-tax income (loss) per share-basic (1) ………………..
Pre-tax income (loss) per share-diluted (2) ………………
Weighted average shares outstanding-basic …………….
Weighted average shares outstanding-diluted …………..
$
$
$
$
(3.07)
(3.07)
(3.07)
(3.07)
18,643
18,643
$
$
$
$
(1.36)
(1.36)
(2.26)
(2.26)
19,230
19,230
$
$
$
$
0.66
0.61
1.15
1.06
20,880
22,595
$
$
$
$
1.82
1.64
0.61
0.55
21,759
24,052
$
$
$
$
0.16
0.14
0.16
0.14
21,627
23,513
Balance Sheet Data
Total assets ……………………………………………….
Cash and cash equivalents ………………………………..
Restricted cash and equivalents ………………………….
Finance receivables, net …………………………………..
Residual interest in securitizations ……………………….
Warehouse lines of credit …………………………………
Residual interest financing ………………………………..
Securitization trust debt …………………………………..
Long-term debt …………………………………………….
Shareholders' equity ……………………………………….
$
1,068,261
12,433
128,511
840,092
4,316
4,932
56,930
904,833
48,083
35,577
$
1,638,807
22,084
153,479
1,339,307
3,582
9,919
67,300
1,404,211
45,826
89,849
$
2,282,813
20,880
170,341
1,967,866
2,274
235,925
70,000
1,798,302
28,134
114,355
$
1,728,594
14,215
193,001
1,401,414
13,795
72,950
31,378
1,442,995
38,574
111,512
$
1,155,144
17,789
157,662
913,576
25,220
35,350
43,745
924,026
58,655
73,589
(1) 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.
(2) 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.
13
(dollars in thousands, except per share data)
2009
2008
2007
2006
2005
As of and
For the Year Ended December 31,
Contract Purchases/Securitizations
Automobile contract purchases………………………….
Automobile contracts securitized - structured
as sales………………………………………………….
Automobile contracts securitized - structured
as secured financings…………………………………..
Managed Portfolio Data
Contracts held by consolidated subsidiaries…………….
Contracts held by non-consolidated subsidiaries…………..
Third party portfolios (1)…………………………
Total managed portfolio……………………………………
Average managed portfolio……………………………….
Weighted average fixed effective interest rate
(total managed portfolio) (2)………………………..
Core operating expense
(% of average managed portfolio) (3)…………………
Allowance for loan losses………………………………..
Allowance for loan losses (% of total contracts
held by consolidated subsidiaries)………………………
Total delinquencies (2) (4)…………………………………
Total delinquencies and repossessions (2) (4)………………
Net charge-offs (2) (5)……………………………………
$
8,599
$
296,817
$
1,282,311
$
1,019,018
$
691,252
-
-
198,662
-
-
-
310,360
1,118,097
957,681
674,421
$
$
922,681
134,894
137,146
1,194,721
1,342,410
$
$
1,477,810
186,233
79
1,664,122
1,934,003
$
2,125,755
-
422
2,126,177
1,906,605
$
$
$
1,527,285
34,850
3,770
1,565,905
1,376,781
$
$
1,000,597
103,130
18,018
1,121,745
997,697
18.0%
18.0%
18.2%
18.5%
18.6%
5.2%
38,274
$
4.8%
78,036
$
4.9%
100,138
$
5.8%
79,380
$
8.0%
57,728
$
4.1%
4.9%
8.8%
11.0%
5.3%
5.6%
8.6%
7.7%
4.7%
4.7%
6.3%
5.3%
5.2%
4.0%
5.5%
4.5%
5.8%
3.8%
5.0%
5.3%
(1) Receivables related to the third party portfolios, on which we earn only a servicing fee.
(2) Excludes receivables related to the third party portfolios.
(3) Total expenses excluding provision for credit losses, interest expense, loss on sale of receivables and impairment loss
on residual assets.
(4) 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.
(5) 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.
14
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. Our business is to purchase and service 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) directly originated 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, 2009, 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. In
2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and
owned by entities not affiliated with us. During 2008 and 2009, 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 $1,194.7 million at December 31, 2009 compared to $1,664.1 million at
December 31, 2008, $2,162.2 million as of December 31, 2007 and $1,565.9 million as of December 31, 2006.
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
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 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 was treated as a sale for accounting
purposes, and in which we retained a residual interest in the automobile contracts.
15
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, 2009, 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, 2009 was approximately $1,194.7 million,
which includes a third party servicing portfolio of $137.1 million on which we earn only servicing fees and have no credit
risk.
Critical Accounting Policies
We believe that our accounting policies related to (a) Allowance for Finance Credit Losses, (b) Amortization of Deferred
Originations Costs and Acquisition Fees, (c) Residual Interest in Securitizations and Gain on Sale of Automobile Contracts
and (d) Income Taxes are the most critical to understanding and evaluating our reported financial results. Such policies are
described below.
Allowance for Finance Credit Losses
In order to estimate an appropriate allowance for losses to be incurred on finance receivables, we use a loss allowance
methodology commonly referred to as "static pooling," which stratifies our finance receivable portfolio into separately
identified pools based on the period of origination. Using analytical and formula driven techniques, we estimate an
allowance for finance credit losses, which we believe is adequate for probable credit losses that can be reasonably estimated
in our portfolio of automobile contracts. Provision for losses is charged to our consolidated statement of operations. Net
losses incurred on finance receivables are charged to the allowance. We evaluate the adequacy of the allowance by
examining current delinquencies, the characteristics of the portfolio, prospective liquidation values of the underlying
collateral and general economic and market conditions. As circumstances change, our level of provisioning and/or
allowance may change as well. We observed deterioration in performance of automobile contracts held in our portfolio
during 2008 and 2009, which we attribute to a general recession that began in December 2007. Accordingly, we increased
our provision for credit losses in the fourth quarter of 2009.
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.
Term Securitizations
Our term securitization structure has generally been as follows:
We sell automobile contracts we acquire to a wholly-owned special purpose subsidiary, which has been established for
the limited purpose of buying and reselling our automobile contracts. The special-purpose subsidiary then transfers the
same automobile contracts to another entity, typically a statutory trust. The trust issues interest-bearing asset-backed
securities, in a principal amount equal to or less than the aggregate principal balance of the automobile contracts. We
typically sell these automobile contracts to the trust at face value and without recourse, except that representations and
warranties similar to those provided by the dealer to us are provided by us to the trust. One or more investors purchase the
asset-backed securities issued by the trust; the proceeds from the sale of the asset-backed securities are then used to
purchase the automobile contracts from us. We may retain or sell subordinated asset-backed securities issued by the trust or
16
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") (ASC 860 10 65-2). 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 it was fully repaid in September
2009. In September 2009 we entered into a new $50 million credit facility which provides for advances on newly acquired
receivables as well as receivables we originated prior to Septemer 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 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.
17
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 $33.5 million is more likely than not based on available tax planning strategies that could be implemented if necessary to
prevent a carryforward from expiring. Our net deferred tax asset of $33.5 million is net of a valuation allowance of $28.6
million and consists of approximately $30.2 million of net U.S. federal deferred tax assets and $3.3 million of net state
deferred tax assets. The major components of the deferred tax asset are $19.6 million in net operating loss carryforwards
and built in losses and $13.9 million in net deductions which have not yet been taken on a tax return. We estimate that we
would need to generate approximately $89 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 2009, we are in a three-year cumulative pretax loss position at December 31, 2009. 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. Moreover, from 2003 through 2007, we generated approximately
$107.0 million in taxable income.
18
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 have been 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 (FASB ASC 740, “Income Taxes”) which would be employed, if necessary, to prevent a carryforward from
expiring. These strategies include the sale of certain assets that can produce significant taxable income within the relevant
carryforward period. Such strategies could be implemented without significant impact on our core business or our ability to
generate future growth. The costs related to the implementation of these tax strategies were considered in evaluating the
amount of taxable income that could be generated in order to realize our deferred tax assets. 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.
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.
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, 2009, we have one available $50 million credit facility but no immediate
plans to complete a term securitization. The adverse changes that have taken place in the market over the last 30 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
reduced demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile
receivables than prior to 2008. Second, there are fewer lenders who provide short term warehouse financing for sub-prime
automobile finance companies such as ours 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, broad economic weakness and
increasing unemployment in 2008 and 2009 made many of our customers 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, 2009 with the Year Ended December 31, 2008
Revenues. During the year ended December 31, 2009, revenues were $223.9 million, a decrease of $144.5 million, or
39.2%, from the prior year revenue of $368.4 million. The primary reason for the decrease in revenues is a decrease in
interest income. Interest income for the year ended December 31, 2009 decreased $143.4 million, or 40.8%, to $208.2
19
million from $351.6 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, 2009 the aggregate outstanding balance of finance
receivables held by consolidated subsidiaries was $922.7 million compared to $1,477.8 million at December 31, 2008,
resulting in a decrease of $143.4 million in interest income. We also experienced a decrease in interest earned on cash
deposits (including restricted cash deposits) of $3.4 million, which was partially offset by an increase in interest income on
our residual interest in securitizations of $770,000.
Servicing fees totaling $4.6 million in the year ended December 31, 2009 increased $2.5, or 124.8%, from $2.1 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 and our appointment in November 2009 as a third-
party servicer for a $147 million portfolio of sub-prime automobile receivables previously originated by another company.
As of December 31, 2009 and 2008, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and
other third parties was as follows:
December 31, 2009
December 31, 2008
Amount
%
Amount
%
Total Managed Portfolio
Owned by Consolidated Subsidiaries……..……$
Owned by Non-Consolidated Subsidiaries……$
$
Third-Party Servicing Portfolios
Total……………………………….……………$
922.7
134.9
137.1
1,194.7
($ in millions)
77.2% $
11.3%
11.5%
100.0% $
1,477.8
186.2
0.1
1,664.1
88.8%
11.2%
0.0%
100.0%
At December 31, 2009, we were generating income and fees on a managed portfolio with an outstanding principal
balance of $1,194.7 million compared to a managed portfolio with an outstanding principal balance of $1,664.1 million as
of December 31, 2008. At December 31, 2009 and 2008, the managed portfolio composition was as follows:
December 31, 2009
December 31, 2008
Amount
%
Amount
%
Originating Entity
CPS……………………………………….……$
TFC………………………………..……………$
$
Third-Party Servicing Portfolios
Total………………………………….…………$
1,034.2
23.4
137.1
1,194.7
($ in millions)
86.6% $
2.0%
11.4%
100.0% $
1,619.7
44.3
0.1
1,664.1
97.3%
2.7%
0.0%
100.0%
Other income decreased $3.7 million, or 25.3%, to $11.1 million in the year ended December 31, 2009 from $14.8 million
during the prior year. The year-over-year decrease is the result of a variety of factors including a decrease of $1.5 million
in convenience fees charged to our customers for web-based and other electronic payments and a decrease of $2.2 million
in income from direct mail and related products and services that we offer to our dealers.
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 $273.3 million for the year ended December 31, 2009, compared to $411.9 million for the
prior year, a decrease of $138.6 million, or 33.6%. The decrease is primarily due to decreases in provision for credit losses
and interest expense, which decreased by $56.4 million and $44.5 million, or 38.0% and 28.5%, respectively.
20
Employee costs decreased by 23.7% to $37.3 million during the year ended December 31, 2009, representing 13.7% of
total operating expenses, from $48.9 million for the prior year, or 11.9% of total operating expenses. The decrease in
employee costs is due to the reduction in our workforce, primarily in the areas of contract originations and marketing,
throughout both 2008 and 2009 as a result of our strategy to reduce our purchases of contracts to conserve our liquidity.
As of December 31, 2009 we had 523 employees, compared to 681 employees at December 31, 2008.
General and administrative expenses decreased by 18.0% to $24.2 million and represented 8.9% of total operating
expenses in the year ending December 31, 2009, as compared to the prior year when such expenses represented 7.2% of
total operating expenses. General and administrative expenses include telecommunications costs, postage and delivery costs
and other costs associated with servicing our managed portfolio.
Provision for credit losses was $92.0 million for the year ended December 31, 2009, a decrease of $56.4 million, or 38%,
compared to the prior year and represented 36.0% of total operating expenses. The provision for credit losses maintains the
allowance for loan losses at levels that we feel are adequate for the probable credit losses that can be reasonably estimated.
The decrease in provision expense compared to the prior year is caused by the decrease in the size of our portfolio of
finance receivables and also the significant decrease in new contract purchases in the current period compared to the prior
period.
Interest expense for the year ended December 31, 2009 decreased $44.5 million, or 28.5%, to $111.8 million, compared to
$156.3 million in the previous year. The decrease 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 decreased by $35.5
million in 2009 compared to the prior year. We also experienced decreases in warehouse debt interest expense and residual
interest financing interest expenses of $9.5 million and $1.9 million, respectively. Decreases in interest expense for
securitization debt, warehouse debt and residual interest debt were partially offset by an increase of $2.5 million in interest
expense on subordinated debt. In June and July 2008 and November 2009 we issued $10 million, $15 million and $5
million, respectively, in new senior secured debt.
Marketing expenses consist primarily of commission-based compensation paid
to our employee marketing
representatives. These expenses decreased by $6.4 million, or 63.0%, to $3.8 million, compared to $10.2 million in the
previous year and represented 1.4% of total operating expenses. The decrease is primarily due to the decrease in automobile
contracts we purchased during the year ended December 31, 2009 as compared to the prior year. During the year ended
December 31, 2009, we purchased 595 automobile contracts aggregating $8.6 million, compared to 19,772 automobile
contracts aggregating $296.8 million in the prior year.
Occupancy expenses decreased by $580,000 or 14.1%, to $3.5 million compared to $4.1 million in the previous year and
represented 1.3% of total operating expenses. The reduction in occupancy expense is primarily attributable to the
amendment in July 2009 of the lease for our Irvine headquarters to reduce our square footage from approximately 90,000 to
approximately 60,000 square feet.
Depreciation and amortization expenses increased by $170,000, or 31.6%, to $707,000 from $537,000 in the previous
year.
For the year ended December 31, 2009, we recorded a tax benefit of $19.2 million or 40.0% of loss before income taxes.
The benefit was offset by an increase of $27.0 to our valuation allowance for deferred taxes. For the year ended December
31, 2008, we recorded income tax benefit of $17.4 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 term securitization
transactions and other sales of automobile contracts, amounts borrowed under 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
21
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, 2009 and 2008 was $79.5 million and $124.9
million, respectively.
Net cash provided by investing activities for the year ended December 31, 2009 was $438.7 million compared to $657.6
million in 2008. Cash provided by investing activities primarily results from principal payments and other proceeds
received on finance receivables held for investment. Cash used in investing activities generally relates to purchases of
automobile contracts. Purchases of finance receivables held for investment were $8.6 million and $296.8 million in 2009
and 2008, respectively. The significant decrease in contract purchases in 2008 and 2009 compared to prior periods together
with ongoing significant proceeds received on finance receivables held for investment resulted in net cash provided by
investing activities in 2008 and 2009 compared to net cash used by investing activities in prior periods.
Net cash used by financing activities for the year ended December 31, 2009 was $527.8 million compared with $781.4
million in 2008. Cash used or provided by financing activities is primarily attributable to the issuance or repayment of debt,
and in particular, securitization trust debt. We did not complete any new securitizations in 2009 compared to new issuances
of $285.4 million in 2008. Repayments of securitization debt were $511.0 million and $693.3 million in 2009 and 2008,
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, consisting 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.
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 further 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. 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 when it was
repaid in full.
On September 25, 2009 we established a $50 million secured revolving credit facility with Fortress Credit Corp. that will
mature on September 25, 2011. The facility is structured to allow us to fund a portion of the purchase price of automobile
22
contracts by drawing against a floating rate variable funding note issued by our consolidated subsidiary Page Four Funding,
LLC. The facility provides for advances up to 75% of eligible finance receivables and the notes under it accrue interest at a
rate of one-month LIBOR plus 12.00% per annum, with a minimum rate of 14.00% per annum. At December 31, 2009,
$4.9 million was outstanding under this facility. As part of the consideration given to Fortress for committing to make
loans under this facility, we issued a 10-year warrant to purchase up to 1,158,087 of our common shares, at an exercise
price of $0.879 per share (we refer to this as the Fortress Warrant). Issuance of the Fortress Warrant required an adjustment
to the terms of an existing outstanding warrant regarding 1,564,324 shares, reducing the exercise price of that other warrant
from $1.44 per share to $1.40702 per share and increasing the number of shares available for purchase to 1,600,991.
Subsequent to the reporting period covered by this report, on March 25, 2010 we entered into an additional $50 million
funding facility. This new facility provides for advances of up to 75% of the principal balance of the eligible pledged
finance receivables and the notes under it accrue interest at a rate of 11.0% per annum.
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. 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 July 2007, we established a combination term and revolving residual credit facility and 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 originally 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 were met, of the Class A-2 note maturity from June 2009 to June 2010.
In June 2009 we met all such conditions and extended the maturity. 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 $56.9 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 1,600,991 shares of our common stock, at an exercise price of
$1.40702 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 FMV Warrants were initially exercisable to purchase 1,500,000 shares for $2.573 per share, were
adjusted in connection with the July 2008 issuance of other warrants to become exercisable to purchase 1,564,324 shares at
$2.4672 per share, and were further adjusted in connection with a July 2009 amendment of our option plan to become
exercisable at $1.44 per share. Upon issuance in September 2009 of the Fortress Warrant, the FMV Warrant was further
adjusted to become exercisable to purchase 1,600,991 shares at an exercise price of $1.407 per share. In November 2009
we entered into an additional agreement with this lender whereby they purchased an additional $5 million note. The note
accrues interest at 15.0% and matures in October 2010 unless we fail to extend the maturity date of the above-mentioned
residual credit facility, in which case the note matures in May 2010.
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
23
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, 2009, we had unrestricted cash of $12.4 million, one $50 million revolving credit facility and no immediate
plans to complete a securitization. There can be no assurance that we will be able to obtain additional 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.
The agreements for our residual interest financing and revolving credit facility include financial covenants which, if
breached, would be an event of default. We have received waivers regarding the potential breach of minimum net worth
covenants on both the revolving credit and residual interest facilities. Without such waiver, the revolving credit lender
could cease funding future advances and could, among other things, sell the finance receivables pledged to that facility in
order satisfy the debt or transfer the servicing on such receivables. Similarly, without such waiver, the residual interest
lender could, among other things, sell the residual interests in the pledged securitizations to satisfy the residual interest
debt.
Our plan for future operations and meeting the obligations of our financing arrangements includes returning to
profitability by gradually increasing the amount of our contract purchases with the goal of increasing the balance of our
outstanding managed portfolio. Our plans also include financing future contract purchases with credit facilities that offer a
lower overall cost of funds compared to our current facility. To illustrate, in the fourth quarter of 2009 we originated $6.1
million in contracts and our only credit facility had a minimum interest rate of 14.00% per annum. By comparison, in the
first quarter of 2010, we originated $17.1 million in contracts and on March 25, 2010 we entered into an additional $50
million funding facility with an interest rate of 11.00% per annum. Moreover, less competition in our marketplace has
resulted in better terms for our contract purchases in 2009 compared to prior years. For the years ended December 31, 2009,
2008 and 2007, the average acquisition fee we charged per automobile contract purchased under our CPS programs was
$1,508, $592 and $209, respectively, or 11.7%, 3.9% and 1.4%, respectively, of the amount financed. Similarly, the
weighted average annual percentage rate of interest payable to us by the obligors on our purchased contracts has increased
significantly: to 19.9% in 2009 from 18.5%, and 18.1% in 2008 and 2007, respectively.
24
We have and will continue to have a substantial amount of indebtedness. At December 31, 2009, we had approximately
$1,014.8 million of debt outstanding. Such debt consisted primarily of $904.8 million of securitization trust debt, and also
included $4.9 million of warehouse lines of credit, $56.9 million of residual interest financing, $26.1 million of senior
secured related party debt and $22.0 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 10
years. The residual interest financing facility matures in June 2010 and we are in discussions with the lender regarding the
extension or restructuring of the facility, as to which there can be no assurance. Of the $26.1 million in senior secured
related party debt, $5.0 million matures in October 2010, unless we fail to extend the maturity of the residual credit facility,
in which case it matures in May 2010.
Our recent operating results include net losses of $57.2 million and $26.1 million in 2009 and 2008, respectively. We
believe that our results have been materially and adversely affected by the disruption in the capital markets that began in the
fourth quarter of 2007, by the recession that began in December 2007, and by related high levels of unemployment. Our
ability to repay or refinance maturing debt may be adversely affected by prospective lenders’ consideration of our recent
operating losses.
Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our
plans for future operations do not generate sufficient cash flows and 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
and may require us to issue additional debt or equity securities.
Contractual Obligations
The following table summarizes our material contractual obligations as of December 31, 2009 (dollars in thousands):
Payment Due by Period (1)
Total
Less than
1 Year
1 to 3
Years
4 to 5
Years
More than
5 Years
Long Term Debt (2)…………..………..
$
105,013
Operating Leases……………………………$
16,155
$
$
75,113
3,129
$
$
8,087
5,474
$
$
21,671
4,370
$
$
142
3,182
(1) Securitization trust debt, in the aggregate amount of $904.8 million as of December 31, 2009, 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
$500.3 million in 2010, $276.1 million in 2011, $107.7 million in 2012 and $20.7 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 in recent years, as
shown in the following summary of our warehouse credit facilities:
Facility in Use from June 2004 to September 2009. In June 2004, we (through our subsidiary Page Funding LLC) entered
into a floating rate variable note purchase facility. From the third quarter of 2005 until the fourth quarter of 2008 up to
$200.0 million of borrowing capacity was available under this facility, 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. The balance of notes outstanding related to this facility was repaid in full
in September 2009.
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. From the fourth quarter of 2006 to the third
quarter of 2008 up to $200 million of borrowing capacity was available under this facility, subject to certain collateral tests
25
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.
Facility Established in September 2009. On September 25, 2009 we established a $50 million secured revolving credit
facility with Fortress Credit Corp. that will mature on September 25, 2011. The facility is structured to allow us to fund a
portion of the purchase price of automobile contracts by drawing against a floating rate variable funding note issued by our
consolidated subsidiary Page Four Funding LLC. The facility provides for advances up to 75% of eligible finance
receivables and the notes under it accrue interest at a rate of one-month LIBOR plus 12.00% per annum, with a minimum
rate of 14.00% per annum. At December 31, 2009, $4.9 million was outstanding under this facility.
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 and the related capital requirements to match anticipated releases of cash from the trusts and
related spread accounts.
Capitalization
Over the period from January 1, 2008 through December 31, 2009 we have managed our capitalization by issuing and
refinancing debt as summarized in the following table:
26
Year Ended December 31,
2009
2008
(Dollars in thousands)
RESIDUAL INTEREST FINANCING:
Beginning balance…………………..…………………..…… $
Issuances…………………………………..………………
Payments…………………………………..………………
Ending balance………………………………...…………… $
67,300
(10,370)
56,930
SECURITIZATION TRUST DEBT:
Beginning balance…………………..…………………..…… $
Issuances…………………………………..………………
Payments…………………………………..………………
Ending balance………………………………...…………… $
1,404,211
(499,378)
904,833
SENIOR SECURED DEBT, RELATED PARTY:
Beginning balance…………………..…………………..…… $
Issuances…………………………………..………………
Payments…………………………………..………………
Debt discount net of amortization………...………………
Ending balance……………………………...……………… $
SUBORDINATED RENEWABLE NOTES:
Beginning balance…………………..…………………..…… $
Issuances…………………………………..………………
Payments…………………………………..………………
Ending balance………………………………...…………… $
20,105
5,000
1,013
26,118
25,721
2,424
(6,180)
21,965
$
$
$
$
$
$
$
$
70,000
20,000
(22,700)
67,300
1,798,302
310,359
(704,450)
1,404,211
25,000
(4,895)
20,105
28,134
4,183
(6,596)
25,721
Residual Interest Financing.
In July 2007, we established a combination term and revolving residual credit facility and 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 originally 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 were met, of the Class A-2 note maturity from June 2009 to June 2010.
In June 2009 we met all such conditions and extended the maturity. 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, 2009
the aggregate indebtedness under this facility was $56.9 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
27
two warrants: (i) warrants that we refer to as the FMV Warrants, which are exercisable for 1,600,991 shares of our common
stock, at an exercise price of $1.40702 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 FMV Warrants were initially exercisable to purchase 1,500,000 shares
for $2.573 per share, were adjusted in connection with the July 2008 issuance of other warrants to become exercisable
to purchase 1,564,324 shares at $2.4672 per share, and were further adjusted in connection with a July 2009
amendment of our option plan to become exercisable at $1.44 per share. Upon issuance in September 2009 of the
Fortress Warrant, the FMV Warrant was further adjusted to become exercisable to purchase 1,600,991 shares at an
exercise price of $1.40702 per share. In November 2009 we entered into an additional agreement with this lender
whereby they purchased an additional $5 million note. The note accrues interest at 15.0% and matures in October 2010
unless we fail to extend the maturity date of the above-mentioned residual credit facility, in which case the note matures in
May 2010.
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. 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. We have received waivers regarding the potential breach of financial covenants for our residual financing facility
and certain of our securitization debt structures.
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-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 June 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (FAS 166, Accounting for
Transfers of Financial Assets – an amendment of FASB Statement No. 140). This standard modifies certain guidance
contained in FASB ASC 860, Transfers and Servicing and limits the circumstances in which a financial asset should be
derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s
continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS No. 140, Accounting for
28
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities along with the exception from applying
Financial Accounting Standards Board Interpretation (“FIN”) 46(R) Consolidation of Variable Interest Entities (“FIN
46(R)”). This standard is effective for us beginning with the first quarter in 2010. Our adoption of this standard is not
expected to have material impact on our financial position, results of operations or stockholders’ equity.
In June 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities (FAS 167, Amendments to FASB Interpretation No. 46(R)). This standard amends several key
consolidation provisions related to variable interest entity (“VIE”), which are included in FASB ASC 810, Consolidation to
require a company to analyze whether its interest in a VIE gives it a controlling financial interest. A company must assess
whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it
has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessment
of whether a company is the primary beneficiary is also required by the standard. This standard amends the criteria to
qualify as a primary beneficiary as well as how to determine the existence of a VIE. This standard is effective for us
beginning with the first quarter in 2010. Comparative disclosures will be required for periods after the effective date. Our
adoption of this standard is not expected to have material impact on our financial position, results of operations or
stockholders’ equity.
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 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."
29
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INDEX TO FINANCIAL STATEMENTS
Page
Reference
Report of Independent Registered Public Accounting Firm – Crowe Horwath LLP ......................................
F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008 ..................................................................
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 ...........................
F-3
F-4
Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2009
and 2008 .....................................................................................................................................................
F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2009 and 2008 ...........
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 ..........................
Notes to Consolidated Financial Statements. ..................................................................................................
F-6
F-7
F-9
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 sheets of Consumer Portfolio Services, Inc. (the Company)
as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the two years ended December 31, 2009. 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. 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 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. as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the two years ended December 31, 2009 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, 2009. The waivers are temporary and will expire during 2010. See Note 1,
Uncertainty of Capital Markets and General Economic Conditions and Financial Covenants and Note 15 for a
discussion of potential consequences associated with the failure to obtain renewed waivers or inability to service or
repay debt.
/s/ CROWE HORWATH LLP
Costa Mesa, California
April 1, 2010
F-2
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Cash and cash equivalents
Restricted cash and equivalents
Finance receivables
Less: Allowance for finance credit losses
Finance receivables, net
Residual interest in securitizations
Furniture and equipment, net
Deferred financing costs
Deferred tax assets, net
Accrued interest receivable
Other assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses
Warehouse lines of credit
Residual interest financing
Securitization trust debt
Senior secured debt, related party
Subordinated renewable notes
Commitments and contingencies
Shareholders' Equity
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued
Series A preferred stock, $1 par value;
authorized 5,000,000 shares; none issued
Common stock, no par value; authorized
75,000,000 shares; 18,034,909 and 19,110,777
shares issued and outstanding at December 31, 2009 and
2008, respectively
Additional paid in capital, warrants
Retained earnings/(Accumulated Deficit)
Accumulated other comprehensive loss
$
$
$
December 31,
2009
December 31,
2008
$
$
$
12,433
128,511
878,366
(38,274)
840,092
4,316
1,509
5,717
33,450
8,573
33,660
1,068,261
17,906
4,932
56,930
904,833
26,118
21,965
1,032,684
-
-
55,346
8,371
(22,504)
(5,636)
35,577
22,084
153,479
1,417,343
(78,036)
1,339,307
3,582
1,404
8,954
52,727
14,903
42,367
1,638,807
21,702
9,919
67,300
1,404,211
20,105
25,721
1,548,958
-
-
54,702
7,471
34,703
(7,027)
89,849
$
1,068,261
$
1,638,807
See accompanying Notes to Consolidated Financial Statements.
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenues:
Interest income
Servicing fees
Other income
Expenses:
Employee costs
General and administrative
Interest
Interest, related party
Provision for credit losses
Loss on sale of receivables
Marketing
Occupancy
Depreciation and amortization
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Number of shares used in computing
earnings (loss) per share:
Basic
Diluted
Year Ended December 31,
2009
2008
$
$
208,196
4,640
11,059
223,895
351,551
2,064
14,796
368,411
37,306
24,204
111,768
-
92,011
-
3,782
3,524
707
273,302
(49,407)
7,800
(57,207)
(3.07)
(3.07)
$
$
48,874
29,506
153,720
2,533
148,408
13,963
10,221
4,104
537
411,866
(43,455)
(17,364)
(26,091)
(1.36)
(1.36)
18,643
18,643
19,230
19,230
$
$
See accompanying Notes to Consolidated Financial Statements
F-4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
Year Ended December 31,
2009
2008
Net income (loss)
Other comprehensive income (loss); minimum
pension liability, net of tax
Comprehensive income (loss)
$
$
(57,207)
1,391
(55,816)
$
$
(26,091)
(4,578)
(30,669)
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital,
Warrants
Retained
Earnings/
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2007
19,525
$
55,216
$
794
$
60,794
$
(2,449)
$
Total
114,355
Common stock issued upon exercise
of options, including tax benefit
Common stock issued upon issuance
of debt
Purchase of common stock
Pension benefit obligation
Valuation of warrants issued
Stock-based compensation
Net loss
Balance at December 31, 2008
Common stock issued upon exercise
of options, including tax benefit
Purchase of common stock
Pension benefit obligation
Valuation of warrants issued
Stock-based compensation
Net loss
Balance at December 31, 2009
70
144
1,225
(1,709)
-
-
-
-
19,111
11
(1,087)
-
-
-
-
18,035
$
$
1,801
(3,717)
-
-
1,258
-
54,702
7
(999)
-
-
1,636
-
55,346
$
$
-
-
-
-
6,677
-
-
7,471
-
-
-
900
-
-
8,371
$
$
-
-
144
-
-
-
-
-
(26,091)
34,703
-
-
-
-
-
(57,207)
(22,504)
$
$
-
-
(4,578)
-
-
-
(7,027)
-
-
1,391
-
-
-
(5,636)
$
$
1,801
(3,717)
(4,578)
6,677
1,258
(26,091)
89,849
7
(999)
1,391
900
1,636
(57,207)
35,577
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on residual asset
Accretion of deferred acquisition fees
Amortization of discount on securitization notes
Amortization of discount on senior secured debt, related party
Depreciation and amortization
Amortization of deferred financing costs
Provision for credit losses
Stock-based compensation expense
Interest income on residual assets
Cash received from residual interest in securitizations
Loss on sale of receivables
Change in market value of warrants
Changes in assets and liabilities:
Payments on restructuring accrual
Accrued interest receivable
Other assets
Deferred tax assets
Accounts payable and accrued expenses
Tax liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of finance receivables held for investment
Payments received on finance receivables held for investment
Proceeds received from sale of receivables
Decreases (increases) in restricted cash and cash equivalents, net
Purchase of furniture and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of securitization trust debt
Proceeds from issuance of subordinated renewable notes
Proceeds from issuance of senior secured debt, related party
Proceeds from issuance of residual financing debt
Payments on subordinated renewable notes
Net proceeds from (repayments to) warehouse lines of credit
Repayment of residual financing debt
Repayment of securitization trust debt
Repayment of senior secured debt, related party
Repayment of other debt
Payment of financing costs
Repurchase of common stock
Exercise of options and warrants
Excess tax benefit related to option exercises
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31,
2009
2008
$
(57,207)
$
(26,091)
-
(7,306)
11,613
1,013
707
3,236
92,011
1,636
(1,542)
-
-
77
-
6,330
12,059
19,277
(2,404)
-
79,500
(8,600)
423,110
-
24,968
(812)
438,666
-
2,424
5,000
-
(6,180)
(4,987)
(10,370)
(510,983)
-
-
(1,722)
(999)
-
-
(527,817)
(9,651)
22,084
12,433
$
$
-
(15,177)
13,868
519
537
10,490
148,408
1,258
(979)
2,123
13,963
555
-
9,195
(20,830)
6,108
(1,267)
(17,706)
124,974
(296,817)
775,730
162,307
16,862
(442)
657,640
285,389
4,183
25,000
20,000
(6,596)
(388,311)
(18,629)
(693,348)
-
-
(5,525)
(3,717)
144
-
(781,410)
1,204
20,880
22,084
See accompanying Notes to Consolidated Financial Statements.
F-7
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest
Income taxes
Non-cash financing activities:
Pension benefit obligation, net
Common stock issued in connection with new senior secured debt, related party
Warrants issued in connection with residual financing and senior secured debt
Warrants issued in connection with warehouse line of credit
Year Ended December 31,
2009
2008
$
98,257
(12,397)
$
126,300
(590)
(1,391)
-
-
822
4,578
1,801
6,284
-
See accompanying Notes to Consolidated Financial Statements.
F-8
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 and servicing retail automobile installment sale contracts ("Contracts")
originated by licensed motor vehicle dealers ("Dealers") located throughout the United States. Dealers located in California,
Pennsylvania, Florida, and Texas represented 25.9%, 8.2%, 7.4% and 6.7%, respectively, of contracts purchased during 2009
compared with 11.6%, 7.0%, 9.3% and 7.1%, respectively in 2008. No other state had a concentration in excess of 6.9%. We
specialize in Contracts with borrowers 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. As of
December 31, 2009, our unrestricted cash balance was $12.4 million.
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
interest 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.
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
F-9
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 and 2008.
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. We observed deterioration in performance of automobile contracts held in our portfolio during 2008 and 2009, which
we attribute to a general recession that began in December 2007.
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 are 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 Origination 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 the line item "Other assets" on our
Consolidated Balance Sheet at its estimated fair value less costs to sell. Included in other assets in the accompanying balance
sheets are repossessed vehicles pending sale of $9.7 million and $14.8 million at December 31, 2009 and 2008, respectively.
In addition, other assets as of December 31, 2009 include 5% of the structured notes issued by our subsidiary in connection
with our $199 million 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, 2009 and 2008 was $5.0 and 8.0 million, respectively.
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
F-10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the 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 when the aggregate
outstanding balance of the contracts has amortized to a specified percentage of the initial aggregate balance. Such repurchases
are referred to as "clean-up calls". When a clean-up call 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-up calls on the three unconsolidated trusts during 2007. The remaining
portion of the residual interest at December 31, 2008 and 2009 represents an estimate of the future cash flows from recoveries
on charge-offs from cleaned-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 have provided "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. .
Our warehouse securitization structures are similar to the above, except that (i) the SPS that purchases the contracts pledges
the contracts to secure promissory notes that it issues, (ii) no increase in the required amount of Credit Enhancement is
contemplated, and (iii) 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.
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.
F-11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally 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 reduction 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 of 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, in general, to our Finance receivables, Spread Accounts and Residuals. Under a
two-year multiple draw credit facility opened in September 2009, the Noteholders have limited recourse against us (10% of the
amount outstanding) in addition to recourse against the assets of the SPS that is the note issuer under that facility.
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.
F-12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The following table presents the primary components of Other Income:
Convenience fees charged to obligors……………...……….………………$
Direct mail revenues………………………….………………..…………. $
Recoveries on previously charged-off contracts……………………………$
Gains recognized on Residual interest in securitizations………………… $
Other……………………………………………………………………… $
Balance at end of year…….………………………………………...………$
December 31,
2009
2008
(In thousands)
4,512
$
2,618
1,560
635
1,734
11,059
$
5,968
5,255
2,065
178
1,330
14,796
Earnings (Loss) Per Share
The following table illustrates the computation of basic and diluted earnings (loss) per share:
Numerator:
Numerator for basic and diluted earnings (loss) per share………..…$
Denominator:
Denominator for basic earnings (loss) per share
- weighted average number of common shares
outstanding during the year……………………...…...……………$
Incremental common shares attributable to exercise
of outstanding options and warrants…………………………….. $
Denominator for diluted earnings (loss) per share………………… $
Basic earnings (loss) per share……………………..….….…………$
Diluted earnings (loss) per share…………….……………..……… $
Year Ended December 31,
2009
2008
(In thousands,
except per share data)
(57,207)
$
(26,091)
18,643
19,230
-
18,643
(3.07)
(3.07)
$
$
-
19,230
(1.36)
(1.36)
Incremental shares of 5,499,000 and 6,320,000 related to stock options have been excluded from the diluted earnings per
share calculation for the year ended December 31, 2009 and 2008, 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.
F-13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Purchases of Company Stock
We record purchases of our own common stock at cost and treat the shares as retired.
Stock Option Plan
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 FASB ASC 718
“Accounting for Stock Based Compensation”.
The per share weighted-average fair value of stock options granted during the years ended December 31, 2009 and 2008 was
$0.51 and $1.57, 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 74% to 111% for 2009 and 43% to 50%
for 2008. The risk-free interest rate is based on the yield on a U.S. 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.
Expected life (years)…………………………………...….
Risk-free interest rate…………………………………… .
Volatility………………………………………….……….
Expected dividend yield……………………………..…….
New Accounting Pronouncements
Year Ended December 31,
2009
5.42
1.99
%
%
79
-
2008
5.95
3.21
%
49
%
-
In June 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (FAS 166, Accounting for
Transfers of Financial Assets – an amendment of FASB Statement No. 140). This standard modifies certain guidance contained
in FASB ASC 860, Transfers and Servicing and limits the circumstances in which a financial asset should be derecognized
when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing
involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a
transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities along with the exception from applying Financial Accounting Standards
Board Interpretation (“FIN”) 46(R) Consolidation of Variable Interest Entities (“FIN 46(R)”). This standard is effective for us
beginning with the first quarter in 2010. Our adoption of this standard is not expected to have material impact on our financial
position, results of operations or stockholders’ equity.
In June 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities (FAS 167, Amendments to FASB Interpretation No. 46(R)). This standard amends several key consolidation
provisions related to variable interest entity (“VIE”), which are included in FASB ASC 810, Consolidation to require a
company to analyze whether its interest in a VIE gives it a controlling financial interest. A company must assess whether it has
an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to
direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessment of whether a
company is the primary beneficiary is also required by the standard. This standard amends the criteria to qualify as a primary
beneficiary as well as how to determine the existence of a VIE. This standard is effective for us beginning with the first quarter
F-14
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in 2010. Comparative disclosures will be required for periods after the effective date. Our adoption of this standard is not
expected to have material impact on our financial position, results of operations or stockholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Specifically, a
number of estimates were made in connection with determining an appropriate allowance for finance credit losses, valuing the
Residuals, accreting discounts and acquisition fees, amortizing deferred costs, the recording of deferred tax assets and reserves
for uncertain tax positions. These are material estimates that could be susceptible to changes in the near term and, accordingly,
actual results could differ from those estimates.
Reclassification
Certain amounts for the prior years have been reclassified to conform to the current year’s presentation with no effect on
previously reported earnings or shareholders’ equity.
Uncertainty of Capital Markets and General Economic Conditions
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 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. The adverse changes that have taken place in the market over the last 30 months have caused us to seek to
conserve liquidity by reducing our purchases of automobile contracts to nominal levels. However, in September 2009 we
entered into a $50 million revolving credit facility that allows advances against new purchases of automobile contracts. This
facility has provided us the liquidity to gradually increase our contract purchases from dealers. Moreover, during 2009 and to
date in 2010 we have observed an increase in demand for asset-backed securities, including securities backed by sub-prime
automobile receivables. Nevertheless, 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 reduced
demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile receivables than
prior to 2008. Second, there are fewer lenders who provide short term warehouse financing for sub-prime automobile finance
companies such as ours 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, broad economic weakness and increasing unemployment
during 2008 and 2009 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.
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.
F-15
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(2) Restricted Cash
Restricted cash consists of cash and cash equivalent accounts relating to our outstanding securitization trusts and credit
facilities. The amount of restricted cash on our consolidated balance sheets was $128.5 million and $153.5 million as of
December 31, 2009 and 2008, respectively.
Certain of our financing agreements require that we establish cash reserves for the benefit of the creditors to protect against
unforseen credit losses on the Contracts. These cash reserves, which are included in restricted cash, were $90.1 million and
$102.6 million as of December 31, 2009 and 2008, respectively.
(3) Finance Receivables
The following table presents the components of Finance Receivables, net of unearned interest:
Finance Receivables
Automobile finance receivables, net of unearned interest……………. $
Less: Unearned acquisition fees and discounts……………………… .
Finance Receivables……………………………………………………. $
(In thousands)
884,819
(6,453)
878,366
$
$
1,430,227
(12,884)
1,417,343
December 31,
2009
December 31,
2008
Finance receivables totaling $16.1 million and $33.3 million at December 31, 2009 and 2008, respectively, have been placed
on non-accrual status as a result of their delinquency status.
The following table presents a summary of the activity for the allowance for credit losses, for the years ended December 31,
2009 and 2008:
December 31,
2009
2008
Balance at beginning of year……………...……….……………………...…$
Provision for credit losses………………………….………………..………$
Charge-offs………………………………….………………….…………. $
Recoveries…………………………………………………………...………$
Allowance attributable to receivables sold…………………………………$
Balance at end of year…….………………………………………...………$
(In thousands)
$
78,036
92,011
(160,174)
28,401
-
38,274
$
100,138
148,408
(195,039)
30,400
(5,871)
78,036
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-16
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross balance of repossessions in inventory……………...……….………$
Allowance for losses on repossessed inventory……………………………$
Net repossessed inventory included in other assets…….………………… $
37,821
(28,084)
9,737
$
$
47,452
(32,690)
14,762
December 31,
2009
2008
(In thousands)
(4) Residual Interest in Securitizations
Residual assets of $126,000 and $935,000 as of December 31, 2009 and 2008, respectively,represented our discounted
estimate of cash flows from recoveries of previously charged off receivables from unconsolidated securitization transactions
completed from 2001 to 2003. We have used a discount rate of 25%, which is consistent with previous periods.
In September 2008 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 $4.2 million and $2.6 million as of December 31, 2009 and 2008,
respectively, 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:
December 31,
2009
2008
Furniture and fixtures…………………………….….. $
Computer and telephone equipment……………………$
Leasing assets………………………………..………. $
Leasehold improvements………………………….…. $
Other fixed assets………………………….…………. $
Less: accumulated depreciation and amortization………$
$
$
(In thousands)
4,133
6,294
673
1,301
280
12,681
(11,172)
1,509
$
4,128
5,651
673
1,190
244
11,886
(10,482)
1,404
Depreciation expense totaled $707,000 and $537,000 for the years ended December 31, 2009 and 2008, 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-17
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Final
Scheduled
Payment
Date (1)
Receivables
Pledged at
December 31,
2009 (2)
Initial
Principal
Outstanding
Principal at
December 31,
2009
Outstanding
Principal at
December 31,
2008
Weighted
Average
Interest Rate at
December 31,
2009
March 2010 $
October 2010
October 2010
February 2011
April 2011
December 2011
October 2011
February 2012
May 2012
July 2012
July 2012
November 2012
January 2013
July 2013
August 2013
November 2013
December 2013
January 2014
May 2014
October 2014
$
-
-
-
1,151
1,800
-
6,858
10,192
19,826
5,210
18,915
41,174
53,601
60,559
67,149
105,753
30,383
132,585
154,761
176,328
$
(Dollars in thousands)
-
-
-
1,254
1,989
-
6,924
10,021
19,661
5,330
19,295
41,546
56,664
64,332
69,584
107,011
31,087
135,602
158,955
175,578
87,500 $
75,000
82,094
96,369
100,000
120,000
137,500
130,625
183,300
72,525
145,000
245,000
257,500
247,500
220,000
290,000
113,293
314,999
327,499
310,359
1,023
1,704
3,277
6,192
8,223
12,395
17,586
21,991
39,478
12,333
36,548
73,257
92,106
101,716
105,687
160,122
51,115
195,800
228,478
235,180
$
886,245 $
3,556,063 $
904,833 $
1,404,211
-
-
-
4.17%
4.24%
-
5.30%
4.67%
5.13%
5.79%
5.71%
5.33%
6.52%
5.81%
5.68%
5.61%
5.76%
6.14%
6.26%
7.21%
Series
CPS 2003-C
CPS 2003-D
CPS 2004-A
CPS 2004-B
CPS 2004-C
CPS 2004-D
CPS 2005-A
CPS 2005-B
CPS 2005-C
CPS 2005-TFC
CPS 2005-D
CPS 2006-A
CPS 2006-B
CPS 2006-C
CPS 2006-D
CPS 2007-A
CPS 2007-TFC
CPS 2007-B
CPS 2007-C
CPS 2008-A
_________________________
(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 $500.3
million in 2010, $276.1 million in 2011, $107.7 million in 2012, and $20.7 million in 2013.
(2) Includes repossessed assets that are included in Other Assets on our Consolidated Balance Sheet.
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, 2009, 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, 2009, restricted cash under the various agreements totaled approximately
$128.5 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 required 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 of credit. Bankruptcy
F-18
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 and 2008 are summarized below:
Residual interest financing
Notes secured by our residual interests in securitizations. In
June 2009, after having met certain conditions, we exercised
our option to extend the maturity from June 2009 to June 2010.
The aggregate indebtedness under this facility was $56.9
million at December 31, 2009. 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 due
in June 2013, a $15 million term note due in July 2013 and a
$5 million term note due in May 2010 but can be extended to
October 2010 if certain conditions are met. The $10 million
and $15 million term notes accrue interest at 16% per annum
while the $5 million term note accrues interest at 15% per
annum. The amount outstanding at December 31, 2009 is net
of the unamortized debt discount of $3.9 million relating to the
valuation of 1,225,000 shares of stock, warrants to purchase
1,600,991 shares of our common stock at an exercise price of
$1.40702, 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 6.85% to 15.35%, with a
weighted average rate of 13.15%, and with maturities from
January 2010 to August 2019 with a weighted average maturity
of October 2012. 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,
2009
2008
(In thousands)
$56,930
$67,300
26,118
20,105
21,965
$105,013
25,721
$113,126
The outstanding debt on our credit facility was $4.9 million as of December 31, 2009, compared to $9.9 million outstanding
as of December 31, 2008. 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 financial losses. Further
covenants include matters relating to investments, acquisitions, restricted payments and certain dividend restrictions.
F-19
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreements for our residual interest financing and revolving credit facility include financial covenants which, if
breached, would be an event of default. We have received waivers regarding the potential breach of minimum net worth
covenants on both the revolving credit and residual interest facilities. Without such waiver, the revolving credit lender could
cease funding future advances and could, among other things, sell the finance receivables pledged to that facility in order
satisfy the debt or transfer the servicing on such receivables. Similarly, without such waiver, the residual interest lender could,
among other things, sell the residual interests in the pledged securitizations to satisfy the residual interest debt.
The following table summarizes the contractual and expected maturity amounts of debt as of December 31, 2009:
Contractual maturity
date
Residual
interest
financing
Senior secured
debt (1)
Subordinated
renewable
notes
Total
2010……………………. $
2011………………………$
2012…………………… $
2013…………………… $
2014…………………… $
Thereafter……………… $
Total…….………………$
_________________________
56,930
-
-
-
-
-
56,930
$
$
$
$
(In thousands)
5,000
-
-
21,118
-
-
26,118
13,183
4,768
3,319
552
1
142
21,965
75,113
4,768
3,319
21,670
1
142
105,013
$
$
$
$
(1) The senior secured debt maturing in 2013 is shown net of unamortized debt discounts of $3.9 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, 2009 and 2008, is $1.6 million and $1.3 million related
to the amortization of deferred compensation expense and valuation of stock options.
Stock Purchases
At four different times between 2000 and 2009, our Board of Directors, authorized us to purchase a total of up to $32.5
million of our securities. As of December 31, 2009, we had purchased $5.0 million in principal amount of debt securities, and
$26.3 million of our common stock, representing 8,213,625 shares.
Options and Warrants
In 2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term Equity Incentive Plan (the “2006
Plan”) pursuant to which our Board of Directors, or a duly-authorized committee thereof, may grant stock options, restricted
stock, restricted stock units and stock appreciation rights to our employees or our subsidiaries, to directors of the Company, and
to individuals acting as consultants to the Company or its subsidiaries. In June 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.
F-20
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At our annual shareholders meeting in July 2009, our shareholders approved an amendment of the 2006 Long-Term Equity
Incentive Plan which allowed an exchange and repricing of eligible outstanding options to purchase 3.96 million shares with
exercise prices ranging from $2.50 to $7.18 per share. Under this Option Exchange Program, eligible employees were able to
elect to exchange outstanding eligible options for new options with an exercise price of $1.50. This transaction resulted in
additional compensation expense of approximately $400,000 at the time of the exchange and approximately $300,000 over the
remaining vesting periods of the exchanged options.
For the year ended December 31, 2009, we recorded stock-based compensation costs in the amount of $1.6 million. As of
December 31, 2009, unrecognized stock-based compensation costs to be recognized over future periods was equal to $3.5
million. This amount will be recognized as expense over a weighted-average period of 3.5 years.
At December 31, 2009, the options outstanding and exercisable had intrinsic values of $529,000 and $72,000, respectively.
The total intrinsic value of options exercised was $7,000 and $50,000 for the years ended December 31, 2009 and 2008,
respectively. New shares were issued for all options exercised during the years ended December 31, 2009 and 2008. At
December 31, 2009, there were a total of 1.4 million additional shares available for grant under the 2006 Plan.
Stock option activity for the year ended December 31, 2009, including the activity related to the option exchange described
above, is as follows:
Options outstanding at the beginning of period…………
Granted………………………………………………
Exercised……………………………………………
Forfeited…………………………………………….
Options outstanding at the end of period………………
Number of
Shares
(in thousands)
6,320
5,410
(11)
(4,845)
6,874
Options exercisable at the end of period………………
4,605
Weighted
Average
Exercise Price
4.35
1.31
0.62
4.84
1.62
1.86
$
$
$
Weighted
Average
Remaining
Contractual Term
N/A
N/A
N/A
N/A
5.91 years
4.65 years
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, 2009 and 2008, was $0.78 and $1.57, respectively.
The per share weighted average fair value 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, 2009 and 2008 was $0.17 and $1.62, respectively. The per share
weighted average 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, 2009 and 2008 was $1.50 and $3.37, respectively.
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 1,600,991 shares of our common stock, at an exercise price of $1.40702 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.
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.
F-21
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Interest Income
The following table presents the components of interest income:
Year Ended December 31,
2009
2008
(In thousands)
Interest on finance receivables……………………...…………. $
Residual interest income …………………….……………….…$
Other interest income……………..…………………..……….. $
Net interest income………………..…………………….………$
205,892
1,376
928
208,196
$
$
346,594
606
4,351
351,551
(10) Income Taxes
Income taxes consist of the following:
Year Ended December 31,
2009
2008
(In thousands)
Current federal tax expense (benefit)……………………… $
Current state tax expense (benefit)………………………… $
Deferred federal tax (benefit)……………………………… $
Deferred state tax expense (benefit)…………………………$
Change in valuation allowance……………………..……… $
$
(28,110)
(2,814)
11,294
(191)
27,621
(23,218)
(178)
5,886
(854)
1,000
Income tax expense (benefit)………………………………. $
7,800
$
(17,364)
Income tax expense/(benefit) for the years ended December 31, 2009 and 2008 differs from the amount determined by
applying the statutory federal rate of 35% to income before income taxes as follows:
Expense at federal tax rate………………………...……………$
State taxes, net of federal income tax benefit………………… $
Other adjustments to tax reserve……………………………… $
Valuation allowance……………………………….……………$
Stock-based compensation……………………………….…… $
Other…………………………………………………..……… $
$
Year Ended December 31,
2009
2008
(In thousands)
(17,293)
(2,187)
(827)
27,621
540
(54)
7,800
$
$
(15,208)
(319)
(3,608)
1,000
411
360
(17,364)
F-22
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, 2009
and 2008 are as follows:
Deferred Tax Assets:
Finance receivables…………………………………… $
Accrued liabilities…………………………………….…$
Furniture and equipment……………………………… $
NOL carryforwards and BILs………………………...…$
Pension Accrual……………………………………...…$
Other……………………………………………...…… $
Total deferred tax assets………………………….……$
Valuation allowance……………………………………$
$
Deferred Tax Liabilities:
$
Other……………………………….……………..
$
Total deferred tax liabilities……………………..……$
$
Net deferred tax asset……………….…………………$
December 31,
2009
2008
(In thousands)
$
11,779
1,613
274
48,170
2,347
-
64,183
(28,621)
35,562
(2,112)
(2,112)
22,187
839
327
27,379
2,877
118
53,727
(1,000)
52,727
-
-
33,450
$
52,727
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. Tax strategies include the sale of certain assets that can produce significant taxable income within the
relevant carryforward period. Such strategies could be implemented without significant impact on our core business or our
ability to generate future growth. The costs related to the implementation of these tax strategies were considered in evaluating
the amount of taxable income that could be generated in order to realize our deferred tax assets.
At December 31, 2009 we have established a $28.6 million valuation allowance against that portion of the deferred tax asset
whose utilization in future periods is not more than likely.
As of December 31, 2009, we had net operating loss carryforwards for federal and state income tax purposes of $74.1 million
and $156.9 million, respectively. The federal net operating losses begin to expire in 2022. The state net operating losses begin
to expire in 2011.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits including interest and penalties for
the year:
Unrecognized tax benefit - opening balance……………$
Gross increases - tax positions in prior period…………$
Gross decreases - tax positions in prior period…………$
Gross increases - tax positions in current period………$
Settlements…………………………………………… $
Lapse of statute of limitations……………………..……$
2009
2008
(In thousands)
8,183
-
(2,165)
-
(532)
(1,167)
$
$
$
$
$
$
12,280
-
(1,764)
1,052
-
(3,385)
Unrecognized tax benefit - ending balance…………… $
4,319
$
8,183
F-23
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the balance of unrecognized tax benefits at December 31, 2009, are $2.9 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, 2009
are $1.4 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 $100,000 and gross interest of $600,000 during 2009 and in total,
as of December 31, 2009, have recognized a liability for penalties of $500,000 million and gross interest of $500,000.
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 2009 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 2002through
2008 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 2002.
(11) Related Party Transactions
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, 2009, $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, 2009, under these leases are due during the years ended
December 31 as follows:
2010…………………………………...……………………….……………… $
2011…………………………………...……………………….……………… $
2012…………………………………...……………………….……………… $
2013…………………………………...……………………….……………… $
2014…………………………………...……………………….……………… $
Thereafter…………………………………...……………………….………… $
Amount
(In thousands)
3,129
2,774
2,700
2,421
1,949
3,182
Total minimum lease payments………………………………….………………$
16,155
Rent expense for the years ended December 31, 2009 and 2008, was $4.1 million and $4.2 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.
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
F-24
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had 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 as being possibly unfair to Mr. Pardee, and the future development of the adversary action is
dependent on the decisions and future actions of the representative of creditors. We believe that resolution of the adversary
action will 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.
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, 2009
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.
(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 for
the year ended December 31, 2008. We did not make any contributions to the plan in 2009 rather we utilized the plan’s
forfeiture account to match $438,000 in employee contributions.
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.
The following tables represents a reconciliation of the change in the plan’s benefit obligations, fair value of plan assets, and
funded status at December 31, 2009 and 2008:
F-25
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2009
2008
(In thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year………………………………….………………… $
Service cost………………………………………………………………………………………… $
Interest cost………………………………………………………………………………………… $
Actuarial gain (loss)……………………………………………………………….…………………$
Benefits paid……………………………………………………………………………………..… $
Projected benefit obligation, end of year………………………………………………………… $
Change in Plan Assets
Fair value of plan assets, beginning of year…………………………………………………………$
Return on assets………………………………………………………………………………………$
Employer contribution………………………………………………………………………..………$
Expenses………………………………………………………………………..………………….. $
Benefits paid…………………………………………………………………………………………$
Fair value of plan assets, end of year…..………………………………………………………...…$
16,085
-
947
243
(633)
16,642
8,515
2,626
-
(43)
(633)
10,465
Funded Status at end of year………………………………………………………………………$
(6,177)
$
$
$
$
$
14,969
-
930
837
(651)
16,085
14,643
(5,418)
-
(59)
(651)
8,515
(7,570)
Additional Information
Weighted average assumptions used to determine benefit obligations and cost at December 31, 2009 and 2008 were as
follows:
Weighted average assumptions used to determine benefit obligations
Discount rate……………………………………………………………………………………… .
5.90%
6.00%
Weighted average assumptions used to determine net periodic benefit cost
Discount rate……………………………………………………………………………………… .
Expected return on plan assets……………………………………………………………...……….
6.00%
8.50%
6.45%
8.50%
December, 31
2009
2008
F-26
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, 2009. 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.
Amounts recognized on Consolidated Balance Sheet
Other assets…………………………………………………………………………………………$
Other liabilities…….…………………………………………………………..…………..………$
Net amount recognized……………………………………………………………………………$
Amounts recognized in accumulated other comprehensive income consists of:
Net loss (gain)………………………………………………………………………………………$
Unrecognized transition asset………………..…………………………………………………… $
Net amount recognized……………………………………………………………………………$
Components of net periodic benefit cost
Interest Cost………………………………………………………………………..………………$
Expected return on assets…………………………………………………………...………………$
Amortization of transition asset………………………………..……………………………………$
Amortization of net loss...……………………………………………………………………..……$
Net periodic benefit cost..……………..…..……………………………….……….……………$
Benefit Obligation Recognized in Other Comprehensive Income
Net loss (gain)……………………………………………………………………..……………… $
Prior service cost (credit)…………………………………………………………………………. $
Amortization of prior service cost…………………………………………………….……………$
Net amount recognized in other comprehensive income……………..…..………………………$
December 31,
2009
2008
(In thousands)
-
(6,177)
(6,177)
9,029
-
9,029
947
(697)
-
675
925
(2,318)
-
-
(2,318)
$
$
$
$
$
$
$
$
-
(7,570)
(7,570)
11,347
-
11,347
930
(1,222)
-
153
(139)
7,383
-
-
7,383
The weighted average asset allocation of our pension benefits at December 31, 2009 and 2008 were as follows:
Weighted Average Asset Allocation at Year-End
Asset Category
Equity securities……………………………………………………………………...…………$
Debt securities……………………………………………………….…………………………$
Cash and cash equivalents……………………………………………………….………………$
Total……………………………………………………………………………………………$
December 31,
2009
2008
76%
24%
0%
100%
71%
28%
1%
100%
Our investment policies and strategies for the pension benefits plan utilize a target allocation of 75% equity securities and
25% fixed income securities. Our investment goals are to maximize returns subject to specific risk management policies. We
address risk management and diversification by the use of a professional investment advisor and several sub-advisors which
invest in domestic and international equity securities and domestic fixed income securities. Each sub-advisor focuses its
investments within a specific sector of the equity or fixed income market. For the sub-advisors focused on the equity markets,
the sectors are differentiated by the market capitalization and the relative valuation of the underlying issuer. For the sub-
advisors focused on the fixed income markets, the sectors are differentiated by the credit quality and the maturity of the
underlying fixed income investment. The investments made by the sub-advisors are readily marketable and can be sold to fund
benefit payment obligations as they become payable.
F-27
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flows
Estimated Future Benefit Payments (In thousands)
2010…………………………………………………………………………...…………………$
2011…………………………………………………………………………...…………………$
2012…………………………………………………………………………...…………………$
2013…………………………………………………………………………...…………………$
2014…………………………………………………………………………...…………………$
Years 2015 - 2019………………………………………………………………………..…… $
Anticipated Contributions in 2010……………………………………………..………………$
589
665
698
753
798
4,786
600
The fair value of plan assets at December 31, 2009, by asset category, is as follows:
Level 1 (1)
Level 2 (2)
Level 3 (3)
Total
Investment Name:
Core Bond……………………………………… $
Fundamental Value………………………………$
Mid Cap Growth…………………………………$
Focus Value………………………………………$
Small Co. Value…………………………………$
Growth……………………………………………$
Income……………………………………………$
International Growth…………………………… $
Inflation Protected Bond…………………………$
Money Market……………………………………$
Company Common Stock……………………… $
Total……………………………………………$
-
-
-
-
-
-
-
-
-
34
567
601
$
$
________________________
(1) Assets with quoted prices in active markets for identical assets
(2) Assets with significant observable inputs
(3) Assets with significant unobservable inputs
(14) Fair Value Measurements
$
$
(in thousands)
1,898
1,683
509
567
521
2,170
92
1,950
473
-
-
9,863
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
$
$
1,898
1,683
509
567
521
2,170
92
1,950
473
34
567
10,464
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157") (ASC 820 10 65).
SFAS No. 157 (ASC 820 10 65) 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.
SFAS No. 157 (ASC 820 10 65) 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 for financial accounting
purposes. In that sale, we retained certain assets that are measured at fair value. We describe below the valuation
methodologies we use for the securities retained and the residual interest in the cash flows of that transaction, as well as the
general classification of such instruments pursuant to the valuation hierarchy. The securities retained as of December 31, 2009
are $5.0 million of notes, which are classified as level 2 because we sold similar assets in the transaction. We use the price at
which those similar notes were sold to value the securities retained. The residual interest in such securitization as of December
31, 2009 is $4.3 million and is classified as level 3. We determine the value of that residual interest using a discounted cash
F-28
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flow model that includes estimates for prepayments and losses. We use a discount rate of 33% per annum. The assumptions
we use are based on historical performance of automobile contracts we have originated and serviced in the past, adjusted for
current market conditions.
Repossessed vehicle inventory, which is included in Other Assets on our balance sheet, is measured at fair value using Level
2 assumptions based on our actual loss experience on sale of repossessed vehicles. At December 31, 2009, the finance
receivables related to the repossessed vehicles in inventory totaled $37.8 million. We have applied a valuation adjustment of
$28.1 million, resulting in an estimated fair value and carrying amount of $9.7 million.
The table below presents a reconciliation for Level 3 assets measured at fair value on a recurring basis using significant
unobservable inputs:
Residual Interest in Securitizations:
Balance at January 1…………………………
$
Transfers into Level 3……………………………… $
Included in earnings…………………………………$
Balance at December 31…………………………… $
2009
(in thousands)
3,582
$
-
734
4,316
$
2008
(in thousands)
2,274
$
2,452
(1,144)
3,582
$
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, 2009 and 2008, 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, 2009 and 2008, were as follows:
December 31,
2009
2008
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
12,433
128,511
840,092
4,316
8,573
4,932
4,267
56,930
904,833
26,118
21,965
$
$
$
$
$
$
(In thousands)
12,433
128,511
806,154
4,316
8,573
4,932
4,267
56,930
942,075
26,118
21,965
$
$
$
$
$
22,084
153,479
1,339,307
3,582
14,903
9,919
5,605
67,300
1,404,211
20,105
25,721
22,084
153,479
1,312,148
3,582
14,903
9,919
5,605
67,300
1,378,271
20,105
25,721
Financial Instrument
Cash and cash equivalents………………………$
Restricted cash and equivalents…………………$
Finance receivables, net…………………….… $
Residual interest in securitizations………...……$
Accrued interest receivable…………….………$
Warehouse lines of credit…………………….. $
Accrued interest payable……………………. $
Residual interest financing………………..……$
Securitization trust debt……………...…………$
Senior secured debt………………….…………$
Subordinated renewable notes…………………$
Cash, Cash Equivalents and Restricted Cash
The carrying value equals fair value.
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.
F-29
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Results of Operations and Management’s Plans
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 term securitization
transactions and other sales of automobile contracts, amounts borrowed under 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, consisting 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.
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
F-30
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 further 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. 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, when it was repaid in full.
On September 25, 2009 we established a $50 million secured multiple draw credit facility with Fortress Credit Corp., which
will mature on September 25, 2011. The facility is structured to allow us to fund a portion of the purchase price of automobile
contracts by drawing against a floating rate variable funding note issued by our consolidated subsidiary Page Four Funding,
LLC. The facility provides for advances up to 75% of eligible finance receivables. The notes issued accrue interest at a rate of
one-month LIBOR plus 12.00% per annum, with a minimum rate of 14.00% per annum. At December 31, 2009, $4.9 million
was outstanding under this facility. As part of the consideration given to Fortress for committing to make loans under this
facility, we issued a 10-year warrant to purchase up to 1,158,087 of our common shares, at an exercise price of $0.879 per
share (we refer to this as the Fortress Warrant). Issuance of the Fortress Warrant required an adjustment to the terms of an
existing outstanding warrant regarding 1,564,324 shares, reducing the exercise price of that other warrant from $1.44 per share
to $1.40702 per share and increasing the number of shares available for purchase to 1,600,991.
Subsequent to the reporting period covered by this report, on March 25, 2010 we entered into an additional $50 million
funding facility. This new facility provides for advances of up to 75% of the principal balance of the eligible pledged finance
receivables and the notes under it accrue interest at a rate of 11.0% per annum.
We securitized $509.0 million of automobile 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. 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 July 2007, we established a combination term and revolving residual credit facility and 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 originally 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 were met, of the Class A-2 note maturity from June 2009 to June 2010. In June 2009 we met all such
conditions and extended the maturity. 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, 2009 the aggregate indebtedness under this facility was $56.9 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 1,600,991 shares of our common stock, at an exercise price of $1.40702 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 FMV Warrants
F-31
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were initially exercisable to purchase 1,500,000 shares for $2.573 per share, were adjusted in connection with the July 2008
issuance of other warrants to become exercisable to purchase 1,564,324 shares at $2.4672 per share, and were further adjusted
in connection with a July 2009 amendment of our option plan to become exercisable at $1.44 per share. Upon issuance in
September 2009 of the Fortress Warrant, the FMV Warrant was further adjusted to become exercisable to purchase 1,600,991
shares at an exercise price of $1.40702 per share. In November 2009 we entered into an additional agreement with this lender
whereby they purchased an additional $5 million note. The note accrues interest at 15.0% and matures in October 2010 unless
we fail to extend the maturity date of the above-mentioned residual credit facility, in which case the note matures in May 2010.
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, 2009, we had unrestricted cash of $12.4 million, one $50 million revolving credit facility and no immediate
plans to complete a securitization. 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.
The agreements for our residual interest financing and revolving credit facility include financial covenants which, if
breached, would be an event of default. We have received waivers regarding the potential breach of minimum net worth
covenants on both the revolving credit and residual interest facilities. Without such waiver, the revolving credit lender could
cease funding future advances and could, among other things, sell the finance receivables pledged to that facility in order
satisfy the debt or transfer the servicing on such receivables. Similarly, without such waiver, the residual interest lender could,
among other things, sell the residual interests in the pledged securitizations to satisfy the residual interest debt.
F-32
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our plan for future operations and meeting the obligations of our financing arrangements includes returning to profitability
by gradually increasing the amount of our contract purchases with the goal of increasing the balance of our outstanding
managed portfolio. Our plans also include financing future contract purchases with credit facilities that offer a lower overall
cost of funds compared to our current facility. To illustrate, in the fourth quarter of 2009 we originated $6.1 million in
contracts and our only credit facility had a minimum interest rate of 14.00% per annum. By comparison, in the first quarter of
2010, we originated $17.1 million in contracts and on March 25, 2010 we entered into an additional $50 million funding
facility with an interest rate of 11.00% per annum. Moreover, less competition in our marketplace has resulted in better terms
for our contract purchases in 2009 compared to prior years. For the years ended December 31, 2009, 2008 and 2007, the
average acquisition fee we charged per automobile contract purchased under our CPS programs was $1,508, $592 and $209,
respectively, or 11.7%, 3.9% and 1.4%, respectively, of the amount financed. Similarly, the weighted average annual
percentage rate of interest payable to us by the obligors on our purchased contracts has increased significantly: to 19.9% in
2009 from 18.5%, and 18.1% in 2008 and 2007, respectively.
We have and will continue to have a substantial amount of indebtedness. At December 31, 2009, we had approximately
$1,014.8 million of debt outstanding. Such debt consisted primarily of $904.8 million of securitization trust debt, and also
included $4.9 million of warehouse lines of credit, $56.9 million of residual interest financing, $26.1 million of senior secured
related party debt and $22.0 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 10 years. The
residual interest financing facility matures in June 2010 and we are in discussions with the lender regarding the extension or
restructuring of the facility, as to which there can be no assurance. Of the $26.1 million in senior secured related party debt,
$5.0 million matures in October 2010, unless we fail to extend the maturity of the residual credit facility, in which case it
matures in May 2010.
Our recent operating results include net losses of $57.2 million and $26.1 million in 2009 and 2008, respectively. We believe
that our results have been materially and adversely affected by the disruption in the capital markets that began in the fourth
quarter of 2007, by the recession that began in December 2007, and by related high levels of unemployment. Our ability to
repay or refinance maturing debt may be adversely affected by prospective lenders’ consideration of our recent operating
losses.
Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans
for future operations do not generate sufficient cash flows and 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 and may require us to
issue additional debt or equity securities.
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