Item
7. Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto and other information
included or incorporated by reference herein.
Overview
We are a
specialty finance company engaged in purchasing and servicing retail automobile
contracts originated primarily by franchised automobile dealers and, to a lesser
extent, by select independent dealers in the United States in the sale of new
and used automobiles, light trucks and passenger vans. Through our automobile
contract purchases, we provide indirect financing to the customers of dealers
who have limited credit histories, low incomes or past credit problems, who we
refer to as sub-prime customers. We serve as an alternative source of
financing for dealers, facilitating sales to customers who otherwise might not
be able to obtain financing from traditional sources, such as commercial banks,
credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly
from dealers, we have also (i) acquired installment purchase contracts in three
merger and acquisition transactions, (ii) purchased immaterial amounts of
vehicle purchase money loans from non-affiliated lenders, and (iii) originated
ourselves an immaterial amount of vehicle purchase money loans by lending money
directly to consumers. In this report, we refer to all of such
contracts and loans as "automobile contracts."
We were
incorporated and began our operations in March 1991. From inception through
December 31, 2008, we have purchased a total of approximately $8.7 billion of
automobile contracts from dealers. In addition, we obtained a total
of approximately $605.0 million of automobile contracts in mergers and
acquisitions we made in 2002, 2003 and 2004. During 2008, unlike
recent prior years, our managed portfolio decreased from the previous year due
to our strategy of decreasing contract purchases to conserve our liquidity in
response to adverse economic conditions as discussed further
below. Our total managed portfolio, net of unearned interest on
pre-computed automobile contracts, was approximately $1,664.1 million at
December 31, 2008 compared to $2,162.2 million at December 31, 2007,
$1,565.9 million as of December 31, 2006 and $1,122.0 million as of
December 31, 2005.
We are
headquartered in Irvine, California, where most operational and administrative
functions are centralized. All credit and underwriting functions are
performed in our California headquarters, and we service our automobile
contracts from our California headquarters and from three servicing branches in
Virginia, Florida and Illinois.
We
purchase contracts in our own name (“CPS”) and, until July 2008, also in the
name of our wholly-owned subsidiary, TFC. Programs marketed under the
CPS name are intended to serve a wide range of sub-prime customers, primarily
through franchised new car dealers. Our TFC program served vehicle
purchasers enlisted in the U.S. Armed Forces, primarily through independent used
car dealers. In July 2008, we suspended contract purchases under our
TFC program.
We
purchase automobile contracts with the intention of financing them on a
long-term basis through securitizations. Securitizations are transactions in
which we sell a specified pool of contracts to a special purpose entity of ours,
which in turn issues asset-backed securities to fund the purchase of the pool of
contracts from us. Depending on the structure of the securitization, the
transaction may be treated, for financial accounting purposes, as a sale of the
contracts or as a secured financing.
Securitization
and Warehouse Credit Facilities
Generally
Throughout
the periods for which information is presented in this report, we have purchased
automobile contracts with the intention of financing them on a long-term basis
through securitizations, and on an interim basis through our warehouse credit
facilities. All such financings have involved identification of
specific automobile contracts, sale of those automobile contracts (and
associated rights) to one of our special-purpose subsidiaries, and issuance of
asset-backed securities to fund the transactions. Depending on the structure,
these transactions may be accounted for under generally accepted accounting
principles as sales of the automobile contracts or as secured
financings.
When
structured to be treated as a secured financing for accounting purposes, the
subsidiary is consolidated with us. Accordingly, the sold automobile contracts
and the related debt appear as assets and liabilities, respectively, on our
consolidated balance sheet. We then periodically: (i) recognize interest and fee
income on the contracts, (ii) recognize interest expense on the securities
issued in the transaction, and (iii) record as expense a provision for credit
losses on the contracts. From July 2003 through April 2008, all of
our securitizations were structured in this manner. In September 2008, we
securitized automobile contracts in a transaction that was in substance a sale,
that
was
treated as a sale for accounting purposes, and in which we retained a residual
interest in the sold automobile contracts.
When
structured to be treated as a sale for accounting purposes, the assets and
liabilities of the special-purpose subsidiary are not consolidated with us.
Accordingly, the transaction removes the sold automobile contracts from our
consolidated balance sheet, the related debt does not appear as our debt, and
our consolidated balance sheet shows, as an asset, a retained residual interest
in the sold automobile contracts. The residual interest represents the
discounted value of what we expect will be the excess of future collections on
the automobile contracts over principal and interest due on the asset-backed
securities. That residual interest appears on our consolidated balance sheet as
"
residual
interest in securitizations,
"
and the
determination of its value is dependent on our estimates of the future
performance of the sold automobile contracts. Of our managed
portfolio outstanding at December 31, 2008, only our September 2008
securitization was structured to be treated as a sale for accounting
purposes.
Credit
Risk Retained
Whether a
sale of automobile contracts in connection with a securitization or warehouse
credit facility is treated as a secured financing or as a sale for financial
accounting purposes, the related special-purpose subsidiary may be unable to
release excess cash to us if the credit performance of the related automobile
contracts falls short of pre-determined standards. Such releases represent a
material portion of the cash that we use to fund our
operations. An unexpected deterioration in the performance of
such automobile contracts could therefore have a material adverse effect on both
our liquidity and our results of operations, regardless of whether such
automobile contracts are treated for financial accounting purposes as having
been sold or as having been financed. For estimation of the magnitude of such
risk, it may be appropriate to look to the size of our
"
managed
portfolio,
"
which represents both financed and sold automobile contracts as to which such
credit risk is retained. Our managed portfolio as of December 31, 2008 was
approximately $1,664.1 million.
Critical
Accounting Policies
We
believe that our accounting policies related to (a) Allowance for Finance Credit
Losses, (b) Amortization of Deferred Originations Costs and Acquisition Fees,
(c) Residual Interest in Securitizations and Gain on Sale of Automobile
Contracts and (d) Income Taxes are the most critical to understanding and
evaluating our reported financial results. Such policies are described
below.
Allowance
for Finance Credit Losses
In order
to estimate an appropriate allowance for losses to be incurred on finance
receivables, we use a loss allowance methodology commonly referred to as
"
static
pooling,
"
which stratifies our finance receivable portfolio into separately identified
pools based on the period of origination. Using analytical and formula driven
techniques, we estimate an allowance for finance credit losses, which we believe
is adequate for probable credit losses that can be reasonably estimated in our
portfolio of automobile contracts. Provision for losses is charged to our
consolidated statement of operations. Net losses incurred on finance receivables
are charged to the allowance. We evaluate the adequacy of the allowance by
examining current delinquencies, the characteristics of the portfolio,
prospective liquidation values of the underlying collateral and general economic
and market conditions. As circumstances change, our level of provisioning and/or
allowance may change as well. We observed deterioration in performance of
automobile contracts held in our portfolio in 2008, which we attribute to a
general recession that began in December 2007, and which appears to be
continuing through the date of this report. Accordingly, we increased our
provision for credit losses in the fourth quarter of 2008.
Amortization
of Deferred Originations Costs and Acquisition Fees
Upon
purchase of a contract from a dealer, we generally either charge or advance the
dealer an acquisition fee. In addition, we incur certain direct costs
associated with originations of our contracts. All such acquisition
fees and direct costs are applied to the carrying value of finance receivables
and are accreted into earnings as an adjustment to the yield over the estimated
life of the contract using the interest method, in accordance with Statement of
Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.
Term
Securitizations
Our term
securitization structure has generally been as follows:
We sell
automobile contracts we acquire to a wholly-owned special purpose subsidiary,
which has been established for the limited purpose of buying and reselling our
automobile contracts. The special-purpose subsidiary
then
transfers the same automobile contracts to another entity, typically a statutory
trust. The trust issues interest-bearing asset-backed securities, in a principal
amount equal to or less than the aggregate principal balance of the automobile
contracts. We typically sell these automobile contracts to the trust at face
value and without recourse, except that representations and warranties similar
to those provided by the dealer to us are provided by us to the trust. One or
more investors purchase the asset-backed securities issued by the trust; the
proceeds from the sale of the asset-backed securities are then used to purchase
the automobile contracts from us. We may retain or sell subordinated
asset-backed securities issued by the trust or by a related entity. Historically
we have purchased external credit enhancement for most of our term
securitizations in the form of a financial guaranty insurance policy,
guaranteeing timely payment of interest and ultimate payment of principal on the
senior asset-backed securities, from an insurance company. In addition, we
structure our securitizations to include internal credit enhancement for the
benefit of the insurance company and the investors (i) in the form of an
initial cash deposit to an account (
"
spread
account
"
)
held by the trust, (ii) in the form of overcollateralization of the senior
asset-backed securities, where the principal balance of the senior asset-backed
securities issued is less than the principal balance of the automobile
contracts, (iii) in the form of subordinated asset-backed securities, or (iv)
some combination of such internal credit enhancements. The agreements governing
the securitization transactions require that the initial level of internal
credit enhancement be supplemented by a portion of collections from the
automobile contracts until the level of internal credit enhancement reaches
specified levels, which are then maintained. The specified levels are generally
computed as a percentage of the principal amount remaining unpaid under the
related automobile contracts. The specified levels at which the internal credit
enhancement is to be maintained will vary depending on the performance of the
portfolios of automobile contracts held by the trusts and on other conditions,
and may also be varied by agreement among us, our special purpose subsidiary,
the insurance company and the trustee. Such levels have increased and decreased
from time to time based on performance of the various portfolios, and have also
varied from one transaction to another. The agreements governing the
securitizations generally grant us the option to repurchase the sold automobile
contracts from the trust when the aggregate outstanding balance of the
automobile contracts has amortized to a specified percentage of the initial
aggregate balance.
Our
September 2008 securitization was in substance a sale of the underlying
receivables, and is treated as a sale for financial accounting purposes. It
differs from those treated as secured financings in that the trust to which our
special-purpose subsidiaries sold the automobile contracts met the definition of
a
"
qualified
special-purpose entity
"
under Statement
of Financial Accounting Standards No. 140 (
"
SFAS 140
"
). As a result,
assets and liabilities of those trusts are not consolidated into our
consolidated balance sheet.
Historically,
our warehouse credit facility structures were similar to the above, except that
(i) our special-purpose subsidiaries that purchased the automobile contracts
pledged the automobile contracts to secure promissory notes that they issued,
(ii) no increase in the required amount of internal credit enhancement was
contemplated, and (iii) we did not purchase financial guaranty
insurance. Through November 2008, we depended substantially on two
warehouse credit facilities: (i) a $200 million warehouse credit facility, which
we established in November 2005 and expired by its terms in November 2008; and
(ii) a $200 million warehouse credit facility, which we established in June
2004 and which was amended in December 2008 to eliminate future advances and to
provide for repayment of the related notes from the cash collections on the
underlying pledged contracts, and certain other principal reductions until its
maturity in September 2009.
Upon each
sale of automobile contracts in a transaction structured as a secured financing
for financial accounting purposes, whether a term securitization or a warehouse
financing, we retain on our consolidated balance sheet the related automobile
contracts as assets and record the asset-backed notes issued in the transaction
as indebtedness.
Under the
September 2008 securitization and other term securitizations completed prior to
July 2003 that were structured as sales for financial accounting purposes, we
removed from our consolidated balance sheet the automobile contracts sold and
added to our consolidated balance sheet (i) the cash received, if any, and (ii)
the estimated fair value of the ownership interest that we retained in the
automobile contracts sold in the transaction. That retained or residual interest
consisted of (a) the cash held in the spread account, if any, (b)
overcollateralization, if any, (c) asset-backed securities retained, if any, and
(d) receivables from the trust, which include the net interest
receivables. Net interest receivables represent the estimated
discounted cash flows to be received from the trust in the future, net of
principal and interest payable with respect to the asset-backed notes, the
premium paid to the insurance company, if any, and certain other expenses. The
excess of the cash received and the assets we retained over the carrying value
of the automobile contracts sold, less transaction costs, equaled the net gain
on sale of automobile contracts we recorded.
We
receive periodic base servicing fees for the servicing and collection of the
automobile contracts. (Under our securitization structures treated as secured
financings for financial accounting purposes, such servicing fees
are
included
in interest income from the automobile contracts.) In addition, we are entitled
to the cash flows from the trusts that represent collections on the automobile
contracts in excess of the amounts required to pay principal and interest on the
asset-backed securities, base servicing fees, and certain other fees and
expenses (such as trustee and custodial fees). Required principal payments on
the asset-backed notes are generally defined as the payments sufficient to keep
the principal balance of such notes equal to the aggregate principal balance of
the related automobile contracts (excluding those automobile contracts that have
been charged off), or a pre-determined percentage of such balance. Where that
percentage is less than 100%, the related securitization agreements require
accelerated payment of principal until the principal balance of the asset-backed
securities is reduced to the specified percentage. Such accelerated principal
payment is said to create overcollateralization of the asset-backed
notes.
If the
amount of cash required for payment of fees, expenses, interest and principal on
the senior asset-backed notes exceeds the amount collected during the collection
period, the shortfall is withdrawn from the spread account, if any. If the cash
collected during the period exceeds the amount necessary for the above
allocations plus required principal payments on the subordinated asset-backed
notes, and there is no shortfall in the related spread account or the required
overcollateralization level, the excess is released to us. If the spread account
and overcollateralization is not at the required level, then the excess cash
collected is retained in the trust until the specified level is achieved.
Although spread account balances are held by the trusts on behalf of our
special-purpose subsidiaries as the owner of the residual interests (in the case
of securitization transactions structured as sales for financial accounting
purposes) or the trusts (in the case of securitization transactions structured
as secured financings for financial accounting purposes), we are restricted in
use of the cash in the spread accounts. Cash held in the various spread accounts
is invested in high quality, liquid investment securities, as specified in the
securitization agreements. The interest rate payable on the automobile contracts
is significantly greater than the interest rate on the asset-backed notes. As a
result, the residual interests described above historically have been a
significant asset of ours.
In all of
our term securitizations and warehouse credit facilities, whether treated as
secured financings or as sales, we have sold the automobile contracts (through a
subsidiary) to the securitization entity. The difference between the two
structures is that in securitizations that are treated as secured financings we
report the assets and liabilities of the securitization trust on our
consolidated balance sheet. Under both structures, recourse to us by holders of
the asset-backed securities and by the trust, for failure of the automobile
contract obligors to make payments on a timely basis, is limited to the
automobile contracts included in the securitizations or warehouse credit
facilities, the spread accounts and our retained interests in the respective
trusts.
Since the
third quarter of 2003, we have conducted 24 term securitizations. Of these 24,
19 were periodic (generally quarterly) securitizations of automobile contracts
that we purchased from automobile dealers under our regular programs. In
addition, in March 2004 and November 2005, we completed securitizations of our
retained interests in other securitizations that we and our affiliates
previously sponsored. The debt from the March 2004 transaction was repaid in
August 2005, and the debt from the November 2005 transaction was repaid in May
2007. Also, in June 2004, we completed a securitization of automobile contracts
purchased in the SeaWest asset acquisition and under our TFC programs. Further,
in December 2005 and May 2007 we completed securitizations that included
automobile contracts purchased under the TFC programs, automobile contracts
purchased under the CPS programs and automobile contracts we repurchased upon
termination of prior securitizations of our MFN and TFC
subsidiaries. Since July 2003 all such securitizations have been
structured as secured financings, except that our September 2008 securitization
was in substance a sale of the underlying receivables, and is treated as a sale
for financial accounting purposes
Income
Taxes
We
account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized
subject to management’s judgment that realization is more likely than
not. Although realization is not assured, we believe that the
realization of the recognized net deferred tax asset of $52.7 million is more
likely than not based on expectations as to future taxable income in the
jurisdictions in which we operate and available tax planning strategies that
could be implemented if necessary to prevent a carryforward from expiring. Our
net deferred tax asset of $52.7 million is net of a valuation allowance of $1.0
million and consists of approximately $48.8 million of net U.S. federal deferred
tax assets and $3.9 million of net state deferred tax assets. The
major components of the deferred tax asset are $27.4 million in net operating
loss carryforwards and built in losses and $22.2 million in net deductions which
have not yet been taken on a tax return. We estimate that we
would need to generate approximately $127.5 million of taxable income during the
applicable carryforward periods to realize fully our federal and state deferred
tax assets.
As a
result of the losses incurred in 2008, we are in a three-year cumulative pretax
loss position at December 31, 2008. A cumulative loss position is considered
significant negative evidence in assessing the realizability of a deferred tax
asset. However, we have concluded that there is sufficient positive evidence to
overcome this negative evidence. First, we recognized a $14.0 million
loss on the September 2008 securitization that was structured as a sale for
financial accounting purposes. Since our inception in 1991, we have
completed 49 securitizations of approximately $6.6 billion in contracts and have
never recognized a loss until the September 2008 securitization. We
view this securitization as an anomaly created by the unusual and adverse market
conditions at the time. Without the $14.0 million loss on the
September 2008 securitization, we would not be in a three-year cumulative loss
position at December 31, 2008. Moreover, from 2003 through 2007, we
generated approximately $107.0 million in taxable income. Finally, we
forecast sufficient taxable income in the carryforward period to fully realize
our deferred tax assets, exclusive of tax planning strategies, even under
stressed scenarios.
Nevertheless,
the amount of the deferred tax asset considered realizable, however, could be
significantly reduced in the future if adverse developments cause us to lower
our estimates of future taxable income during the carryforward period. Based
upon the foregoing discussion, as well as tax planning opportunities and other
factors discussed below, we have concluded that the U.S. and state net operating
loss carryforward periods provide enough time to utilize the deferred tax assets
pertaining to the existing net operating loss carryforwards and any net
operating loss that would be created by the reversal of the future net
deductions which have not yet been taken on a tax return. Regarding the estimate
of future taxable income, we have projected pretax earnings based upon our core
business that we intend to conduct going forward. Our core business has produced
strong earnings in the past, even with intermittent loss periods resulting from
economic cycles not unlike, although not as severe, as the current economic
downturn. We have already taken steps to reduce our cost structure
and have adjusted the contract interest rates and purchase prices applicable to
our purchases of automobile contracts from dealers. We appear to be able to
increase our acquisition fees and reduce our purchase prices because of lessened
competition for our services. Taking these items into account, we project
generating sufficient pretax earnings within the carryforward period to realize
our deferred tax assets. We have also examined tax planning
strategies available to us in accordance with SFAS 109 which would be
employed, if necessary, to prevent a carryforward from expiring. Our
projection of sufficient earnings is a forward-looking statement, and there can
be no assurance that our projections of such earnings will be correct. Factors
discussed under "Risk Factors," and in particular under the subheading "Risk
Factors -- Forward-Looking Statements" may affect whether such projections prove
to be correct.
In June
2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty
in income taxes recognized in the financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 provides that a tax benefit from
an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical
merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
We
adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized an increase of approximately $1.1
million in the liability for unrecognized tax benefits, which was accounted for
as a reduction to the January 1, 2007, balance of retained
earnings.
We
recognize interest and penalties related to unrecognized tax benefits within the
income tax expense line in the accompanying consolidated statement of
operations. Accrued interest and penalties are included within the
related tax liability line in the consolidated balance sheet.
Uncertainty
of Capital Markets and General Economic Conditions
Historically,
we have depended upon the availability of warehouse credit facilities and access
to long-term financing through the issuance of asset-backed securities
collateralized by our automobile contracts. Since 1994, we have completed 49
term securitizations of approximately $6.6 billion in contracts. We conducted
four term securitizations in 2006, four in 2007, and two in 2008. From July 2003
through April 2008 all of our securitizations were structured as secured
financings. The second of our two securitization transactions in 2008
(completed in
September
2008) was in substance a sale of the related contracts, and is treated as a sale
for financial accounting purposes.
Since the
fourth quarter of 2007, we have observed unprecedented adverse changes in the
market for securitized pools of automobile contracts. These changes include
reduced liquidity, and reduced demand for asset-backed securities, particularly
for securities carrying a financial guaranty and for securities backed by
sub-prime automobile receivables. Moreover, many of the firms that previously
provided financial guarantees, which were an integral part of our
securitizations, are no longer offering such guarantees. As of
December 31, 2008, we have no available warehouse credit facilities and no
immediate plans to complete a term securitization. The adverse
changes that have taken place in the market over the last 18 months have caused
us to seek to conserve liquidity by reducing our purchases of automobile
contracts to nominal levels. If the current adverse circumstances that have
affected the capital markets should continue or worsen, we may curtail further
or cease our purchases of new automobile contracts, which could lead to a
material adverse effect on our operations.
Current
economic conditions have negatively affected many aspects of our
industry. First, as stated above, there is little demand for
asset-backed securities secured by consumer finance receivables, including
sub-prime automobile receivables. Second, lenders who previously
provided short term warehouse financing for sub-prime automobile finance
companies such as ours are reluctant to provide such short-term financing due to
the uncertainty regarding the prospects of obtaining long-term financing through
the issuance of asset-backed securities. In addition, many capital
market participants such as investment banks, financial guaranty providers and
institutional investors who previously played a role in the sub-prime auto
finance industry have withdrawn from the industry, or in some cases, have ceased
to do business. Finally, the broad economic weakness and increasing
unemployment has made many of the obligors under our receivables less willing or
able to pay, resulting in higher delinquency, charge-offs and
losses. Each of these factors has adversely affected our results of
operations. Should existing economic conditions worsen, both our
ability to purchase new contracts and the performance of our existing managed
portfolio may be impaired, which, in turn, could have a further material adverse
effect on our results of operations.
Results
of Operations
Comparison
of Operating Results for the Year Ended December 31, 2008 with the Year Ended
December 31, 2007
Revenues
. During
the year ended December 31, 2008, revenues were $368.4 million, a decrease of
$26.1 million, or 6.6%, from the prior year revenue of $394.6 million. The
primary reason for the decrease in revenues is a decrease in interest income.
Interest income for the year ended December 31, 2008 decreased $18.7 million, or
5.1%, to $351.6 million from $370.3 million in the prior year. The primary
reason for the decrease in interest income is the decrease in finance
receivables held by consolidated subsidiaries. At December 31, 2008
the aggregate outstanding balance of finance receivables held by consolidated
subsidiaries was $1,477.8 million compared to $2,125.7 million at December 31,
2007, resulting in a decrease of $12.3 million in interest
income. We also experienced decreases in interest earned on cash
deposits (including restricted cash deposits) of $4.7 million, and a decrease in
interest income on our residual interest in securitizations of $1.7
million.
Servicing
fees totaling $2.1 million in the year ended December 31, 2008 increased
$845,000, or 69.3%, from $1.2 million in the prior year. The increase in
servicing fees is the result our September 2008 securitization that was
structured as a sale for financial accounting purposes and on which we earn a
base servicing fee. During 2008 we also earned base servicing fees on
the SeaWest Third Party Portfolio, which has declined to an immaterial amount as
of December 31, 2008. As of December 31, 2008 and 2007, our managed
portfolio owned by consolidated vs. non-consolidated subsidiaries and other
third parties was as follows:
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Total
Managed Portfolio
|
($
in millions)
|
Owned
by Consolidated Subsidiaries
|
$
|
1,477.8
|
|
|
|
88.8
|
%
|
|
|
$
|
2,125.8
|
|
|
|
100.0
|
%
|
Owned
by Non-Consolidated Subsidiaries
|
|
186.2
|
|
|
|
11.2
|
%
|
|
|
|
-
|
|
|
|
0.0
|
%
|
SeaWest
Third Party Portfolio
|
|
0.1
|
|
|
|
0.0
|
%
|
|
|
|
0.4
|
|
|
|
0.0
|
%
|
Total
|
$
|
1,664.1
|
|
|
|
100.0
|
%
|
|
|
$
|
2,126.2
|
|
|
|
100.0
|
%
|
At
December 31, 2008, we were generating income and fees on a managed portfolio
with an outstanding principal balance of $1,664.1 million compared to a managed
portfolio with an outstanding principal balance of
$2,126.2
million
as of December 31, 2007. At December 31, 2008 and 2007, the managed portfolio
composition was as follows:
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Originating
Entity
|
|
($
in millions)
|
|
CPS
|
|
$
|
1,619.6
|
|
|
|
97.3
|
%
|
|
$
|
2,062.8
|
|
|
|
97.0
|
%
|
TFC
|
|
|
44.3
|
|
|
|
3.0
|
%
|
|
|
62.0
|
|
|
|
3.0
|
%
|
MFN
|
|
|
0.0
|
|
|
|
0.0
|
%
|
|
|
0.0
|
|
|
|
0.0
|
%
|
SeaWest
|
|
|
0.1
|
|
|
|
0.0
|
%
|
|
|
1.0
|
|
|
|
0.0
|
%
|
SeaWest
Third Party Portfolio
|
|
|
0.1
|
|
|
|
0.0
|
%
|
|
|
0.4
|
|
|
|
0.0
|
%
|
Total
|
|
$
|
1,664.1
|
|
|
|
100.0
|
%
|
|
$
|
2,126.2
|
|
|
|
100.0
|
%
|
Other
income decreased $8.3 million, or 35.9%, to $14.8 million in the year ended
December 31, 2008 from $23.1 million during the prior year. The
year-over-year decrease is the result of a variety of
factors. Current year other income includes $178,000 resulting from
an increase in the carrying value of our residual interest in securitizations,
compared to $6.2 million of such increases in 2007. The carrying
value was increased primarily as a result of the underlying receivables having
incurred fewer losses than we had previously estimated, which in turn resulted
in actual cash flows exceeding estimated cash flows. The prior year
period also included proceeds of $1.8 million from the sale of certain charged
off receivables acquired in the MFN, TFC and SeaWest
acquisitions. There was no sale of charged off receivables in
2008. In addition, in 2007 we realized $1.0 million in recoveries on
a note payable by a third party that we had previously written
off. Decreases to other income were somewhat offset by increases of
$1.7 million in convenience fees charged to our customers for web-based and
other electronic payments.
Expenses
. Our
operating expenses consist primarily of provisions for credit losses, interest
expense, employee costs and general and administrative
expenses. Provisions for credit losses and interest expense are
significantly affected by the volume of automobile contracts we purchased during
a period and by the outstanding balance of finance receivables held by
consolidated subsidiaries. Employee costs and general and
administrative expenses are incurred as applications and automobile contracts
are received, processed and serviced. Factors that affect margins and net income
include changes in the automobile and automobile finance market environments,
and macroeconomic factors such as interest rates and the unemployment
level.
Employee
costs include base salaries, commissions and bonuses paid to employees, and
certain expenses related to the accounting treatment of outstanding warrants and
stock options, and are one of our most significant operating expenses. These
costs (other than those relating to stock options) generally fluctuate with the
level of applications and automobile contracts processed and
serviced.
Other
operating expenses consist primarily of facilities expenses, telephone and other
communication services, credit services, computer services, marketing and
advertising expenses, and depreciation and amortization.
Total
operating expenses were $411.9 million for the year ended December 31, 2008,
compared to $370.6 million for the prior year, an increase of $41.3 million, or
11.1%. The increase is primarily due to increases in provision for credit losses
and interest expense, which increased by $11.1 million and $16.2 million, or
8.1% and 11.7%, respectively. In addition, we recognized a loss on
sale of receivables of $14.0 million in conjunction with our September 2008
securitization.
In
September 2008, we securitized $198.7 million of our receivables in a
transaction that is treated as a sale of the receivables for financial
accounting purposes. The terms of the September 2008 securitization
provide for us (1) to continue servicing the sold portfolio, (2) to retain a
5.0% interest in the bonds issued by the trust to which we sold the receivables
and (3) to earn additional compensation contingent upon (a) the return to the
holders of the senior bonds issued by the trust reaching certain targets or (b)
“lifetime” cumulative net charge-offs on the receivables being below a
pre-determined level. We recognized a loss on the sale of $14.0
million. We used a portion of the proceeds of the sale to reduce
substantially the amounts outstanding under our warehouse credit
facilities.
Employee
costs increased by 4.6% to $48.9 million during the year ended December 31,
2008, representing 11.9% of total operating expenses, from $46.7 million for the
prior year, or 12.6% of total operating expenses. The decrease as a
percentage of total operating expenses reflects the higher total of operating
expenses, primarily a result of the increased provision for credit losses and
interest expense. In the recent years prior to 2008, we generally
had
regular
increases in our numbers of employees to accommodate increasing volumes of
contract purchases and the size of our total managed portfolio. As we
gradually reduced our new contract purchases in 2008, however, we also reduced
total employees, primarily in the areas of contract originations and
marketing. As of December 31, 2008 we had 681 employees, compared to
997 employees at December 31, 2007.
General
and administrative expenses increased by 18.2% to $29.5 million and represented
7.2% of total operating expenses in the year ending December 31, 2008, as
compared to the prior year when general and administrative expenses represented
6.7% of total operating expenses. General and administrative expenses include
telecommunications costs, postage and delivery costs and other costs associate
with servicing our managed portfolio.
Interest
expense for the year ended December 31, 2008 increased $17.1 million, or 12.3%,
to $156.3 million, compared to $139.2 million in the previous year. The increase
is primarily the result of changes in the amount and composition of
securitization trust debt carried on our consolidated balance sheet. Interest on
securitization trust debt increased by $12.6 million in 2008 compared to the
prior year. We also experienced increases in senior secured and
subordinated debt interest expense and residual interest financing interest
expenses of $2.2 million and $4.0 million, respectively. In June and
July 2008 we issued $10 million and $15 million, respectively, in new senior
secured debt. In addition, in July 2008 we amended our residual
interest financing facility, which resulted in a higher rate of interest and
allows us the option to extend the maturity if certain conditions are
met. Increases in interest expense for securitization trust debt,
subordinated debt and residual interest financing were somewhat offset by a
decrease of $1.8 million in interest expense for warehouse
financing. Throughout 2008, we gradually reduced new contract
purchases, resulting in lower amounts outstanding under our warehouse facilities
compared to the prior year.
Marketing
expenses consist primarily of commission-based compensation paid to our employee
marketing representatives. These expenses decreased by $7.9 million,
or 43.7%, to $10.2 million, compared to $18.1 million in the previous year and
represented 2.5% of total operating expenses. The decrease is primarily due to
the decrease in automobile contracts we purchased during the year ended December
31, 2008 as compared to the prior year. During the year ended
December 31, 2008, we purchased 19,772 automobile contracts aggregating $296.8
million, compared to 83,246 automobile contracts aggregating $1,282.3 million in
the prior year.
Occupancy
expenses increased by $341,000 or 9.1%, to $4.1 million compared to $3.8 million
in the previous year and represented 1.0% of total operating
expenses.
Depreciation
and amortization expenses decreased by $10,000, or 1.9%, to $537,000 from
$547,000 in the previous year.
For the
year ended December 31, 2008, we recorded a tax benefit of $17.4 million or
40.0% of loss before income taxes. For the year ended December 31,
2007, we recorded income tax expense of $10.1 million.
Comparison
of Operating Results for the Year Ended December 31, 2007 with the Year Ended
December 31, 2006
Revenues
. During
the year ended December 31, 2007, revenues were $394.6 million, an increase of
$115.7 million, or 41.5%, from the prior year revenue of $278.9 million. The
primary reason for the increase in revenues is an increase in interest income.
Interest income for the year ended December 31, 2007 increased $106.7 million,
or 40.5%, to $370.3 million from $263.6 million in the prior year. The primary
reason for the increase in interest income is the increase in finance
receivables held by consolidated subsidiaries (resulting in an increase of
$109.4 million in interest income) and the increase in interest earned on
cash deposits (including restricted cash deposits) of $2.8
million. These increases were partially offset by the decline in the
balance of the portfolios of automobile contracts we acquired in the MFN, TFC
and SeaWest transactions (in the aggregate, resulting in a decrease of
$2.2 million in interest income), and a decrease in interest income on our
residual interest in securitizations of $2.1 million.
Servicing
fees totaling $1.2 million in the year ended December 31, 2007 decreased $1.7
million, or 57.9%, from $2.9 million in the prior year. The decrease in
servicing fees is the result of the change in securitization structure and the
consequent decline in our managed portfolio held by non-consolidated
subsidiaries. As of December 31, 2007 and 2006, our managed portfolio owned by
consolidated vs. non-consolidated subsidiaries and other third parties was as
follows:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Total
Managed Portfolio
|
|
(in
millions)
|
|
Owned
by Consolidated Subsidiaries
|
$
|
2,125.8
|
|
|
|
100.0
|
%
|
|
|
$
|
1,527.3
|
|
|
|
97.5
|
%
|
Owned
by Non-Consolidated Subsidiaries
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
34.8
|
|
|
|
2.2
|
%
|
SeaWest
Third Party Portfolio
|
|
0.4
|
|
|
|
0.0
|
%
|
|
|
|
3.8
|
|
|
|
0.2
|
%
|
Total
|
$
|
2,126.2
|
|
|
|
100.0
|
%
|
|
|
$
|
1,565.9
|
|
|
|
100.0
|
%
|
At
December 31, 2007, we were generating income and fees on a managed portfolio
with an outstanding principal balance of $2,126.2 million (this amount includes
$422,000 of automobile contracts securitized by SeaWest, on which we earn only
servicing fees), compared to a managed portfolio with an outstanding principal
balance of $1,565.9 million as of December 31, 2006. At December 31, 2007 and
2006, the managed portfolio composition was as follows:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Originating
Entity
|
|
($
in millions)
|
|
CPS
|
$
|
2,062.8
|
|
|
|
97.0
|
%
|
|
$
|
1,496.5
|
|
|
|
95.6
|
%
|
TFC
|
|
62.0
|
|
|
|
3.0
|
%
|
|
|
60.9
|
|
|
|
3.9
|
%
|
MFN
|
|
0.0
|
|
|
|
0.0
|
%
|
|
|
0.2
|
|
|
|
0.0
|
%
|
SeaWest
|
|
1.0
|
|
|
|
0.0
|
%
|
|
|
4.5
|
|
|
|
0.3
|
%
|
SeaWest
Third Party Portfolio
|
|
0.4
|
|
|
|
0.0
|
%
|
|
|
3.8
|
|
|
|
0.2
|
%
|
Total
|
$
|
2,126.2
|
|
|
|
100.0
|
%
|
|
$
|
1,565.9
|
|
|
|
100.0
|
%
|
Other
income increased $10.7 million, or 86.0%, to $23.1 million in the year ended
December 31, 2007 from $12.4 million during the prior year. The
year-over-year increase is the result of a variety of
factors. Current year other income includes $6.2 million resulting
from an increase in the carrying value of our residual interest in
securitizations (a $5.0 million increase over the increase in carrying value for
the prior year). The carrying value was increased primarily as a
result of the underlying receivables having incurred fewer losses than we had
previously estimated, which in turn resulted in actual cash flows exceeding cash
flows that were estimated in our valuation of the residual asset at December 31,
2006. We do not expect that future cash flows will significantly
exceed the estimates we are currently using for the valuation of our residual
interest. The current year period also includes proceeds of $1.8
million from the sale of certain charged off receivables acquired in the MFN,
TFC and SeaWest acquisitions. There was no sale of charged off
receivables in 2006. In addition, we experienced increases in
convenience fees charged to obligors for certain transaction types (an increase
of $1.3 million) and $1.0 million in recoveries on a note payable by a third
party that we had previously written off. We also experienced
increased revenue on our direct mail services (an increase of $1.6
million). These direct mail services are provided to our dealers and
consist of customized solicitations targeted to prospective vehicle purchasers,
in proximity to the dealer, who appear to meet our credit
criteria. These increases to other income were somewhat offset by
decreases in recoveries on MFN and certain other automobile contracts (a
decrease of $1.2 million) compared to the prior year.
Expenses
. Our
operating expenses consist primarily of provisions for credit losses, interest
expense, employee costs and general and administrative
expenses. Provisions for credit losses and interest expense are
significantly affected by the volume of automobile contracts we purchased during
a period and by the outstanding balance of finance receivables held by
consolidated subsidiaries. Employee costs and general and
administrative expenses are incurred as applications and automobile contracts
are received, processed and serviced. Factors that affect margins and net income
include changes in the automobile and automobile finance market environments,
and macroeconomic factors such as interest rates and the unemployment
level.
Employee
costs include base salaries, commissions and bonuses paid to employees, and
certain expenses related to the accounting treatment of outstanding warrants and
stock options, and are one of our most significant operating expenses. These
costs (other than those relating to stock options) generally fluctuate with the
level of applications and automobile contracts processed and
serviced.
Other
operating expenses consist primarily of facilities expenses, telephone and other
communication services, credit services, computer services, marketing and
advertising expenses, and depreciation and amortization.
Total
operating expenses were $370.6 million for the year ended December 31, 2007,
compared to $265.7 million for the prior year, an increase of $104.9 million, or
39.5%. The increase is primarily due to increases in provision for credit losses
and interest expense, which increased by $45.2 million and $46.1 million, or
49.1% and 49.5%, respectively. Both interest expense and provision for credit
losses are directly affected by the growth in our portfolio of automobile
contracts held by consolidated affiliates.
Employee
costs increased by 21.4% to $46.7 million during the year ended December 31,
2007, representing 12.6% of total operating expenses, from $38.5 million for the
prior year, or 14.5% of total operating expenses. The decrease
as a percentage of total operating expenses reflects the higher total of
operating expenses, primarily a result of the increased provision for credit
losses and interest expense. The increase in employee costs is the
result of additions to our staff, generally throughout all areas of the Company,
to accommodate greater volumes of contract purchases and the resulting higher
balance of our managed portfolio. As of December 31, 2007 we had 997
employees compared to 789 employees at December 31, 2006.
General
and administrative expenses increased by 7.6% to $25.0 million and represented
6.7% of total operating expenses in the year ending December 31, 2007, as
compared to the prior year when general and administrative expenses represented
8.7% of total operating expenses. The decrease as a percentage of total
operating expenses reflects the higher operating expenses primarily a result of
the provision for credit losses and interest expense.
Interest
expense for the year ended December 31, 2007 increased $46.1 million, or 49.5%,
to $139.2 million, compared to $93.1 million in the previous year. The increase
is primarily the result of changes in the amount and composition of
securitization trust debt carried on our consolidated balance sheet. Interest on
securitization trust debt increased by $40.9 million in 2007 compared to the
prior year. We also experienced increases in warehouse interest
expense and residual interest financing interest expenses of $5.1 million and
$1.1 million, respectively. A portion of the increase in interest
expense can also be attributed to a gradual increase in market interest rates
during 2007. Increases in interest expense for securitization trust
debt, warehouse and residual interest financing were somewhat offset by a
decrease of $1.0 million in interest expense for subordinated debt.
Marketing
expenses consist primarily of commission-based compensation paid to our employee
marketing representatives and increased by $4.1 million, or 29.3%, to $18.1
million, compared to $14.0 million in the previous year and represented 4.9% of
total operating expenses. The increase is primarily due to the increase in
automobile contracts we purchased during the year ended December 31, 2007 as
compared to the prior year. During the year ended December 31, 2007,
we purchased 83,246 automobile contracts aggregating $1,282.3 million, compared
to 66,504 automobile contracts aggregating $1,019.0 million in the prior
year.
Occupancy
expenses decreased slightly by $219,000 or 5.5%, to $3.8 million compared to
$4.0 million in the previous year and represented 1.0% of total operating
expenses.
Depreciation
and amortization expenses decreased by $253,000, or 31.6%, to $547,000 from
$800,000 in the previous year.
For the
year ended December 31, 2007, we recorded tax expense of $10.1 million or 42.2%
of income before income taxes. For the year ended December 31, 2006,
we recorded an income tax benefit of $41.8 million related to the reversal of a
portion of the valuation allowance against deferred tax assets, offset by
current income tax paid or then payable of $20.2 million, less $4.8 million in
deferred tax benefit. As of December 31, 2007, we had remaining
deferred tax assets of $68.6 million, partially offset by a valuation allowance
of $9.8 million related to federal and state net operating losses and other
timing differences, leaving a net deferred tax asset of $58.8
million.
Liquidity
and Capital Resources
Liquidity
Our
business requires substantial cash to support purchases of automobile contracts
and other operating activities. Our primary sources of cash have been
cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities,
servicing fees on portfolios of automobile contracts previously sold in
securitization transactions or serviced for third parties, customer payments of
principal and interest on finance receivables, fees for origination of
automobile contracts, and releases of cash from securitized portfolios of
automobile contracts in which we have retained a residual ownership interest and
from the spread accounts associated with such pools. Our primary uses of cash
have been the purchases of automobile contracts, repayment of amounts borrowed
under warehouse credit facilities and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of spread accounts and initial
overcollateralization, if any, and the increase of credit enhancement to
required levels in
securitization
transactions, and income taxes. There can be no assurance that internally
generated cash will be sufficient to meet our cash demands. The sufficiency of
internally generated cash will depend on the performance of securitized pools
(which determines the level of releases from those portfolios and their related
spread accounts), the rate of expansion or contraction in our managed portfolio,
and the terms upon which we are able to purchase, sell, and borrow against
automobile contracts.
Net cash
provided by operating activities for the years ended December 31, 2008, 2007 and
2006 was $124.9 million, $153.4 million and $92.4 million, respectively.
Cash from operating activities is generally provided by our results from
operations.
Net cash
provided by investing activities for the year ended December 31, 2008 was $657.6
million compared to net cash used in investment activities of $665.4 million and
$603.7 million for 2007 and 2006, respectively. Cash used in investing
activities generally relates to purchases of automobile contracts. Purchases of
finance receivables held for investment were $296.8 million, $1,282.3 million
and $1,019.0 million in 2008, 2007 and 2006, respectively. The
significant decrease in contract purchases in 2008 compared to prior periods
together with onging significant proceeds received on finance receivables held
for investment resulted in net cash provided by investing activities in 2008
compared to net cash used by investing activities in 2007. Net cash
used in investing activities is also affected by changes in the amounts of
restricted cash and equivalents, which in turn, is affected by the timing and
structure of our asset-backed securitization transactions. In
December 2006, we completed a securitization transaction which included a
pre-funding component that resulted in specific restricted cash deposits of
$70.3 million at December 31, 2006. In December 2008 and 2007, we did
not complete a securitization transaction with a pre-funding component and, as
such, there was no corresponding restricted cash deposit at December 31, 2008 or
2007.
Net cash
used by financing activities for the year ended December 31, 2008, was $781.4
million compared with net cash provided by financing activities $518.6 million
and $507.7 million for the years ended December 31, 2007 and 2006, respectively.
Cash used or provided by financing activities is primarily attributable to the
issuance or repayment of debt. We issued $285.4 million of securitization trust
debt in 2008 as compared to $1,035.9 million in 2007. Issuances of
securitization debt were offset by repayments of $693.3 million, $685.9 million
and $487.7 million in 2008, 2007 and 2006, respectively.
We
purchase automobile contracts from dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee which may either increase or
decrease the automobile contract purchase price. Those automobile contracts
generate cash flow, however, over a period of years. As a result, we have been
dependent on warehouse credit facilities to purchase automobile contracts, and
on the availability of cash from outside sources in order to finance our
continuing operations, as well as to fund the portion of automobile contract
purchase prices not financed under revolving warehouse credit facilities. At
December 31, 2007, we had $425 million in warehouse credit capacity, in the form
of two $200 million senior facilities, and one $25 million subordinated
facility. One $200 million facility provided funding for automobile
contracts purchased under the TFC programs while both warehouse facilities
provided funding for automobile contracts purchased under the CPS programs. The
subordinated facility was established on January 12, 2007 and expired by its
terms in April 2008.
The first
of two warehouse facilities mentioned above was provided by an affiliate of
Bear, Stearns and was structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expired on November 6,
2008. On November 8, 2006 the facility was increased from $150
million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other
conditions and covenants. On January 12, 2007 the facility was amended to allow
for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields required for bonds issued in
our term securitizations. Senior notes under this facility accrued
interest at a rate of one-month LIBOR plus 2.50% per annum while the
subordinated notes accrued interest at a rate of one-month LIBOR plus 5.50% per
annum.
The
second of two warehouse facilities was provided by an affiliate of UBS AG and
was similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note
issued by our consolidated subsidiary Page Funding LLC. This facility
was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for
automobile contracts purchased under the TFC programs, in addition to our CPS
programs. The
available
credit under the facility was increased again to $200 million on August 31,
2005. In April 2006, the terms of this facility were amended to allow advances
to us of up to 80% of the principal balance of automobile contracts that we
purchase under our CPS programs, and of up to 70% of the principal balance of
automobile contracts that we purchase under our TFC programs, in all events
subject to collateral tests and certain other conditions and
covenants. On June 30, 2006, the terms of this facility were amended
to allow advances to us of up to 83% of the principal balance of automobile
contracts that we purchase under our CPS programs, in all events subject to
collateral tests and certain other conditions and covenants. In February 2007
the facility was amended to allow for the issuance of subordinated notes
resulting in an increase of the maximum advance rate to 93%. The
advance rate was subject to the lender’s valuation of the collateral which, in
turn, was affected by factors such as the credit performance of our managed
portfolio and the terms and conditions of our term securitizations, including
the expected yields for bonds issued in our term
securitizations. Senior notes under this facility accrue interest at
a rate of one-month LIBOR plus 9.85% per annum. The facility was
amended in December 2008 which eliminated future advances and provided for
repayment of the notes from proceeds collected on the underlying pledged
receivables, plus certain future scheduled principal reductions until its
maturity in September 2009. At December 31, 2008, $9.9 million was outstanding
under this facility.
We
securitized $509.0 million in auto contracts in two private placement
transactions in 2008 as compared to $1,118.1 million of automobile contracts in
four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in
2006. All but one of these transactions were structured as secured
financings and, therefore, resulted in no gain or loss on sale. The
September 2008 transaction was structured as a sale for financial accounting
purposes and resulted in a loss on sale of $14.0 million.
In
November 2005, we completed a securitization in which a wholly-owned bankruptcy
remote consolidated subsidiary of ours issued $45.8 million of asset-backed
notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million
outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on the Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet
because
the terms of the warrants also included a provision whereby the lender could
require us to purchase the warrants for cash. That provision was eliminated by
mutual agreement in September 2008.
The
acquisition of automobile contracts for subsequent sale in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of
capital required is most heavily dependent on the rate of our automobile
contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and
their related spread accounts either release cash to us or capture cash from
collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile
contracts.
We are
and may in the future be limited in our ability to purchase automobile contracts
due to limits on our capital. As of December 31, 2008, we had
unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a
securitization. Our plans to manage our liquidity include maintaining
our rate of automobile contract purchases at a merely nominal level,
and, wherever appropriate, reducing our operating costs. There
can be no assurance that we will be able to obtain future warehouse financing or
to complete securitizations on favorable economic terms or that we will be able
to complete securitizations at all. If we are unable to complete such
securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income
would decrease.
Our
liquidity will also be affected by releases of cash from the trusts established
with our securitizations. While the specific terms and mechanics of
each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the
amount of credit enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the automobile contracts in the
pool are below certain predetermined levels. In the event delinquencies,
defaults or net losses on the automobile contracts exceed such levels, the terms
of the securitization: (i) may require increased credit enhancement to be
accumulated for the particular pool; (ii) may restrict the distribution to us of
excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on
some or all of the automobile contracts to another servicer. There can be no
assurance that collections from the related trusts will continue to generate
sufficient cash. Moreover, most of our spread account balances
are pledged as collateral to our residual interest financing. As
such, most of the current releases of cash from our securitization trusts are
directed to pay the obligations of our residual interest financing.
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net worth,
financial loss in any one period and maintenance of active warehouse credit
facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.
Contractual
Obligations
The
following table summarizes our material contractual obligations as of December
31, 2008 (dollars in thousands):
|
Payment
Due by Period (1)
|
|
|
|
|
|
Less
than
|
|
1
to 3
|
|
4
to 5
|
|
More
than
|
|
|
Total
|
|
1
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
Long
Term Debt (2)
|
|
$
|
113,126
|
|
|
$
|
20,642
|
|
|
$
|
70,065
|
|
|
$
|
22,281
|
|
|
$
|
138
|
|
Operating
Leases
|
|
$
|
25,771
|
|
|
$
|
3,985
|
|
|
$
|
7,443
|
|
|
$
|
6,728
|
|
|
$
|
7,615
|
|
(1)
|
Securitization
trust debt, in the aggregate amount of $1,404.2 million as of December 31,
2008, is omitted from this table because it becomes due as and when the
related receivables balance is reduced by payments and charge-offs.
Expected payments, which will depend on the performance of such
receivables, as to which there can be no assurance, are $639.4 million in
2009, $422.2 million in 2010, $235.9 million in 2011, $90.0 million in
2012, $16.7 million in
2013.
|
(2)
|
Long-term
debt includes residual interest debt, senior secured debt and subordinated
renewable notes.
|
Warehouse
Credit Facilities
The terms
on which credit has been available to us for purchase of automobile contracts
have varied over the three years 2006-2008 and through December 31, 2008, as
shown in the following summary of our warehouse credit facilities:
Facility in Use from June 2004 to
present
. In June 2004, we (through our subsidiary Page Funding
LLC) entered into a floating rate variable note purchase facility. Up
to $200.0 million of borrowing capacity under this facility was available at any
time subject to certain collateral tests and other conditions. We used funds
derived from this facility to purchase automobile contracts under the CPS
programs and TFC programs, which were pledged to secure the notes. The
collateral tests and other conditions generally allowed us to borrow up to
approximately 93% of the principal balance of automobile contracts that we
purchased under our CPS programs (up to 83.0% in the form of senior notes and
the remainder in the form of subordinated notes), and of up to 70% of the
principal balance of automobile contracts that we purchased under our TFC
programs. The advance rate was subject to the lender’s valuation of the
collateral which, in turn, was affected by factors such as the credit
performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields required for bonds issued in our
term securitizations. The facility was amended in December 2008 which
eliminated future advances and provided for repayment of the notes from proceeds
collected on the underlying pledged receivables, plus certain future scheduled
principal reductions until its maturity in September 2009. Senior
notes issued under this facility accrue interest at one-month LIBOR plus 9.85%
per annum. The balance of notes outstanding related to this facility
at December 31, 2008 was $9.9 million.
Facility in Use from November 2005
to November 2008
. In November 2005, we (through our subsidiary
Page Three Funding LLC) entered into a floating rate variable note purchase
facility. Up to $200 million of borrowing capacity under this
facility was available at any time subject to certain collateral tests and other
conditions. We used funds derived from this facility to purchase
automobile contracts under the CPS programs, which were pledged to secure the
notes. The collateral tests and other conditions generally allowed us
to borrow up to approximately 93.0% of the principal balance of the automobile
contracts (up to 83.0% in the form of senior notes and the remainder in the form
of subordinated notes). The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields require for bonds issued in
our term securtizations. The facility expired by its terms in
November 2008.
Capital
Resources
Securitization
trust debt is repaid from collections on the related receivables, and becomes
due in accordance with its terms as the principal amount of the related
receivables is reduced. Although the securitization trust debt also has
alternative final maturity dates, those dates are significantly later than the
dates at which repayment of the related receivables is anticipated, and at no
time in our history have any of our sponsored asset-backed securities reached
those alternative final maturities.
The
acquisition of automobile contracts for subsequent transfer in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, when those transactions take place, results in a
continuing need for capital. The amount of capital required is most heavily
dependent on the rate of our automobile contract purchases, the required level
of initial credit enhancement in securitizations, and the extent to which the
trusts and related spread accounts either release cash to us or capture cash
from collections on securitized automobile contracts. We plan to adjust our
levels of automobile contract purchases so as to match anticipated releases of
cash
from the
trusts and related spread accounts with our capital requirements. As we have
already reduced such purchases to nominal levels, we retain little ability to
reduce purchases further to meet any additional capital
requirements.
Capitalization
Over the
period from January 1, 2005 through December 31, 2008 we have managed our
capitalization by issuing and refinancing debt as summarized in the following
table:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
RESIDUAL
INTEREST FINANCING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
|
$
|
70,000
|
|
|
|
|
$
|
|
31,378
|
|
|
|
|
$
|
43,745
|
|
Issuances
|
|
|
|
|
20,000
|
|
|
|
|
|
|
85,860
|
|
|
|
|
|
13,667
|
|
Payments
|
|
|
|
|
(22,700
|
)
|
|
|
|
|
|
(47,238
|
)
|
|
|
|
|
(26,034
|
)
|
Ending
balance
|
|
|
|
$
|
67,300
|
|
|
|
|
$
|
|
70,000
|
|
|
|
|
$
|
31,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIZATION
TRUST DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
|
$
|
1,798,302
|
|
|
|
|
$
|
|
1,442,995
|
|
|
|
|
$
|
924,026
|
|
Issuances
|
|
|
|
|
310,359
|
|
|
|
|
|
|
1,035,864
|
|
|
|
|
|
1,003,645
|
|
Payments
|
|
|
|
|
(704,450
|
)
|
|
|
|
|
|
(680,557
|
)
|
|
|
|
|
(484,676
|
)
|
Ending
balance
|
|
|
|
$
|
1,404,211
|
|
|
|
|
$
|
|
1,798,302
|
|
|
|
|
$
|
1,442,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SENIOR
SECURED DEBT, RELATED PARTY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
|
$
|
-
|
|
|
|
|
$
|
|
25,000
|
|
|
|
|
$
|
40,000
|
|
Issuances
|
|
|
|
|
20,105
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
-
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
(15,000
|
)
|
Ending
balance
|
|
|
|
$
|
20,105
|
|
|
|
|
$
|
|
-
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,000
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,000
|
)
|
Ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
RENEWABLE NOTES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
|
$
|
28,134
|
|
|
|
|
$
|
|
13,574
|
|
|
|
|
$
|
4,655
|
|
Issuances
|
|
|
|
|
4,183
|
|
|
|
|
|
|
17,664
|
|
|
|
|
|
9,985
|
|
Payments
|
|
|
|
|
(6,596
|
)
|
|
|
|
|
|
(3,104
|
)
|
|
|
|
|
(1,066
|
)
|
Ending
balance
|
|
|
|
$
|
25,721
|
|
|
|
|
$
|
|
28,134
|
|
|
|
|
$
|
13,574
|
|
Residual Interest
Financing.
In November 2005, we completed a securitization in
which a wholly-owned bankruptcy remote consolidated subsidiary of ours issued
$45.8 million of asset-backed notes secured by its retained interest in 10 term
securitization transactions. At December 31, 2006 there was $19.6
million outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on
the
Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million, by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
Securitization Trust
Debt.
From July 2003 through April 2008, we have, for
financial accounting purposes, treated securitizations of automobile contracts
as secured financings, and the asset-backed securities issued in such
securitizations remain on our balance sheet as securitization trust
debt. Our most recent securitization, in September 2008, was
structured as a sale for financial accounting purposes and the asset-backed
securities issued in that transaction are not on our balance sheet.
Senior Secured
Debt.
From 1998 to 2005, we entered into a series of financing
transactions with Levine Leichtman Capital Partners II, L.P. In July
2007 we repaid the final amounts due under these financing
transactions. On June 30, 2008, we entered into a series of
agreements pursuant to which an affiliate of Levine Leichtman Capital Partners
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet because the terms of the warrants also included a provision
whereby the lender could require us to purchase the warrants for cash. That
provision was eliminated by mutual agreement in September 2008.
Subordinated Renewable Notes
Debt.
In June 2005, we began issuing registered subordinated
renewable notes in an ongoing offering to the public. Upon maturity,
the notes are automatically renewed for the same term as the maturing notes,
unless we elect not to have the notes renewed or unless the investor notifies us
within 15 days after the maturity date for his notes that he wants his notes
repaid. Renewed notes bear interest at the rate we are offering at
that time to other investors with similar aggregate note
portfolios. Based on the terms of the individual notes, interest
payments may be required monthly, quarterly, annually or upon
maturity.
We must
comply with certain affirmative and negative covenants related to debt
facilities, which require, among other things, that we maintain certain
financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions, restricted payments and certain dividend restrictions. We were in
compliance with all such covenants as of December 31, 2008. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare default
if a default occurred under a different facility.
Forward-looking
Statements
This
report on Form 10-K includes certain
"
forward-looking
statements
".
Forward-looking statements may be identified by the use of words such as
"
anticipates,
"
"
expects,
"
"
plans,
"
"
estimates,
"
or words of like
meaning. As to the specifically identified forward-looking statements, factors
that could affect charge-offs and recovery rates include changes in the general
economic climate, which could affect the willingness or ability of obligors to
pay pursuant to the terms of contracts, changes in laws respecting consumer
finance, which could affect our ability to enforce rights under contracts, and
changes in the market for used vehicles, which could affect the levels of
recoveries upon sale of repossessed vehicles. Factors that could affect our
revenues in the current year include the levels of cash releases from existing
pools of contracts, which would affect our ability to purchase contracts, the
terms on which we are able to finance such purchases, the willingness of dealers
to sell contracts to us on the terms that it offers, and the terms on which we
are able to complete term securitizations once contracts are acquired. Factors
that could affect our expenses in the current year include competitive
conditions in the market for qualified personnel, investor demand for
asset-backed securities and interest rates (which affect the rates that we pay
on asset-backed securities issued in our securitizations).
The
statements concerning structuring securitization transactions as secured
financings and the effects of such structures on financial items and on future
profitability also are forward-
looking
statements. Any change to the structure of our securitization transaction could
cause such forward-looking statements not to be accurate. Both the amount of the
effect of the change in structure on our profitability and the duration of the
period in which our profitability would be affected by the change in
securitization structure are estimates. The accuracy of such estimates will be
affected by the rate at which we purchase and sell contracts, any changes in
that rate, the credit performance of such contracts, the financial terms of
future securitizations, any changes in such terms over time, and other factors
that generally affect our profitability.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position
(FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, to partially defer
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. SFAS 157 is effective for us on January 1,
2008, except for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value on a recurring basis. For those excepted
assets and liabilities our effective date is January 1, 2009. The adoption of
this statement did not have a material effect on our financial position or
results of operations.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements.. The three levels are defined as follows: Level 1 - inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets. Level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument. Level 3
– inputs to the valuation methodology are unobservable and significant to the
fair value measurement.
In
September 2008 we sold automobile contracts in a securitization that was
structured as a sale. In that sale, we retained certain
assets that are measured at fair value. Following is a description of
the valuation methodologies used for the securities retained and the residual
interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation hierarchy: The
securities retained total $8.5 million of notes and are classified as level 2
because there were similar notes sold in the transaction. We used the price at
which those similar notes were sold to value the securities
retained. The residual interest in the cash flows totals $2.5 million
and is classified as level 3. We determined the value of that residual interest
using a discounted cash flow model that included estimates for prepayments and
losses. We used a discount rate of 33% per annum. The assumptions we
used were based on historical performance of automobile contracts we had
originated and serviced in the past, adjusted for current market
conditions.
Off-Balance
Sheet Arrangements
From July
2003 through April 2008 all of our securitizationswere structured as secured
financings for financial accounting purposes. In September 2008, we securitized
$198.7 million of our automobile contracts in a structure that is treated as a
sale of the receivables for financial accounting purposes. The terms
of the September 2008 securitization provide for us (1) to continue servicing
the sold portfolio, (2) to retain a 5.0% interest in the bonds issued by the
trust to which we sold the automobile contracts and (3) to earn additional
compensation contingent upon (a) the return to the holders of the senior bonds
issued by the trust reaching certain targets or (b) “lifetime” cumulative net
charge-offs on the automobile contracts being below a pre-determined
level. See "Critical Accounting Policies" for a detailed discussion
of our securitization structure.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Interest
Rate Risk
We are
subject to interest rate risk during the period between when contracts are
purchased from dealers and when such contracts become part of a term
securitization. Specifically, the interest rate due on our warehouse credit
facility is adjustable while the interest rates on the contracts are fixed.
Historically, our term securitization facilities have had fixed rates of
interest. To mitigate some of this risk, we have in the past, and intend to
continue to structure
our
securitization transactions to include pre-funding structures, whereby the
amount of Notes issued exceeds the amount of contracts initially sold to the
Trusts. In pre-funding, the proceeds from the pre-funded portion are held in an
escrow account until we sell the additional contracts to the Trust in amounts up
to the balance of the pre-funded escrow account. In pre-funded securitizations,
we lock in the borrowing costs with respect to the contracts we subsequently
deliver to the Trust. However, we incur an expense in pre-funded securitizations
equal to the difference between the money market yields earned on the proceeds
held in escrow prior to subsequent delivery of contracts and the interest rate
paid on the Notes outstanding, the amount as to which there can be no
assurance.
Item
8. Financial Statements and Supplementary Data
This
report includes Consolidated Financial Statements, notes thereto and an
Independent Auditors’ Report, at the pages indicated below, in the
"
Index to Financial
Statements.
"
Certain
unaudited quarterly financial information is included in the Notes to
Consolidated Financial Statements, as Note 17.
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Disclosure Controls and
Procedures
. Under the supervision and with the participation
of the Company’s Chief Executive Officer and Chief Financial Officer, management
of the Company has evaluated the effectiveness of the design and operation of
the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the
"
Exchange Act
"
) as of
December 31, 2008 (the
"
Evaluation
Date
"
). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, the Company’s disclosure controls and
procedures are effective (i) to ensure that information required to be
disclosed by us in reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission; and
(ii) to ensure that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is accumulated and
communicated to our management, including the Company’s Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosures.
The
certifications of our chief executive officer and chief financial officer
required under Section 302 of the Sarbanes-Oxley Act have been filed as
Exhibits 31.1 and 31.2 to this report.
Internal Control.
Management’s Report on Internal Control over Financial Reporting is included in
this Annual Report, immediately below. During the fiscal quarter ended
December 31, 2008, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Report on Internal
Control over Financial Reporting
. We are responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our
internal control over financial reporting is designed to provide reasonable
assurance to our management and Board of Directors regarding the preparation and
fair presentation of published financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can only provide reasonable assurance with respect to financial
statement preparation and presentation.
Management,
with the participation of the chief executive and chief financial officers,
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated Framework. Based on this
assessment, management, with the participation of the chief executive and chief
financial officers, believes that, as of December 31, 2008, our internal
control over financial reporting is effective based on those
criteria.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securites and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Item
9B. Other Information
Not
Applicable
PART
III
Item
10. Directors and Executive Officers of the Registrant
Information
regarding directors of the registrant is incorporated by reference to the
registrant’s definitive proxy statement for its annual meeting of shareholders
to be held in 2009 (the
"
2009 Proxy
Statement
"
).
The 2009 Proxy Statement will be filed not later than April 30, 2009.
Information regarding executive officers of the registrant appears in Part I of
this report, and is incorporated herein by reference.
Item
11. Executive Compensation
Incorporated
by reference to the 2009 Proxy Statement.
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated
by reference to the 2009 Proxy Statement.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Incorporated
by reference to the 2009 Proxy Statement.
Item
14. Principal Accountant Fees and Services
Incorporated
by reference to the 2009 Proxy Statement.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
The
financial statements listed below under the caption
"
Index to Financial
Statements
"
are filed as a part of this report. No financial statement schedules are filed
as the required information is inapplicable or the information is presented in
the Consolidated Financial Statements or the related notes. Separate financial
statements of the Company have been omitted as the Company is primarily an
operating company and its subsidiaries are wholly owned and do not have minority
equity interests held by any person other than the Company in amounts that
together exceed 5% of the total consolidated assets as shown by the most recent
year-end Consolidated Balance Sheet.
The
exhibits listed below are filed as part of this report, whether filed herewith
or incorporated by reference to an exhibit filed with the report identified in
the parentheses following the description of such exhibit. Unless otherwise
indicated, each such identified report was filed by or with respect to the
registrant.
Exhibit
Number
|
Description (“**”
indicates compensatory plan or agreement.)
|
|
2.1
|
Agreement
and Plan of Merger, dated as of November 18, 2001, by and among the
Registrant, CPS Mergersub, Inc. and MFN Financial Corporation. (Exhibit
2.1 to Form 8-K filed on November 19, 2001 by MFN Financial
Corporation)
|
|
3.1
|
Articles
of Incorporation, as amended to date. (filed
herewith)
|
|
3.2
|
Amended
and Restated Bylaws (Exhibit 3.2.1 to Form 8-K filed August 17,
2007)
|
|
4.1
|
Instruments
defining the rights of holders of long-term debt of certain consolidated
subsidiaries of the registrant are omitted pursuant to the exclusion set
forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation
S-K (17 CFR 229.601). The registrant agrees to provide copies of such
instruments to the United States Securities and Exchange Commission upon
request.
|
|
4.2
|
Form
of Indenture re Renewable Unsecured Subordinated Notes (“RUS
Notes”), (Exhibit 4.1 to Form S-2,
no. 333-121913)
|
|
4.2.1
|
Form
of RUS Notes (Exhibit 4.2 to Form S-2, no.
333-121913)
|
|
4.23
|
Indenture
dated as of June 1, 2007, respecting notes issued by CPS Auto Receivables
Trust 2007-B (exhibit 4.23 to Form 8-K filed by the registrant
on June 29, 2007)
|
|
4.24
|
Sale
and Servicing Agreement dated as of June 1, 2007, related to notes issued
by CPS Auto Receivables Trust 2007-B (exhibit 4.24 to Form 8-K filed by
the registrant on June 29, 2007.)
|
|
4.25
|
Indenture
dated as of September 1, 2007, respecting notes issued by CPS Auto
Receivables Trust 2007-C (exhibit 4.25 to Form 8-K filed by the registrant
on November 2, 2007)
|
|
4.26
|
Sale
and Servicing Agreement dated as of September 1, 2007, related to notes
issued by CPS Auto Receivables Trust 2007-C (exhibit 4.26 to Form 8-K
filed by the registrant on November 2, 2007.)
|
|
4.27
|
Indenture
re Notes issued by CPS Auto Receivables Trust 2008-A (exhibit 4.27 to Form
8-K filed by the registrant on April 15,
2008)
|
|
4.28
|
Sale
and Servicing Agreement dated as of March 1, 2008, related to notes issued
by CPS Auto Receivables Trust 2008-A (exhibit 4.28 to Form 8-K filed by
the registrant on April 15, 2008)
|
|
10.1
|
1991
Stock Option Plan & forms of Option Agreements
thereunder (Exhibit 10.19 to Form S-2, no. 333-121913)
**
|
|
10.2
|
1997
Long-Term Incentive Stock Plan ("1997 Plan") (Exhibit 10.20 to Form S-2,
no. 333-121913) **
|
|
10.2.1
|
Form
of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K filed
March 13, 2006) **
|
|
10.4
|
Lease
of Headquarters Building (to be filed by
amendment)
|
|
10.5
|
Third
Amended & Restated Sale and Servicing Agreement dated February 14,
2007 by and among Page Funding LLC ("PFLLC"), the registrant and Wells
Fargo Bank, N.A. ("WFBNA") (Exhibit 10.5 to registrant's
Form 10-K filed March 9,
2007)
|
|
10.5.1
|
Amendment
dated March 30, 2007 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed July
23, 2007)
|
|
10.5.2
|
Amendment
dated June 29, 2007 to the Third Amended & Restated Sale and Servicing
Agreement dated February 14, 2007 by and among PFLLC, the registrant and
WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed July 23,
2007)
|
|
10.5.3
|
Amendment
dated September 30, 2007 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (Exhibit 10.5.3 to registrant's Form 10-Q filed
November 6, 2007)
|
|
10.5.4
|
Amendment
dated as of February 15, 2008 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (filed herewith)
|
|
10.5.5
|
Amendment
dated as of March 15, 2008 to the Third Amended & Restated Sale and
Servicing Agreement dated February 14, 2007 by and among PFLLC, the
registrant and WFBNA (filed herewith)
|
|
10.6
|
Second
Amended & Restated Indenture dated as of February 14, 2007 by and
between PFLLC and WFBNA (Exhibit 10.6 to registrant's Form 10-K filed
March 9, 2007)
|
|
10.
8
|
Second
Amended & Restated Note Purchase Agreement dated as of February 14,
2007 by and among PFLLC, UBS Real Estate Securities Inc. and WFBNA
(Exhibit 10.8 to registrant's Form 10-K filed March 9,
2007)
|
|
10.9
|
Omnibus
Amendment Agreement containing Amendment dated as of September 30, 2008 to
the Third Amended & Restated Sale and Servicing Agreement dated
February 14, 2007 by and among Page Funding LLC ("PFLLC"), the registrant
and Wells Fargo Bank, N.A. ("WFBNA"); and Amendment to Second
Amended & Restated Note Purchase Agreement dated as of February 14,
2007 by and among PFLLC, UBS Real Estate Securities Inc. and WFBNA (to be
filed by amendment)
|
|
10.9.1
|
Second
Omnibus Amendment Agreement containing Amendment dated as of December 12,
2008 to the Third Amended & Restated Sale and Servicing Agreement
dated February 14, 2007 by and among PFLLC, the registrant and WFBNA; and
Amendment to Second Amended & Restated Note Purchase Agreement dated
as of February 14, 2007 by and among PFLLC, UBS Real Estate Securities
Inc. and WFBNA; and Amendment to Second Amended & Restated Indenture
dated as of February 14, 2007 by and between PFLLC and WFBNA (to be filed
by amendment)
|
|
10.10
|
Amended
& Restated Sale and Servicing Agreement dated as of January 12, 2007,
among Page Three Funding LLC ("P3FLLC"), the registrant and WFBNA (Exhibit
10.10 to registrant's Form 10-K filed March 9, 2007)
|
|
10.10.1
|
Amendment
dated as of February 15, 2008 to the Amended & Restated Sale and
Servicing Agreement dated as of January 12, 2007, among P3FLLC, the
registrant and WFBNA (to be filed by amendment)
|
|
10.10.2
|
Amendment
dated as of September 12, 2008 to the Amended & Restated Sale and
Servicing Agreement dated as of January 12, 2007, among P3FLLC, the
registrant and WFBNA (to be filed by amendment)
|
|
10.11
|
Amended
& Restated Indenture dated as of January 12, 2007 between P3FLLC and
WFBNA (Exhibit 10.11 to registrant's Form 10-K filed March 9,
2007)
|
|
10.12
|
Amended
& Restated Note Purchase Agreement dated as of January 12, 2007 among
P3FLLC, the registrant and Bear, Stearns International Limited (Exhibit
10.12 to registrant's Form 10-K filed March 9, 2007)
|
|
10.14
|
2006
Long-Term Equity Incentive Plan as amended to date (filed
herewith)**
|
|
10.14.1
|
Form
of Option Agreement under the 2006 Long-Term Equity Incentive Plan
(Exhibit 10.14.1 to registrant's Form 10-K filed March 9,
2007)**
|
|
10.15
|
Securities
Purchase Agreement between the registrant and Levine Leichtman Capital
Partners IV, L. P. ("LLCP"), relating to the sale of an aggregate of $25
million of Notes. (incorporated by reference to exhibit 99.2 to Schedule
13D filed by LLCP on July 10, 2008)
|
|
10.15.1
|
Am.
No. 1 dated July 10, 2008 to Securities Purchase Agreement dated June 30,
2008 between the registrant and LLCP. (Exhibit 10.15.1 to
registrant's Form 10-Q filed August 11,
2008)
|
|
10.16
|
Registration
Rights Agreement between the registrant and LLCP. (Incorporated by
reference to exhibit 99.6 to Schedule 13D filed by LLCP on July 10,
2008)
|
|
10.17
|
Investor
Rights Agreement between the registrant and LLCP. (Incorporated
by reference to exhibit 99.7 to Schedule 13D filed by LLCP on July 10,
2008)
|
|
10.18
|
FMV
Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to
the FMV warrant appearing as pages A-1 through A-13 of the preliminary
proxy statement filed by the registrant on July 28,
2008.)
|
|
10.19
|
N
Warrant dated June 30, 2008, issued to LLCP. (Incorporated by reference to
the FMV warrant appearing as pages B-1 through B-13 of the preliminary
proxy statement filed by the registrant on July 28,
2008.)
|
|
10.20
|
Amended
and Restated Note Purchase Agreement dated July 10, 2008 among the
registrant, its subsidiary Folio Funding II, LLC, and Citigroup Financial
Products Inc. (Exhibit 10.20 to registrant's Form 10-Q filed
August 11, 2008)
|
|
10.21
|
Amended
and Restated Indenture dated July 10, 2008 among Folio Funding II, LLC,
Citigroup Financial Products Inc. and Wells Fargo Bank,
N.A. (Exhibit 10.21 to registrant's Form 10-Q filed August 11,
2008)
|
|
10.22
|
Performance
Guaranty dated July 10, 2008 issued by the registrant in favor of
Citigroup Financial Products Inc. (Exhibit 10.22 to registrant's Form 10-Q
filed August 11, 2008)
|
|
10.23
|
Warrant
dated July 10, 2008, issued to Citigroup Global Markets Inc. (Exhibit
10.23 to registrant's Form 10-Q filed August 11, 2008)
|
|
10.24
|
Purchase
and Sale Agreement re Motor Vehicle Contracts dated as of September 26,
2008 (Exhibit 10.24 to Form 8-K/A filed by the registrant on November 7,
2008)
|
|
10.25
|
Transfer
and Servicing Agreement dated as of September 26, 2008 (Exhibit 10.25 to
Form 8-K/A filed by the registrant on November 7, 2008)
|
|
14
|
Registrant’s
Code of Ethics for Senior Financial Officers (Exhibit 14 to Form 10-K
filed March 13, 2006)
|
|
21
|
List
of subsidiaries of the registrant (filed herewith)
|
|
23.1a
|
Consent
of McGladrey & Pullen, LLP (filed herewith)
|
|
23.1b
|
Consent
of Crowe Horwath LLP (filed herewith)
|
|
31.1
|
Rule
13a-14(a) certification by chief executive officer (filed
herewith)
|
|
31.2
|
Rule
13a-14(a) certification by chief financial officer (filed
herewith)
|
|
32
|
Section
1350 certification (filed
herewith)
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
CONSUMER PORTFOLIO SERVICES,
INC.
(registrant)
|
March
31, 2009
|
|
By:
|
/s/
CHARLES E. BRADLEY, JR.
|
|
|
|
Charles
E. Bradley, Jr.,
President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the
following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
March
31, 2009
|
|
|
/s/
CHARLES E. BRADLEY, JR.
|
|
|
|
Charles
E. Bradley, Jr.,
Director,
President
and Chief Executive Officer
(Principal
Executive Officer)
|
March
31, 2009
|
|
|
/s/
CHRIS A. ADAMS
|
|
|
|
Chris
A. Adams,
Director
|
March
31, 2009
|
|
|
/s/
E. BRUCE FREDRIKSON
|
|
|
|
E.
Bruce Fredrikson,
Director
|
March
31, 2009
|
|
|
/s/
BRIAN J. RAYHILL
|
|
|
|
Brian
J. Rayhill,
Director
|
March
31, 2009
|
|
|
/s/
WILLIAM B. ROBERTS
|
|
|
|
William
B. Roberts,
Director
|
March
31, 2009
|
|
|
/s/
JOHN C. WARNER
|
|
|
|
John
C. Warner,
Director
|
March
31, 2009
|
|
|
/s/
GREGORY S. WASHER
|
|
|
|
Gregory
S. Washer,
Director
|
March
31, 2009
|
|
|
/s/
DANIEL S. WOOD
|
|
|
|
Daniel
S. Wood,
Director
|
March
31, 2009
|
|
|
/s/
JEFFREY P. FRITZ
|
|
|
|
Jeffrey
P. Fritz,
Sr. Vice
President and Chief Financial Officer
(Principal
Accounting Officer)
|
INDEX
TO FINANCIAL STATEMENTS
|
Page
Reference
|
Report
of Independent Registered Public Accounting Firm – Crowe Horwath
LLP
|
F-2
|
Report
of Independent Registered Public Accounting Firm – McGladrey & Pullen,
LLP
|
F-3
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006
|
F-5
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008,
2007, and 2006
|
F-6
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2008,
2007, and 2006
|
F-7
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
F-8
|
Notes
to Consolidated Financial Statements
|
F-10
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Consumer
Portfolio Services, Inc.
We have
audited the accompanying consolidated balance sheet of Consumer Portfolio
Services, Inc. (the Company) as of December 31, 2008, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the year ended December 31, 2008. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Portfolio Services,
Inc. as of December 31, 2008, and the results of its operations and its
cash flows for the year ended December 31, 2008 in conformity with U.S.
generally accepted accounting principles.
The Company is currently in
compliance with debt covenants or has obtained waivers for all potential
covenant violations as of December 31, 2008. The waivers are temporary and will
expire during 2009. See Note 1 for a discussion of potential consequences
associated with the potential failure to obtain renewed waivers.
/s/ Crowe
Horwath LLP
Costa
Mesa, California
March 31,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Consumer
Portfolio Services, Inc.
We have
audited the consolidated balance sheets of Consumer Portfolio Services, Inc. and
subsidiaries (the Company) as of December 31, 2007, and the related
consolidated statements of operations, comprehensive income, shareholders’
equity and cash flows for each of the two years in the period ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Portfolio Services,
Inc. and subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
described in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for uncertain tax positions.
/s/
McGladrey & Pullen, LLP
Irvine,
California
March 17,
2008
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per
share data)
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
22,084
|
|
|
$
|
20,880
|
|
Restricted
cash and equivalents
|
|
|
153,479
|
|
|
|
170,341
|
|
|
|
|
|
|
|
|
|
|
Finance
receivables
|
|
|
1,417,343
|
|
|
|
2,068,004
|
|
Less:
Allowance for finance credit losses
|
|
|
(78,036
|
)
|
|
|
(100,138
|
)
|
Finance
receivables, net
|
|
|
1,339,307
|
|
|
|
1,967,866
|
|
|
|
|
|
|
|
|
|
|
Residual
interest in securitizations
|
|
|
3,582
|
|
|
|
2,274
|
|
Furniture
and equipment, net
|
|
|
1,404
|
|
|
|
1,500
|
|
Deferred
financing costs
|
|
|
8,954
|
|
|
|
15,482
|
|
Deferred
tax assets, net
|
|
|
52,727
|
|
|
|
58,835
|
|
Accrued
interest receivable
|
|
|
14,903
|
|
|
|
24,099
|
|
Other
assets
|
|
|
42,367
|
|
|
|
21,536
|
|
|
|
$
|
1,638,807
|
|
|
$
|
2,282,813
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
21,702
|
|
|
$
|
18,391
|
|
Warehouse
lines of credit
|
|
|
9,919
|
|
|
|
235,925
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
17,706
|
|
Residual
interest financing
|
|
|
67,300
|
|
|
|
70,000
|
|
Securitization
trust debt
|
|
|
1,404,211
|
|
|
|
1,798,302
|
|
Senior
secured debt, related party
|
|
|
20,105
|
|
|
|
-
|
|
Subordinated
renewable notes
|
|
|
25,721
|
|
|
|
28,134
|
|
|
|
|
1,548,958
|
|
|
|
2,168,458
|
|
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; 19,110,777 and 19,525,042
|
|
|
|
|
|
|
|
|
shares
issued and outstanding at December 31, 2008 and
|
|
|
|
|
|
|
|
|
2007,
respectively
|
|
|
54,702
|
|
|
|
55,216
|
|
Additional
paid in capital, warrants
|
|
|
7,471
|
|
|
|
794
|
|
Retained
earnings
|
|
|
34,703
|
|
|
|
60,794
|
|
Accumulated
other comprehensive loss
|
|
|
(7,027
|
)
|
|
|
(2,449
|
)
|
|
|
|
89,849
|
|
|
|
114,355
|
|
|
|
$
|
1,638,807
|
|
|
$
|
2,282,813
|
|
See
accompanying Notes to Consolidated Financial Statements.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
351,551
|
|
|
$
|
370,265
|
|
|
$
|
263,566
|
|
Servicing
fees
|
|
|
2,064
|
|
|
|
1,218
|
|
|
|
2,894
|
|
Other
income
|
|
|
14,796
|
|
|
|
23,067
|
|
|
|
12,403
|
|
|
|
|
368,411
|
|
|
|
394,550
|
|
|
|
278,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
costs
|
|
|
48,874
|
|
|
|
46,716
|
|
|
|
38,483
|
|
General
and administrative
|
|
|
29,506
|
|
|
|
24,959
|
|
|
|
23,197
|
|
Interest
|
|
|
153,720
|
|
|
|
137,543
|
|
|
|
87,510
|
|
Interest,
related party
|
|
|
2,533
|
|
|
|
1,646
|
|
|
|
5,602
|
|
Provision
for credit losses
|
|
|
148,408
|
|
|
|
137,272
|
|
|
|
92,057
|
|
Loss
on sale of receivables
|
|
|
13,963
|
|
|
|
-
|
|
|
|
-
|
|
Marketing
|
|
|
10,221
|
|
|
|
18,147
|
|
|
|
14,031
|
|
Occupancy
|
|
|
4,104
|
|
|
|
3,763
|
|
|
|
3,983
|
|
Depreciation
and amortization
|
|
|
537
|
|
|
|
547
|
|
|
|
800
|
|
|
|
|
411,866
|
|
|
|
370,593
|
|
|
|
265,663
|
|
Income
(loss) before income tax expense (benefit)
|
|
|
(43,455
|
)
|
|
|
23,957
|
|
|
|
13,200
|
|
Income
tax expense (benefit)
|
|
|
(17,364
|
)
|
|
|
10,099
|
|
|
|
(26,355
|
)
|
Net
income (loss)
|
|
$
|
(26,091
|
)
|
|
$
|
13,858
|
|
|
$
|
39,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.36
|
)
|
|
$
|
0.66
|
|
|
$
|
1.82
|
|
Diluted
|
|
|
(1.36
|
)
|
|
|
0.61
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computing
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,230
|
|
|
|
20,880
|
|
|
|
21,759
|
|
Diluted
|
|
|
19,230
|
|
|
|
22,595
|
|
|
|
24,052
|
|
See
accompanying Notes to Consolidated Financial Statements
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(26,091
|
)
|
|
$
|
13,858
|
|
|
$
|
39,555
|
|
Other
comprehensive income (loss); minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
pension
liability, net of tax
|
|
|
(4,578
|
)
|
|
|
(698
|
)
|
|
|
678
|
|
Comprehensive
income (loss)
|
|
$
|
(30,669
|
)
|
|
$
|
13,160
|
|
|
$
|
40,233
|
|
See accompanying Notes to
Consolidated Financial Statements.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
|
Capital,
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
Balance
at December 31, 2005
|
|
|
21,687
|
|
|
$
|
66,748
|
|
|
$
|
794
|
|
|
$
|
8,476
|
|
|
$
|
(2,429
|
)
|
|
$
|
73,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
options, including tax benefit
|
|
|
553
|
|
|
|
2,254
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,254
|
|
Purchase
of common stock
|
|
|
(735
|
)
|
|
|
(4,808
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,808
|
)
|
Pension
benefit obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
678
|
|
|
|
678
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
244
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,555
|
|
|
|
-
|
|
|
|
39,555
|
|
Balance
at December 31, 2006
|
|
|
21,505
|
|
|
|
64,438
|
|
|
|
794
|
|
|
|
48,031
|
|
|
|
(1,751
|
)
|
|
|
111,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
options, including tax benefit
|
|
|
337
|
|
|
|
1,356
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,356
|
|
Purchase
of common stock
|
|
|
(2,317
|
)
|
|
|
(11,711
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,711
|
)
|
Pension
benefit obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(698
|
)
|
|
|
(698
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
1,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,133
|
|
Adjustment
to adopt FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,095
|
)
|
|
|
-
|
|
|
|
(1,095
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,858
|
|
|
|
-
|
|
|
|
13,858
|
|
Balance
at December 31, 2007
|
|
|
19,525
|
|
|
$
|
55,216
|
|
|
$
|
794
|
|
|
$
|
60,794
|
|
|
$
|
(2,449
|
)
|
|
$
|
114,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
options, including tax benefit
|
|
|
70
|
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
Common
stock issued upon issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
debt
|
|
|
1,225
|
|
|
|
1,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,801
|
|
Purchase
of common stock
|
|
|
(1,709
|
)
|
|
|
(3,717
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,717
|
)
|
Pension
benefit obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,578
|
)
|
|
|
(4,578
|
)
|
Valuation
of warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
6,677
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,677
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
1,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,258
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,091
|
)
|
|
|
-
|
|
|
|
(26,091
|
)
|
Balance
at December 31, 2008
|
|
|
19,111
|
|
|
$
|
54,702
|
|
|
$
|
7,471
|
|
|
$
|
34,703
|
|
|
$
|
(7,027
|
)
|
|
$
|
89,849
|
|
See
accompanying Notes to Consolidated Financial
Statements.
CONSUMER
PORTFOLIO SERVICES, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(In
Thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(26,091
|
)
|
|
$
|
13,858
|
|
|
$
|
39,555
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Gain
on residual asset
|
|
|
-
|
|
|
|
(6,155
|
)
|
|
|
(1,200
|
)
|
Accretion
of deferred acquisition fees
|
|
|
(15,177
|
)
|
|
|
(16,761
|
)
|
|
|
(11,912
|
)
|
Amortization
of discount on securitization notes
|
|
|
13,868
|
|
|
|
5,316
|
|
|
|
3,005
|
|
Amortization
of discount on senior secured debt, related party
|
|
|
519
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
537
|
|
|
|
547
|
|
|
|
800
|
|
Amortization
of deferred financing costs
|
|
|
10,490
|
|
|
|
9,372
|
|
|
|
6,580
|
|
Provision
for credit losses
|
|
|
148,408
|
|
|
|
137,272
|
|
|
|
92,057
|
|
Stock-based
compensation expense
|
|
|
1,258
|
|
|
|
1,133
|
|
|
|
244
|
|
Interest
income on residual assets
|
|
|
(979
|
)
|
|
|
(2,324
|
)
|
|
|
(5,656
|
)
|
Cash
received from residual interest in securitizations
|
|
|
2,123
|
|
|
|
19,999
|
|
|
|
18,282
|
|
Loss
on sale of receivables
|
|
|
13,963
|
|
|
|
-
|
|
|
|
-
|
|
Change
in market value of warrants
|
|
|
555
|
|
|
|
-
|
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on restructuring accrual
|
|
|
-
|
|
|
|
(366
|
)
|
|
|
(633
|
)
|
Accrued
interest receivable
|
|
|
9,195
|
|
|
|
(7,055
|
)
|
|
|
(6,113
|
)
|
Other
assets
|
|
|
(20,830
|
)
|
|
|
(994
|
)
|
|
|
(8,051
|
)
|
Deferred
tax assets
|
|
|
6,108
|
|
|
|
(11,147
|
)
|
|
|
(57,435
|
)
|
Accounts
payable and accrued expenses
|
|
|
(1,267
|
)
|
|
|
3,311
|
|
|
|
12,629
|
|
Tax
liabilities
|
|
|
(17,706
|
)
|
|
|
7,409
|
|
|
|
10,297
|
|
Net
cash provided by operating activities
|
|
|
124,974
|
|
|
|
153,415
|
|
|
|
92,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of finance receivables held for investment
|
|
|
(296,817
|
)
|
|
|
(1,282,312
|
)
|
|
|
(1,019,018
|
)
|
Payments
received on finance receivables held for investment
|
|
|
775,730
|
|
|
|
595,347
|
|
|
|
451,037
|
|
Proceeds
received from sale of receivables
|
|
|
162,307
|
|
|
|
-
|
|
|
|
-
|
|
Decreases
(increases) in restricted cash and cash equivalents, net
|
|
|
16,862
|
|
|
|
22,661
|
|
|
|
(35,338
|
)
|
Purchase
of furniture and equipment
|
|
|
(442
|
)
|
|
|
(1,087
|
)
|
|
|
(412
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
657,640
|
|
|
|
(665,391
|
)
|
|
|
(603,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of securitization trust debt
|
|
|
285,389
|
|
|
|
1,035,864
|
|
|
|
1,003,645
|
|
Proceeds
from issuance of subordinated renewable notes
|
|
|
4,183
|
|
|
|
103,523
|
|
|
|
23,652
|
|
Proceeds
from issuance of senior secured debt, related party
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from issuance of residual financing debt
|
|
|
20,000
|
|
|
|
85,860
|
|
|
|
13,667
|
|
Payments
on subordinated renewable notes
|
|
|
(6,596
|
)
|
|
|
|
|
|
|
|
|
Net
proceeds from (repayments to) warehouse lines of credit
|
|
|
(388,311
|
)
|
|
|
162,975
|
|
|
|
37,599
|
|
Repayment
of residual financing debt
|
|
|
(18,629
|
)
|
|
|
(47,238
|
)
|
|
|
(26,034
|
)
|
Repayment
of securitization trust debt
|
|
|
(693,348
|
)
|
|
|
(685,873
|
)
|
|
|
(487,681
|
)
|
Repayment
of senior secured debt, related party
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
(15,000
|
)
|
Repayment
of other debt
|
|
|
-
|
|
|
|
(88,964
|
)
|
|
|
(28,899
|
)
|
Payment
of financing costs
|
|
|
(5,525
|
)
|
|
|
(12,151
|
)
|
|
|
(10,687
|
)
|
Repurchase
of common stock
|
|
|
(3,717
|
)
|
|
|
(11,711
|
)
|
|
|
(4,808
|
)
|
Exercise
of options and warrants
|
|
|
144
|
|
|
|
1,118
|
|
|
|
1,555
|
|
Excess
tax benefit related to option exercises
|
|
|
-
|
|
|
|
238
|
|
|
|
699
|
|
Net
cash provided by (used in) financing activities
|
|
|
(781,410
|
)
|
|
|
518,641
|
|
|
|
507,708
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
1,204
|
|
|
|
6,665
|
|
|
|
(3,574
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
20,880
|
|
|
|
14,215
|
|
|
|
17,789
|
|
Cash
and cash equivalents at end of period
|
|
$
|
22,084
|
|
|
$
|
20,880
|
|
|
$
|
14,215
|
|
|
See
accompanying Notes to Consolidated Financial
Statements.
|
CONSUMER
PORTFOLIO SERVICES, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(In
Thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
126,300
|
|
|
$
|
121,631
|
|
|
$
|
81,628
|
|
Income
taxes
|
|
|
(590
|
)
|
|
|
7,273
|
|
|
|
10,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
benefit obligation, net
|
|
|
4,578
|
|
|
|
698
|
|
|
|
(677
|
)
|
Common
stock issued in connection with new senior secured debt, related
party
|
|
|
1,801
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
issued in connection with residual financing and senior secured
debt
|
|
|
6,284
|
|
|
|
-
|
|
|
|
-
|
|
See accompanying Notes to Consolidated
Financial Statements
.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Description
of Business
Consumer
Portfolio Services, Inc. (
"
CPS
"
) was incorporated
in California on March 8, 1991. CPS and its subsidiaries (collectively, the
"
Company
"
) specialize in
purchasing, selling and servicing retail automobile installment sale contracts
(
"
Contracts
"
) originated by
licensed motor vehicle dealers (
"
Dealers
"
) located
throughout the United States. Dealers located in California, Florida, Texas and
Pennsylvania represented 11.6%, 9.3%, 7.1% and 7.0%, respectively, of contracts
purchased during 2008 compared with 10.4%, 8.4%, 9.2% and 6.2%, respectively in
2007. No other state had a concentration in excess of 6.9%. We
specialize in contracts with obligors who generally would not be expected to
qualify for traditional financing, such as that provided by commercial banks or
automobile manufacturers’ captive finance companies.
We are
subject to various regulations and laws as they relate to the extension of
credit in consumer credit transactions. Although we believe we are currently in
material compliance with these regulations and laws, there can be no assurance
that we will be able to maintain such compliance. Failure to comply with such
laws and regulations could have a material adverse effect on the
Company.
Acquisitions
On March
8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger
(the
"
MFN
Merger
"
). On
May 20, 2003, we acquired TFC Enterprises, Inc. and its subsidiaries in a second
merger (the
"
TFC Merger
"
). Each merger was
accounted for as a purchase. MFN Financial Corporation and its subsidiaries
(
"
MFN
"
) and TFC
Enterprises, Inc. and its subsidiaries (
"
TFC
"
) were engaged in
similar businesses: buying contracts from Dealers, financing those contracts
through securitization transactions, and servicing those contracts. MFN ceased
acquiring contracts in March 2002; TFC acquired contracts under its
"
TFC Programs"
until July 2008 when such purchases were suspended.
On April
2, 2004, we purchased a portfolio of contracts and certain other assets (the
"
SeaWest
Asset Acquisition
"
) from SeaWest
Financial Corporation (
"
SeaWest
"
). In addition, we
were named the successor servicer for three term securitization transactions
originally sponsored by SeaWest (the
"
SeaWest Third
Party Portfolio
"
). We do not offer
financing programs similar to those previously offered by SeaWest.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of Consumer Portfolio
Services, Inc. and its wholly-owned subsidiaries, certain of which are Special
Purpose Subsidiaries (
"
SPS
"
), formed to
accommodate the structures under which we purchase and securitize our contracts.
The Consolidated Financial Statements also include the accounts of CPS Leasing,
Inc., an 80% owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash
and Cash Equivalents
For
purposes of the statements of cash flows, we consider all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. Cash equivalents consist of cash on hand and due from banks and
money market accounts. Substantially all of our cash is deposited at two
financial institutions. We maintain cash due from banks in excess of the banks'
insured deposit limits. We do not believe we are exposed to any significant
credit risk on these deposits. As part of certain financial covenants related to
debt facilities, we are required to maintain a minimum unrestricted cash
balance.
Finance
Receivables
Finance
receivables, which we have the intent and ability to hold for the forseable
future or until maturity or payoff, are presented at cost. All finance
receivable contracts are held for investment. Interest income is accrued on the
unpaid principal balance. Origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level yield
method without anticipating prepayments. Generally, payments received on finance
receivables are restricted to certain securitized pools, and the related
contracts cannot be resold. Finance receivables are charged off pursuant to the
controlling documents of certain securitized pools, generally before they become
contractually delinquent five payments. Contracts that are deemed uncollectible
prior to the maximum delinquency period are charged off
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 less than 90 days
delinquent. Any payments received on a Contract that is greater than 90 days
delinquent are first applied to accrued interest and then to principal
reduction.
Finance
Receivables Held for Sale
Finance
receivables originated and intended for sale in the secondary market are carried
at the lower of aggregate cost or market. Net unrealized losses, if any, are
recorded as a valuation allowance and charged to earnings. We had no finance
receivables held for sale at December 31, 2008 and 2007.
Allowance
for Finance Credit Losses
In order
to estimate an appropriate allowance for losses to be incurred on finance
receivables, we use a loss allowance methodology commonly referred to as
"
static
pooling,
"
which stratifies the finance receivable portfolio into separately identified
pools based on their period of origination, then uses historical performance of
seasoned pools to estimate future losses on current pools. Historical loss
experience is adjusted as necessary for current economic conditions. Using
analytical and formula driven techniques, we estimate an allowance for finance
credit losses, which we believe is adequate for probable credit losses that can
be reasonably estimated in our portfolio of finance receivable contracts. Such
allowance for loss is charged to expense on a monthly basis. Net losses incurred
on finance receivables are charged to the allowance. We evaluate the adequacy of
the allowance by examining current delinquencies, the characteristics of the
portfolio, the value of the underlying collateral and historical loss trends. As
conditions change, our level of provisioning and/or allowance may change as
well.
Charge
Off Policy
Delinquent
contracts for which the related financed vehicle has been repossessed are
generally charged off at the earliest of (1) the month in which the proceeds
from the sale of the financed vehicle were received, (2) the month in which 90
days have passed from the date of repossession or (3) the month in which the
Contract becomes seven scheduled payments past due (see Repossessed and Other
Assets below). The amount charged off is the remaining principal balance of the
Contract, after the application of the net proceeds from the liquidation of the
financed vehicle. With respect to delinquent contracts for which the related
financed vehicle has not been repossessed, the remaining principal balance
thereof is generally charged off no later than the end of the month that the
Contract becomes five scheduled payments past due for CPS Program receivables,
and no later than the end of the month that the Contract becomes seven scheduled
payments past due for other receivables.
Contract
Acquisition Fees and Originations Costs
Upon
purchase of a Contract from a Dealer, we generally either charge or advance the
Dealer an acquisition fee. Dealer acquisition fees and deferred originations
costs are applied to the carrying value of finance receivables and are accreted
into earnings as an adjustment to the yield over the estimated life of the
Contract using the interest method.
Repossessed
and Other Assets
If a
Contract obligor fails to make or keep promises for payments, or if the obligor
is uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the obligor’s payment due date, but could
occur sooner or later, depending on the specific circumstances. At the time the
vehicle is repossessed we stop accruing interest on the Contract, and reclassify
the remaining Contract balance to other assets at its estimated fair value less
costs to sell. Included in other assets in the accompanying balance sheets are
repossessed vehicles pending sale of $14.8 million and $11.5 million at
December 31, 2008 and 2007, respectively.
In
addition, other assets as of December 31, 2008 include 5% of the structured
notes issued by our subsidiary in connection with our $199 million whole loan
sale completed in September 2008. These notes are held for
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
investment
and earn interest at a rate of LIBOR plus 5%. The amount outstanding as of
December 31, 2008 was $8.0 million.
Treatment
of Securitizations
Prior to
July 2003, dispositions of Contracts in securitization transactions were
structured as sales for financial accounting purposes. As a result,
gain on sale was recognized on those securitization transactions in which the
Company, or a wholly-owned, consolidated subsidiary of the Company, retained a
residual interest in the Contracts that were sold to a wholly-owned,
unconsolidated special purpose subsidiary. These securitization transactions
included
"
term
"
securitizations
(the purchaser held the Contracts for substantially their entire term) and
"
warehouse
"
securitizations
(which financed the acquisition of the Contracts for future sale into term
securitizations).
The line
item
"
Residual interest
in securitizations
"
on our
Consolidated Balance Sheet represents the residual interests in term
securitizations completed prior to July 2003, together with our residual
interest in our September 2008 transaction. This line represents the discounted
sum of expected future cash flows from recoveries on charge-offs from the
pre-July 2003 securitization trusts plus the Residual (as defined below) from
the September 2008 transaction. The terms of the securitizations provide us the
option to repurchase the underlying receivables from the trust and retire the
related bonds. Such repurchases are referred to as
"
clean-ups
"
. When
a clean-up takes place, we purchase the underlying receivables and record them
on the balance sheet and remove that portion of the residual interest that is
attributable to the trust that is terminated when the related bonds are retired.
We conducted such clean-ups on the three remaining unconsolidated trusts during
2007. The remaining portion of the residual interest at December 31,
2007 and 2008 represents an estimate of the future cash flows from recoveries on
charge offs from clean-up securitizations and will remain on the balance sheet
for some time until those particular cash flows are realized, but in no case
later than 84 months from the inception date of the term
securitization.
With the
exception of the September 2008 transaction, all securitizations since July 2003
have been structured as secured financings. The warehouse securitizations are
accordingly reflected in the line items
"
Finance
receivables
"
and
"
Warehouse lines of
credit
"
on
our Consolidated Balance Sheet, and the term securitizations are reflected in
the line items
"
Finance
receivables
"
and
"
Securitization
trust debt.
"
Our term
securitization structure has generally been as follows:
We sell
Contracts we acquire to a wholly-owned special purpose subsidiary (
"
SPS
"
), which has been
established for the limited purpose of buying and reselling our contracts. The
SPS then transfers the same Contracts to another entity, typically a statutory
trust (
"
Trust
"
). The Trust
issues interest-bearing asset-backed securities (
"
Notes
"
), in a principal
amount equal to or less than the aggregate principal balance of the contracts.
We typically sell these contracts to the Trust at face value and without
recourse, except that representations and warranties similar to those provided
by the Dealer to us are provided by us to the Trust. One or more investors
purchase the Notes issued by the Trust (the
"
Noteholders
"
); the proceeds
from the sale of the Notes are then used to purchase the contracts from us. We
may retain or sell subordinated Notes issued by the Trust. Historically we have
purchased a financial guaranty insurance policy for most of our term
securitizations, guaranteeing timely payment of interest and ultimate payment of
principal on the senior Notes, from an insurance company (a
"
Note Insurer
"
). In addition, we
provide
"
Credit
Enhancement
"
for the benefit of the Note Insurer and the Noteholders in three forms: (1) an
initial cash deposit to a bank account (a
"
Spread
Account
"
)
held by the Trust, (2) overcollateralization of the Notes, where the
principal balance of the Notes issued is less than the principal balance of the
contracts, and (3) in the form of subordinated Notes. The agreements governing
the securitization transactions (collectively referred to as the
"
Securitization
Agreements
"
)
require that the initial level of Credit Enhancement be supplemented by a
portion of collections from the contracts until the level of Credit Enhancement
reaches specified levels which are then maintained. The specified levels are
generally computed as a percentage of the principal amount remaining unpaid
under the related contracts. The specified levels at which the Credit
Enhancement is to be maintained will vary depending on the performance of the
portfolios of contracts held by the Trusts and on other conditions, and may also
be varied by agreement among the Company, the SPS, the Note Insurers and the
trustee. Such levels have increased and decreased from time to time based on
performance of the various portfolios, and have also varied by from one Trust to
another. The Securitization Agreements generally grant us the option to
repurchase the sold contracts from the Trust (
i.e
., a
"
clean-up call
"
) when the
aggregate outstanding balance of the contracts has amortized to a specified
percentage of the initial aggregate balance.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Our
warehouse securitization structures are similar to the above, except that (i)
the SPS that purchases the contracts pledges the contracts to secure promissory
notes that it issues, (ii) no increase in the required amount of Credit
Enhancement was contemplated, and (iii) we do not purchase financial guaranty
insurance. Upon each sale of contracts in a securitization structured as a
secured financing, we retain as assets on our Consolidated Balance Sheet the
securitized contracts and record as indebtedness the Notes issued in the
transaction.
Under the
September 2008 securitization and other term securitizations completed prior to
July 2003 (which were structured as sales for financial accounting purposes), we
removed from our Consolidated Balance Sheet the contracts sold and added to our
Consolidated Balance Sheet (i) the cash received, if any, and (ii) the estimated
fair value of the ownership interest that we retained in contracts sold in the
securitization. That retained or residual interest (the
"
Residual
"
) consists of (a)
the cash held in the Spread Account, if any, (b) overcollateralization, if any,
(c) Notes retained, if any, and (d) receivables from the Trust, which include
the net interest receivables (
"
NIRs
"
). NIRs represent
the estimated discounted cash flows to be received from the Trust in the future,
net of principal and interest payable with respect to the Notes, the premium
paid to the Note Insurer, if any, and certain other expenses.
We
recognize gains or losses attributable to any changes in the estimated fair
value of the Residuals. Gains in fair value are recognized as other income in
the income statement, and losses are recorded as an impairment loss in the
income statement. We are not aware of an active market for the purchase or sale
of interests such as the Residuals; accordingly, we determine the estimated fair
value of the Residuals by discounting the amount of anticipated cash flows that
we estimate will be released to us in the future (the cash out method), using a
discount rate that we believe is appropriate for the risks involved. The
anticipated cash flows may include collections from both current and charged off
receivables. Historically we have used an effective pre-tax discount rate of 14%
per annum for cash flows from current receivables and of 25% per annum for cash
flows from charged-off receivables. As a result of changing market
conditions as discussed below, we have used an effective pre-tax discount rate
of 33% per annum for the September 2008 Residual.
We
receive periodic base servicing fees for the servicing and collection of the
contracts. In addition, we are entitled to the cash flows from the Trusts that
represent collections on the contracts in excess of the amounts required to pay
principal and interest on the Notes, the base servicing fees, and the premium
paid to the Note Insurer, and certain other fees (such as trustee and custodial
fees). Required principal payments on the Notes are generally defined as the
payments sufficient to keep the principal balance of the Notes equal to the
aggregate principal balance of the related contracts (excluding those contracts
that have been charged off), or a pre-determined percentage of such balance.
Where that percentage is less than 100%, the related Securitization Agreements
require accelerated payment of principal until the principal balance of the
Notes is reduced to the specified percentage. Such accelerated principal payment
is said to create
"
overcollateralization
"
of the
Notes.
If the
amount of cash required for payment of fees, interest and principal on the
senior Notes exceeds the amount collected during the collection period, the
shortfall is withdrawn from the Spread Account, if any. If the cash collected
during the period exceeds the amount necessary for the above allocations plus
required principal payments on the subordinated Notes, if any, and there is no
shortfall in the related Spread Account or other form of Credit Enhancement, the
excess is released to us. If the total Credit Enhancement amount is not at the
required level, then the excess cash collected is retained in the Trust until
the specified level is achieved. Cash in the Spread Accounts is restricted from
our use. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. In
determining the value of the Residuals, we have estimated the future rates of
prepayments, delinquencies, defaults, default loss severity, and recovery rates,
as all of these factors affect the amount and timing of the estimated cash
flows. Our estimates are based on historical performance of comparable
contracts.
Following
a securitization that is structured as a sale for financial accounting purposes,
we recognize interest income on the balance of the Residuals. In addition, we
will recognize additional revenue in other income if the actual performance of
the contracts related to the Residuals is better than our estimate of the value
of the Residual. If the actual performance of the contracts is worse than our
estimate, then a downward adjustment to the carrying value of the Residuals and
a related impairment charge would be required. In a securitization structured as
a secured financing for financial accounting purposes, interest income is
recognized when accrued under the terms of the related contracts and, therefore,
presents less potential for fluctuations in performance when compared to the
approach used in a transaction structured as a sale for financial accounting
purposes.
In all
our term securitizations, whether treated as secured financings or as sales, we
have transferred the receivables (through a subsidiary) to the securitization
Trust. The difference between the two structures is that
in
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
securitizations
that are treated as secured financings we report the assets and liabilities of
the securitization Trust on our Consolidated Balance Sheet. Under both
structures the Noteholders’ and the related securitization Trusts’ recourse to
us for failure of the contract obligors to make payments on a timely basis is
limited to our Finance receivables, Spread Accounts and
Residuals.
Servicing
We
consider the contractual servicing fee received on our managed portfolio held by
non-consolidated subsidiaries to be equal to adequate compensation.
Additionally, we consider that these fees would fairly compensate a substitute
servicer, should one be required. As a result, no servicing asset or liability
has been recognized. Servicing fees received on the managed portfolio held by
non-consolidated subsidiaries are reported as income when earned. Servicing fees
received on the managed portfolio held by consolidated subsidiaries are included
in interest income when earned. Servicing costs are charged to expense as
incurred. Servicing fees receivable, which are included in Other Assets in the
accompanying balance sheets, represent fees earned but not yet remitted to us by
the trustee.
Furniture
and Equipment
Furniture
and equipment are stated at cost net of accumulated depreciation. We calculate
depreciation using the straight-line method over the estimated useful lives of
the assets, which range from three to five years. Assets held under capital
leases and leasehold improvements are amortized over the lesser of the estimated
useful lives of the assets or the related lease terms. Amortization expense on
assets acquired under capital lease is included with depreciation expense on
owned assets.
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
Other
Income
Other
Income consists primarily of gains recognized on our Residual interest in
securitizations, recoveries on previously charged off contracts, convenience
fees charged to obligors for certain types of payment transaction methods, fees
paid to us by Dealers for certain direct mail services we provide and proceeds
from the sale of previously charged-off receivables to independent third
parties. The gain recognized related to the Residual interest was $178,000 for
2008, $6.2 million for 2007 and $1.2 million for 2006. The recoveries on the
charged-off CPS contracts relate to contracts from previously unconsolidated
trusts and MFN contracts acquired in the MFN acquisition. These recoveries
totaled $2.1 million, $3.0 million and $4.3 million for the years ended 2008,
2007 and 2006, respectively.
The
convenience fees charged to obligors were $6.0 million, $3.5 million
and $2.1 million for the same periods, respectively.
The direct mail
revenues were $5.3 million for 2008 and 2007 and $3.8 million for 2006. The
proceeds from the sale of previously charged-off receivables to independent
third parties were $1.8 million in 2007. There were no sales of previously
charged-off receivables in 2008 and 2006.
Earnings
(Loss) Per Share
The
following table illustrates the computation of basic and diluted earnings (loss)
per share:
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings (loss) per share
|
|
$
|
(26,091
|
)
|
|
$
|
13,858
|
|
|
$
|
39,555
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-
weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the year
|
|
|
19,230
|
|
|
|
20,880
|
|
|
|
21,759
|
|
Incremental
common shares attributable to exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
of
outstanding options and warrants
|
|
|
-
|
|
|
|
1,715
|
|
|
|
2,293
|
|
Denominator
for diluted earnings (loss) per share
|
|
|
19,230
|
|
|
|
22,595
|
|
|
|
24,052
|
|
Basic
earnings (loss) per share
|
|
$
|
(1.36
|
)
|
|
$
|
0.66
|
|
|
$
|
1.82
|
|
Diluted
earnings (loss) per share
|
|
$
|
(1.36
|
)
|
|
$
|
0.61
|
|
|
$
|
1.64
|
|
Incremental
shares of 6,320,000, 1,539,000 and 950,000 related to stock options have been
excluded from the diluted earnings per share calculation for the year ended
December 31, 2008, 2007 and 2006, respectively, because the effect is
anti-dilutive. The exercise prices of these stock options were greater than the
average market price of the Company’s common shares or the Company was in a net
loss position and, therefore, the effect would be anti-dilutive to earnings
(loss) per share.
Deferral
and Amortization of Debt Issuance Costs
Costs
related to the issuance of debt are deferred and amortized using the interest
method over the contractual or expected term of the related debt.
Income
Taxes
The
Company and its subsidiaries file a consolidated federal income tax return and
combined or stand-alone state franchise tax returns for certain states. We
utilize the asset and liability method of accounting for income taxes, under
which deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statement values of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. We have
estimated a valuation allowance against that portion of the deferred tax asset
whose utilization in future periods is not more than likely.
In July
2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes”. Fin 48 is an interpretation of
“Statement of Financial Accounting Standards No. 109”, which provides criteria
for the recognition, measurement, presentation and disclosures of uncertain tax
positions. A tax benefit from an uncertain tax position may be
recognized if it is “more likely than not” that the position is sustainable
based solely on its technical merits. We adopted FIN 48 on January 1,
2007.
Purchases
of Company Stock
We record
purchases of our own common stock at cost and treat the shares as
retired.
Stock
Option Plan
Effective
January 1, 2006, we adopted SFAS No. 123 (revised),
"
Share-Based
Payment
"
(SFAS 123(R)) utilizing the modified prospective approach. Under the modified
prospective approach, Employee Costs include all share based payments granted
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R).
The per
share weighted-average fair value of stock options granted during the years
ended December 31, 2008, 2007 and 2006, was $1.57, $2.89, and $3.39,
respectively. That fair value was estimated using the Black-Scholes option
pricing model using the weighted average assumptions noted in the following
table. We estimate the expected life of each option as the average of the
vesting period and the contractual life of the option. The volatility estimate
is based on the historical volatility of our stock over the period that equals
the expected life of the option. Volatility assumptions ranged from 43% to 50%
for 2008, 36% to 48% for 2007 and 34% to 50% for 2006. The
risk-free
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
interest
rate is based on the yield on a US Treasury bond with a maturity comparable to
the expected life of the option. The dividend yield is estimated to be zero
based on our intention not to issue dividends for the foreseeable
future.
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected
life (years)
|
|
5.95
|
|
|
|
5.94
|
|
|
|
5.69
|
|
Risk-free
interest rate
|
|
3.21
|
%
|
|
|
4.54
|
%
|
|
|
4.80
|
%
|
Volatility
|
|
49
|
%
|
|
|
46
|
%
|
|
|
47
|
%
|
Expected
dividend yield
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position
(FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, to partially defer
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. SFAS 157 is effective for us on January 1,
2008, except for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value on a recurring basis. For those excepted
assets and liabilities our effective date is January 1, 2009. The adoption of
this statement did not have a material effect on our financial position or
results of operations. In October 2008, the FASB issued Staff Position (FSP) No.
157-3, “Determining the Fair Value of a Financial Asset when the Market for that
Asset is not Active”. This FSP clarifies the application of FAS 157 in a market
that is not active. The effect of adoption was not material.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The three levels are defined as follows: level 1 - inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets; level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument; and
level 3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
In
September 2008 we sold automobile contracts in a securitization that was
structured as a sale. In that sale, we retained certain assets that
are measured at fair value. Following is a description of the
valuation methodologies used for the securities retained and the residual
interest in the cash flows of the transaction, as well as the general
classification of such instruments pursuant to the valuation
hierarchy. The securities retained total $8.5 million of notes and
are classified as level 2 because there were similar assets sold in the
transaction. We used the price at which those similar notes were sold to value
the securities retained. The residual interest in the cash flows
totals $2.5 million and is classified as level 3. We determined the value of
that residual interest using a discounted cash flow model that included
estimates for prepayments and losses. We used a discount rate of 33%
per annum. The assumptions we used were based on historical performance of
automobile contracts we had originated and serviced in the past, adjusted for
current market conditions.In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
. Effective January
1, 2008, the standard provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The Company did not elect the fair value option on
any of its financial assets or liabilities on January 1, 2008.
On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,
Written Loan Commitments Recorded at
Fair Value through Earnings
(“SAB 109”). Previously, SAB 105,
Application of
Accounting Principles to Loan
Commitments
, stated that in measuring the fair value of a derivative loan
commitment, a company should not incorporate the expected net future cash flows
related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and
indicates that the expected net future cash flows related to the associated
servicing of the loan should
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
be
included in measuring fair value for all written loan commitments that are
accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB 109 retains that
view. SAB 109 was effective for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15,
2007. The effect of adoption was not material.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of income and expenses during the reported periods. Specifically, a
number of estimates were made in connection with determining an appropriate
allowance for finance credit losses, valuing the Residuals, accreting discounts
and acquisition fees, amortizing deferred costs, the recording of deferred tax
assets and reserves for uncertain tax positions. These are material estimates
that could be susceptible to changes in the near term and, accordingly, actual
results could differ from those estimates.
Reclassification
Certain
amounts for the prior years have been reclassified to conform to the current
year’s presentation with no effect on previously reported earnings or
shareholders’ equity.
Uncertainty
of Capital Markets and General Economic Conditions
Historically,
we have depended upon the availability of warehouse credit facilities and access
to long-term financing through the issuance of asset-backed securities
collateralized by our automobile contracts. We conducted four term
securitizations in 2006, four in 2007, and two in 2008. From July 2003 through
April 2008 all of our securitizations were structured as secured
financings. The second of our two securitization transactions in 2008
(completed in September 2008) was in substance a sale of the related contracts,
and is treated as a sale for financial accounting purposes.
Since the
fourth quarter of 2007, we have observed unprecedented adverse changes in the
market for securitized pools of automobile contracts. These changes include
reduced liquidity, and reduced demand for asset-backed securities, particularly
for securities carrying a financial guaranty and for securities backed by
sub-prime automobile receivables. Moreover, many of the firms that previously
provided financial guarantees, which were an integral part of our
securitizations, are no longer offering such guarantees. As of
December 31, 2008, we have no available warehouse credit facilities and no
immediate plans to complete a term securitization.
The
adverse changes that have taken place in the market over the last 18 months have
caused us to significantly curtail our purchases of automobile contracts in
order to conserve our capital. If the current adverse circumstances that have
affected the capital markets should continue or worsen, we may further curtail
further or cease our purchases of new automobile contracts, which could lead to
a material adverse effect on our operations.
Current
economic conditions have negatively affected many aspects of our
industry. First, as stated above, there is little demand for
asset-backed securities secured by consumer finance receivables, including
sub-prime automobile receivables. Second, lenders who previously
provided short-term warehouse financing for sub-prime automobile finance
companies such as ours are reluctant to provide such short-term financing due to
the uncertainty regarding the prospects of obtaining long-term financing through
the issuance of asset-backed securities. In addition, many capital
market participants such as investment banks, financial guaranty providers and
institutional investors who previously played a role in the sub-prime auto
finance industry have withdrawn from the industry, or in some cases, have ceased
to do business. Finally, the broad economic weakness and increasing
unemployment has negatively affected many of the obligors under our receivables,
resulting in higher delinquency, charge-offs and losses. Each of
these factors has adversely affected our results of
operations. Should existing economic conditions worsen, both our
ability to purchase new contracts and the performance of our existing managed
portfolio may be impaired, which, in turn, could have a further material adverse
effect on our results of operations.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Covenants
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net
worth, financial loss in any one period and maintenance of active warehouse
credit facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.
(2)
Restricted Cash
Restricted
cash consists of the following components:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Securitization
trust accounts
|
$
|
153,479
|
|
|
|
$
|
170,191
|
|
Other
|
|
-
|
|
|
|
|
150
|
|
Total
restricted cash
|
$
|
153,479
|
|
|
|
$
|
170,341
|
|
Certain
of our financing agreements require that we establish cash reserves for the
benefit of the other parties to the agreements, in case those parties are
subject to any claims or exposure.
(3)
Finance Receivables
The
following table presents the components of Finance Receivables, net of unearned
interest:
|
December
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
Finance
Receivables
|
(In
thousands)
|
Automobile
finance receivables, net of unearned interest
|
$
|
1,430,227
|
|
|
$
|
2,091,892
|
|
Less:
Unearned acquisition fees and discounts
|
|
(12,884
|
)
|
|
|
(23,888
|
)
|
Finance
Receivables
|
$
|
1,417,343
|
|
|
$
|
2,068,004
|
|
Finance
receivables totaling $33.3 million and $28.5 million at December 31, 2008 and
2007, respectively, have been placed on non-accrual status as a result of their
delinquency status.
The
following table presents a summary of the activity for the allowance for credit
losses, for the years ended December 31, 2008, 2007 and 2006:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
100,138
|
|
|
$
|
79,380
|
|
|
$
|
57,728
|
|
Provision
for credit losses
|
|
|
148,408
|
|
|
|
137,272
|
|
|
|
92,057
|
|
Charge-offs
|
|
|
(195,039
|
)
|
|
|
(140,963
|
)
|
|
|
(88,335
|
)
|
Recoveries
|
|
|
30,400
|
|
|
|
24,449
|
|
|
|
17,930
|
|
Allowance
attributable to receivables sold
|
|
|
(5,871
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance
at end of year
|
|
$
|
78,036
|
|
|
$
|
100,138
|
|
|
$
|
79,380
|
|
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.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(In
thousands)
|
|
|
|
Gross
balance of repossessions in inventory
|
$
|
47,452
|
|
|
$
|
33,380
|
|
Allowance
for losses on repossessed inventory
|
|
(32,690
|
)
|
|
|
(21,849
|
)
|
Net
repossessed inventory included in other assets
|
$
|
14,762
|
|
|
$
|
11,531
|
|
(4)
Residual Interest in Securitizations
As of
December 31, 2008 we have exercised our clean-up call option on each of our
unconsolidated securitization transactions completed from 2001 to 2003. Residual
assets of $935,000 and $2.3 million as of December 31, 2008 and 2007,
respectively, remains, which represents our discounted estimate of cash flows
from recoveries of previously charged off receivables from these unconsolidated
securitization transactions. We have used a discount rate of 25%, which is
consistent with previous periods. The effect of a 20% adverse change to the fair
value of residual cash flows at December 31, 2008 would result in a decrease of
$109,000 to the value of the asset recorded.
During
the third quarter we completed a structured loan sale in which we retained a
residual interest. The residual interest in the cash flows from this
September 2008 transaction was $2.6 million as of December 31, 2008 and was
determined using a discounted cash flow model that included estimates for
prepayments and losses. The discount rate utilized was 33%. The
assumptions utilized were based on our historical performance adjusted for
current market conditions.
(5)
Furniture and Equipment
The
following table presents the components of furniture and equipment:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Furniture
and fixtures
|
$
|
4,128
|
|
|
$
|
3,996
|
|
Computer
and telephone equipment
|
|
5,651
|
|
|
|
5,680
|
|
Leasing
assets
|
|
673
|
|
|
|
673
|
|
Leasehold
improvements
|
|
1,190
|
|
|
|
1,085
|
|
Other
fixed assets
|
|
244
|
|
|
|
17
|
|
|
|
11,886
|
|
|
|
11,451
|
|
Less:
accumulated depreciation and amortization
|
|
(10,482
|
)
|
|
|
(9,951
|
)
|
|
$
|
1,404
|
|
|
$
|
1,500
|
|
Depreciation
expense totaled $537,000, $406,000 and $667,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
(6)
Securitization Trust Debt
We have
completed a number of term securitization transactions that are structured as
secured borrowings for financial accounting purposes. The debt issued in these
transactions is shown on our consolidated balance sheets as “Securitization
trust debt,” and the components of such debt are summarized in the following
table:
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Final
|
|
Receivables
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Average
|
|
|
|
Scheduled
|
|
Pledged
at
|
|
|
|
|
|
Principal
at
|
|
|
Principal
at
|
|
|
Interest
Rate at
|
|
|
|
Payment
|
|
December
31,
|
|
|
Initial
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
Series
|
|
Date
(1)
|
|
2008
|
|
|
Principal
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
CPS
2003-C
|
|
March
2010
|
|
$
|
964
|
|
|
$
|
87,500
|
|
|
$
|
1,023
|
|
|
$
|
5,683
|
|
|
|
3.57
|
%
|
CPS
2003-D
|
|
October
2010
|
|
|
1,568
|
|
|
|
75,000
|
|
|
|
1,704
|
|
|
|
6,695
|
|
|
|
3.91
|
%
|
CPS
2004-A
|
|
October
2010
|
|
|
2,999
|
|
|
|
82,094
|
|
|
|
3,277
|
|
|
|
9,849
|
|
|
|
4.32
|
%
|
CPS
2004-B
|
|
February
2011
|
|
|
5,821
|
|
|
|
96,369
|
|
|
|
6,192
|
|
|
|
14,937
|
|
|
|
4.17
|
%
|
CPS
2004-C
|
|
April
2011
|
|
|
7,964
|
|
|
|
100,000
|
|
|
|
8,223
|
|
|
|
18,763
|
|
|
|
4.24
|
%
|
CPS
2004-D
|
|
December
2011
|
|
|
12,230
|
|
|
|
120,000
|
|
|
|
12,395
|
|
|
|
25,994
|
|
|
|
4.44
|
%
|
CPS
2005-A
|
|
October
2011
|
|
|
18,517
|
|
|
|
137,500
|
|
|
|
17,586
|
|
|
|
34,154
|
|
|
|
5.30
|
%
|
CPS
2005-B
|
|
February
2012
|
|
|
23,455
|
|
|
|
130,625
|
|
|
|
21,991
|
|
|
|
39,008
|
|
|
|
4.67
|
%
|
CPS
2005-C
|
|
May
2012
|
|
|
41,170
|
|
|
|
183,300
|
|
|
|
39,478
|
|
|
|
67,834
|
|
|
|
5.13
|
%
|
CPS
2005-TFC
|
|
July
2012
|
|
|
12,425
|
|
|
|
72,525
|
|
|
|
12,333
|
|
|
|
24,654
|
|
|
|
5.76
|
%
|
CPS
2005-D
|
|
July
2012
|
|
|
37,016
|
|
|
|
145,000
|
|
|
|
36,548
|
|
|
|
61,857
|
|
|
|
5.69
|
%
|
CPS
2006-A
|
|
November
2012
|
|
|
74,068
|
|
|
|
245,000
|
|
|
|
73,257
|
|
|
|
120,667
|
|
|
|
5.33
|
%
|
CPS
2006-B
|
|
January
2013
|
|
|
93,318
|
|
|
|
257,500
|
|
|
|
92,106
|
|
|
|
144,941
|
|
|
|
6.33
|
%
|
CPS
2006-C
|
|
July
2013
|
|
|
102,382
|
|
|
|
247,500
|
|
|
|
101,716
|
|
|
|
159,308
|
|
|
|
5.62
|
%
|
CPS
2006-D
|
|
August
2013
|
|
|
107,516
|
|
|
|
220,000
|
|
|
|
105,687
|
|
|
|
159,384
|
|
|
|
5.56
|
%
|
CPS
2007-A
|
|
November
2013
|
|
|
164,138
|
|
|
|
290,000
|
|
|
|
160,122
|
|
|
|
233,092
|
|
|
|
5.53
|
%
|
CPS
2007-TFC
|
|
December
2013
|
|
|
51,157
|
|
|
|
113,293
|
|
|
|
51,115
|
|
|
|
84,685
|
|
|
|
5.77
|
%
|
CPS
2007-B
|
|
January
2014
|
|
|
200,207
|
|
|
|
314,999
|
|
|
|
195,800
|
|
|
|
277,878
|
|
|
|
5.99
|
%
|
CPS
2007-C
|
|
May
2014
|
|
|
232,744
|
|
|
|
327,499
|
|
|
|
228,478
|
|
|
|
308,919
|
|
|
|
6.05
|
%
|
CPS
2008-A
|
|
October
2014
|
|
|
254,931
|
|
|
|
310,359
|
|
|
|
235,180
|
|
|
|
-
|
|
|
|
6.79
|
%
|
|
|
|
|
$
|
1,444,590
|
|
|
$
|
3,556,063
|
|
|
$
|
1,404,211
|
|
|
$
|
1,798,302
|
|
|
|
|
|
(1)
|
The
Final Scheduled Payment Date represents final legal maturity of the
securitization trust debt. Securitization trust debt is expected to become
due and to be paid prior to those dates, based on amortization of the
finance receivables pledged to the Trusts. Expected payments, which will
depend on the performance of such receivables, as to which there can be no
assurance, are $639.4 million in 2009, $422.2 million in 2010, $235.9
million in 2011, $90.0 million in 2012, $16.7 million in
2013.
|
All of
the securitization trust debt was issued in private placement transactions to
qualified institutional investors. The debt was issued through wholly-owned,
bankruptcy remote subsidiaries of CPS and is secured by the assets of such
subsidiaries, but not by other assets of the Company. Principal and interest
payments on the senior notes are guaranteed by financial guaranty insurance
policies.
The terms
of the various Securitization Agreements related to the issuance of the
securitization trust debt require that certain delinquency and credit loss
criteria be met with respect to the collateral pool, and require that we
maintain minimum levels of liquidity and net worth and not exceed maximum
leverage levels and maximum financial losses. We were in compliance with all
such covenants as of December 31, 2008, in some cases only after giving effect
to waivers of otherwise applicable standards.
We are
responsible for the administration and collection of the contracts. The
Securitization Agreements also require certain funds be held in restricted cash
accounts to provide additional collateral for the borrowings or to be applied to
make payments on the securitization trust debt. As of December 31, 2008,
restricted cash under the various agreements totaled approximately $153.5
million. Interest expense on the securitization trust debt is composed of the
stated rate of interest plus amortization of additional costs of borrowing.
Additional costs of borrowing include facility fees, insurance premiums,
amortization of transaction costs, and amortization of discounts given on the
notes at the time of issuance. Deferred financing costs related to the
securitization trust debt are amortized using the interest method. Accordingly,
the effective cost of borrowing of the securitization trust debt is greater than
the stated rate of interest.
The
wholly-owned, bankruptcy remote subsidiaries of CPS were formed to facilitate
the above asset-backed financing transactions. Similar bankruptcy remote
subsidiaries issue the debt outstanding under our warehouse
line
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
of
credit. Bankruptcy remote refers to a legal structure in which it is expected
that the applicable entity would not be included in any bankruptcy filing by its
parent or affiliates. All of the assets of these subsidiaries have been pledged
as collateral for the related debt. All such transactions, treated as secured
financings for accounting and tax purposes, are treated as sales for all other
purposes, including legal and bankruptcy purposes. None of the assets of these
subsidiaries are available to pay other creditors of the Company or its
affiliates.
(7)
Debt
The terms
of our debt outstanding at December 31, 2008 and 2007 are summarized
below:
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
|
(In
thousands)
|
Residual
interest financing
|
|
|
|
|
Notes
secured by our residual interests in securitizations. The terms
of the $60 million term residual facility and the $60 million revolving
residual credit facility were amended on July 10, 2008 to eliminate the
revolving feature, increase the interest rate, establish an amortization
schedule for principal reductions, and provide an extension of the
maturity from June 2009 to June 2010 at our option if certain conditions
are met. The aggregate indebtedness under this facility was $67.3 million
at December 31, 2008. It bears interest at 10.875% over
LIBOR.
|
|
$67,300
|
|
$70,000
|
Senior
secured debt, related party
|
|
|
|
|
Notes
payable to Levine Leichtman Capital Partners IV, L.P.
(“LLCP”). The notes consisted of a $10 million term note and a
$15 million term note that each accrue interest at 16% per annum and are
due in June and July 2013. The amount outstanding at December 31, 2008 is
net of the unamortized debt discount of $4.9 million relating to the
valuation of 1,225,000 shares of stock, warrants to purchase 1,564,324
shares of our common stock at an exercise price of $2.4672, warrants to
purchase 283,985 of our common stock at an exercise price of $0.01 and
$1.4 million in cash paid to the lender at issuance.
|
|
20,105
|
|
--
|
Subordinated
renewable notes
|
|
|
|
|
Notes
bearing interest ranging from 5.85% to 15.30%, with a weighted average
rate of 12.82%, and with maturities from January 2009 to November 2018
with a weighted average maturity of October 2011. We began
issuing the notes in June 2005 and incurred issuance costs of
$250,000. Payments are made monthly, quarterly, annually or
upon maturity based on the terms of the individual notes.
|
|
25,721
|
|
28,134
|
|
|
$113,126
|
|
$98,134
|
The
outstanding debt on our warehouse facility was $9.9 million as of December 31,
2008, compared to $235.9 million outstanding on our two warehouse facilities as
of December 31, 2007. See Note 15 for a discussion of our warehouse
lines of credit.
The costs
incurred in conjunction with the above debt are recorded as deferred financing
costs on the accompanying balance sheets and are more fully described in Note
1.
We must
comply with certain affirmative and negative covenants related to debt
facilities, which require, among other things, that we maintain certain
financial ratios related to liquidity, net worth, capitalization and
maximum
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
financial
losses. Further covenants include matters relating to investments, acquisitions,
restricted payments and certain dividend restrictions.
The
following table summarizes the contractual and expected maturity amounts of debt
as of December 31, 2008:
Contractual
maturity
date
|
|
|
Residual
interest
financing
(1)
|
|
|
Senior
secured
debt
(2)
|
|
|
Subordinated
renewable
notes
|
|
|
|
Total
|
|
|
|
|
|
|
(In
thousands)
|
|
|
2009
|
|
|
|
|
$
|
10,370
|
|
|
$
|
-
|
|
|
$
|
10,272
|
|
|
$
|
|
20,642
|
|
|
2010
|
|
|
|
|
|
56,930
|
|
|
|
-
|
|
|
|
10,349
|
|
|
|
|
67,279
|
|
|
2011
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,786
|
|
|
|
|
2,786
|
|
|
2012
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,660
|
|
|
|
|
1,660
|
|
|
2013
|
|
|
|
|
|
-
|
|
|
|
20,105
|
|
|
|
516
|
|
|
|
|
20,621
|
|
Thereafter
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138
|
|
|
|
|
138
|
|
|
|
|
|
|
|
$
|
67,300
|
|
|
$
|
20,105
|
|
|
$
|
25,721
|
|
|
$
|
|
113,126
|
|
_________________________
(1)
|
Assumes
that we meet certain conditions that allow us to exercise our option to
extend the maturity from June 2009 to June
2010.
|
(2)
|
The senior
secured debt maturing in 2013 is shown net of unamortized debt discounts
of $4.9 million. On a gross basis the scheduled maturity of this debt in
2013 is $25 million.
|
(8)
Shareholders’ Equity
Common
Stock
Holders
of common stock are entitled to such dividends as our Board of Directors, in its
discretion, may declare out of funds available, subject to the terms of any
outstanding shares of preferred stock and other restrictions. In the event of
liquidation of the Company, holders of common stock are entitled to receive,
pro rata
, all of the
assets of the Company available for distribution, after payment of any
liquidation preference to the holders of outstanding shares of preferred stock.
Holders of the shares of common stock have no conversion or preemptive or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the common stock.
We
are required to comply with various operating and financial covenants defined in
the agreements governing the warehouse lines of credit, senior debt, residual
interest financing and subordinated debt. The covenants restrict the payment of
certain distributions, including dividends (See Note 7).
Included
in compensation expense for the years ended December 31, 2008, 2007, and 2006,
is $1.3 million, $1.1 million and $244,000 related to the amortization of
deferred compensation expense and valuation of stock options.
Stock
Purchases
At
four different times between 2000 and 2008, our Board of Directors, authorized
us to purchase a total of up to $32.5 million of our securities. As of December
31, 2008, we had purchased $5.0 million in principal amount of the debt
securities, and $25.3 million of our common stock, representing 7,126,657
shares.
Options
and Warrants
In
July 1997, the Company adopted and its shareholders approved the 1997 Long-Term
Incentive Plan (the “1997 Plan”) pursuant to which our Board of Directors may
grant stock options, restricted stock and stock appreciation rights to
employees, directors or employees of entities in which we have a controlling or
significant equity interest. Options that have been granted under the 1997 Plan
have been granted at an exercise price equal to (or greater than) the stock’s
fair market value at the date of the grant, with terms generally of 10 years and
vesting generally over five years. Subsequent amendments to the 1997 Plan have
increased the aggregate maximum 6,900,000 shares. There are no shares available
for grant in the 1997 Plan as of December 31, 2008.
In
2006, the Company adopted and its shareholders approved the CPS 2006 Long-Term
Equity Incentive Plan (the “2006 Plan”) pursuant to which our Board of
Directors, or a duly-authorized committee thereof, may grant
stock
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
options,
restricted stock, restricted stock units and stock appreciation rights to our
employees or our subsidiaries, to directors of the Company, and to individuals
acting as consultants to the Company or its subsidiaries. In June 2008, the
shareholders of the Company approved an amendment to the 2006 Plan to increase
the maximum number of shares that may be subject to awards under the 2006 Plan
from 3,000,000 to 5,000,000. Options that have been granted under the
2006 Plan have been granted at an exercise price equal to (or greater than) the
stock’s fair market value at the date of the grant, with terms generally of 10
years and vesting generally over five years.
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment, revised 2004” (“SFAS 123R”), prospectively for all
option awards granted, modified or settled after January 1, 2006, using the
modified prospective method. Under this method, we recognize compensation costs
in the financial statements for all share-based payments granted subsequent to
January 1, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R).
For the
year ended December 31, 2008, we recorded stock-based compensation costs in the
amount of $1.3 million. As of December 31, 2008, unrecognized stock-based
compensation costs to be recognized over future periods equaled $4.2 million.
This amount will be recognized as expense over a weighted-average period of 3.3
years.
At
December 31, 2008, the options outstanding and exercisable had no intrinsic
value. The total intrinsic value of options exercised was $50,000, $1.0 million,
and $2.2 million for the years ended December 31, 2008, 2007, and 2006,
respectively. New shares were issued for all options exercised during the years
ended December 31, 2008, 2007 and 2006. At December 31, 2008, there were a total
of 2.4 million additional shares available for grant under the 2006
Plan.
Stock
option activity for the year ended December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
Number
of
|
|
|
Weighted
|
|
|
Average
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
(in
thousands)
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
Options
outstanding at the beginning of period
|
6,196
|
|
|
$
|
4.47
|
|
|
N/A
|
Granted
|
575
|
|
|
|
3.18
|
|
|
N/A
|
Exercised
|
(70)
|
|
|
|
1.52
|
|
|
N/A
|
Forfeited
|
(381)
|
|
|
|
5.01
|
|
|
N/A
|
Options
outstanding at the end of period
|
6,320
|
|
|
$
|
4.35
|
|
|
6.04
years
|
Options
exercisable at the end of period
|
4,643
|
|
|
$
|
3.97
|
|
|
5.18
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, 2008, 2007 and 2006, was $1.57, $2.91, and $3.39,
respectively.
The per
share weighted average fair value and exercise price of stock options granted
whose exercise price was above the market price of the stock on the grant date
during the year ended December 31, 2008 were $1.62 and $3.37, respectively. The
per share weighted average fair value and exercise price of stock options
granted whose exercise price was above the market price of the stock on the
grant date during the year ended December 31, 2007 were $2.53 and $5.00,
respectively. We did not issue any stock options above the market price of the
stock during the year ended December 31, 2006.
We have
not issued any stock options with an exercise price below the market price of
the stock on the grant date.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants,
which
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
are
exercisable for 283,985 shares of our common stock, at a nominal exercise price.
Both the FMV Warrants and the N Warrants are exercisable in whole or in part and
at any time up to and including June 30, 2018. We valued the warrants
using the Black-Scholes valuation model.
In
connection with the amendment to our residual credit facility discussed in Note
15, we issued warrants valued as being equivalent to 2,500,000 common shares, or
$4,071,429. The warrants represent the right to purchase 2,500,000
CPS common shares at a nominal exercise price, at any time prior to July 10,
2018.
(9)
Interest Income
The
following table presents the components of interest income:
|
Year
Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
|
2006
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Interest
on finance receivables
|
$
|
346,594
|
|
|
$
|
358,862
|
|
|
$
|
251,609
|
|
Residual
interest income
|
|
606
|
|
|
|
2,324
|
|
|
|
5,656
|
|
Other
interest income
|
|
4,351
|
|
|
|
9,079
|
|
|
|
6,301
|
|
Net
interest income
|
$
|
351,551
|
|
|
$
|
370,265
|
|
|
$
|
263,566
|
|
(10) Income
Taxes
Income
taxes consist of the following:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
Current
federal tax expense
|
|
$
|
(23,218
|
)
|
|
$
|
10,385
|
|
|
$
|
19,036
|
|
Current
state tax expense
|
|
|
(178
|
)
|
|
|
2,200
|
|
|
|
1,193
|
|
Deferred
federal tax (benefit)
|
|
|
5,886
|
|
|
|
(2,538
|
)
|
|
|
(9,660
|
)
|
Deferred
state tax expense (benefit)
|
|
|
(854
|
)
|
|
|
52
|
|
|
|
4,877
|
|
Change
in valuation allowance
|
|
|
1,000
|
|
|
|
-
|
|
|
|
(41,801
|
)
|
Income
tax expense (benefit)
|
|
$
|
(17,364
|
)
|
|
$
|
10,099
|
|
|
$
|
(26,355
|
)
|
Income
tax expense/(benefit) for the years ended December 31, 2008, 2007 and 2006,
differs from the amount determined by applying the statutory federal rate of 35%
to income before income taxes as follows:
|
|
Year
Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
Expense
at federal tax rate
|
|
$
|
(15,208
|
)
|
|
$
|
8,385
|
|
|
$
|
4,620
|
|
State
taxes, net of federal income tax benefit
|
|
|
(319
|
)
|
|
|
1,458
|
|
|
|
5,585
|
|
Other
adjustments to tax reserve
|
|
|
(3,608
|
)
|
|
|
(110
|
)
|
|
|
5,136
|
|
Effect
of change in state tax rate
|
|
|
-
|
|
|
|
-
|
|
|
|
486
|
|
Valuation
allowance
|
|
|
1,000
|
|
|
|
-
|
|
|
|
(41,801
|
)
|
Stock-based
compensation
|
|
|
411
|
|
|
|
279
|
|
|
|
47
|
|
Other
|
|
|
360
|
|
|
|
87
|
|
|
|
(428
|
)
|
|
|
$
|
(17,364
|
)
|
|
$
|
10,099
|
|
|
$
|
(26,355
|
)
|
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The tax
effected cumulative temporary differences that give rise to deferred tax assets
and liabilities as of December 31, 2008 and 2007 are as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
Finance
receivables
|
|
$
|
22,187
|
|
|
$
|
37,812
|
|
Accrued
liabilities
|
|
|
839
|
|
|
|
728
|
|
Furniture
and equipment
|
|
|
327
|
|
|
|
417
|
|
NOL
carryforwards and BILs
|
|
|
27,379
|
|
|
|
19,547
|
|
Pension
Accrual
|
|
|
2,877
|
|
|
|
123
|
|
Other
|
|
|
118
|
|
|
|
208
|
|
Total
deferred tax assets
|
|
|
53,727
|
|
|
|
58,835
|
|
Valuation
allowance
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
|
52,727
|
|
|
|
58,835
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
Pension
Accrual
|
|
|
-
|
|
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
52,727
|
|
|
$
|
58,835
|
|
As part
of the MFN and TFC Mergers, CPS acquired certain net operating losses and
built-in loss assets. Moreover, both MFN and TFC have undergone an ownership
change for purposes of Internal Revenue Code (“IRC”) Section 382. In general,
IRC Section 382 imposes an annual limitation on the ability of a loss
corporation (that is, a corporation with a net operating loss (“NOL”)
carryforward, credit carryforward, or certain built-in losses (“BILs”)) to
utilize its pre-change NOL carryforwards or BILs to offset taxable income
arising after an ownership change.
In
determining the possible future realization of deferred tax assets,
we have considered the taxes paid in the current and prior years that
may be available to recapture, as well as future taxable income from the
following sources: (a) reversal of taxable temporary differences; (b) future
operations exclusive of reversing temporary differences; and (c) tax planning
strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire. During the year
ended December 31, 2007, the Company determined that deferred tax assets
totaling approximately $9.8 million, which were subject to a 100% valuation
allowance at December 31, 2006, were permanently not available for future
utilization. As a result, the deferred tax assets and the related valuation
allowance were adjusted, with no effect on the net deferred tax assets recorded
or to the provision for income taxes. At December 31, 2008 we have estimated a
$1.0 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, 2008, we had net operating loss carryforwards for federal and state
income tax purposes of $19.5 million and $91.8 million,
respectively. The federal net operating losses begin to expire in
2028. The state net operating losses begin to expire in 2013.
The
following is a tabular reconciliation of the total amounts of unrecognized tax
benefits including interest and penalties for the year:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Unrecognized
tax benefit - opening balance
|
|
$
|
12,280
|
|
|
$
|
11,612
|
|
Gross
increases - tax positions in prior period
|
|
|
-
|
|
|
|
1,357
|
|
Gross
decreases - tax positions in prior period
|
|
|
(1,764
|
)
|
|
|
(965
|
)
|
Gross
increases - tax positions in current period
|
|
|
1,052
|
|
|
|
1,279
|
|
Settlements
|
|
|
-
|
|
|
|
(119
|
)
|
Lapse
of statute of limitations
|
|
|
(3,385
|
)
|
|
|
(884
|
)
|
Unrecognized
tax benefit - ending balance
|
|
$
|
8,183
|
|
|
$
|
12,280
|
|
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Included
in the balance of unrecognized tax benefits at December 31, 2008, are $14.9
million of tax benefits that, if recognized, would affect the effective tax
rate. Also included in the balance of unrecognized tax benefits at December 31,
2008 are $1.3 million of tax benefits that, if recognized, would result in
adjustments to other tax accounts, primarily deferred taxes.
We
recognize potential interest and penalties related to unrecognized tax benefits
as income tax expense. Related to the uncertain tax benefits noted above, we
accrued penalties of $0.2 million and gross interest of $0.2 million during 2008
and in total, as of December 31, 2008, have recognized a liability for penalties
of $0.6 million and gross interest of $1.0 million.
We do not
anticipate a significant change in unrecognized tax positions within the coming
year. In addition, we believe that it is reasonably possible that
none of our currently remaining unrecognized tax positions, each of which is
individually insignificant, may be recognized by the end of 2008 as a result of
a lapse of the statute of limitations.
We are
subject to taxation in the US and various states and foreign
jurisdictions. The Company’s tax years for 2001through 2007 are
subject to examination by the tax authorities. With few exceptions,
we are no longer subject to U.S. federal, state, or local examinations by tax
authorities for years before 2001.
(11)
Related Party Transactions
Loans
to Officers to Exercise Certain Stock Options
During
2002, our Board of Directors approved a program under which officers of the
Company were advanced amounts sufficient to enable them to exercise certain of
their outstanding options. Such loans were available for a limited period of
time, and available only to exercise previously repriced options. The loans
accrued interest at a rate of 5.50% per annum, and were due in 2007. At December
31, 2007 there was $383,000 outstanding related to three such
loans. Such amounts were recorded as contra-equity within common
stock in the Shareholders’ Equity section of our Consolidated Balance Sheet. Two
of the loans were paid off during 2008 with cash. The third loan was paid off on
August 5, 2008 through a transfer of 210,000 shares of company stock. This is
reported in the consolidated statement of shareholders equity in “Purchase of
common stock”. At December 31, 2008 all loans have been repaid and there are no
amounts outstanding.
Director
Purchase of Retail Note
In
December 2007, one of our directors purchased a $4 million subordinated
renewable note pursuant to our ongoing program of issuing such notes to the
public. The note was purchased through the registered agent and under
the same terms and conditions, including the interest rate, that were offered to
other purchasers at the time the note was issued. As of December 31, 2008, $4
million remains outstanding on this note.
(12)
Commitments and Contingencies
Leases
The
Company leases its facilities and certain computer equipment under
non-cancelable operating leases, which expire through 2016. Future minimum lease
payments at December 31, 2008, under these leases are due during the years ended
December 31 as follows:
|
Amount
|
|
(In
thousands)
|
2009
|
$
|
3,985
|
2010
|
|
3,875
|
2011
|
|
3,568
|
2012
|
|
3,496
|
2013
|
|
3,232
|
Thereafter
|
|
7,615
|
Total
minimum lease payments
|
$
|
25,771
|
Rent
expense for the years ended December 31, 2008, 2007 and 2006, was $4.2 million,
$4.0 million, and $3.9 million, respectively.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Our
facility leases contain certain rental concessions and escalating rental
payments, which are recognized as adjustments to rental expense and are
amortized on a straight-line basis over the terms of the leases.
During
2007 and 2006, we received $113,000 and $194,000, respectively, of sublease
income, which is included in occupancy expense. We did not receive any sublease
income in 2008.
Litigation
Stanwich Litigation.
CPS was
for some time a defendant in a class action (the “Stanwich Case”) brought in the
California Superior Court, Los Angeles County. The original plaintiffs in that
case were persons entitled to receive regular payments (the “Settlement
Payments”) pursuant to earlier settlements of claims, generally personal injury
claims, against unrelated defendants. Stanwich Financial Services Corp.
(“Stanwich”), an affiliate of the former chairman of the board of directors of
CPS, is the entity that was obligated to pay the Settlement Payments. Stanwich
defaulted on its payment obligations to the plaintiffs and in June 2001 filed
for reorganization under the Bankruptcy Code, in the federal bankruptcy court in
Connecticut. By February 2005, CPS had settled all claims brought against it in
the Stanwich Case.
In
November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The litigation between Mr. Pardee and CPS is stayed, awaiting resolution
of an adversary action brought against Mr. Pardee in the bankruptcy court, which
is hearing the bankruptcy of Stanwich.
CPS has
reached an agreement in principle with the representative of creditors in the
Stanwich bankruptcy to resolve the adversary action. Under the
agreement in principle, CPS would pay the bankruptcy estate $625,000 and abandon
its claims against the estate, while the estate would abandon its adversary
action against Mr. Pardee. The bankruptcy court has rejected that
proposed settlement, and the representative of creditors has appealed that
rejection. If the agreement in principle were to be approved upon
appeal, CPS would expect that the agreement would result in (i) limitation of
its exposure to Mr. Pardee to no more than some portion of his attorneys
fees incurred and (ii) stays in Rhode Island being lifted, causing those cases
to become active again. CPS is unable to predict whether the ruling
of the bankruptcy court will be sustained or overturned on appeal.
The
reader should consider that an adverse judgment against CPS in the Rhode Island
case for indemnification, if in an amount materially in excess of any liability
already recorded in respect thereof, could have a material adverse
effect.
Other
Litigation.
The
Company has recorded a liability as of December 31, 2008 that it believes
represents a sufficient allowance for legal contingencies. Any adverse judgment
against the Company, if in an amount materially in excess of the recorded
liability, could have a material adverse effect on the financial position of the
Company. The Company is involved in various other legal matters
arising in the normal course of business. Management believes that any liability
as a result of those matters would not have a material effect on the Company’s
financial position.
(13)
Employee Benefits
The
Company sponsors a pretax savings and profit sharing plan (the “401(k) Plan”)
qualified under Section 401(k) of the Internal Revenue Code. Under the 401(k)
Plan, eligible employees are able to contribute up to 15% of their compensation
(subject to stricter limitation in the case of highly compensated employees). We
may, at our discretion, match 100% of employees’ contributions up to $1,500 per
employee per calendar year. Our contributions to the 401(k) Plan were $672,000,
$674,000 and $520,000 for the year ended December 31, 2008, 2007 and 2006,
respectively.
We also
sponsor the MFN Financial Corporation Pension Plan (the “Plan”). The Plan
benefits were frozen June 30, 2001.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS
No. 158 requires an employer that sponsors one or more single-employer
defined benefit plans to (a) recognize the overfunded or underfunded status
of a benefit plan in its statement of financial position, (b) recognize as
a component of other comprehensive income, net of tax, the gains or losses and
prior service costs
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
or
credits that arise during the period but are not recognized as components of net
periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for
Pensions”, or SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions,” (c) measure defined benefit plan assets and
obligations as of the date of the employer’s fiscal year-end, and
(d) disclose in the notes to financial statements additional information
about certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses, prior service costs or
credits, and transition asset or obligation. SFAS No. 158 was adopted by the
Company in the fourth quarter of 2006. The adoption did not have a significant
effect on our financial position or results of operations. The disclosure
requirements of this standard are included herein.
The
following tables set forth the plan’s benefit obligations, fair value of plan
assets, and amounts recognized at December 31, 2008 and 2007:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Change
in Projected Benefit Obligation
|
|
|
|
|
|
|
Projected
benefit obligation, beginning of year
|
|
$
|
14,969
|
|
|
$
|
15,456
|
|
Service
cost
|
|
|
-
|
|
|
|
-
|
|
Interest
cost
|
|
|
930
|
|
|
|
881
|
|
Actuarial
gain (loss)
|
|
|
837
|
|
|
|
(723
|
)
|
Benefits
paid
|
|
|
(651
|
)
|
|
|
(645
|
)
|
Projected
benefit obligation, end of year
|
|
$
|
16,085
|
|
|
$
|
14,969
|
|
The
accumulated benefit obligation for the plan was $16.1 million and $15.0 million
at December 31, 2008 and 2007, respectively.
|
|
December
31,
|
|
Change
in Plan Assets
|
|
2008
|
|
|
2007
|
|
Fair
value of plan assets, beginning of year
|
|
$
|
14,643
|
|
|
$
|
15,696
|
|
Return
on assets
|
|
|
(5,418
|
)
|
|
|
(543
|
)
|
Employer
contribution
|
|
|
-
|
|
|
|
200
|
|
Expenses
|
|
|
(59
|
)
|
|
|
(65
|
)
|
Benefits
paid
|
|
|
(651
|
)
|
|
|
(645
|
)
|
Fair
value of plan assets, end of year
|
|
$
|
8,515
|
|
|
$
|
14,643
|
|
Additional
Information
Weighted
average assumptions used to determine benefit obligations and cost at December
31, 2008 and 2007 were as follows:
|
December,
31
|
|
|
2008
|
|
|
2007
|
|
Weighted
average assumptions used to determine benefit obligations
|
|
|
|
|
|
Discount
rate
|
|
6.00
|
%
|
|
|
6.45
|
%
|
|
|
|
|
|
|
|
|
Weighted
average assumptions used to determine net periodic benefit
cost
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.45
|
%
|
|
|
5.88
|
%
|
Expected
return on plan assets
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Our
overall expected long-term rate of return on assets is 8.50% per annum as of
December 31, 2008. The expected long-term rate of return is based on the
weighted average of historical returns on individual asset categories, which are
described in more detail below.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
(In
thousands)
|
|
Amounts
recognized on Consolidated Balance Sheet
|
|
|
|
|
|
|
Other
assets
|
$
|
-
|
|
|
$
|
-
|
|
Other
liabilities
|
|
(7,570
|
)
|
|
|
(326
|
)
|
Net
amount recognized
|
$
|
(7,570
|
)
|
|
$
|
(326
|
)
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income consists
of:
|
|
|
|
|
|
|
|
Net
loss (gain)
|
$
|
11,347
|
|
|
$
|
3,964
|
|
Unrecognized
transition asset
|
|
-
|
|
|
|
-
|
|
Net
amount recognized
|
$
|
11,347
|
|
|
$
|
3,964
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost
|
|
|
|
|
|
|
|
Interest
Cost
|
$
|
930
|
|
|
$
|
881
|
|
Expected
return on assets
|
|
(1,222
|
)
|
|
|
(1,312
|
)
|
Amortization
of transition asset
|
|
-
|
|
|
|
-
|
|
Amortization
of net loss
|
|
153
|
|
|
|
71
|
|
Net
periodic benefit cost
|
$
|
(139
|
)
|
|
$
|
(360
|
)
|
|
|
|
|
|
|
|
|
Benefit
Obligation Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
Net
loss (gain)
|
$
|
7,383
|
|
|
$
|
1,126
|
|
Prior
service cost (credit)
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
-
|
|
|
|
-
|
|
Net
amount recognized in other comprehensive income
|
$
|
7,383
|
|
|
$
|
1,126
|
|
The
weighted average asset allocation of our pension benefits at December 31, 2008
and 2007 were as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Weighted
Average Asset Allocation at Year-End
|
|
|
|
|
|
|
Asset
Category
|
|
|
|
|
|
|
Equity
securities
|
|
71
|
%
|
|
77
|
%
|
Debt
securities
|
|
28
|
%
|
|
23
|
%
|
Cash
and cash equivalents
|
|
1
|
%
|
|
0
|
%
|
Total
|
|
100
|
%
|
|
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.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
Flows
|
|
|
|
|
|
|
|
Expected
Benefit Payouts (In thousands)
|
|
|
|
2009
|
$
|
564
|
|
2010
|
|
583
|
|
2011
|
|
663
|
|
2012
|
|
698
|
|
2013
|
|
757
|
|
Years
2014 - 2018
|
|
4,584
|
|
|
|
|
|
Anticipated
Contributions in 2009
|
$
|
-
|
|
(14) Fair Value of Financial
Instruments
The
following summary presents a description of the methodologies and assumptions
used to estimate the fair value of our financial instruments. Much of the
information used to determine fair value is highly subjective. When applicable,
readily available market information has been utilized. However, for a
significant portion of our financial instruments, active markets do not exist.
Therefore, considerable judgments were required in estimating fair value for
certain items. The subjective factors include, among other things, the estimated
timing and amount of cash flows, risk characteristics, credit quality and
interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 2008 and 2007, the amounts that will actually be
realized or paid at settlement or maturity of the instruments could be
significantly different. The estimated fair values of financial assets and
liabilities at December 31, 2008 and 2007, were as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
Financial Instrument
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
22,084
|
|
|
$
|
22,084
|
|
|
$
|
20,880
|
|
|
$
|
20,880
|
|
Restricted
cash and equivalents
|
|
|
153,479
|
|
|
|
153,479
|
|
|
|
170,341
|
|
|
|
170,341
|
|
Finance
receivables, net
|
|
|
1,339,307
|
|
|
|
1,312,148
|
|
|
|
1,967,866
|
|
|
|
1,967,866
|
|
Residual
interest in securitizations
|
|
|
3,582
|
|
|
|
3,582
|
|
|
|
2,274
|
|
|
|
2,274
|
|
Accrued
interest receivable
|
|
|
14,903
|
|
|
|
14,903
|
|
|
|
24,099
|
|
|
|
24,099
|
|
Warehouse
lines of credit
|
|
|
9,919
|
|
|
|
9,919
|
|
|
|
235,925
|
|
|
|
235,925
|
|
Notes
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued
interest payable
|
|
|
5,605
|
|
|
|
5,605
|
|
|
|
6,740
|
|
|
|
6,740
|
|
Residual
interest financing
|
|
|
67,300
|
|
|
|
67,300
|
|
|
|
70,000
|
|
|
|
70,000
|
|
Securitization
trust debt
|
|
|
1,404,211
|
|
|
|
1,378,271
|
|
|
|
1,798,302
|
|
|
|
1,786,263
|
|
Senior
secured debt
|
|
|
20,105
|
|
|
|
20,105
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated
renewable notes
|
|
|
25,721
|
|
|
|
25,721
|
|
|
|
28,134
|
|
|
|
28,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Warehouse
Lines of Credit, Notes Payable, Residual Interest Financing, and Senior Secured
Debt and Subordinated Renewable Notes
The
carrying value approximates fair value because the related interest rates are
estimated to reflect current market conditions for similar types of secured
instruments.
Securitization
Trust Debt
The fair
value is estimated by discounting future cash flows using interest rates that we
believe reflects the current market rates.
(15) Liquidity
Our
business requires substantial cash to support purchases of automobile contracts
and other operating activities. Our primary sources of cash have been
cash flows from operating activities, including proceeds from sales of
automobile contracts, amounts borrowed under our warehouse credit facilities,
servicing fees on portfolios of automobile contracts previously sold in
securitization transactions or serviced for third parties, customer payments of
principal and interest on finance receivables, fees for origination of
automobile contracts, and releases of cash from securitized portfolios of
automobile contracts in which we have retained a residual ownership interest and
from the spread accounts associated with such pools. Our primary uses of cash
have been the purchases of automobile contracts, repayment of amounts borrowed
under warehouse credit facilities and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of spread accounts and initial
overcollateralization, if any, and the increase of credit enhancement to
required levels in securitization transactions, and income taxes. There can be
no assurance that internally generated cash will be sufficient to meet our cash
demands. The sufficiency of internally generated cash will depend on the
performance of securitized pools (which determines the level of releases from
those portfolios and their related spread accounts), the rate of expansion or
contraction in our managed portfolio, and the terms upon which we are able to
purchase, sell, and borrow against automobile contracts.
We
purchase automobile contracts from dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee which may either increase or
decrease the automobile contract purchase price. Those automobile contracts
generate cash flow, however, over a period of years. As a result, we have been
dependent on warehouse credit facilities to purchase automobile contracts, and
on the availability of cash from outside sources in order to finance our
continuing operations, as well as to fund the portion of automobile contract
purchase prices not financed under revolving warehouse credit facilities. At
December 31, 2007, we had $425 million in warehouse credit capacity, in the form
of two $200 million senior facilities, and one $25 million subordinated
facility. One $200 million facility provided funding for automobile
contracts purchased under the TFC programs while both warehouse facilities
provided funding for automobile contracts purchased under the CPS programs. The
subordinated facility was established on January 12, 2007 and expired by its
terms in April 2008.
The first
of two warehouse facilities mentioned above was provided by an affiliate of
Bear, Stearns and was structured to allow us to fund a portion of the purchase
price of automobile contracts by drawing against a floating rate variable
funding note issued by our consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expired on November 6,
2008. On November 8, 2006 the facility was increased from $150
million to $200 million and the maximum advance rate was increased to 83% from
80% of eligible contracts, subject to collateral tests and certain other
conditions and covenants. On January 12, 2007 the facility was amended to allow
for the issuance of subordinated notes resulting in an increase of the maximum
advance rate to 93%. The advance rate was subject to the lender’s
valuation of the collateral which, in turn, was affected by factors such as the
credit performance of our managed portfolio and the terms and conditions of our
term securitizations, including the expected yields required for bonds issued in
our term securitizations. Senior notes under this facility accrued
interest at a rate of one-month LIBOR plus 2.50% per annum while the
subordinated notes accrued interest at a rate of one-month LIBOR plus 5.50% per
annum.
The
second of two warehouse facilities was provided by an affiliate of UBS AG and
was similarly structured to allow us to fund a portion of the purchase price of
automobile contracts by drawing against a floating rate variable funding note
issued by our consolidated subsidiary Page Funding LLC. This facility
was entered into on June 30, 2004. On June 29, 2005 the facility was increased
from $100 million to $125 million and further amended to provide for funding for
automobile contracts purchased under the TFC programs, in addition to our CPS
programs. The available credit under the facility was increased again
to $200 million on August 31, 2005. In April 2006, the terms
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
of this
facility were amended to allow advances to us of up to 80% of the principal
balance of automobile contracts that we purchase under our CPS programs, and of
up to 70% of the principal balance of automobile contracts that we purchase
under our TFC programs, in all events subject to collateral tests and certain
other conditions and covenants. On June 30, 2006, the terms of this
facility were amended to allow advances to us of up to 83% of the principal
balance of automobile contracts that we purchase under our CPS programs, in all
events subject to collateral tests and certain other conditions and covenants.
In February 2007 the facility was amended to allow for the issuance of
subordinated notes resulting in an increase of the maximum advance rate to
93%. The advance rate was subject to the lender’s valuation of the
collateral which, in turn, was affected by factors such as the credit
performance of our managed portfolio and the terms and conditions of our term
securitizations, including the expected yields for bonds issued in our term
securitizations. Senior notes under this facility accrue interest at
a rate of one-month LIBOR plus 9.85% per annum. The facility was
amended in December 2008 which eliminated future advances and provided for
repayment of the notes from proceeds collected on the underlying pledged
receivables, plus certain future scheduled principal reductions until its
maturity in September 2009. At December 31, 2008, $9.9 million was outstanding
under this facility.
We
securitized $509.0 million in auto contracts in two private placement
transactions in 2008 as compared to $1,118.1 million of automobile contracts in
four private placement transactions during 2007, and $957.7 million of
automobile contracts in four private placement transactions in
2006. All but one of these transactions were structured as secured
financings and, therefore, resulted in no gain or loss on sale. The
September 2008 transaction was structured as a sale for financial accounting
purposes and resulted in a loss on sale of $14.0 million.
In
November 2005, we completed a securitization in which a wholly-owned bankruptcy
remote consolidated subsidiary of ours issued $45.8 million of asset-backed
notes secured by its retained interest in 10 term securitization
transactions. At December 31, 2006 there was $19.6 million
outstanding on this facility and in May 2007 the notes were fully
repaid. In December 2006 we entered into a $35 million residual
credit facility that was secured by our retained interests in additional term
securitizations. At December 31, 2006, there was $12.2 million
outstanding under this facility. In July 2007, we established a combination term
and revolving residual credit facility and used a portion of our initial draw
under that facility to repay our remaining outstanding debt under the December
2006 $35 million residual facility.
Under the
combination term and revolving residual credit facility, we have used eligible
residual interests in securitizations as collateral for floating rate
borrowings. The amount that we were able to borrow was computed using
an agreed valuation methodology of the residuals, subject to an overall maximum
principal amount of $120 million, represented by (i) a $60 million Class A-1
variable funding note (the “revolving note”), and (ii) a $60 million Class A-2
term note (the “term note”). The term note was fully drawn in July
2007 and was due in July 2009. As of July 2008, we had drawn $26.8
million on the revolving note. The facility’s revolving feature
expired in July 2008. On July 10, 2008 we amended the terms of the
combination term and revolving residual credit facility, (i) eliminating the
revolving feature and increasing the interest rate, (ii) consolidating the
amounts then owing on the Class A-1 note with the Class A-2 note, (iii)
establishing an amortization schedule for principal reductions on the Class A-2
note, and (iv) providing for an extension, at our option if certain conditions
are met, of the Class A-2 note maturity from June 2009 to June
2010. In conjunction with the amendment, we reduced the principal
amount outstanding to $70 million by delivering to the lender (i) warrants
valued as being equivalent to 2,500,000 common shares, or $4,071,429 and (ii)
cash of $12,765,244. The warrants represent the right to purchase
2,500,000 CPS common shares at a nominal exercise price, at any time prior to
July 10, 2018. As of December 31, 2008 the aggregate indebtedness
under this facility was $67.3 million.
On June
30, 2008, we entered into a series of agreements pursuant to which a lender
purchased a $10 million five-year, fixed rate, senior secured note from
us. The indebtedness is secured by substantially all of our assets,
though not by the assets of our special-purpose financing
subsidiaries. In July 2008, in conjunction with the amendment of the
combination term and revolving residual credit facility as discussed above, the
lender purchased an additional $15 million note with substantially the same
terms as the $10 million note. Pursuant to the June 30, 2008
securities purchase agreement, we issued to the lender 1,225,000 shares of
common stock. In addition, we issued the lender two warrants: (i)
warrants that we refer to as the FMV Warrants, which are exercisable for
1,564,324 shares of our common stock, at an exercise price of $2.4672 per share,
and (ii) warrants that we refer to as the N Warrants, which are exercisable for
283,985 shares of our common stock, at a nominal exercise price. Both the FMV
Warrants and the N Warrants are exercisable in whole or in part and at any time
up to and including June 30, 2018. We valued the warrants using the
Black-Scholes valuation model and recorded their value as a liability on our
balance sheet
CONSUMER
PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
because
the terms of the warrants also included a provision whereby the lender could
require us to purchase the warrants for cash. That provision was eliminated by
mutual agreement in September 2008.
The
acquisition of automobile contracts for subsequent sale in securitization
transactions, and the need to fund spread accounts and initial
overcollateralization, if any, and increase credit enhancement levels when those
transactions take place, results in a continuing need for capital. The amount of
capital required is most heavily dependent on the rate of our automobile
contract purchases, the required level of initial credit enhancement in
securitizations, and the extent to which the previously established trusts and
their related spread accounts either release cash to us or capture cash from
collections on securitized automobile contracts. Of those, the factor most
subject to our control is the rate at which we purchase automobile
contracts.
We are
and may in the future be limited in our ability to purchase automobile contracts
due to limits on our capital. As of December 31, 2008, we had
unrestricted cash of $22.1 million, no available capacity under any warehouse
financing facilities and no immediate plans to complete a
securitization. Our plans to manage our liquidity include maintaining
our rate of automobile contract purchases at a merely nominal level, and,
wherever appropriate, reducing our operating costs. There can be no
assurance that we will be able to obtain future warehouse financing or to
complete securitizations on favorable economic terms or that we will be able to
complete securitizations at all. If we are unable to complete such
securitizations, we may be unable to increase our rate of automobile contract
purchases, in which case our interest income and other portfolio related income
would decrease.
Our
liquidity will also be affected by releases of cash from the trusts established
with our securitizations. While the specific terms and mechanics of
each spread account vary among transactions, our securitization agreements
generally provide that we will receive excess cash flows, if any, only if the
amount of credit enhancement has reached specified levels and/or the
delinquency, defaults or net losses related to the automobile contracts in the
pool are below certain predetermined levels. In the event delinquencies,
defaults or net losses on the automobile contracts exceed such levels, the terms
of the securitization: (i) may require increased credit enhancement to be
accumulated for the particular pool; (ii) may restrict the distribution to us of
excess cash flows associated with other pools; or (iii) in certain
circumstances, may permit the insurers to require the transfer of servicing on
some or all of the automobile contracts to another servicer. There can be no
assurance that collections from the related trusts will continue to generate
sufficient cash. Moreover, most of our spread account balances
are pledged as collateral to our residual interest financing. As
such, most of the current releases of cash from our securitization trusts are
directed to pay the obligations of our residual interest financing.
Certain
of our securitization transactions and our warehouse credit facility contain
various financial covenants requiring certain minimum financial ratios and
results. Such covenants include maintaining minimum levels of liquidity and net
worth and not exceeding maximum leverage levels and maximum financial losses. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare a default
if a default occurred under a different facility.
The
agreements under which we receive periodic fees for servicing automobile
contracts in securitizations are terminable by the respective insurance
companies upon defined events of default, and, in some cases, at the will of the
insurance company. We have received waivers regarding the
potential breach of certain such covenants relating to minimum net worth,
financial loss in any one period and maintenance of active warehouse credit
facilities. Without such waivers, certain credit enhancement
providers would have had the right to terminate us as servicer with respect to
certain of our outstanding securitization pools. Although such rights
have been waived, such waivers are temporary, and there can be no assurance as
to their future extension. We do, however, believe that we will obtain such
future extensions because it is generally not in the interest of any party to
the securitization transaction to transfer servicing. Nevertheless,
there can be no assurance as to our belief being correct. Were an
insurance company in the future to exercise its option to terminate such
agreements, such a termination could have a material adverse effect on our
liquidity and results of operations, depending on the number and value of the
terminated agreements. Our note insurers continue to extend our term as servicer
on a monthly and/or quarterly basis, pursuant to the servicing
agreements.