CONSUMER PORTFOLIO SERVICES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.

COMMISSION FILE NUMBER: 1-11416

CONSUMER PORTFOLIO SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

California 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

16355 Laguna Canyon Road, Irvine, California 92618
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER: (949) 753-6800

FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of August 12, 2003 the registrant had 20,190,144 common shares outstanding.

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
PAGE
----
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002.................................................3

Condensed Consolidated Statements of Operations and Comprehensive
Income for the three-month and six-month periods ended
June 30, 2003 and 2002 ...............................................4

Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2003 and 2002 .......................5

Notes to Condensed Consolidated Financial Statements..................6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................22

Item 3. Quantitative and Qualitative Disclosures About Market Risk...........35

Item 4. Controls and Procedures..............................................36

PART II. OTHER INFORMATION

Item 1. Legal Proceedings..................................................36

Item 4. Submission of Matters to a Vote of Shareholders....................37

Item 6. Exhibits and Reports on Form 8-K...................................37

Signatures....................................................................38

2

INSERT ITEM 1. FINANCIAL STATEMENTS

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
Assets

Cash $ 33,611 $ 32,947
Restricted cash 33,816 18,912

Finance receivables 214,791 110,420
Less: Allowance for finance credit losses (40,342) (25,828)
---------- ----------
Finance receivables, net 174,449 84,592

Servicing fees receivable 5,282 3,407
Residual interest in securitizations 130,843 127,170
Furniture and equipment, net 1,260 1,612
Deferred financing costs 1,558 1,671
Deferred interest expense 1,357 2,695
Other assets 8,462 12,442
---------- ----------
$ 390,638 $ 285,448
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 23,598 $ 18,132
Warehouse line of credit 4,565 --
Tax liabilities, net 9,525 8,800
Capital lease obligation 33 67
Notes payable 5,936 673
Securitization trust debt 150,022 71,630
Senior secured debt 52,496 50,072
Subordinated debt 35,966 36,000
Related party debt 17,500 17,500
---------- ----------
299,641 202,874

SHAREHOLDERS' EQUITY
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 20,189,744 and 20,528,270 shares
issued and outstanding at June 30, 2003 and
December 31, 2002, respectively 64,358 63,929
Retained earnings 29,517 20,597
Comprehensive loss - minimum pension benefit obligation, net (1,594) (1,594)
Deferred compensation (1,284) (358)
---------- ----------
90,997 82,574
---------- ----------
$ 390,638 $ 285,448
========== ==========

See accompanying Notes to Condensed Consolidated Financial Statements

3

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)

(Unaudited)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------

2003 2002 2003 2002
--------- --------- --------- ---------

REVENUES:
Net gain on sale of contracts $ 4,109 $ 5,095 $ 8,664 $ 6,867
Interest income 11,442 14,746 20,770 22,490
Servicing fees 4,463 3,376 9,065 6,766
Other income 3,701 3,999 7,763 4,229
--------- --------- --------- ---------
23,715 27,216 46,262 40,352
--------- --------- --------- ---------

EXPENSES:
Employee costs 9,442 10,972 17,889 19,434
General and administrative 4,049 5,121 8,081 9,525
Interest 5,086 7,217 10,617 11,648
Marketing 763 1,203 1,728 2,688
Occupancy 1,004 1,138 1,984 1,979
Depreciation and amortization 239 286 477 574
--------- --------- --------- ---------
20,583 25,937 40,776 45,848
--------- --------- --------- ---------
Income (loss) before income taxes (benefit) 3,132 1,279 5,486 (5,496)
Income tax expense (benefit) 490 540 (3,434) (5,254)
--------- --------- --------- ---------
Income (loss) before extraordinary item 2,642 739 8,920 (242)
Extraordinary item, unallocated negative goodwill -- -- -- 17,412
--------- --------- --------- ---------
Net income $ 2,642 $ 739 $ 8,920 $ 17,170
========= ========= ========= =========

Earnings (loss) per share before extraordinary item:
Basic $ 0.13 $ 0.04 $ 0.44 $ (0.01)
Diluted 0.12 0.04 0.41 (0.01)

Earnings per share, extraordinary item:
Basic $ -- $ -- $ -- $ 0.90
Diluted -- -- -- 0.90

Earnings (loss) per share after extraordinary item:
Basic $ 0.13 $ 0.04 $ 0.44 $ 0.89
Diluted 0.12 0.04 0.41 0.89

Number of shares used in computing earnings (loss) per share:
Basic 20,209 19,418 20,239 19,405
Diluted 21,565 21,064 22,160 19,405

See accompanying Notes to Condensed Consolidated Financial Statements

4

CONSUMER PORTFOLIO SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

SIX MONTHS ENDED
JUNE 30,
--------------------------
2003 2002
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,920 $ 17,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain, excess of assets acquired over purchase price -- (17,412)
Depreciation and amortization 477 574
Amortization of deferred financing costs 1,413 3,209
Provision for (recovery of) credit losses 526 240
NIR gains recognized, net (6,676) (4,500)
Loss on sale of furniture and equipment -- 5
Deferred compensation 447 1,908
Releases of cash from Trusts to Company 13,859 36,068
Initial deposits to spread accounts (17,299) (1,273)
Net deposits to spread accounts (1,325) (6,700)
(Increase) decrease in receivables from Trusts and
investment in subordinated certificates 7,769 (9,113)
Changes in assets and liabilities:
Restricted cash 2,819 12,098
Purchases of contracts held for sale (182,045) (256,479)
Amortization and liquidation of contracts held for sale 216,769 307,387
Other assets 3,885 923
Accounts payable and accrued expenses (1,299) (14,031)
Warehouse lines of credit 2,188 --
Deferred tax asset/liability (1,348) 190
---------- ----------
Net cash provided by operating activities 49,080 70,264

CASH FLOWS FROM INVESTING ACTIVITIES:
Net related party receivables -- (11)
Purchase of subsidiary, net of cash acquired (10,181) (29,467)
Purchases of furniture and equipment (67) (170)
---------- ----------
Net cash used in investing activities (10,248) (29,648)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior secured debt 25,000 46,242
Repayment of securitization trust debt (37,205) (41,156)
Repayment of senior secured debt (22,576) (6,986)
Repayment of subordinated debt (34) (22,665)
Repayment of capital lease obligations (51) (241)
Repayment of notes payable (1,058) (532)
Payment of financing costs (1,300) (1,037)
Purchase of common stock (1,116) --
Exercise of options and warrants 172 275
---------- ----------
Net cash used in financing activities (38,168) (26,100)
---------- ----------
Increase in cash 664 14,516

Cash at beginning of period 32,947 2,570
---------- ----------
Cash at end of period $ 33,611 $ 17,086
========== ==========

Supplemental disclosure of cash flow information:
Cash paid (received) during
the period for:
Interest $ 7,849 $ 9,596
Income taxes (2,085) (5,505)

Supplemental disclosure of non-cash investing and
financing activities:
Stock compensation 447 1,908

See accompanying Notes to Condensed Consolidated Financial Statements

5

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(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
primarily in the business of purchasing, selling and servicing retail automobile
installment sale Contracts ("Contracts" or "finance receivables") originated by
licensed motor vehicle dealers ("Dealers") located throughout the United States.
The Company purchases 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.

ACQUISITION OF MFN FINANCIAL CORPORATION

On March 8, 2002, CPS acquired 100% of MFN Financial Corporation, a Delaware
corporation ("MFN") and its subsidiaries, by the merger (the "MFN Merger") of a
direct wholly-owned subsidiary of CPS with and into MFN. MFN thus became a
wholly owned subsidiary of CPS, and CPS thus acquired the assets of MFN, which
consisted principally of interests in automobile installment sales finance
Contracts and the facilities for originating and servicing such Contracts. The
MFN Merger was accounted for as a purchase.

MFN, through its primary operating subsidiary, Mercury Finance Company LLC, was
in the business of purchasing automobile installment sales finance Contracts
from Dealers, and securitizing and servicing such Contracts. CPS continues to
use the assets acquired in the MFN Merger in the automobile finance business,
but has disposed of a portion of such assets. MFN has ceased to purchase
automobile installment sales finance Contracts, and does not anticipate
recommencing such purchasing. In connection with the termination of MFN
origination activities and the integration and consolidation of certain
activities, the Company has recognized certain liabilities related to the costs
to exit these activities and terminate the affected employees of MFN. These
activities include service departments such as accounting, finance, human
resources, information technology, administration, payroll and executive
management. These costs include the following:

JUNE 30, DECEMBER 31,
2003 (1) ACTIVITY 2002
------- ------- -------
(IN THOUSANDS)

Severance payments and consulting Contracts ..... $ 352 $ 219 $ 571
Facilities closures ............................. 1,437 558 1,995
Termination of Contracts, leases, services and
other obligations .......................... 206 117 323
Acquisition expenses accrued but unpaid ......... 51 -- 51
------- ------- -------
Total liabilities assumed .................. $2,046 $ 894 $2,940
======= ======= =======

- ------------
(1) The initial accrual amount recorded was $6.2 million on March 8, 2002 and
the remaining accrual recorded in the Condensed Consolidated Balance Sheet of
the Company is approximately $2.0 million, $2.4 million, and $2.9 million as of
June 30, 2003, March 31, 2003 and December 31, 2002, respectively. The Company
believes that this amount provides adequately for anticipated remaining costs
related to exiting certain activities of MFN, and that amounts indicated above
are reasonably allocated.

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statement of Operations as of and for the three and six months ended June 30,
2003 and 2002, include the balance sheet accounts of MFN Financial Corporation
as of June 30, 2003 and 2002 and the results of operations subsequent to March
8, 2002, the merger date.

6

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition.

MARCH 8, 2002
(IN THOUSANDS)
Cash .................................................... $ 93,782
Restricted cash ......................................... 25,499
Finance Contracts, net .................................. 186,554
Residual interest in securitizations .................... 32,485
Other assets ............................................ 12,006
---------
Total assets acquired ........................... 350,326
---------
Securitization trust debt ............................... 156,923
Subordinated debt ....................................... 22,500
Accounts payable and other liabilities .................. 30,242
---------
Total liabilities assumed ....................... 209,665
---------
Net assets acquired ............................. 140,661
Less: purchase price ............................ 123,249
---------
Excess of net assets acquired over purchase price $ 17,412
=========

Selected unaudited pro forma combined results of operations for the three-month
and six-month periods ending June 2002, assuming the MFN Merger occurred on
January 1, 2002, are as follows:

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(IN THOUSANDS)

Total revenue ............................................. $ 27,216 $ 57,755
Net earnings (loss) before Merger-related expenses and
extraordinary item ........................................ 739 (8,833)
Extraordinary item ........................................ -- 17,412
Net earnings .............................................. 739 8,579

Basic net earnings (loss) per share before Merger-related
expenses and extraordinary item ...................... $ 0.04 $ (0.46)
Extraordinary item ........................................ -- 0.90
Basic net earnings per share .............................. 0.04 0.44

Diluted net earnings (loss) per share before Merger-related
expenses and extraordinary item ...................... $ 0.04 $ (0.46)
Extraordinary item ........................................ -- 0.90
Diluted net earnings per share ............................ 0.04 0.44

ACQUISITION OF TFC ENTERPRISES, INC.

On May 20, 2003, CPS acquired TFC Enterprises, Inc., a Delaware corporation
("TFC") and its subsidiaries, by the merger (the "TFC Merger") of a direct,
wholly-owned subsidiary of CPS, with and into TFC. In the TFC Merger, TFC became
a wholly-owned subsidiary of CPS. CPS thus acquired the assets of TFC and its
subsidiaries, which consisted principally of interests in motor vehicle
installment sales finance Contracts, interests in securitized pools of such
Contracts, and the facilities for originating and servicing such Contracts. The
merger was accounted for as a purchase.

7

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

TFC, through its primary operating subsidiary, "The Finance Company," is in the
business of purchasing motor vehicle installment sales finance Contracts from
automobile Dealers, and securitizes and services such Contracts. CPS intends to
continue to use the assets acquired in the TFC Merger in the automobile finance
business.

In connection with the integration and consolidation of certain activities
between CPS and TFC, the Company has recognized certain liabilities related to
the costs to integrate certain activities and terminate the affected employees
of TFC. These activities include service departments such as accounting,
finance, human resources, information technology, administration, payroll and
executive management. The total liabilities recognized by the Company is $4.5
million. As of the period ended June 30, 2003 there has been no activity within
this accrual amount.

At the closing of the TFC Merger, each outstanding share of common stock of TFC
became a right to receive $1.87 per share in cash. The total merger
consideration payable to stockholders of TFC was approximately $21.6 million.
The recipients of the total merger consideration had no material relationship
with CPS, its directors, its officers or any associates of such directors or
officers, to the best of CPS's knowledge. The merger consideration was paid with
existing cash of CPS. The aggregate purchase price, including expenses related
to the transaction, was approximately $23.7 million.

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statement of Operations as of and for the three and six months ended June 30,
2003, include the balance sheet accounts of TFC Enterprises, Inc. as of June 30,
2003 and the results of operations subsequent to May 20, 2003, the merger date.
The Company has recorded certain purchase accounting adjustments on its
Condensed Consolidated Balance Sheet, which are estimates based on available
information.

The following table summarizes the recorded amounts of the assets acquired
and liabilities assumed at the date of acquisition.

MAY 20, 2003
(IN THOUSANDS)
Cash ...................................................... $ 13,545
Restricted cash ........................................... 17,723
Finance Contracts, net .................................... 125,108
Other assets .............................................. 502
---------
Total assets acquired ............................. 156,878
---------
Securitization trust debt ................................. 115,597
Subordinated debt ......................................... 6,321
Capital lease obligations ................................. 17
Accounts payable and other liabilities .................... 11,217
---------
Total liabilities assumed ......................... 133,152
---------
Purchase price .................................... $ 23,726
=========

Selected unaudited pro forma combined results of operations for the three-month
and six-month periods ending June 30, 2003 and 2002, assuming the TFC Merger
occurred on January 1, 2003 and 2002, are as follows:

8

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
(IN THOUSANDS)

Total revenue ......................................... $ 26,340 $ 32,983
Net earnings .......................................... $ 2,646 $ 1,611
Basic net earnings per share .......................... $ 0.13 $ 0.08
Diluted net earnings per share ........................ $ 0.12 $ 0.08

SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
(IN THOUSANDS)

Total revenue ............................................. $ 52,926 $ 53,246
Net earnings before Merger-related expenses and
extraordinary item ........................................ 9,349 1,798
Extraordinary item ........................................ -- 17,412
Net earnings .............................................. 9,349 19,210

Basic net earnings per share before Merger-related
expenses and extraordinary item ...................... $ 0.46 $ 0.09
Extraordinary item ........................................ -- 0.90
Basic net earnings per share .............................. $ 0.46 $ 0.99

Diluted net earnings per share before Merger-related
expenses and extraordinary item ...................... $ 0.43 $ 0.09
Extraordinary item ........................................ -- 0.83
Diluted net earnings per share ............................ $ 0.43 $ 0.92

BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements of the Company have
been prepared in conformity with accounting principles generally accepted in the
United States of America, with the instructions to Form 10-Q and with Article 10
of Regulation S-X of the Securities and Exchange Commission, and include all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements have been
reclassified for comparability to current period presentation. Results for the
three-month and six-month periods ended June 30, 2003 are not necessarily
indicative of the operating results to be expected for the full year.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.

9

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

RECENT DEVELOPMENTS

Subsequent to June 30, 2003, the Company agreed with the other parties to its
continuous or "warehouse" securitization facilities to amend the terms of such
facilities. The effect of the amendments will be to cause future use of those
facilities to be treated for financial accounting purposes as borrowings secured
by pledged Contracts, rather than as sales of such Contracts.

In addition, the Company announced in August 2003 that it intends to structure
its future term securitization transactions so that they will be treated for
financial accounting purposes as borrowings secured by receivables, rather than
as sales of receivables. The new structure for the warehouse facilities
described in the preceding paragraph and the intended future structure of the
Company's term securitizations will affect the way in which the transactions are
reported, including (i) the finance receivables will be shown as assets of the
Company on its balance sheet, (ii) the debt issued in the transactions will be
recorded as indebtedness of the Company, (iii) the servicing fee that the
Company receives in connection with such receivables will be included in the
interest earned on such receivables, (iv) the Company will initially and
periodically record as expense a provision for estimated incurred losses on the
receivables, and (v) the portion of payments on the receivables representing
interest will be recorded as revenue as accrued. These changes collectively
represent a deferral of revenue and acceleration of expenses, and thus initially
will result in the Company's reporting lower earnings than it would report if it
were to continue to structure its securitizations to require recognition of gain
on sale. As a result, reported earnings initially will be less than they would
be had the Company continued to structure its securitizations to record a gain
on sale and therefore, reported net earnings may be negative or nominally
positive for approximately the next year. The Company's cash availability and
cash requirements should be unaffected by the intended change in structure.

RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS

Gain on sale may be recognized on the disposition of Contracts outright or in
securitization transactions. In its securitization transactions, the Company, or
a wholly-owned, consolidated subsidiary of the Company, retains a residual
interest in the Contracts that are sold to a wholly-owned, unconsolidated
special purpose subsidiary. The Company's securitization transactions include
"term" securitizations (purchaser holds the Contracts for substantially their
entire term) and "continuous" securitizations (which finance the acquisition of
the Contracts for future sale into term securitizations).

The residual interest in term securitizations and the residual interest in the
Contracts held in continuous ("warehouse") securitizations are reflected in the
line item "residual interest in securitizations" on the Company's Condensed
Consolidated Balance Sheet.

The Company's securitization structure has generally been as follows:

The Company sells Contracts it acquires to a wholly-owned, unconsolidated
Special Purpose Subsidiary ("SPS"), which has been established for the limited
purpose of buying and reselling the Company's Contracts. The SPS then transfers
the same Contracts to an owner trust ("Trust"). The Trust is a qualifying
special purpose entity as defined in Statement of Financial Accounting Standards
No. 140 ("SFAS 140"), and is therefore not consolidated in the Company's
Condensed Consolidated Financial Statements. The Trust issues interest-bearing
asset backed securities (the "Notes"), generally in a principal amount equal to
the aggregate principal balance of the Contracts. The Company typically sells
these Contracts to the Trust at face value and without recourse, except that

10

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

representations and warranties similar to those provided by the Dealer to the
Company are provided by the Company to the Trust. One or more investors purchase
the Notes issued by the Trust; the proceeds from the sale of the Notes are then
used to purchase the Contracts from the Company. The Company may retain
subordinated Notes issued by the Trust. The Company purchases a financial
guaranty insurance policy, guaranteeing timely payment of principal and interest
on the senior Notes, from an insurance company (a "Note Insurer"). In addition,
the Company provides a "Credit Enhancement" for the benefit of the Note Insurer
and the investors in the form of an initial cash deposit to an account ("Spread
Account") held by the Trust, in the form of overcollateralization of the Notes,
where the principal balance of the Notes issued is less than the principal
balance of the Contracts, in the form of subordinated Notes, or some combination
of such Credit Enhancements. The agreements governing the securitization
transactions (collectively referred to as the "Securitization Agreements")
require that the initial level of Credit Enhancement be supplemented by a
portion of collections from the Contracts until the level of Credit Enhancement
reaches specified levels, and then maintained at those levels. 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
Enhancements are 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 portfolios, and have also varied by Securitization Agreement.
The Securitization Agreements generally grant the Company the option to
repurchase the sold Contracts from the Trust when the aggregate outstanding
balance has amortized to 10% or less of the initial aggregate balance.

The Company's warehouse securitization structures are similar to the above,
except that (i) the SPS that purchases the Contracts pledges the Contracts to
secure promissory notes issued directly by the SPS, (ii) the initial purchaser
of such notes has had the right, but not the obligation, to require that the
Company repurchase the Contracts, (iii) the promissory notes are in an aggregate
principal amount of not more than 72.5% to 73% of the aggregate principal
balance of the Contracts (that is, at least 27% overcollateralization), and (iv)
no Spread Account is involved. The SPS is a qualifying special purpose entity
and therefore has not been consolidated in the Company's Condensed Consolidated
Financial Statements. Subsequent to June 30, 2003, this securitization structure
was amended to give the Company the right to repurchase the Contracts from the
SPS. As a result, Contracts warehoused after June 30, 2003 will be reflected as
secured borrowings for financial accounting purposes.

Upon each sale of Contracts in a securitization, whether a term securitization
or a continuous securitization, the Company removes from its Condensed
Consolidated Balance Sheet the Contracts held for sale and adds to its Condensed
Consolidated Balance Sheet (i) the cash received and (ii) the estimated fair
value of the ownership interest that the Company retains in Contracts sold in
the securitization. That retained interest (the "Residual") consists of (a) the
cash held in the Spread Account, if any, (b) overcollateralization, if any, (c)
subordinated Notes retained, if any, and (d) receivables from Trust, which
include the net interest receivables ("NIRs"). NIRs represent the estimated
discounted cash flows to be received from the Trust in the future, net of
principal and interest payable with respect to the Notes, and certain expenses.
The excess of the cash received and the assets retained by the Company over the
carrying value of the Contracts sold, less transaction costs, equals the net
gain on sale of Contracts recorded by the Company.

The Company allocates its basis in the Contracts between the Notes sold and the
Residuals retained based on the relative fair values of those portions on the
date of the sale. The Company recognizes gains or losses attributable to the
change in the fair value of the Residuals, which are recorded at estimated fair
value. The Company is not aware of an active market for the purchase or sale of

11

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

interests such as the Residuals; accordingly, the Company determines the
estimated fair value of the Residuals by discounting the amount and timing of
anticipated cash flows that it estimates will be released to the Company in the
future (the cash out method), using a discount rate that the Company believes is
appropriate for the risks involved. The Company estimates the value of its
optional right to repurchase receivables pursuant to the terms of the
Securitization Agreements primarily based on its estimate of the amount and
timing of cash flows that it anticipates will be received from the repurchased
receivables following exercise of the optional right. The anticipated cash flows
include collections from both current and charged off receivables. The Company
has used an effective discount rate of approximately 14% per annum.

The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Notes, the base
servicing fees, and certain other fees (such as trustee and custodial fees).
Required principal payments are generally defined as the payments sufficient to
keep the principal balance of the Notes equal to the aggregate principal balance
of the related Contracts (excluding those Contracts that have been charged off),
or a pre-determined percentage of such balance. Where that percentage is less
than 100%, the related Securitization Agreements require accelerated payment of
principal until the principal balance of the Notes is reduced to the specified
percentage. Such accelerated principal payment is said to create
"overcollateralization" of the Notes.

If the amount of cash required for payment of fees, interest and principal
exceeds the amount collected during the collection period, the shortfall is
withdrawn from the Spread Account, if any. If the cash collected during the
period exceeds the amount necessary for the above allocations, and there is no
shortfall in the related Spread Account, the excess is released to the Company,
or in certain cases is transferred to other Spread Accounts that may be below
their required levels. If the Spread Account balance is not at the required
credit enhancement level, then the excess cash collected is retained in the
Spread Account until the specified level is achieved. Although Spread Account
balances are held by the Trusts on behalf of the Company's SPS as the owner of
the Residuals, the cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. The
interest rate payable on the Contracts is significantly greater than the
interest rate on the Notes. As a result, the Residuals described above are a
significant asset of the Company. In determining the value of the Residuals, the
Company must estimate the future rates of prepayments, delinquencies, defaults
and default loss severity, recovery rates and the value of the Company's
optional right to repurchase receivables pursuant to the terms of the
Securitization Agreements, as all of these factors affect the amount and timing
of the estimated cash flows. The Company estimates prepayments by evaluating
historical prepayment performance of comparable Contracts. The Company has used
prepayment estimates of approximately 18.4% to 21.7% cumulatively over the lives
of the related Contracts. The Company estimates defaults and default loss
severity using available historical loss data for comparable Contracts and the
specific characteristics of the Contracts purchased by the Company. The Company
estimates recovery rates of previously charged off receivables using available
historical recovery data and projected future recovery levels. In valuing the
Residuals, the Company estimates that charge-offs as a percentage of the
original principal balance will approximate 13.9% to 20.8% cumulatively over the
lives of the related Contracts, with recovery rates approximating 2.3% to 5.3%
of the original principal balance.

12

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Following a securitization, interest income is recognized on the balance of the
Residuals at the same rate as used for calculating the present value of the
NIRs, which is equal to 14% per annum. In addition, the Company will recognize
additional revenue from the Residuals if the actual performance of the Contracts
is better than the original estimate. If the actual performance of the Contracts
were worse than the original estimate, then a downward adjustment to the
carrying value of the Residuals would be required.

The Noteholders and the related securitization Trusts have no recourse to the
Company for failure of the Contract obligors to make payments on a timely basis.
The Company's Residuals, however, are subordinate to the Notes until the
Noteholders are fully paid, and the Company is therefore at risk to that extent.

OTHER INCOME

Other income consists primarily of recoveries on certain previously charged off
Contracts.

STOCK BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation." ("SFAS 123"). APB
25 provides that compensation expense relative to the Company's employee stock
options is measured based on the difference between the share price and the
exercise price of stock options at the date of grant and the Company recognizes
compensation expense in its statement of operations using the straight-line
method over the vesting period for fixed awards. Under SFAS 123, the fair value
of stock options at the date of grant is recognized in earnings over the vesting
period of the options. In December 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." ("SFAS
148"). SFAS 148 amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results.

As of June 30, 2003 and 2002, the Company had options outstanding to acquire
3,655,899 and 3,175,549 shares, respectively, of its common stock. The following
table shows the pro forma net income (loss) as if the fair value method of SFAS
123 had been used to account for stock-based compensation expense (in thousands,
except per share amounts):

13

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)

Net income, as reported .................. $ 2,642 $ 739 $ 8,920 $ 17,170
Stock-based employee compensation expense,
fair value method, net of tax ............ (162) (173) (425) (354)
Previously recorded stock-based employee
compensation (income) expense, net of tax 340 618 259 1,107
---------- ---------- ---------- -----------
Pro forma net income ..................... $ 2,820 $ 1,184 $ 8,754 $ 17,923
========== ========== ========== ===========
Net income per share
Basic, as reported ....................... $ 0.13 $ 0.04 $ 0.44 $ 0.89
Diluted, as reported (1) ................. $ 0.12 $ 0.06 $ 0.41 $ 0.89

Pro forma Basic .......................... $ 0.14 $ 0.04 $ 0.43 $ 0.92
Pro forma Diluted (1) .................... $ 0.13 $ 0.06 $ 0.41 $ 0.92

(1) The assumed conversion of certain subordinated debt during the three-month
and the six-month periods ended June 30, 2003, resulted in an increase to income
for purposes of the diluted earnings per share calculation of $18,326 and
$268,282, respectively.

Pro forma net income (loss) and income (loss) per share reflect only options
granted in the years ended December 31, 1996 to June 30, 2003. Therefore, the
full effect of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma amounts presented above, as compensation
expense for options granted prior to 1996 is not considered.

PURCHASES OF COMPANY STOCK

During the six-month period ended June 30, 2003, the Company purchased 519,926
shares of its common stock at an average price of $2.15, or $1.1 million in
total.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45")."
FIN 45 clarifies previously issued accounting guidance and disclosure
requirements for guarantees, expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees, and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 was effective as of December 31,
2002. The adoption of FIN 45 did not have a material effect on the Company.

Financial Accounting Standards Board Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), issued January 2003, requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both.
Prior to FIN 46, a company included another entity in its Consolidated Financial

14

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Statements only if it controlled the entity through voting interests. FIN 46
also requires disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest.
The consolidated requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidated requirements apply to
older entities in the first fiscal year or interim period after June 15, 2003.
Certain disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of FIN 46 is not expected to have a material effect on
the Company.

In April 2003, FASB issued Statement on Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other Contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 149 is effective for most Contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of SFAS 149 is not expected to have a material
effect on the Company.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer.

Generally, SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the adoption of SFAS 150 to have a material impact on its financial statements.

(2) FINANCE RECEIVABLES

The following table presents the components of Finance Receivables, net of
unearned income:

JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
(IN THOUSANDS)

Finance Receivables
Automobile
Simple interest .................................... $ 41,737 $ 31,359
Precompute or "Rule of 78's," net of unearned income 173,054 79,061
--------- ---------
Finance Receivables, net of unearned income ........... $214,791 $110,420
========= =========

The following table presents the contractual maturities of Finance Receivables,
net of unearned income as of June 30, 2003:

15

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

AMOUNT %
--------- ---------
(IN THOUSANDS)
Due in 2003 ........................ $ 70,403 33%
Due in 2004 ........................ 72,286 34%
Due in 2005 ........................ 46,001 21%
Due thereafter ..................... 26,101 12%
--------- ---------
Total .......................... $214,791 100%
========= =========

The following table presents a summary of the activity for the allowance for
credit losses, for the six-month periods ended June 30, 2003 and 2002:

JUNE 30, JUNE 30,
2003 2002
--------- ---------
(IN THOUSANDS)
Balance at beginning of period .......................... $ 25,828 $ --
Addition to allowance for credit losses from acquisitions 24,271 59,261
Provision for credit losses ............................. 526 240
Net charge offs ......................................... (10,283) (16,670)
--------- ---------
Balance at end of period ................................ $ 40,342 $ 42,831
========= =========

(3) RESIDUAL INTEREST IN SECURITIZATIONS

The following table presents the components of the residual interest in
securitizations:

JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
(IN THOUSANDS)

Cash, commercial paper, United States government
securities and other qualifying investments (Spread Account) $ 40,648 $ 27,218
Receivables from Trusts (NIRs) ............................. 28,259 33,214
Overcollateralization ...................................... 43,320 59,366
Investment in subordinated notes ........................... 18,616 7,372
--------- ---------
Residual interest in securitizations ....................... $130,843 $127,170
========= =========

The following table presents estimated remaining undiscounted credit losses
included in the estimated fair value of the residual interest in securitizations
as a percentage of the Company's servicing portfolio subject to recourse
provisions:

JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
(IN THOUSANDS)

Undiscounted estimated credit losses........................ $ 62,535 $ 54,363
Servicing portfolio subject to recourse provisions.......... 535,036 477,038
Undiscounted estimated credit losses as percentage of
servicing portfolio subject to recourse provisions.......... 11.71% 11.40%

16

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On March 31, 2003, CPS (through a subsidiary) sold automobile installment sales
finance Contracts to CPS Auto Receivables Trust 2003-A in a securitization
transaction, retaining a residual interest therein. In this transaction,
qualified institutional buyers purchased $138.13 million of notes backed by
automotive Contracts that CPS had purchased from Dealers. The Notes, issued by
CPS Auto Receivables Trust 2003-A, consist of two classes: $17.96 million of
1.53% Class A-1 Notes, and $120.17 million of 2.89% Class A-2 Notes. The value
of the residual was $29.7 million at June 30, 2003. The key assumptions used in
determining the value were a discount rate of 14.0% per annum, prepayment speed
of 20.86% per annum, and cumulative lifetime net losses of 12.44%.

On June 30, 2003, CPS (through a subsidiary) sold automobile installment sales
finance Contracts to CPS Auto Receivables Trust 2003-B in a securitization
transaction, retaining a residual interest therein. In this transaction,
qualified institutional buyers purchased $104.5 million of notes backed by
automotive Contracts that CPS had purchased from Dealers. The Notes, issued by
CPS Auto Receivables Trust 2003-B, consist of two classes: $69.0 million of
1.43% Class A-1 Notes, and $35.5 million of 2.69% Class A-2 Notes. The value of
the residual was $19.4 million at June 30, 2003. The key assumptions used in
determining the value were a discount rate of 14.0% per annum, prepayment speed
of 21.71% per annum, and cumulative lifetime net losses of 12.50%.

(4) SECURITIZATION TRUST DEBT

The Company's MFN and TFC subsidiaries have completed a number of securitization
transactions that are treated as secured borrowings for financial accounting
purposes, rather than as sales. The debt issued in those transactions is shown
on the Company's balance sheet as "Securitization Trust Debt," and the
components of such debt are summarized in the following table:

Outstanding Principal
Series: Issue Date Initial Principal at June 30, 2003
------- ---------- ----------------- ----------------
TFC2003-1 May 20, 2003 $52.4 million $50.0 million
TFC2002-2 October 9, 2002 62.6 million 37.4 million
TFC2002-1 March 19, 2002 64.6 million 21.4 million
MFN2001-A June 28, 2001 301.0 million 40.7 million

All of the securitization trust debt was sold in private placement transactions
to qualified institutional buyers. The debt was issued through wholly-owned,
bankruptcy remote, subsidiaries of TFC or MFN, and is secured by the assets of
such subsidiaries, but not by other assets of the Company. Principal and
interest payments are guaranteed by financial guaranty insurance policies.

The terms of the various Securitization Agreements related to the issuance of
the securitization trust debt require that certain delinquency and credit loss
criteria be met with respect to the collateral pool, and require that the
Company maintain a minimum net worth, and meet other financial tests. As of June
30, 2003, the Company was not in default of any provisions of the agreements
other than a covenant specifying maximum leverage. Subsequent to June 30, 2003,
the Company has received a waiver on this covenant breach from the controlling
party. The Company is responsible for the administration and collection of the
Contracts. Securitization Agreements also require certain funds be held in

17

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

restricted cash accounts to provide additional collateral for the borrowings or
to be applied to make payments on the securitization trust debt. As of June 30,
2003, restricted cash under the various agreements totaled approximately $26.8
million. Interest expense on the securitization trust debt is composed of the
stated rate of interest plus amortization of additional costs of borrowing.
Additional costs of borrowing include facility fees, insurance and amortization
of deferred financing costs. Deferred financing costs related to the
securitization trust debt are amortized in proportion to the principal
distributed to the noteholders. Accordingly, the effective cost of borrowing of
the securitization trust debt is greater than the stated rate of interest.

The wholly-owned bankruptcy remote subsidiaries of MFN and TFC were formed to
facilitate the above asset-backed financing transactions. 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 on the
securitization trust debt. None of the assets of these subsidiaries are
available to pay other creditors of the Company or its affiliates.

(5) SENIOR SECURED DEBT

On February 3, 2003, the Company borrowed $25 million from Levine Leichtman
Capital Partners II, L.P. ("LLCP"), net of fees and expenses of $1.05 million.
The indebtedness, represented by the "Term D Note," was originally due in April
2003, with Company options to extend the maturity to May 2003 and January 2004,
upon payment of successive extension fees of $125,000. The Company has paid the
fees to extend the maturity to January 2004. Interest on the Term D Note is
payable monthly at rates that averaged 4.79% per annum through June 30, 2003,
and 12.0% per annum thereafter.

In a separate transaction, the Bridge Note issued to LLCP in connection with the
acquisition of MFN, in an original principal amount of $35.0 million, was due on
February 28, 2003. The outstanding principal balance of $17.0 million was paid
in February 2003.

(6) NET GAIN ON SALE OF CONTRACTS

The following table presents components of net gain on sale of Contracts:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)

Gain recognized on sale ................. $ 3,375 $ 5,479 $ 6,676 $ 7,131
Deferred acquisition fees and discounts . 2,299 1,220 4,590 1,220
Expenses related to sales ............... (1,105) (837) (2,076) (1,244)
(Provision for) Recovery of credit losses (460) (767) (526) (240)
-------- -------- -------- --------

Net gain on sale of Contracts ........... $ 4,109 $ 5,095 $ 8,664 $ 6,867
======== ======== ======== ========

18

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(7) INTEREST INCOME

The following table presents the components of interest income:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)

Interest on finance receivables $ 6,658 $11,695 $12,110 $15,604
Residual interest income, net . 4,647 2,935 8,388 6,756
Other interest income ......... 137 116 272 130
-------- -------- -------- --------
Net interest income ........... $11,442 $14,746 $20,770 $22,490
======== ======== ======== ========

(8) EARNINGS PER SHARE

Diluted earnings per share for the three-month and six-month periods ended June
30, 2003 and 2002, were calculated using the weighted average number of shares
outstanding for the related period. The following table reconciles the number of
shares used in the computations of basic and diluted earnings per share for the
three-month and the six-month periods ended June 30, 2003 and 2002:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS)

Weighted average number of common shares outstanding during
the period used to compute basic earnings (loss) per
share ..................................................... 20,209 19,418 20,239 19,405

Incremental common shares attributable to exercise of
outstanding options and warrants .......................... 1,022 1,646 842 --

Incremental common shares attributable to convertible
debt ...................................................... 334 -- 1,079 --
------- ------- ------- -------

Number of common shares used to compute diluted
earnings (loss) per share ................................. 21,565 21,064 22,160 19,405
======= ======= ======= =======

The assumed conversion of certain subordinated debt during the three-month and
six-month period ended June 30, 2003, resulted in an increase to income for
purposes of the diluted earnings per share calculation of $18,326 and $268,282,
respectively, representing interest attributable to convertible debt that would
not have been incurred if the convertible debt had been converted. Diluted net
earnings for purposes of the diluted earnings per share calculation totaled $2.8
million for the three months ended June 30, 2003 and $9.2 million for the six-
month ended June 30, 2003.

19

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

If the anti-dilutive effects of common stock equivalents were not considered,
additional shares included in the diluted earnings per share calculation for the
three-month and six-month periods ended June 30, 2002 would have included an
additional 1.1 million and 2.6 million shares, respectively, attributable to the
conversion of certain subordinated debt and the exercise of outstanding options
and warrants. No such anti-dilution existed for the three-month and six-month
periods ended June 30, 2003.

(9) INCOME TAXES

As of December 31, 2002, the Company had a net deferred tax liability of $6.7
million, which included a valuation allowance against certain deferred tax
assets of $8.6 million. Tax liabilities, net at June 30, 2003 include $2.1
million of current taxes payable and no net deferred taxes as net deferred tax
assets acquired were fully offset with a valuation allowance. The tax benefit
for the six months ended June 30, 2003 is primarily the result of the resolution
of certain Internal Revenue Service examinations of previously filed MFN tax
returns, resulting in a tax benefit of $4.9 million, and other state tax
matters. The tax benefit for the six months ended June 30, 2002 is due to tax
legislation passed in early 2002, which enabled the Company to reverse a
previously recorded valuation allowance of approximately $3.2 million. The
Company has evaluated its deferred tax assets and believes that it is more
likely than not that certain deferred tax assets will not be realized due to
limitations imposed by the Internal Revenue Code and expected future taxable
income.

(10) LIQUIDITY

The Company's business requires substantial cash to support its purchases of
Contracts and other operating activities. The Company's primary sources of cash
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving credit facilities (also
sometimes known as warehouse credit facilities), servicing fees on portfolios of
Contracts previously sold, customer payments of principal and interest on
Contracts held for sale, fees for origination of Contracts, and releases of cash
from securitized pools of Contracts in which the Company has retained a residual
ownership interest, and from the Spread Accounts associated with such pools. The
Company's primary uses of cash have been the purchases of Contracts, repayment
of amounts borrowed under lines of credit and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of and further contributions to "Spread Accounts"
(cash posted to enhance credit of securitized pools), and income taxes. There
can be no assurance that internally generated cash will be sufficient to meet
the Company's cash demands. The sufficiency of internally generated cash will
depend on the performance of securitized pools (which determines the level of
releases from Spread Accounts), the rate of expansion or contraction in the
Company's servicing portfolio, and the terms upon which the Company is able to
acquire, sell, and borrow against Contracts.

Contracts are purchased from Dealers for a cash price approximating their
principal amount, and generate cash flow over a period of years. As a result,
the Company has been dependent on warehouse credit facilities to purchase
Contracts, and on the availability of cash from outside sources in order to
finance its continuing operations, as well as to fund the portion of Contract
purchase prices not financed under warehouse credit facilities. Through May
2002, the Company's Contract purchasing program consisted of both (i) flow
purchases for immediate resale to non-affiliates, and (ii) purchases for the
Company's own account made on other than a flow basis, funded primarily by
advances under a revolving warehouse credit facility. Flow purchases allowed the
Company to purchase Contracts with minimal demands on liquidity. The Company's
revenues from the resale of flow purchase Contracts, however, were materially
less than those that may be received by holding Contracts to maturity or by
selling Contracts in securitization transactions. During the six-month period
ended June 30, 2003 the Company purchased $182.0 million of Contracts for its
own account and none on a flow basis, compared to $181.1 million of Contracts on
a flow basis and $75.4 million for its own account in 2002. The Company's flow
purchase program ended in May 2002.

20

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company's primary means of ensuring that its cash demands do not exceed its
cash resources is to match its levels of Contract purchases to its availability
of cash. The Company's ability to adjust the quantity of Contracts that it
purchases and sells will be subject to general competitive conditions and the
continued availability of warehouse credit facilities. There can be no assurance
that the desired level of Contract acquisition can be maintained or increased.
Obtaining releases of cash from the Trusts and their related Spread Accounts is
dependent on collections from the related Trusts generating sufficient cash to
maintain the Spread Accounts in excess of their respective requisite levels.
There can be no assurance that collections from the related Trusts will continue
to generate sufficient cash.

Certain of the Company's securitization transactions and the warehouse credit
facilities contain various covenants requiring certain minimum financial ratios
and results. The Company was in compliance with all of these covenants as of
June 30, 2003 except one related to maximum leverage. Subsequent to June 30,
2003, the Company has received a waiver on this covenant breach from the
controlling party. To the extent that the TFC Merger had not occurred, the
Company would not have been in breach of such covenant.

(11) LEGAL PROCEEDINGS

The Company is routinely involved in various legal proceedings resulting from
its consumer finance activities and practices, both continuing and discontinued.
The Company believes that there are substantive legal defenses to such claims,
and intends to defend them vigorously. There can be no assurance, however, as to
the outcome.

21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries,
the "Company") is a consumer finance company specializing in the business of
purchasing, selling and servicing automobile installment purchase Contracts
("Contracts") originated by licensed automobile dealers ("Dealers") in the sale
of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides indirect financing to Dealer customers with
limited credit histories, low incomes or past credit problems ("Sub-Prime
Customers"). The Company serves as an alternative source of financing for
Dealers, allowing sales to customers who otherwise might not be able to obtain
financing. The Company does not lend money directly to consumers. Rather, it
purchases Contracts from Dealers.

CPS was incorporated and began its operations in 1991. From inception through
June 30, 2003 the Company has purchased approximately $4.8 billion of Contracts,
and as of June 30, 2003, had an outstanding servicing portfolio of approximately
$754.0 million. The Company makes the decision to purchase Contracts under CPS'
programs exclusively from its headquarters location in Irvine, California. The
Company currently purchases Contracts under TFC's programs from two regional
centers, one in Chesapeake, Virginia and one in San Diego, California. The
Company services Contracts from several regional centers across the United
States.

CREDIT RISK RETAINED

Throughout the periods for which information is presented in this report, the
Company has purchased Contracts with the intention of reselling them in
securitizations reflected as sales for financial accounting purposes.
Additionally, the Company in its acquisition has acquired finance receivables
that had been previously securitized in term securitization transactions
reflected as secured borrowings for financial accounting purposes. As of June
30, 2003, the Company's Condensed Consolidated Balance Sheet included net
finance receivables of approximately $165.9 million and securitization trust
debt of $150.2 million related to finance receivables acquired in the
acquisitions.

In a securitization treated as a sale, the Company sells Contracts to a special
purpose subsidiary, which funds the purchase by sale of asset backed
interest-bearing securities. At the closing of such a securitization, the
Company has removed the sold Contracts from its Condensed Consolidated Balance
Sheet. The Company remains responsible for collecting payments due under the
Contracts, and retains a residual interest in the sold Contracts. The residual
interest represents the discounted value of what the Company expects will be the
excess of future collections on the Contracts over principal and interest due on
the asset backed securities. That residual interest appears on the Company's
balance sheet as "Residual interest in securitizations," and its value is
dependent on estimates of the future performance of the sold Contracts. In
August 2003, the Company announced its intention to structure its future
securitizations in such a way that they would be treated as financings, and not
as sales. Whether treated as a financing or as a sale, the related special
purpose subsidiary may be prohibited from releasing the excess cash to the
Company if the credit performance of the sold Contracts falls short of
pre-determined standards. Such releases represent a material portion of the cash
that the Company uses to fund its operations. An unexpected deterioration in the
performance of sold Contracts could therefore have a material adverse effect on
both the Company's liquidity and its results of operations.

22

RESULTS OF OPERATIONS

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statement of Operations as of and for the three and six months ended June 30,
2003 and 2002 include the results of operations of MFN Financial Corporation for
the period subsequent to March 8, 2002, the date on which the Company acquired
that corporation and its subsidiaries in a merger (the "MFN Merger"). See Note 1
of Notes to Condensed Consolidated Financial Statements, Acquisition of MFN
Financial Corporation.

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statement of Operations as of and for the three and six months ended June 30,
2003 include the results of operations of TFC Enterprises, Inc. for the period
subsequent to May 20, 2003, the date on which the Company acquired that
corporation and its subsidiaries in a merger (the "TFC Merger"). See Note 1 of
Notes to Condensed Consolidated Financial Statements, Acquisition of TFC
Enterprises, Inc.

THE THREE-MONTH PERIOD ENDED JUNE 30, 2003 COMPARED TO THE THREE-MONTH PERIOD
ENDED JUNE 30, 2002

REVENUES. During the three months ended June 30, 2003, revenues were $23.7
million, a decrease of $3.5 million, or 12.9%, from the prior year period
revenue amount of $27.2 million. The primary reason for the decrease in revenues
is a decrease in interest income and net gain on sale of Contracts. The decrease
is offset in part by an increase in servicing fees. Net gain on sale of
Contracts decreased by $986,000, or 19.4%, to $4.1 million in the three-month
period ended June 30, 2002, compared to $5.1 million in the year earlier period,
primarily as the result of the termination of the flow purchase program in early
May 2002. Revenues of $1.1 million relating to the flow purchase program were
included in net gain on sale of Contracts for the three-month period ended June
30, 2002.

Interest income for the three-month period ended June 30, 2003 decreased $3.3
million, or 22.4%, to $11.4 million in 2003 from $14.7 million in 2002. The
primary reason for the decrease in interest income is the decline in the balance
of the portfolio of Contracts acquired in the MFN Merger. This decline was
partially offset by the interest income earned on the portfolio of Contracts
acquired in the TFC Merger for the period after May 20, 2003 and an increase in
residual interest income.

Servicing fees of $4.5 million in the three months ended June 30, 2003 increased
$1.1 million or 32.2%, from $3.4 million in the same period a year earlier. The
increase in servicing fees is the result of growth in the Company's servicing
portfolio. At June 30, 2003, the Company was servicing a portfolio with an
outstanding principal balance approximating $754.0 million, compared to a
portfolio with an outstanding principal balance approximating $570.7 million as
of June 30, 2002. The servicing portfolio had been approximately stable
(amortization and charge-off of existing receivables roughly balanced by new
purchases) prior to the TFC Merger. The TFC Merger increased the servicing
portfolio by approximately $149 million.

The period over period decrease in other income resulted from decreased
recoveries on previously charged off MFN Contracts. Such recoveries were $3.1
million for the three months ended June 30, 2003, compared to $3.4 million for
the same period in 2002.

EXPENSES. The Company's operating expenses consist primarily of personnel costs
and other operating expenses, which are incurred as applications and Contracts
are received, processed and serviced. Factors that affect margins and net
earnings include changes in the automobile and automobile finance market
environments, macroeconomic factors such as interest rates, and mix of business
between Contracts purchased on a flow basis and Contracts purchased on an other
than flow basis. The Company ceased to purchase Contracts on a flow basis in May
2002.

23

Personnel costs include base salaries, commissions and bonuses paid to
employees, and certain expenses related to the accounting treatment of
outstanding warrants and stock options, and are one of the Company's most
significant operating expenses. These costs (other than those relating to stock
options) generally fluctuate with the level of applications and Contracts
processed and serviced.

Other operating expenses consist primarily of facilities expenses, telephone and
other communication services, credit services, computer services (including
personnel costs associated with information technology support), professional
services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $20.6 million for the second quarter of 2003,
compared to $25.9 million for the second quarter of 2002.

Personnel costs decreased to $9.4 million during the three months ended June 30,
2003, representing 45.9% of total operating expenses, from $11.0 million for the
2002 period, or 42.3% of total operating expenses. The decrease is primarily the
result of staff reductions since the MFN Merger on March 8, 2002 related to the
integration and consolidation of certain service and administrative activities
and the decline in the balance of the portfolio of Contracts acquired in the MFN
Merger. The decline in personnel costs also resulted from the decline in
stock-based employee compensation expense from $1.1 million in the second
quarter of 2002 to $587,000 in the comparable period in 2003.

General and administrative expenses decreased to $4.0 million, or 19.7% of total
operating expenses, in the second quarter of 2003, from $5.1 million, or 19.7%
of total operating expenses, in the second quarter of 2002.

Interest expense for the three-month period ended June 30, 2002, decreased $2.1
million, or 29.5%, to $5.1 million in 2003, compared to $7.2 million in 2002.
The decrease is due to the reduction in interest expense related to the average
balance of the Securitization Trust Debt.

Income tax expense of $490,000 was recorded in the 2003 period. The Company's
tax provision for the quarter reflects tax matters related to its acquisitions.
The Company expects to record no tax provision for the remainder of 2003. In the
2002 period, income tax expense of $540,000 was recorded.

THE SIX-MONTH PERIOD ENDED JUNE 30, 2003 COMPARED TO THE SIX-MONTH PERIOD ENDED
JUNE 30, 2002

REVENUES. During the six months ended June 30, 2003, revenues were $46.3
million, an increase of $5.9 million, or 14.6%, from the prior year period
revenue amount of $40.3 million. Net gain on sale of Contracts increased $1.8
million, or 26.2%, to $8.7 million in the six-month period ended June 30, 2003,
compared to $6.9 million in the year earlier period, primarily as the result of
increased sales of Contracts in securitizations offset in part by termination of
the flow purchase program in early May 2002. The 2003 gain on sale amount is net
of a $1.8 million pre-tax charge related to the Company's analysis and estimate
of the expected ultimate performance of the Company's previously securitized
pools in which it retains a residual interest. During the first quarter of 2002,
to prepare for the MFN Merger and related financing requirements, the Company
chose to originate Contracts almost exclusively on a flow basis, resulting in a
significantly lower gain on sale than had the Contracts been originated for the
Company's own account and securitized, as was the case in the first quarter of
2003. In addition, as a result of revised Company estimates resulting from
analyses of the current and historical performance of certain of the Company's
previously securitized pools, the Company recorded pre-tax charges of
approximately $2.5 million related to its residual interest in securitizations
during the first quarter of 2002. Certain of the Company's older pools related
to 1998 and prior had not performed as originally projected. Also in the first
quarter of 2002, the Company recognized a charge of approximately $500,000
related to a loss realized upon the sale of a subordinated certificate ("B
Piece") from the Company's 2002-A securitization.

24

Interest income for the six-month period ended June 30, 2003 decreased $1.7
million, or 7.6%, to $20.8 million in 2003 from $22.5 million in 2002. The
primary reason for the decrease in interest income is the decline in the balance
of the portfolio of Contracts acquired in the MFN Merger. This decline was
partially offset by the interest income earned on the portfolio of Contracts
acquired in the TFC Merger for the period after May 20, 2003 and an increase in
residual interest income.

Servicing fees totaling $9.1 million in the six months ended June 30, 2003
increased $2.3 million, or 34.0%, from $6.8 million in the same period a year
earlier. The increase in servicing fees can be attributed to the addition of the
servicing fees generated by the portfolio acquired in the MFN Merger, compared
to the prior year period when servicing fees were earned from the portfolio
acquired in the MFN Merger only for the period from March 8, 2002 to June 30,
2002.

At June 30, 2003, the Company was generating income and fees on a portfolio with
an outstanding principal balance approximating $754.0 million, compared to a
portfolio with an outstanding principal balance approximating $570.7 million as
of June 30, 2002. As the portfolio of Contracts acquired in the MFN Merger
amortizes, the portfolio of Contracts originated by CPS continues to expand. At
June 30, 2003, the portfolio composition was $482.9 million, or 64.0%, CPS,
$146.3 million, or 19.4%, TFC, and $124.8 million, or 16.6%, MFN, compared to
$261.1 million, or 45.8%, CPS and $309.6 million, or 54.2%, MFN at June 30,
2002.

The period over period increase in other income can be attributed to recoveries
on previously charged off MFN Contracts totaling $6.8 million for the six-month
period ended June 30, 2003 compared to $3.4 million for the comparable period in
2002.

EXPENSES. The Company's operating expenses consist primarily of personnel costs
and other operating expenses, which are incurred as applications and Contracts
are received, processed and serviced. Factors that affect margins and net income
include changes in the automobile and automobile finance market environments,
macroeconomic factors such as interest rates, and mix of business between
Contracts purchased on a flow basis and Contracts purchased on an other than
flow basis. The Company ceased to purchase Contracts on a flow basis in May
2002.

Personnel costs include base salaries, commissions and bonuses paid to
employees, and certain expenses related to the accounting treatment of
outstanding stock options, and are one of the Company's most significant
operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and Contracts processed and
serviced.

Other operating expenses consist primarily of facilities expenses, telephone and
other communication services, credit services, computer services (including
personnel costs associated with information technology support), professional
services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $40.8 million for the six-month period ended June
30, 2003, compared to $45.8 million for the same period in 2002.

Personnel costs were lower, $17.9 million during the six months ended June 30,
2003, representing 43.9% of total operating expenses, compared to $19.4 million
for the 2002 period, or 42.4% of total operating expenses. The decrease is
primarily the result of staff reductions since the MFN Merger on March 8, 2002
related to the integration and consolidation of certain service and
administrative activities and the decline in the balance of the portfolio of
Contracts acquired in the MFN Merger. The decline in personnel costs also
resulted from the decline in stock-based employee compensation expense from $1.9
million in the six-month period ended June 30, 2002 to $447,000 in the
comparable period in 2003.

25

General and administrative expenses decreased to $8.1 million, or 19.8% of total
operating expenses, in the first and second quarters of 2003, from $9.5 million,
or 20.8% of total operating expenses, in the same quarters in 2002.

Interest expense for the six-month period ended June 30, 2003, decreased $1.0
million, or 8.9%, to $10.6 million in 2003, compared to $11.6 million in 2002.
The decrease is due to the reduction in interest expense resulting from the MFN
Merger, specifically related to the average balance of the Securitization Trust
Debt.

Income tax benefit of $3.4 million and $5.3 million has been provided in the
2003 and 2002 periods, respectively. The 2003 benefit is primarily the result of
the resolution of certain Internal Revenue Service examinations of previously
filed MFN tax returns, resulting in a tax benefit of $4.9 million, and other
state tax matters which have been included in the current period tax provision.
The 2002 benefit is due to tax legislation passed in early 2002, which enabled
the Company to reverse a previously recorded valuation allowance of
approximately $3.2 million, as well as record benefit in the then current
period. The Company expects to record no tax provision for the remainder of
2003.

EXTRAORDINARY ITEM. The six months ended June 30, 2002 included $17.4 million
of unallocated negative goodwill, which represented the difference between the
net assets acquired and the purchase price paid by the Company in connection
with the MFN Merger.

INTENDED CHANGE IN SECURITIZATION STRUCTURE

The Company announced in August 2003 that it intends to structure its future
securitization transactions so that they will be treated for financial
accounting purposes as borrowings secured by receivables, rather than as sales
of receivables. The intended future structure will affect the way in which the
transactions are reported, including (i) the finance receivables will be shown
as assets of the Company on its balance sheet, (ii) the debt issued in the
transactions will be recorded as indebtedness of the Company, (iii) the
servicing fee that the Company receives in connection with such receivables will
be included in the interest earned on such receivables, (iv) the Company will
initially and periodically record as expense a provision for estimated incurred
losses on the receivables, and (v) the portion of payments on the receivables
representing interest will be recorded as revenue as accrued. These changes
collectively represent a deferral of revenue and acceleration of expenses, and
thus initially will result in the Company's reporting lower earnings than it
would report if it were to continue to structure its securitizations to require
recognition of gain on sale. As a result, reported earnings initially will be
less than they would be had the Company continued to structure its
securitizations to record a gain on sale and therefore, reported net earnings
may be negative or nominally positive for approximately the next year. The
Company's cash availability and cash requirements should be unaffected by the
intended change in structure.

LIQUIDITY AND CAPITAL RESOURCES

The Company's business requires substantial cash to support its purchases of
Contracts and other operating activities. The Company's primary sources of cash
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving credit facilities (also
sometimes known as warehouse credit facilities), servicing fees on portfolios of
Contracts previously sold, customer payments of principal and interest on
Contracts held for sale, fees for origination of Contracts, and releases of cash
from securitized pools of Contracts in which the Company has retained a residual

26

ownership interest, and from the Spread Accounts associated with such pools. The
Company's primary uses of cash have been the purchases of Contracts, repayment
of amounts borrowed under lines of credit and otherwise, operating expenses such
as employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of and further contributions to "Spread Accounts"
(cash posted to enhance credit of securitized pools), and income taxes. There
can be no assurance that internally generated cash will be sufficient to meet
the Company's cash demands. The sufficiency of internally generated cash will
depend on the performance of securitized pools (which determines the level of
releases from Spread Accounts), the rate of expansion or contraction in the
Company's servicing portfolio, and the terms upon which the Company is able to
acquire, sell, and borrow against Contracts.

Net cash provided by operating activities for the six months ended June 30, 2003
and 2002, was $49.1 million and $70.3 million, respectively. Cash from operating
activities is generally provided by the net releases from the Company's
securitization Trusts and from the amortization and liquidation of Contracts.

Net cash used in investing activities for the six months ended June 30, 2003 and
2002, was $10.2 million and $29.6 million, respectively. Cash used in the TFC
Merger, net of the cash acquired in the transaction, totaled $10.2 million for
the six months ended June 30, 2003.

Net cash provided by financing activities for the six months ended June 30, 2003
and 2002, was $38.2 million and $26.1 million, respectively. Cash used or
provided by financing activities is primarily attributable to the repayment or
issuance of debt.

Contracts are purchased from Dealers for a cash price approximating their
principal amount, and generate cash flow over a period of years. As a result,
the Company has been dependent on warehouse credit facilities to purchase
Contracts, and on the availability of cash from outside sources in order to
finance its continuing operations, as well as to fund the portion of Contract
purchase prices not financed under warehouse credit facilities. The Company
currently has $225 million in warehouse credit capacity, in the form of a $125
million facility, a $75 million facility and a $25 million facility. The first
two warehouse facilities provide funding for Contracts purchased under CPS'
programs while the third facility provides funding for Contracts purchased under
TFC's programs. Through May 2002, the Company's Contract purchasing program
consisted of both (i) flow purchases for immediate resale to non-affiliates and
(ii) purchases for the Company's own account made on other than a flow basis,
funded primarily by advances under a revolving warehouse credit facility. Flow
purchases allowed the Company to purchase Contracts with minimal demands on
liquidity. The Company's revenues from the resale of flow purchase Contracts,
however, were materially less than those that may be received by holding
Contracts to maturity or by selling Contracts in securitization transactions.
During the six-month period ended June 30, 2003 the Company purchased $182.0
million of Contracts for its own account, compared to $75.4 million for its own
account and $181.1 million of Contracts on a flow basis in 2002. The Company's
flow purchase program ended in May 2002.

The $125 million warehouse facility is structured to allow CPS to fund a portion
of the purchase price of Contracts by drawing against a floating rate variable
funding note issued by CPS Warehouse Trust. This facility was established in
March 7, 2002, in the maximum amount of $100 million. Such maximum amount was
increased to $125 million in November 2002. Approximately 73% of the principal
balance of Contracts may be advanced to the Company under this facility, subject
to collateral tests and certain other conditions and covenants. Notes under this
facility bear interest at a rate of one-month commercial paper plus 1.18% per
annum. This facility was renewed on March 6, 2003 for a 364-day term.

The $75 million warehouse facility is similarly structured to allow CPS to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by CPS Funding LLC. Approximately 72.5% of the
principal balance of Contracts may be advanced to the Company under this
facility, subject to collateral tests and certain other conditions and

27

covenants. Notes under this facility bear interest at a rate of one-month LIBOR
plus 0.75% per annum. This facility was renewed and restated on January 9, 2003,
also for a 364-day term.

The $25 million warehouse facility is similarly structured to allow TFC to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by TFC Warehouse I LLC. Approximately 71% of the
principal balance of Contracts may be advanced to TFC under this facility,
subject to collateral tests and certain other conditions and covenants. Notes
under this facility bear interest at a rate of one-month LIBOR plus 1.75% per
annum. This facility was entered into as part of the TFC Merger on May 20, 2003
and has a 364-day term.

These facilities are independent of each other. Two different financial
institutions purchase the notes issued by these facilities, and three different
insurers insure the notes. Sales of Contracts to the facility-related special
purpose subsidiaries ("SPS") related to the first two facilities have been
treated as continuous securitizations. The Company, therefore, has removed these
securitized Contracts and related debt from its Condensed Consolidated Balance
Sheet and has recognized a gain on sale in the Company's Condensed Consolidated
Statement of Operations. Indebtedness related to Contracts funded by the third
facility, however, is on the Company's Condensed Consolidated Balance Sheet and
no gain on sale was recognized in the Company's Condensed Consolidated Statement
of Operations. Subsequent to June 30, 2003, each of the first two facilities was
amended, with the effect that use of such facilities will be treated for
financial accounting purposes as borrowing secured by such receivables, rather
than as a sale of receivables. The effects of that amendment are similar to
those discussed above with respect to the intended change in securitization
structure.

Prior to June 2002, the Company also purchased Contracts on a flow basis, which,
as compared with purchases of Contracts for the Company's own account, involved
a materially reduced demand on the Company's cash. The Company's plan for
meeting its liquidity needs is to match its levels of Contract purchases to its
availability of cash.

Cash used for subsequent deposits to Spread Accounts for the six-month periods
ended June 30, 2003 and 2002 was $1.3 million and $6.7 million, respectively.
Cash released from Spread Accounts to the Company for the six-month periods
ended June 30, 2003 and 2002, was $13.9 million and $36.1 million, respectively.
Changes in deposits to and releases from Spread Accounts are affected by the
relative size, seasoning and performance of the various pools of Contracts sold
that make up the Company's servicing portfolio to which the respective Spread
Accounts are related. During the six months ended June 30, 2003 the Company made
initial deposits to the related Spread Accounts of $17.3 million related to its
term securitization transactions, compared to $1.3 million in the 2002 period.
The acquisition of Contracts for subsequent sale in securitization transactions,
and the need to fund Spread Accounts when those transactions take place, results
in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company's Contract purchases (other than flow
purchases), the required level of initial credit enhancement in securitizations,
and the extent to which the previously established Spread Accounts either
release cash to the Company or capture cash from collections on sold Contracts.
The Company is currently limited in its ability to purchase Contracts due to
certain liquidity constraints. As of June 30, 2003, the Company had cash on hand
of $33.6 million and available Contract purchase commitments from its warehouse
credit facilities of $205.2 million. The Company's plans to manage the need for
liquidity include the completion of additional term securitizations that would
provide additional credit availability from the warehouse credit facilities, and
matching its levels of Contract purchases to its availability of cash. There can
be no assurance that the Company will be able to complete the term
securitizations on favorable economic terms or that the Company will be able to
complete term securitizations at all. If the Company is unable to complete such
securitizations, servicing fees and other portfolio related income would
decrease.

28

The Company's primary means of ensuring that its cash demands do not exceed its
cash resources is to match its levels of Contract purchases to its availability
of cash. The Company's ability to adjust the quantity of Contracts that it
purchases and sells will be subject to general competitive conditions and the
continued availability of warehouse credit facilities. There can be no assurance
that the desired level of Contract acquisition can be maintained or increased.
Obtaining releases of cash from the Trusts and their related Spread Accounts is
dependent on collections from the related Trusts generating sufficient cash to
maintain the Spread Accounts in excess of their respective requisite levels.
There can be no assurance that collections from the related Trusts will continue
to generate sufficient cash.

Certain of the Company's securitization transactions and the warehouse credit
facilities contain various covenants requiring certain minimum financial ratios
and results. The Company was in compliance with all of these covenants as of
June 30, 2003, except one related to maximum leverage. Subsequent to June 30,
2003, the Company has received a waiver on this covenant breach from the
controlling party. To the extent that the TFC Merger had not occurred, the
Company would not have been in breach of such covenant.

CRITICAL ACCOUNTING POLICIES

(a) ALLOWANCE FOR FINANCE CREDIT LOSSES

In order to estimate an appropriate allowance for losses incurred on finance
receivables held on the Company's balance sheet, the Company uses a loss
estimation methodology commonly referred to as "static pooling," which
stratifies its finance receivable portfolio into separately identified pools.
Using analytical and formula driven techniques, the Company estimates an
allowance for finance credit losses, which management believes is adequate for
known and inherent losses in the finance receivable Contract portfolio.
Provision for loss is charged to the Company's Consolidated Statement of
Operations. Net losses incurred on finance receivables are charged to the
allowance. Management evaluates the adequacy of the allowance by examining
current delinquencies, the characteristics of the portfolio and the value of the
underlying collateral. As conditions change, the Company's level of provisioning
and/or allowance may change as well.

(b) RESIDUAL INTEREST IN SECURITIZATION AND GAIN ON SALE OF CONTRACTS

Gain on sale may be recognized on the disposition of Contracts outright or in
securitization transactions. In its securitization transactions, the Company, or
a wholly-owned, consolidated subsidiary of the Company, retains a residual
interest in the Contracts that are sold to a wholly-owned, unconsolidated
special purpose subsidiary. The Company's securitization transactions include
"term" securitizations (purchaser holds the Contracts for substantially their
entire term) and "continuous" securitizations (which finance the acquisition of
the Contracts for future sale into term securitizations).

The residual interest in term securitizations and the residual interest in the
Contracts held in continuous ("warehouse") securitizations are reflected in the
line item "residual interest in securitizations" on the Company's Condensed
Consolidated Balance Sheet.

The Company's securitization structure has generally been as follows:

The Company sells Contracts it acquires to a wholly-owned, unconsolidated
Special Purpose Subsidiary ("SPS"), which has been established for the limited
purpose of buying and reselling the Company's Contracts. The SPS then transfers
the same Contracts to an owner trust ("Trust"). The Trust is a qualifying
special purpose entity as defined in Statement of Financial Accounting Standards

29

No. 140 ("SFAS 140"), and is therefore not consolidated in the Company's
Condensed Consolidated Financial Statements. The Trust issues interest-bearing
asset backed securities (the "Notes"), generally in a principal amount equal to
the aggregate principal balance of the Contracts. The Company typically sells
these Contracts to the Trust at face value and without recourse, except that
representations and warranties similar to those provided by the Dealer to the
Company are provided by the Company to the Trust. One or more investors purchase
the Notes issued by the Trust; the proceeds from the sale of the Notes are then
used to purchase the Contracts from the Company. The Company may retain
subordinated Notes issued by the Trust. The Company purchases a financial
guaranty insurance policy, guaranteeing timely payment of principal and interest
on the senior Notes, from an insurance company (a "Note Insurer"). In addition,
the Company provides a "Credit Enhancement" for the benefit of the Note Insurer
and the investors in the form of an initial cash deposit to an account ("Spread
Account") held by the Trust, in the form of overcollateralization of the Notes,
where the principal balance of the Notes issued is less than the principal
balance of the Contracts, in the form of subordinated Notes, or some combination
of such Credit Enhancements. The agreements governing the securitization
transactions (collectively referred to as the "Securitization Agreements")
require that the initial level of Credit Enhancement be supplemented by a
portion of collections from the Contracts until the level of Credit Enhancement
reaches specified levels, and then maintained at those levels. 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
Enhancements are 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 portfolios, and have also varied by Securitization Agreement.
The Securitization Agreements generally grant the Company the option to
repurchase the sold Contracts from the Trust when the aggregate outstanding
balance has amortized to 10% or less of the initial aggregate balance.

The Company's warehouse securitization structures are similar to the above,
except that (i) the SPS that purchases the Contracts pledges the Contracts to
secure promissory notes issued directly by the SPS, (ii) the initial purchaser
of such notes has had the right, but not the obligation, to require that the
Company repurchase the Contracts, (iii) the promissory notes are in an aggregate
principal amount of not more than 72.5% to 73% of the aggregate principal
balance of the Contracts (that is, at least 27% overcollateralization), and (iv)
no Spread Account is involved. The SPS is a qualifying special purpose entity
and therefore has not been consolidated in the Company's Condensed Consolidated
Financial Statements. Subsequent to June 30, 2003, this securitization structure
was amended to give the Company the right to repurchase the Contracts from the
SPS. As a result, Contracts warehoused after June 30, 2003 will be reflected as
secured borrowings for financial accounting purposes.

Upon each sale of Contracts in a securitization, whether a term securiti