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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 1-14116
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0459135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 753-6800
Securities registered pursuant to section 12(b) of the Act:
Title of each class: RISING INTEREST SUBORDINATED REDEEMABLE SECURITIES DUE 2006
10.50% PARTICIPATING EQUITY NOTES DUE 2004
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value on March 22, 2001 (based on the $1.75 per share
closing price on the Nasdaq Stock Market on that date) of the voting stock
beneficially held by non-affiliates of the registrant was $23,223,482. The
number of shares of the registrant's Common Stock outstanding on March 22, 2001,
was 19,537,440.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for its 2001 annual meeting of shareholders is
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
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 retail automobile installment contracts
("Contracts") originated by licensed motor vehicle 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 installment Contracts from Dealers.
CPS was incorporated and began its operations in 1991. From inception through
December 31, 2000 the Company has purchased approximately $3.4 billion of
Contracts, and as of December 31, 2000, had an outstanding servicing portfolio
of approximately $412 million. The Company makes the decision to purchase
Contracts exclusively from its headquarters location. The Company services the
Contracts from two regional centers, one in its California headquarters, and the
other in Virginia.
The Market We Serve
The Company's automobile financing programs are designed to serve customers who
generally would not qualify for automobile financing from traditional sources,
such as commercial banks, credit unions and the captive finance companies
affiliated with major automobile manufacturers. Such customers ("Sub-Prime
Customers") generally have limited credit histories, low incomes or past credit
problems, and are therefore often unable to obtain credit from traditional
sources of automobile financing. (The terms "prime" and "sub-prime" reflect the
Company's categorization of customers and bear no relationship to the prime rate
of interest or persons who are able to borrow at that rate.) Because the Company
serves customers who are unable to meet the credit standards imposed by most
traditional automobile financing sources, the Company generally receives
interest at rates higher than those charged by traditional automobile financing
sources. The Company also sustains a higher level of credit losses than
traditional automobile financing sources since the Company provides financing in
a relatively high risk market.
Marketing
The Company directs its marketing efforts to Dealers, rather than to consumers.
As of December 31, 2000, the Company was a party to its standard form dealer
agreements ("Dealer Agreements") with 4,504 Dealers. Approximately 99% of these
Dealers are franchised new car dealers that sell both new and used cars and the
remainder are independent used car dealers. For the year ended December 31,
2000, approximately 83% of the Contracts purchased by the Company consisted of
financing for used cars and the remaining 17% for new cars, as compared to 85%
new and 15% used in the year ended December 31, 1999.
The Company establishes relationships with Dealers through Company
representatives who contact a prospective Dealer to explain the Company's
Contract purchase programs, and who thereafter provide Dealer training and
support services. As of December 31, 2000, the Company had 64 representatives,
62 of whom were employees and 2 of whom were independent. The representatives
are contractually obligated to represent the Company's financing program
exclusively. The Company's representatives present the Dealer with a marketing
package, which includes the Company's promotional material
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containing the terms offered by the Company for the purchase of Contracts, a
copy of the Company's standard-form Dealer Agreement, examples of monthly
reports, and required documentation relating to Contracts. Marketing
representatives have no authority relating to the decision to purchase Contracts
from Dealers.
Most of the Dealers under contract with CPS regularly submit Contracts to the
Company for purchase, although they are under no obligation to submit any
Contracts to the Company, nor is the Company obligated to purchase any
Contracts. During the year ended December 31, 2000, no Dealer accounted for more
than 1.0% of the total number of Contracts purchased by the Company. The
following table sets forth the geographical sources of the Contracts purchased
by the Company (based on the addresses of the customers as stated on the
Company's records) during the years ended December 31, 2000 and 1999:
Contracts Purchased During The Year Ended
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December 31, 2000 December 31, 1999
--------------------- ----------------------
Number Percent Number Percent
------ ------- ------ -------
California 5,251 12.8% 4,446 15.2%
Texas 5,023 12.2% 2,383 8.1%
North Carolina 3,691 9.0% 2,298 7.9%
Florida 3,437 8.4% 1,856 6.3%
Louisiana 3,413 8.3% 1,728 5.9%
Alabama 2,631 6.4% 1,942 6.6%
Pennsylvania 2,217 5.4% 2,336 8.0%
Michigan 2,042 5.0% 1,915 6.5%
South Carolina 1,807 4.4% 884 3.0%
New York 1,375 3.3% 928 3.2%
Illinois 1,359 3.3% 615 2.1%
Maryland 965 2.3% 733 2.5%
Ohio 958 2.3% 629 2.1%
New Jersey 907 2.2% 514 1.8%
Virginia 880 2.1% 512 1.7%
Other States 5,112 12.4% 5,548 19.0%
------ ------
Total 41,068 100.0% 29,267 100.0%
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Origination of Contracts
Dealer Origination. When a retail automobile buyer elects to obtain financing
from a Dealer, the Dealer takes a credit application to submit to its financing
sources. Typically, a Dealer will submit the buyer's application to more than
one financing source for review. The Company believes the Dealer's decision to
finance the automobile purchase with the Company, rather than other financing
sources, is based primarily on the monthly payment that will be offered to the
automobile buyer, the discounted purchase price offered for the Contract, the
timeliness, consistency and predictability of response, the cash resources of
the financing source, and any conditions to purchase.
Upon receipt of an application from a Dealer, the Company's administrative
personnel order a credit report to document the buyer's credit history. If, upon
review by a Company loan officer, it is determined that the application meets
the Company's underwriting criteria, or would meet such criteria with
modification, the Company requests and reviews further information and
supporting documentation and, ultimately, decides whether to purchase the
Contract. When presented with an application, the Company attempts to notify the
Dealer within four hours as to whether it intends to purchase such Contract.
The actual agreement for purchase of the vehicle ("Contract") is prepared by the
Dealer. The Dealer also arranges for recording the Company's lien on the
vehicle. After the appropriate documents are signed by the Dealer and the
customer, the Dealer sells the Contract to the Company. The Company currently
sells
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immediately a portion of the Contracts that it purchases, and holds the
remainder for its own account. In either case, the customer then receives
monthly billing statements.
The Company purchases Contracts from Dealers at a price generally equal to the
total amount financed under the Contracts, reduced by an acquisition fee ranging
from zero to $1,595 for each Contract purchased. The fees vary based on the
perceived credit risk and, in some cases, the interest rate on the Contract. For
the years ended December 31, 2000, 1999 and 1998, the average amount charged per
Contract purchased was $469, $336 and $418, respectively, or 3.17%, 2.32% and
3.24%, respectively, of the amount financed. In addition, during 1998 the
Company began purchasing certain Contracts of higher credit quality for which
the Company pays a fee to the Dealer. During 2000, 1999 and 1998, respectively,
the Company purchased 2,104, 2,161 and 1,583 of these Contracts, representing
approximately 5.1%, 7.4% and 1.9% of all Contracts purchased. The average fee
paid to Dealers on these Contracts was $595, $568 and $531, respectively.
The Company attempts to control misrepresentation regarding the customer's
credit worthiness by carefully screening the Contracts it purchases, by
establishing and maintaining professional business relationships with Dealers,
and by including certain representations and warranties by the Dealer in the
Dealer Agreement. Pursuant to the Dealer Agreement, the Company may require the
Dealer to repurchase any Contract in the event that the Dealer breaches its
representations or warranties. There can be no assurance, however, that any
Dealer will have the financial resources to satisfy its repurchase obligations
to the Company.
Objective Contract Purchase Criteria. To be eligible for purchase by the
Company, a Contract must have been originated by a Dealer that has entered into
a Dealer Agreement to sell Contracts to the Company. The Contracts must be
secured by a first priority lien on a new or used automobile, light truck or
passenger van and must meet the Company's underwriting criteria. In addition,
each Contract requires the customer to maintain physical damage insurance
covering the financed vehicle and naming the Company as a loss payee. The
Company or any purchaser of the Contract from the Company may, nonetheless,
suffer a loss upon theft or physical damage of any financed vehicle if the
customer fails to maintain insurance as required by the Contract and is unable
to pay for repairs to or replacement of the vehicle or is otherwise unable to
fulfill his or her obligations under the Contract.
The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Sub-Prime Customers and the
adequacy of the financed vehicle as security for a Contract. These criteria
include standards for price, term, amount of down payment, installment payment
and interest rate; mileage, age and type of vehicle; principal amount of the
Contract in relation to the value of the vehicle; customer income level, job and
residence stability, credit history and debt serviceability; and other factors.
Specifically, the Company's guidelines limit the maximum principal amount of a
purchased Contract to 115% of wholesale book value in the case of used vehicles
or to 110% of the manufacturer's invoice in the case of new vehicles, plus, in
each case, sales tax, licensing and, when the customer purchases such additional
items, a service contract or a credit life or disability policy. The Company
does not finance vehicles that are more than seven model years old or have in
excess of 85,000 miles. Under most CPS programs, the maximum term of a purchased
Contract is 60 months; a shorter maximum term may be applied based on the year
and mileage of the vehicle, and contracts with terms up to 72 months may be
purchased if the customer is among the more creditworthy of CPS's obligors and
the vehicle is not more than three model years old and has less than 30,000
miles. Contract purchase criteria are subject to change from time to time as
circumstances may warrant. Upon receiving this information with the customer's
application, the Company's underwriters verify the customer's employment,
residency, insurance and credit information provided by the customer by
contacting various parties noted on the customer's application, credit
information bureaus and other sources. In addition, prior to purchasing a
Contract, CPS contacts each customer by telephone to confirm that the Customer
understands and agrees to the terms of the related Contact.
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Credit Scoring. The Company has used a proprietary scoring model to assign to
each Contract a "credit score" at the time the application is received from the
Dealer and the customer's credit information is retrieved from the credit
reporting agencies. The credit score is based on a variety of parameters, such
as the customer's job and residence stability, the amount of the down payment,
and the age and mileage of the vehicle. The Company has developed the credit
score as a means of improving its allocation of credit evaluation resources, and
managing the risk inherent in the sub-prime market.
Characteristics of Contracts. All of the Contracts purchased by the Company are
fully amortizing and provide for level payments over the term of the Contract.
The average original principal amount financed under Contracts purchased in the
year ended December 31, 2000 was approximately $14,780, with an average original
term of approximately 62 months and an average down payment of 13.2%. Based on
information contained in customer applications, for this twelve-month period,
the retail purchase price of the related automobiles averaged $15,064 (which
excludes tax and license fees, and any additional costs such as a maintenance
contract), the average age of the vehicle at the time the Contract was purchased
was 3 years, and the Company's customers averaged approximately 37 years of age,
with approximately $35,693 in average annual household income and an average of
4.5 years' history with his or her current employer.
All Contracts may be prepaid at any time without penalty. In the event a
customer elects to prepay a Contract in full, the payoff amount is calculated by
deducting the unearned interest from the Contract balance, in the case of a
pre-computed Contract, or by adding accrued interest to the Contract balance, in
the case of a simple interest Contract.
Each Contract purchased by the Company prohibits the sale or transfer of the
financed vehicle without the Company's consent and allows for the acceleration
of the maturity of a Contract upon a sale or transfer without such consent. In
most circumstances, the Company will not consent to a sale or transfer of a
financed vehicle unless the related Contract is prepaid in full.
Dealer Compliance. The Dealer Agreement and related assignment contain
representations and warranties by the Dealer that an application for state
registration of each financed vehicle, naming the Company as secured party with
respect to the vehicle, was effected at the time of sale of the related Contract
to the Company, and that all necessary steps have been taken to obtain a
perfected first priority security interest in each financed vehicle in favor of
the Company under the laws of the state in which the financed vehicle is
registered. If a Dealer or the Company, because of clerical error or otherwise,
has failed to take such action in a timely manner, or to maintain such interest
with respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in
the financed vehicle and its security interest may be subordinate to the
interest of, among others, subsequent purchasers of the financed vehicle,
holders of perfected security interests and a trustee in bankruptcy of the
customer. The security interest of the Company or the purchaser of a Contract
may also be subordinate to the interests of third parties if the interest is not
perfected due to administrative error by state recording officials. Moreover,
fraud or forgery could render a Contract unenforceable. In such events, the
Company could suffer a loss with respect to the related Contract. In the event
the Company suffers such a loss, it will generally have recourse against the
Dealer from which it purchased the Contract. This recourse will be unsecured,
and there can be no assurance that any particular Dealer will satisfy any such
repurchase obligations to the Company.
Servicing of Contracts
General. The Company's servicing activities consist of collecting, accounting
for and posting of all payments received; responding to customer inquiries;
taking all necessary action to maintain the security interest granted in the
financed vehicle or other collateral; investigating delinquencies; communicating
with the customer to obtain timely payments; repossessing and liquidating the
collateral when necessary; and generally monitoring each Contract and any
related collateral.
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Collection Procedures. The Company believes that its ability to monitor
performance and collect payments owed from Sub-Prime Customers is primarily a
function of its collection approach and support systems. The Company believes
that if payment problems are identified early and the Company's collection staff
works closely with customers to address these problems, it is possible to
correct many of them before they deteriorate further. To this end, the Company
utilizes pro-active collection procedures, which include making early and
frequent contact with delinquent customers; educating customers as to the
importance of maintaining good credit; and employing a consultative and customer
service approach to assist the customer in meeting his or her obligations, which
includes attempting to identify the underlying causes of delinquency and cure
them whenever possible. In support of its collection activities, the Company
maintains a computerized collection system specifically designed to service
automobile installment sale contracts with Sub-Prime Customers and similar
consumer obligations.
With the aid of its high penetration auto dialer, the Company typically attempts
to make telephonic contact with delinquent customers on the sixth day after
their monthly payment due date. Using coded instructions from a collection
supervisor, the automatic dialer will attempt to contact customers based on
their physical location, state of delinquency, size of balance or other
parameters. If the automatic dialer obtains a "no-answer" or a busy signal, it
records the attempt on the customer's record and moves on to the next call. If a
live voice answers the automatic dialer's call, the call is transferred to a
waiting collector at the same time that the customer's pertinent information is
simultaneously displayed on the collector's workstation. The collector then
inquires of the customer the reason for the delinquency and when the Company can
expect to receive the payment. The collector will attempt to get the customer to
make a promise for the delinquent payment for a time generally not to exceed one
week from the date of the call. If the customer makes such a promise, the
account is routed to a pending queue and is not contacted until the outcome of
the promise is known. If the payment is made by the promise date and the account
is no longer delinquent, the account is routed out of the collection system. If
the payment is not made, or if the payment is made, but the account remains
delinquent, the account is returned to the automatic dialing queue for
subsequent contacts.
If a customer fails to make or keep promises for payments, or if the customer is
uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the customer's payment due date, but could
occur sooner or later, depending on the specific circumstances.
If CPS elects to repossess the vehicle, it assigns the task to an independent
local repossession service. Such services are licensed and/or bonded as required
by law. When the vehicle is recovered, the repossessor delivers it to a
wholesale auto auction, where it is kept until sold, usually within 30 days of
the repossession. The UCC and other state laws regulate repossession sales by
requiring that the secured party provide the customer with reasonable notice of
the date, time and place of any public sale of the collateral, the date after
which any private sale of the collateral may be held and of the customer's right
to redeem the financed vehicle prior to any such sale and by providing that any
such sale be conducted in a commercially reasonable manner. Financed vehicles
repossessed generally are resold by the Company through unaffiliated automobile
auctions, which are attended principally by car dealers. Net liquidation
proceeds are applied to the customer's outstanding obligation under the
Contract.
Under the UCC and other laws applicable in most states, a creditor is entitled
to obtain a deficiency judgment from a customer for any deficiency on
repossession and resale of the motor vehicle securing the unpaid balance of such
customer's Contract. However, some states impose prohibitions or limitations on
deficiency judgments. When obtained, deficiency judgements are entered against
defaulting individuals who may have little capital or income. Therefore, in many
cases, it may not be useful to seek a deficiency judgment against a customer or,
if one is obtained, it may be settled at a significant discount.
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Credit Experience
The Company's financial results are dependent on the performance of the
Contracts in which it retains an ownership interest. The tables below document
the delinquency, repossession and net credit loss experience of all Contracts
that the Company was servicing as of the respective dates shown.
DELINQUENCY EXPERIENCE(1)
December 31, 2000 December 31, 1999 December 31, 1998
--------------------- -------------------- -----------------------
Number Number Number
of of of
Contracts Amount Contracts Amount Contracts Amount
--------- -------- --------- -------- --------- ----------
(Dollars in thousands)
Gross servicing portfolio(1) .... 60,178 $427,734 92,388 $868,797 141,396 $1,674,417
Period of delinquency(2)
31-60 days ...................... 2,319 16,778 2,781 26,204 4,202 48,324
61-90 days ...................... 683 4,983 1,130 11,226 1,869 22,335
91+ days ........................ 418 3,148 652 6,997 1,694 20,096
------ -------- ------ -------- ------- ----------
Total delinquencies(2) .......... 3,420 24,909 4,563 44,427 7,765 90,755
Amount in repossession(3) ....... 1,106 8,302 3,424 28,896 2,961 32,772
------ -------- ------ -------- ------- ----------
Total delinquencies and amount in
repossession(2) ............... 4,526 $ 33,211 7,987 $ 73,323 10,726 $ 123,527
====== ======== ====== ======== ======= ==========
Delinquencies as a percent of
gross servicing portfolio ..... 5.7% 5.8% 4.9% 5.1% 5.5% 5.4%
Total delinquencies and amount in
repossession as a percent of
gross servicing portfolio ..... 7.5% 7.8% 8.7% 8.4% 7.6% 7.4%
(1) All amounts and percentages are based on the full amount remaining to be
repaid on each Contract, including, for pre-computed Contracts, any
unearned finance charges. The information in the table represents the
principal amount of all Contracts purchased by the Company, including
Contracts subsequently sold by the Company, which it continues to
service.
(2) The Company considers a Contract delinquent when an obligor fails to
make at least 90% of a contractually due payment by the following due
date, which date may have been extended within limits specified in the
Servicing Agreements. The period of delinquency is based on the number
of days payments are contractually past due. Contracts less than 31 days
delinquent are not included.
(3) Amount in repossession represents financed vehicles that have been
repossessed but not yet liquidated.
NET CHARGE-OFF EXPERIENCE(1)
Year Ended December 31,
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(Dollars in thousands)
2000 1999 1998
-------- ---------- ------------
Average servicing portfolio outstanding $578,200 $1,223,238 $ 1,300,519
Net charge-offs as a percent of average
servicing portfolio(2)(3) ........... 11.2% 9.2% 6.5%
(1) All amounts and percentages are based on the principal amount scheduled
to be paid on each Contract. The information in the table represents all
Contracts serviced by the Company.
(2) Net charge-offs include the remaining principal balance, after the
application of the net proceeds from the liquidation of the vehicle
(excluding accrued and unpaid interest).
(3) The increase in net charge-offs as a percent of the average servicing
portfolio is primarily due to the decrease in the servicing portfolio
for the year ended December 31, 2000, compared to the prior year.
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Flow Purchase Program
From May 1999 through the date of this report, the Company has purchased
Contracts primarily for immediate and outright resale to non-affiliated third
parties. The Company sells such Contracts for a mark-up above what the Company
pays the Dealer. In such sales, the Company makes certain representations and
warranties to the purchasers, normal in the industry, which relate primarily to
the legality of the sale of the underlying motor vehicle and to the validity of
the security interest that is being conveyed to the purchaser. These
representations and warranties are generally similar to the representations and
warranties given by the originating Dealer to the Company. In the event of a
breach of such representations or warranties, the Company may incur liabilities
in favor of the purchaser(s) of the Contracts and there can be no assurance that
the Company would be able to recover, in turn, against the originating
Dealer(s).
Liquidation of Non-securitized Portfolio
From June 1994 through November 1998, substantially all Contracts that the
Company purchased were sold in securitization transactions, as described below.
In March 1999 the Company learned that it would not be able to close a
securitization transaction for an indefinite period. The Company's "warehouse"
lines of credit, under which the Company had drawn funds to acquire Contracts,
by their terms set a limit on how long any Contract could be considered eligible
collateral thereunder. Because the Company was unable to sell Contracts in a
securitization transaction, those time limits were exceeded, and the Company
fell into default on those lines of credit. In order to repay the outstanding
indebtedness the Company embarked on a program of selling outright, to
non-affiliated third parties, substantially all of such Contracts. A total of
approximately $318.0 million of Contracts were sold from June 1999 through
September 1999, yielding sufficient proceeds to repay all of the warehouse
indebtedness. All of such sales were at prices less than the Company's
acquisition cost of such Contracts; accordingly, the Company recorded a net loss
in the approximate aggregate amount of $15.2 million on such sales. The Company
has no intention or expectation of again selling quantities of Contracts at less
than their acquisition cost.
Securitization and Sale of Contracts
The Company currently purchases Contracts (i) for immediate and outright resale
to non-affiliated third parties, and (ii) to hold pending resale in
securitization transactions. The Company has not sold Contracts in a
securitization transaction since December 1998, and there can be no assurance
that such future transactions will occur.
In a securitization sale, the Company is required to make certain
representations and warranties, which are generally similar to the
representations and warranties made by Dealers in connection with the Company's
purchase of the Contracts. If the Company breaches any of its representations or
warranties to a purchaser of the Contracts, the Company will be obligated to
repurchase the Contract from such purchaser at a price equal to such purchaser's
purchase price less the related cash securitization reserve and any payments
received by such purchaser on the Contract. The Company may then be entitled
under the terms of its Dealer Agreement to require the selling Dealer to
repurchase the Contract at a price equal to the Company's purchase price, less
any payments made by the customer. Subject to any recourse against Dealers, the
Company will bear the risk of loss on repossession and resale of vehicles under
Contracts repurchased by it.
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Upon the sale of a portfolio of Contracts in a securitization transaction, the
Company retains the obligation to service the Contracts, and receives a monthly
fee for doing so. Among other services performed, the Company mails to obligors
monthly billing statements directing them to mail payments on the Contracts to a
lock-box account. The Company engages an independent lock-box processing agent
to retrieve and process payments received in the lock-box account. This results
in a daily deposit to the trust's bank account of the entire amount of each
day's lock-box receipts and the simultaneous electronic data transfer to the
Company of customer payment data records. Pursuant to the Servicing Agreements,
the Company is required to deliver monthly reports to the trust reflecting all
transaction activity with respect to the Contracts. The reports contain, among
other information, a reconciliation of the change in the aggregate principal
balance of the Contracts in the portfolio to the amounts deposited into the
trust's bank account as reflected in the daily reports of the lock-box
processing agent.
Pursuant to its securitization purchase commitments, the Company generally
warrants that, to the best of the Company's knowledge, no such liens or claims
are pending or threatened with respect to a financed vehicle, which may be or
become prior to or equal with the lien of the related Contracts. In the event
that any of the Company's representations or warranties proves to be incorrect,
the trust would be entitled to require the Company to repurchase the Contract
relating to such financed vehicle.
The Servicing Portfolio
The Company currently services all Contracts that it owns, as well as those
Contracts included in portfolios that it has sold to securitization trusts. The
Company does not service Contracts that were acquired in its flow purchase
program or that were sold in its Contract liquidation program. Pursuant to the
Company's usual form of servicing agreement (the Company's servicing agreements
with purchasers of portfolios of Contracts are collectively referred to as the
"Servicing Agreements"), CPS is obligated to service all Contracts sold to the
trusts in accordance with the Company's standard procedures. The Servicing
Agreements generally provide that the Company will bear all costs and expenses
incurred in connection with the management, administration and collection of the
Contracts serviced. The Servicing Agreements also provide that the Company will
take all actions necessary or reasonably requested by the investor to maintain
perfection and priority of the trust's security interest in the financed
vehicles.
The Company is entitled under most of the Servicing Agreements to receive a base
monthly servicing fee of 2.0% per annum computed as a percentage of the
declining outstanding principal balance of the non-defaulted Contracts in the
portfolio. The Servicing Agreements also provide that the Company is entitled to
receive certain other fees collected from customers. Each month, after payment
of the Company's base monthly servicing fee and certain other fees, the trust
receives the paid principal reduction of the Contracts in its portfolios and
interest thereon at the fixed rate that was agreed when the Contracts were sold
to the Trust. If, in any month, collections on the Contracts are insufficient to
pay such amounts and any principal reduction due to charge-offs, the shortfall
is satisfied from the "Spread Account" established in connection with the sale
of the portfolio. The "Spread Account" is an account established at the time the
Company sells a portfolio of Contracts, to provide security to the purchase of
the portfolio. If collections on the Contracts exceed such amounts, the excess
is utilized, first, to build up or replenish the Spread Account to the extent
required, next, to cover deficiencies in Spread Accounts for other portfolios,
and the balance, if any, constitutes excess cash flows, which are distributed to
the Company.
Pursuant to the Servicing Agreements, the Company is generally required to
charge off the balance of any Contract by the earlier of the end of the month in
which the Contract becomes four scheduled installments past due or, in the case
of repossessions, the month that the proceeds from the liquidation of the
financed vehicle are received by the Company or if the vehicle has been in
repossession inventory for more than 90 days. In the case of a repossession, the
amount of the charge-off is the difference between the outstanding principal
balance of the defaulted Contract and the net repossession sale proceeds. In the
event collections on the Contracts are not sufficient to pay to the holders of
interests in the trust ("Investors") the entire principal balance of Contracts
charged off during the month, the trustee draws on the related
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Spread Account to pay the Investors. The amount drawn would then have to be
restored to the Spread Account from future collections on the Contracts
remaining in the portfolio before the Company would again be entitled to receive
excess cash. In addition, the Company would not be entitled to receive any
further monthly servicing fees with respect to the defaulted Contracts. Subject
to any recourse against the Company in the event of a breach of the Company's
representations and warranties with respect to any Contracts and after any
recourse to any insurer guarantees backing the Certificates, the Investors bear
the risk of all charge-offs on the Contracts in excess of the Spread Account.
The Investors' rights with respect to distributions from the Trusts are senior
to the Company's rights. Accordingly, variation in performance of pools of
Contracts affects the Company's ultimate realization of value derived from such
Contracts.
The Servicing Agreements are terminable by the insurer of certain of the trust's
obligations in the event of certain defaults by the Company and under certain
other circumstances. As of December 31, 2000, 7 of the Company's 9 remaining
securitized pools had incurred cumulative losses exceeding certain predetermined
levels, which in turn has given the certificate insurer the right to terminate
the Servicing Agreements with respect to all of the pools. To date, the
certificate insurer has waived its right to terminate the Servicing Agreements.
Competition
The automobile financing business is highly competitive. The Company competes
with a number of national, local and regional finance companies with operations
similar to those of the Company. In addition, competitors or potential
competitors include other types of financial services companies, such as
commercial banks, savings and loan associations, leasing companies, credit
unions providing retail loan financing and lease financing for new and used
vehicles, and captive finance companies affiliated with major automobile
manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit
Corporation, and Nissan Motors Acceptance Corporation. Many of the Company's
competitors and potential competitors possess substantially greater financial,
marketing, technical, personnel and other resources than the Company. Moreover,
the Company's future profitability will be directly related to the availability
and cost of its capital in relation to the availability and cost of capital to
its competitors. The Company's competitors and potential competitors include far
larger, more established companies that have access to capital markets for
unsecured commercial paper and investment grade-rated debt instruments and to
other funding sources that may be unavailable to the Company. Many of these
companies also have long-standing relationships with Dealers and may provide
other financing to Dealers, including floor plan financing for the Dealers'
purchase of automobiles from manufacturers, which is not offered by the Company.
The Company believes that the principal competitive factors affecting a Dealer's
decision to offer Contracts for sale to a particular financing source are the
purchase price offered for the Contracts, the reasonableness of the financing
source's underwriting guidelines and documentation requests, the predictability
and timeliness of purchases and the financial stability of the funding source.
The Company believes that it can obtain from Dealers sufficient Contracts for
purchase at attractive prices by consistently applying reasonable underwriting
criteria and making timely purchases of qualifying Contracts.
Government Regulation
Several federal and state consumer protection laws, including the federal
Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair
Debt Collection Practices Act and the Federal Trade Commission Act, regulate the
extension of credit in consumer credit transactions. These laws mandate certain
disclosures with respect to finance charges on Contracts and impose certain
other restrictions on Dealers. In many states, a license is required to engage
in the business of purchasing Contracts from Dealers. In addition, laws in a
number of states impose limitations on the amount of
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finance charges that may be charged by Dealers on credit sales. The so-called
Lemon Laws enacted by various states provide certain rights to purchasers with
respect to motor vehicles that fail to satisfy express warranties. The
application of Lemon Laws or violation of such other federal and state laws may
give rise to a claim or defense of a customer against a Dealer and its
assignees, including the Company and purchasers of Contracts from the Company.
The Dealer Agreement contains representations by the Dealer that, as of the date
of assignment of Contracts, no such claims or defenses have been asserted or
threatened with respect to the Contracts and that all requirements of such
federal and state laws have been complied with in all material respects.
Although a Dealer would be obligated to repurchase Contracts that involve a
breach of such warranty, there can be no assurance that the Dealer will have the
financial resources to satisfy its repurchase obligations to the Company.
Certain of these laws also regulate the Company's servicing activities,
including its methods of collection.
Although the Company believes that it is currently in material compliance with
applicable statutes and regulations, there can be no assurance that the Company
will be able to maintain such compliance. The past or future failure to comply
with such statutes and regulations could have a material adverse effect upon the
Company. Furthermore, the adoption of additional statutes and regulations,
changes in the interpretation and enforcement of current statutes and
regulations or the expansion of the Company's business into jurisdictions that
have adopted more stringent regulatory requirements than those in which the
Company currently conducts business could have a material adverse effect upon
the Company. In addition, due to the consumer-oriented nature of the industry in
which the Company operates and the application of certain laws and regulations,
industry participants are regularly named as defendants in litigation involving
alleged violations of federal and state laws and regulations and consumer law
torts, including fraud. Many of these actions involve alleged violations of
consumer protection laws. A significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. See "Legal Proceedings."
Alternative Marketing Programs
From 1996 through 1998, the Company invested in a 80 percent-owned subsidiary,
Samco Acceptance Corporation ("Samco"), which pursued a business strategy of
purchasing Contracts from independent finance companies that had in turn
purchased the Contracts from Dealers. The Contracts purchased from Samco showed
consistently higher losses than Contracts purchased by CPS directly from
Dealers. In December 1998, the Company ceased further investments in Samco, and
Samco terminated all operations during the first quarter of 1999. The Company
believes that any credit losses related to Samco-originated Contracts have been
adequately reserved for, and that no material losses will result from Samco's
terminated operations.
In May 1996, CPS formed LINC Acceptance Corp. ("LINC"), an 80 percent-owned
subsidiary based in Norwalk, Connecticut. LINC offered the Company's sub-prime
auto finance products to credit unions, banks and savings institutions
("Depository Institutions"). The Company believes that Depository Institutions
do not generally make loans to Sub-Prime Customers, even though they may have
relationships with Dealers and have Sub-Prime Customers.
During the second quarter of 1999, the Company ceased to provide additional
funding to LINC in conjunction with the Company's plan to reduce the level of
Contract purchases and thus to decrease its capital requirements. LINC thereupon
ceased its operations. In November 1999 three former employees of LINC filed an
involuntary Chapter 7 (liquidation) bankruptcy petition against LINC. See "Legal
Proceedings." See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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Employees
As of December 31, 2000, the Company had 537 full-time and 4 part-time
employees, of whom 11 are senior management personnel, 245 are collections
personnel, 130 are Contract origination personnel, 72 are marketing personnel
(64 of whom are marketing representatives), 57 are operations and systems
personnel, and 26 are administrative personnel. The Company believes that its
relations with its employees are good. The Company is not a party to any
collective bargaining agreement.
ITEM 2. PROPERTY
The Company's headquarters are located in Irvine, California, where it leases
approximately 115,000 square feet of general office space from an unaffiliated
lessor. The annual rent is approximately $1.9 million for the first five years
of the lease term, and increases to $2.1 million for years six through ten. The
Company has the option to cancel the lease after five years without penalty. In
addition to the foregoing base rent, the Company has agreed to pay the property
taxes, maintenance and other expenses of the premises.
The Company in March 1997 established a branch collection facility in
Chesapeake, Virginia. The Company leases approximately 28,000 square feet of
general office space in Chesapeake, Virginia, at a base rent that is currently
$419,470 per year, increasing to $504,545 over a ten-year term.
ITEM 3. LEGAL PROCEEDINGS
On October 29, 1999, three ex-employees of LINC filed an involuntary petition
under Chapter 7 of the Bankruptcy Code, naming LINC as the debtor, and seeking
its liquidation. The petition was filed in the U.S. Bankruptcy Court for the
District of Connecticut. Among the allegations asserted against the Company is
that LINC is entitled to a retained interest in the Contracts sold by LINC in
securitizations, and thus to a share of the distributions from the securitized
pools. The Company intends to contest vigorously this matter.
On May 12, 2000, Jon L. Kunert and Penny Kunert commenced a lawsuit against an
automobile dealer, the Company and in excess of 20 other defendants in the
Superior Court of California, Los Angeles County. The defendants other than the
automobile dealer appear to be various entities ("finance defendants") that may
have purchased retail installment contracts from that dealer. The lawsuit
alleges that the various finance defendants conspired with the automobile dealer
defendant to conceal from motor vehicle purchasers the full cost of credit
applicable to their purchases, and seeks a refund of the concealed excess cost.
The court has ordered the plaintiffs to file separate lawsuits against each
finance defendant. As of the date of this report, the Company is not aware that
any such lawsuit has been filed. The Company intends to contest vigorously any
such lawsuit, when and if it is filed.
On August 15, 2000, Linda McGee filed a lawsuit in the New Jersey Circuit Court
of Gloucester County alleging that she, and a purported 48-state class, were
defrauded by a "conspiracy" among the Company and unspecified automobile
dealers. The alleged object of the conspiracy was to conceal from plaintiff the
minimum interest rate at which the Company would be willing to finance a vehicle
purchase, and thus to gain for the dealer the additional amount that the Company
is willing to pay for higher-rate Contracts. The complaint seeks damages in an
unspecified amount. The 48-state class alleged by plaintiff is defined to
exclude the states of Alabama and Tennessee, where similar lawsuits against
other auto finance companies have failed.
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On November 15, 2000, Denice and Gary Lang filed a lawsuit in South Carolina
Common Pleas Court, Beaufort County, alleging that they, and a purported
nationwide class, were harmed by an alleged failure to refer, in the notice
given after repossession of their vehicle, of the right to purchase the vehicle
by tender of the full amount owed under the retail installment contract. They
seek damages in an unspecified amount.
Approximately 12 plaintiffs have filed seven lawsuits against approximately 50
defendants, all arising out of the failure of Stanwich Financial Services Corp.
("SFSC") to make certain payments when due in November 2000. The defendants
include SFSC, numerous financial institutions, Charles Bradley, Sr., Charles
Bradley, Jr. and the Company. The five lawsuits that name the Company as a
defendant allege, in essence, that the Company acted as the alter-ego of Charles
Bradley, Sr. in connection with the acquisition of SFSC by a corporation
controlled by Mr. Bradley, and that Mr. Bradley wrongfully caused SFSC to not
pay its obligations to the plaintiffs. Among the acts alleged to be wrongful are
the actions of SFSC in lending the Company an aggregate of $20.5 million. Since
the filing of the first such lawsuit, the Company has prepaid to SFSC $4 million
of such indebtedness. As of the date of this report, the Company has not been
required to respond to any of the seven lawsuits, and is in the process of
retaining counsel to appear on its behalf. The Company intends to contest
vigorously this litigation.
It is management's opinion, based on the advice of counsel, that all litigation
of which it is aware, including the matters discussed above, will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity, beyond reserves already taken.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers follows:
Charles E. Bradley, Jr., 41, has been the President and a director of the
Company since its formation in March 1991. In January 1992, Mr. Bradley was
appointed Chief Executive Officer of the Company. From March 1991 until December
1995 he served as Vice President and a director of CPS Holdings, Inc. From April
1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr.
Bradley, Jr. was an associate of The Harding Group, a private investment banking
firm. Mr. Bradley, Jr. is currently serving as a director of NAB Asset
Corporation, and Reunion Industries, Inc. Charles E. Bradley, Sr., Chairman of
the board of directors of the Company, is his father.
William L. Brummund, Jr., 48, has been Senior Vice President - Operations since
March 1991. From 1986 to March 1991, Mr. Brummund was Vice President and Systems
Administrator for Far Western Bank.
Nicholas P. Brockman, 56, has been Senior Vice President - Asset Recovery &
Liquidation since January 1996. He was Senior Vice President of Contract
Originations from April 1991 to January 1996. From 1986 to March 1991, Mr.
Brockman served as a Vice President and Branch Manager of Far Western Bank.
Richard P. Trotter, 57, has been Senior Vice President-Contract Origination
since January 1996. He was Senior Vice President of Administration from April
1995 to December 1995. From January 1994 to April 1995 he was Senior Vice
President-Marketing of the Company. From December 1992 to January 1994, Mr.
Trotter was Executive Vice President of Lange Financial Corporation, Newport
Beach, California.
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From May 1992 to December 1992, he was Executive Director of Fabozzi, Prenovost
& Normandin, Santa Ana, California. From December 1990 to May 1992 he was
Executive Vice President/Chief Operating Officer of R. Thomas Ashley, Newport
Beach, California. From April 1984 to December 1990, he was President/Chief
Executive Officer of Far Western Bank, Tustin, California.
Curtis K. Powell, 44, has been Senior Vice President - Marketing of the Company
since April 1995. He joined the Company in January 1993 as an independent
marketing representative until being appointed Regional Vice President of
Marketing for Southern California in November 1994. From June 1985 through
January 1993, Mr. Powell was in the retail automobile sales and leasing
business.
Mark A. Creatura, 41, has been Senior Vice President - General Counsel since
October 1996. From October 1993 through October 1996, he was Vice President and
General Counsel at Urethane Technologies, Inc., a polyurethane chemicals
formulator. Mr. Creatura was previously engaged in the private practice of law
with the Los Angeles law firm of Troy & Gould Professional Corporation, from
October 1985 through October 1993.
Thurman Blizzard, 58, has been Senior Vice President - Risk Management since
May 1999, and was Senior Vice President-Collections from January 1998 until May
1999. The Company had previously engaged Mr. Blizzard as a consultant from
October 1997 to December 1997 to provide recommendations to the Company
concerning its collections operation. Prior thereto, Mr. Blizzard served as
Chief Operations Officer of Monaco Finance from May 1994 to March 1997. Mr.
Blizzard was previously an Asset Liquidation Manager with the Resolution Trust
Corporation, from November 1991 to May 1994.
Kris I. Thomsen, 43, has been Senior Vice President - Systems since June 1999.
Previously, Ms. Thomsen had been Vice President-Systems since the Company's
inception in March 1991.
James L. Stock, 35, has been Senior Vice President - Chief Financial Officer of
the Company since January 2000. Prior to being named the Chief Financial
Officer, Mr. Stock was the Vice President and Corporate Controller of the
Company. From August 1993 to December 1994, Mr. Stock was the assistant
controller of Fluid Recycling Services, an industrial fluids management company
based in Santa Ana, California. From July 1990 to August 1993, Mr. Stock was a
senior associate with Coopers & Lybrand.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System, under
the symbol "CPSS." The following table sets forth the high and low sales prices
reported by Nasdaq for the Common Stock for the periods shown.
High Low
---- ---
January 1-March 31, 1999................. 5.250 2.813
April 1-June 30, 1999.................... 4.313 1.031
July 1-September 30, 1999................ 1.813 0.938
October 1-December 31, 1999.............. 1.875 0.438
January 1-March 31, 2000................. 2.938 1.313
April 1-June 30, 2000.................... 2.250 0.688
July 1-September 30, 2000................ 1.938 1.031
October 1-December 31, 2000.............. 1.938 1.125
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As of March 22, 2001, there were 79 holders of record of the Company's Common
Stock. To date, the Company has not declared or paid any dividends on its Common
Stock. The payment of future dividends, if any, on the Company's Common Stock is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition, and other
relevant factors. The instruments governing the Company's outstanding debt place
certain restrictions on the payment of dividends. The Company does not intend to
declare any dividends on its Common Stock in the foreseeable future, but instead
intends to retain any earnings for use in the Company's operations.
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ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Gain (loss) on sale of Contracts, net .. $ 16,234 $ (14,844) $ 58,306 $ 35,045 $ 20,565
Interest income ........................ 3,480 3,032 41,841 23,526 19,980
Servicing fees ......................... 15,848 27,761 25,156 14,487 7,893
Total revenue .......................... 35,951 14,805 126,280 75,251 48,438
Operating expenses ..................... 68,354 86,968 81,960 43,292 24,746
Net income (loss) ...................... (22,147) (44,532) 25,703 18,532 14,097
Basic earnings (loss) per share(1) ..... (1.10) (2.38) 1.67 1.29 1.05
Diluted net earnings (loss) per share(1) (1.10) (2.38) 1.50 1.17 0.93
December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Contracts held for sale ................ $ 18,830 $ 2,421 $165,582 $ 68,271 $ 21,657
Residual interest in securitizations ... 99,199 172,530 217,848 124,616 43,597
Total assets ........................... 175,694 220,314 431,962 225,895 101,946
Term debt .............................. 102,614 119,173 274,546 119,719 36,265
Total liabilities ...................... 113,572 135,877 312,881 143,288 44,989
Total shareholders' equity ............. 62,122 84,437 119,081 82,607 56,957
(1) All prior periods have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition of the Company should be read
in conjunction with "Selected Financial Data" and the Company's Consolidated
Financial Statements and the Notes thereto and the other financial data included
elsewhere in this report.
OVERVIEW
Consumer Portfolio Services, Inc. and its subsidiaries (collectively, the
"Company") primarily engage in the business of purchasing, selling and servicing
retail automobile installment sale contracts ("Contracts") originated by
automobile dealers ("Dealers") located throughout the United States. In the
past, the Company has purchased contracts in as many as 44 different states. At
various times in 1999, the Company suspended its solicitation of Contract
purchases in as many as 20 states, and as of the date of this report is active
in 34 states. There can be no assurance as to resumption of Contract purchasing
activities in other states. Through its purchase of Contracts, the Company
provides indirect financing to Dealer customers with limited credit histories,
low incomes or past credit problems, who generally would not be expected to
qualify for financing provided by banks or by automobile manufacturers' captive
finance companies.
The Company historically has generated revenue primarily from the gains
recognized on the sale or securitization of its Contracts, servicing fees earned
on Contracts sold, and interest earned on Residuals (as defined below) and on
Contracts held for sale. Beginning with the year ended December 31, 1999, and
through the date of this report, the Company did not sell any Contracts in
securitization transactions, and therefore recognized no gains on sale. All
sales of Contracts during 1999 were on a servicing released basis either in the
form of bulk sales of Contracts being held by the Company for sale, or as part
of a pass through agreement with a third party for which the Company earned fees
on a per Contract basis. During the year ended December 31, 2000, the Company
entered into a second third party pass through agreement and proceeded to sell
nearly all of the Contracts purchased during the year to one or the other third
party, for a mark-up above what the Company pays the Dealer. There were no bulk
sales during 2000. As a result of the Company's pass through sales during the
year ended December 31, 2000, the Company recognized a $16.2 million gain on
sale of Contracts, compared to a net loss on sale of Contracts for the year
ended December 31, 1999, of $14.8 million. During the year ended December 31,
1998, the Company recognized a net gain on sale of $58.3 million. Revenues from
interest and servicing fees for the year ended December 31, 2000, were $3.5
million and $15.8 million, respectively. Such revenues for the year ended
December 31, 1999, were $3.0 million and $27.8 million, respectively, and for
the year ended December 31, 1998, such revenues were $41.8 million and $25.2
million, respectively. The Company's income is affected by losses incurred on
Contracts, whether such Contracts are held for sale or have been sold in
securitizations. The Company's cash requirements have been significant in the
past and will continue to be significant in the future. Net cash provided by
operating activities for the year ended December 31, 2000, was approximately
$38.7 million, compared to net cash used in operating activities of
approximately $180,000 for the year ended December 31, 1999, and net cash used
in operating activities of approximately $71.1 million for the year ended
December 31, 1998. See "Liquidity and Capital Resources."
The Company has purchased Contracts with the primary intention of reselling them
in securitization transactions as asset-backed securities. From late May 1999 to
the present, the Company has purchased Contracts on a flow basis for third
parties; that is, the Company purchases a Contract from a Dealer, and sells the
Contract the next day to the third party for a mark-up above what the Company
pays the Dealer. The Company retains no interest in such Contracts, and neither
services such Contracts nor earns a servicing fee.
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Although the Company has not been able to sell Contracts in a securitization
transaction since December 1998, it does plan to securitize in the future, as to
which there can be no assurance. The Company's securitization structure has been
as follows:
First, the Company sells a portfolio of Contracts to a wholly owned 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
either a grantor trust or an owner trust (the "Trust"). The Trust in turn issues
interest-bearing asset-backed securities (the "Certificates"), 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 Certificates issued by the Trust; the proceeds from
the sale of the Certificates are then used to purchase the Contracts from the
Company. The Company purchases a financial guaranty insurance policy,
guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. The agreements governing the
securitization transactions (collectively referred to as the "Servicing
Agreements") require that the initial deposits to the Spread Accounts be
supplemented by a portion of collections from the Contracts until the Spread
Accounts reach 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 Certificates. The specified levels at which
the Spread Accounts 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 Certificate
Insurer and the trustee. Such levels have increased and decreased from time to
time based on performance of the portfolios, and have also been varied by
agreement. The specified levels applicable to the Company's sold pools increased
materially in 1998. Effective November 3, 1999, as applied to monthly
measurement dates from September 1999 onward, the specified levels have
decreased, as is discussed under the heading "Liquidity and Capital Resources."
At the closing of each securitization, the Company removes from its consolidated
balance sheet the Contracts held for sale and adds to its consolidated balance
sheet (i) the cash received and (ii) the estimated fair value of the ownership
interest that the Company retains in the Contracts sold in the securitization.
That retained interest (the "Residual") consists of (a) the cash held in the
Spread Account and (b) the net interest receivables ("NIRs"). NIRs represent the
estimated discounted cash flows to be received by the Trust in the future, net
of principal and interest payable with respect to the Certificates, 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 Certificates 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 and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of 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
released from the Spread Account (the cash out method), using a discount rate
that the Company believes is appropriate for the risks involved. For that
valuation, 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 Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
fees such as trustee and custodial fees for the period, then to the
Certificateholders for
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interest at the pass-through rate on the Certificates plus principal as defined
in the Servicing Agreements. If the amount of cash required for the above
allocations exceeds the amount collected during the collection period, the
shortfall is drawn from the Spread Account. 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 specified levels. Pursuant to certain Servicing Agreements, excess cash
collected during the period is used to make accelerated principal paydowns on
certain Certificates to create over-collateralization, that is, to reduce the
aggregate principal balance of outstanding Certificates below the aggregate
principal amount of the related automotive receivables. 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. 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 Servicing Agreements. Spread Account
balances are held by the Trusts on behalf of the Company as the owner of the
Residuals.
The annual percentage rate payable on the Contracts is significantly greater
than the rates payable on the Certificates. Accordingly, the Residuals described
above are a significant asset of the Company. In determining the value of the
Residuals described above, the Company must estimate the future rates of
prepayments, delinquencies, defaults and default loss severity, as they 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 a constant prepayment estimate of approximately
4% per annum. 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. In valuing the
Residuals, the Company estimates that losses as a percentage of the original
principal balance will range from 14% to 17.0% cumulatively over the lives of
the related Contracts.
In future periods, the Company could recognize additional revenue from the
Residuals if the actual performance of the Contracts were to be better than
originally estimated, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company has established a provision
for future losses on the Residuals.
From March 1999 to the present, the Company has been unable to complete a
securitization transaction, due to unavailability of sufficient capital. The
above description is included because the Residuals created in past
securitizations continue to represent the Company's largest asset, and because
the Company plans again to sell Contracts in securitization transactions, when
necessary pre-conditions (including availability of capital) are fulfilled.
During the year ended December 31, 1999, the Company has altered its basic
system of doing business. Previously, the Company would acquire Contracts for
its own account, borrowing from 88% to 97% of the principal balance of such
Contracts under "warehouse" lines of credit. Periodically (approximately once
every quarter) the Company would then sell most or all of the recently acquired
Contracts in a securitization transaction as described above. In such a sale,
the Company would retain (1) a residual ownership interest in the Contracts
sold, (2) the obligation to service the Contracts sold, and (3) the right to
receive servicing fees. At the end of March 1999, the Company learned that it
would be unable to sell Contracts in securitization transactions for an
indeterminate period. Accordingly, the Company commenced purchasing Contracts
for immediate re-sale to a third party, which third party purchases the
Contracts in turn on a daily basis for a mark-up above what the Company pays the
Dealer. In this arrangement, the Company retains no residual interest in the
Contracts, has no servicing obligation, and receives no servicing fee.
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In November 2000, the Company entered into a one year revolving note purchase
facility under which up to $75 million of notes may be outstanding at any time
subject to a collateral test and other conditions. The Company uses funds
derived from this facility to purchase Contracts, which are pledged to secure
the Notes. Such Contracts are held for sale in anticipated future securitization
transactions, as to which there can be no assurance. The collateral test
generally allows the Company to borrow up to approximately 75% of the price paid
for such Contracts. Notes issued under this facility bear interest at one-month
LIBOR plus 0.30% per annum.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Revenue. During the year ended December 31, 2000, revenues increased $21.1
million, or 142.8%, compared to the year ended December 31, 1999. Net gain on
sale of Contracts increased by $31.1 million, from a $14.8 million loss on sale
for the year ended December 31, 1999, to a $16.2 million gain for the year ended
December 31, 2000. The primary reason for the increase is that the prior year
included sales of some $318.0 million of Contracts for less than their
acquisition costs, resulting in a loss on sale of $15.2 million. Net gain on
sale also increased due to an increase in the number of Contracts sold on a flow
basis, and an increase in the average fee paid to the Company per Contract sold.
During the year ended December 31, 2000, the Company sold $600.4 million of
Contracts on a flow basis compared to $241.2 million of Contracts in the year
ended December 31, 1999. For the years ended December 31, 2000 and 1999, $1.8
million and $5.3 million, respectively, of provision for losses on Contracts
held for sale was charged against gain on sale.
Interest income increased by $448,000, or 14.8%, representing 9.7% of total
revenues for the year ended December 31, 2000. Prior to the second quarter of
the year 2000, the Company recognized residual interest income as the excess
cash flows generated by the Trusts over the related obligations of the Trusts.
This method of residual interest income recognition approximated a level yield
rate of residual interest income, net of the amortization of the NIRs, primarily
due to the continued addition of new securitizations. As a result of the
Company's not having securitized any Contracts since December 1998, the
Company's existing method of amortizing the Residuals would not reflect the
appropriate level yield. Therefore, the Company refined its methodology to
accrete residual interest income on a level yield basis, using an accretion rate
that approximates the discount rate used to value the residual interest in
securitizations. That rate is 14% per annum.
Servicing fees decreased by $11.9 million, or 42.9%, and represented 44.1% of
total revenue. Servicing fees are composed of base fees, which are payable at
the rate of 2% per annum on the principal balance of the outstanding Contracts
in the related trusts, plus any other fees collected by the Company, such as
late fees and returned check fees. The decrease in servicing fees is primarily
due to the decrease in the Company's servicing portfolio. As of December 31,
2000, the servicing portfolio was $411.9 million compared to $821.0 million as
of December 31, 1999.
Expenses. During the year ended December 31, 2000, operating expenses decreased
by $18.6 million, or 21.4%, compared to the year ended December 31, 1999.
Employee costs decreased by $5.2 million, or 17.4%, and represented 36.0% of
total operating expenses. The decrease is due to the reductions of staff in
accordance with the decrease in the Company's servicing portfolio. The decrease
was offset by an increase in employee costs of $778,000 related to the valuation
of certain stock options in accordance with recently issued accounting
principles. General and administrative expenses decreased by $3.8 million, or
19.6% and represented 23.1% of total operating expenses. The decrease in general
and administrative expenses is primarily due to the decrease in costs associated
with servicing the Company's portfolio. Such costs include telephone, postage,
and lockbox processing fees.
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Interest expense decreased by $10.2 million, or 37.1%, and represented 25.2% of
total operating expenses. The decrease in interest expense is primarily due to
the reductions in warehouse and non-warehouse indebtedness from the prior year.
(See "Liquidity and Capital Resources").
Marketing expenses increased by $703,000 or 13.0%, and represented 9.0% of total
expenses. The increase is primarily due to the increase in Contracts purchased
during the year ended December 31, 2000. Fees paid to marketing representatives
for their role in the submission of Contracts ultimately purchased by the
Company are included as a component in gain on sale of Contracts, net.
Occupancy expenses increased by $615,000 or 22.0%, and represented 5.0% of total
expenses. The increase is primarily due to additional property taxes paid during
2000. Depreciation and amortization expenses decreased by $434,000 or 27.2%, and
represented 1.7% of total expenses. In November 1998, the Company moved its
headquarters to a new 115,000 square foot facility. The Company is leasing the
new headquarters facility for a ten-year term, with base rent of $1.9 million
for the first five years, and $2.1 million for years six through ten. In
addition to base rent, the Company pays property taxes, maintenance, and other
expenses of the property.
The results for the years ended December 31, 2000 and 1999, include net losses
of $19,816 and net earnings of $35,131 respectively, from the Company's
subsidiary CPS Leasing, Inc.
The results for the year ended December 31, 2000, include a net operating loss
of $755,000 from the Company's investment in 38% of NAB Asset Corp. The results
for the year ended December 31, 1999, include $2.5 million in net earnings from
the Company's investment in NAB Asset Corp.
The Company's effective tax rate was 31.7% and 38.3%, for the years ended
December 31, 2000 and 1999, respectively. The decline in the effective tax rate
in 2000 reflects the full utilization of net operating loss carryback
availability, and the recording of a $3.7 million valuation allowance on a
portion of the Company's net deferred tax assets.
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue. During the year ended December 31, 1999, revenue decreased $111.5
million, or 88.3%, compared to the year ended December 31, 1998. Gain on sale of
Contracts, net, decreased by $73.2 million, or 125.5%, from a $58.3 million gain
on sale for the year ended December 31, 1998, to a $14.8 million loss for the
year ended December 31, 1999. The change in gain on sale from positive to
negative is due to the Company selling Contracts only on a servicing released
basis and thus not recording any NIR gains during the year, as well as to
selling Contracts at a loss. During the year ended December 31, 1999, the
Company sold $318.0 million of Contracts on a servicing released basis, that is,
with no residual interest retained, with no servicing obligation, and with no
right to receive a servicing fee. Those sales resulted in a net loss of
approximately $15.2 million. Expenses of approximately $1.1 million were
incurred related to previous securitization transactions, including the
amortization of a warrant issued to the Certificate Insurer in November 1998. In
addition, the Company sold $241.2 million of Contracts on a flow through basis
and received $6.2 million of fees, which have been included as a component of
gain on sale of Contracts, net. For the years ended December 31, 1999 and 1998,
$5.3 million and $3.5 million, respectively, of provision for losses on
Contracts held for sale were charged against gain on sale. The increase in the
provision for losses on Contracts held for sale is primarily due to the
Company's inability to securitize Contracts during 1999. As a result, Contracts
were held for sale for longer periods of time prior to being sold on a servicing
released basis, thus requiring additional loss reserves.
Interest income decreased by $38.8 million, or 92.8%, representing 20.5% of
total revenues for the year ended December 31, 1999. The decrease is primarily
due to decreases in Contracts held for sale and NIRs during 1999. Beginning in
May 1999, the Company began to purchase Contracts on a flow through basis and
thus did not hold any additional Contracts for sale since that time.
Additionally, the Company
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completed the final sale of Contracts on a servicing released basis, other than
those sold on a flow through basis, on September 1, 1999, leaving approximately
$4.6 million of Contracts held for sale at the end of September and decreasing
to $2.4 million by year end.
Servicing fees increased by $2.6 million, or 10.4%, and represented 187.5% of
total revenue. Servicing fees are composed of base fees, which are payable at
the rate of 2% per annum on the principal balance of the outstanding Contracts
in the related trusts, plus any other fees collected by the Company, such as
late fees and returned check fees. The increase in servicing fees is primarily
due to an increase in the fees other than base fees collected during 1999.
During the year ended December 31, 1999, the Company collected $4.9 million of
other servicing fees, an increase of 39.7% over other servicing fees collected
in the prior year.
Expenses. During the year ended December 31, 1999, operating expenses increased
$5.0 million, or 6.1%, compared to the year ended December 31, 1998. Employee
costs increased by $1.0 million, or 3.5%, and represented 34.3% of total
operating expenses. The increase is due to increases in salaries and wage rates.
General and administrative expenses decreased by $1.0 million, or 4.9% and
represented 22.5% of total operating expenses. The decrease in general and
administrative expenses is primarily due to the decrease in costs associated
with purchasing Contracts such as credit reports. During the year ended December
31, 1999, the Company purchased $424.7 million of Contracts, compared to
$1,076.5 million of Contracts purchased in the prior year.
Interest expense increased $5.4 million, or 24.5%, and represented 31.5% of
total operating expenses. The increase is due in part to the interest paid on
$25.0 million in subordinated debt securities issued by the Company in November
1998, and $6.5 million of additional subordinated debt securities issued during
the year ended December 31, 1999. In addition, the interest rate on the $25.0
million of subordinated debt issued in November 1998, was increased from 13.5%
in 1998 to 14.5% in April of 1999. Interest expense was also affected by the
volume of Contracts held for sale, as well as by the Company's cost of borrowed
funds. (See "Liquidity and Captial Resources").
Marketing expenses decreased by $1.5 million or 21.3%, and represented 6.2% of
total expenses. The decrease is primarily due to the decrease in Contracts
purchased during the year ended December 31, 1999. Fees paid to marketing
representatives for their role in the submission of Contracts ultimately
purchased by the Company are included as a component in gain on sale of
Contracts, net.
Occupancy expenses increased by $526,000 or 23.2%, and represented 3.2% of total
expenses. Depreciation and amortization expenses increased by $340,000 or 27.1%,
and represented 1.8% of total expenses. In November 1998, the Company moved its
headquarters to a new 115,000 square foot facility. The Company is leasing the
new headquarters facility for a ten-year term, with base rent of $1.9 million
for the first five years, and $2.1 million for years six through ten. In
addition to base rent, the Company pays property taxes, maintenance, and other
expenses of the property.
The results for the years ended December 31, 1999, and 1998, include a net
operating loss of approximately $150,000 and $1.1 million, respectively, from
the Company's subsidiary Samco. Samco terminated all of its operations during
the first quarter of 1999.
The results for the year ended December 31, 1999, include a net operating loss
of $830,380 from the Company's subsidiary LINC. For the year ended December 31,
1998, LINC had net operating losses of $565,333. During the second quarter of
1999, LINC ceased all operations.
The results for the years ended December 31, 1999 and 1998, include net earnings
of $35,131 and $298,000, respectively, from the Company's subsidiary CPS
Leasing, Inc.
The results for the year ended December 31, 1999, include a net operating loss
of $2.5 million from the Company's investment in 38% of NAB Asset Corp. The
results for the year ended December
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31, 1998, include $52,000 in net earnings from the Company's investment in NAB
Asset Corp.
The Company's effective tax rate was 38.3% and 42.0%, for the years ended
December 31, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
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
from operating activities have been proceeds from sales of Contracts, amounts
borrowed under lines of credit, servicing fees on portfolios of Contracts
previously sold, customer payments of principal and interest on Contracts held
for sale, fees received from its flow purchase programs for origination of
Contracts, and releases of cash from Spread Accounts. 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, and occupancy expenses, the establishment of and further contributions
to Spread Accounts, and income taxes. Internally generated cash may or may not
be sufficient to meet the Company's cash demands, depending on the performance
of securitized pools (which determines the level of releases from Spread
Accounts), on the rate of growth or decline in the Company's servicing
portfolio, and on the terms on which the Company is able to buy, borrow against
and sell Contracts.
Contracts are purchased from Dealers for a cash price close to their principal
amount, and return cash over a period of years. As a result, the Company has
been dependent on lines of credit to purchase Contracts, and on the availability
of cash from outside sources in order to finance its continued operations, and
to fund the portion of Contract purchase prices not borrowed under lines of
credit. For much of the three-year period ended December 31, 2000, the Company
was not party to any line of credit that would facilitate purchase of Contracts.
Furthermore, the Company did not receive any material releases of cash from
Spread Accounts from June 1998 through October 1999. The inability to borrow and
the lack of cash releases resulted in a liquidity deficiency, which has since
been alleviated.
The Company's Contract purchasing program currently comprises both (i) purchases
for the Company's own account, funded primarily by advances under a revolving
credit facility, and (ii) flow purchases for the account of non-affiliates. Flow
purchases allow the Company to purchase Contracts with minimal demands on
liquidity. The Company's revenues from flow purchase of Contracts, however, are
materially less than may be received by holding Contracts to maturity or by
selling Contracts in securitization transactions. For the year ended December
31, 2000, the Company purchased $600.4 million of Contracts on a flow basis, and
$31.1 million for its own account, compared to $424.7 million of Contracts
purchased, $241.2 million of which was purchased on a flow basis, in the prior
year.
Net cash provided by operating activities was $38.7 million for the year ended
December 31, 2000, compared to net cash used in operating activities of $180,000
for the same period in the prior year. During the years ended December 31, 2000,
and 1999, the Company did not complete a securitization transaction, and
therefore, did not use any cash for initial deposits to Spread Accounts. Cash
used for subsequent deposits to Spread Accounts for the year ended December 31,
2000, was $15.0 million, a decrease of $8.1 million, or 34.9%, from cash used
for subsequent deposits to Spread Accounts for the prior year. Cash released
from Spread Accounts to the Company for the year ended December 31, 2000, was
$80.6 million, as compared with $28.0 million for the prior year. Changes in
deposits to and releases from Spread Accounts are affected by the relative size,
seasoning and performance of the various pools of sold Contracts that make up
the Company's Servicing Portfolio. In particular, in the prior year most of the
cash generated by Contracts held by the Trusts was directed, pursuant to the
Securitization
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Agreements, to building Spread Accounts to their respective specified levels.
Those levels having been reached in November 1999, cash subsequently generated
has been available for release to the Company.
From June 1998 to November 1999, the Company's liquidity was adversely affected
by the absence of releases from Spread Accounts. Such releases did not occur
because a number of the Trusts had incurred cumulative net losses as a
percentage of the original Contract balance or average delinquency ratios in
excess of the predetermined levels specified in the respective Securitization
Agreements. Accordingly, pursuant to the Securitization Agreements, the
specified levels applicable to the Company's Spread Accounts were increased, in
most cases to an unlimited amount. Due to cross collateralization provisions of
the Securitization Agreements, the specified levels were increased on all but
the two most recent of the Company's Trusts. Increased specified levels for the
Spread Accounts have been in effect from time to time in the past. As a result
of the increased Spread Account specified levels and cross collateralization
provisions, excess cash flows that would otherwise have been released to the
Company instead were retained in the Spread Accounts to bring the balance of
those Spread Accounts up to higher levels. In addition to requiring higher
Spread Account levels, the Securitization Agreements provide the Certificate
Insurer with certain other rights and remedies, some of which have been waived
on a recurring basis by the Certificate Insurer with respect to all of the
Trusts. Until the November 1999 effectiveness of an amendment (the "Amendment")
to the Securitization Agreements, no material releases from any of the Spread
Accounts were available to the Company. Upon effectiveness of the Amendment, the
requisite Spread Account levels in general have been set at 21% of the
outstanding principal balance of the Certificates issued by the related Trusts.
The 21% level is subject to adjustment to reflect over collateralization. Older
Trusts may require more than 21% of credit enhancement if the Certificate
balance has amortized to such a level that "floor" or minimum levels of credit
enhancement are applicable.
In the event of certain defaults by the Company, the specified level applicable
to such credit enhancement could increase to an unlimited amount, but such
defaults are narrowly defined, and the Company does not anticipate suffering
such defaults. The Amendment has been effective since November 1999, and the
Company has received releases of cash from the securitized portfolio on a
monthly basis thereafter. The releases of cash are expected to continue and to
vary in amount from month to month. There can be no assurance that such releases
of cash will continue in the future.
Since November 2000, the Company has been able to purchase Contracts for its own
account using proceeds from a $75 million revolving note purchase facility.
Approximately 75% of the acquisition cost of Contracts may be advanced to the
Company under that facility (see "Credit Facilities"). The Company also
purchases Contracts on a flow basis, which, as compared with purchase of
Contracts for the Company's own account, involves a materially reduced demand on
the Company's cash. Cash requirements are reduced because the Company need only
fund such purchases for the period of several days that elapse between payment
to the Dealer and receipt of funds from the flow purchasers. The Company's plan
for meeting its liquidity needs is to adjust its levels of Contract purchases to
match 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 other factors. There
can be no assurance that the current level of Contract acquisition can be
maintained or increased. Obtaining releases of cash from the Spread Accounts is
dependent on collections from the related Trusts generating sufficient cash in
excess of the amended specified levels. There can be no assurance that
collections from the related Trusts will generate cash in excess of the amended
specified levels.
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CREDIT FACILITIES
The terms on which credit has been available to the Company for purchase of
Contracts have varied over the three-year period ended December 31, 2000, as
shown in the following recapitulation:
In November 1998, the Company entered into a warehouse line of credit agreement
with General Electric Capital Corporation (the "GECC Line"). The GECC Line
provided for warehouse facility advances up to a maximum of $100 million at a
variable interest rate of LIBOR + 3.75% . The GECC Line by its terms was to
expire November 30, 1999. During 1999, the Company defaulted on the GECC Line
agreements and was required to repay all balances owed. During August 1999, all
amounts owed under the GECC Line were repaid and the agreement was terminated.
In November 1997, the Company entered into a warehouse line of credit agreement
with First Union Capital Markets ("First Union Line"). The First Union Line
provided for a maximum of $150.0 million of advances to the Company, with
interest at a variable rate indexed to prevailing commercial paper rates. In
July 1998, the advance amount was increased to $200.0 million. In conjunction
with the increase in maximum advance amount under the agreement, the expiration
date was changed to July 31, 1999, renewable for one year with the mutual
consent of the Company and First Union Capital Markets. During 1999, the Company
defaulted on the First Union Line agreement and was required to repay the
balance outstanding in its entirety. In June 1999, the balance of the First
Union Line was repaid in its entirety and the related agreement was terminated.
In December 1996, the Company entered into an overdraft financing facility, with
a bank, that provided for maximum borrowings of $2.0 million. Interest was
charged on the outstanding balance at the bank's reference rate plus 1.75%.
During 1997, the overdraft facility was increased to $4.0 million. There were no
borrowings outstanding under this facility at December 31, 1998. During 1999,
the Company defaulted under the overdraft facility and was required to repay the
outstanding balance in its entirety. In November 1999, the remaining balance
outstanding under the overdraft facility was repaid in its entirety and the
related agreement was terminated.
In November 2000, the Company entered into a revolving note purchase facility
under which up to $75 million of notes may be outstanding at any time subject to
a collateral test and other conditions. The Company uses funds derived from this
facility to purchase Contracts, which are pledged to secure the Notes. The
collateral test generally allows the Company to borrow up to approximately 75%
of the price paid for such Contracts. Notes issued under this facility bear
interest at one-month LIBOR plus 0.30% per annum. The balance of notes
outstanding at December 31, 2000, was $2.0 million.
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CAPITAL RESOURCES
In the past, the Company funded the increase in its servicing portfolio through
off balance sheet securitization transactions, as discussed above, and funded
its other capital needs with cash from operations and with the proceeds from the
issuance of long-term debt and/or equity.
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 Spread Accounts either release cash to the Company
or capture cash from collections on sold Contracts. The Company plans to adjust
its levels of Contract purchases so as to match anticipated releases of cash
from Spread Accounts with capital requirements for securitization of Contracts
that are purchased for the Company's own account.
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CAPITALIZATION
Over the three-year period ended December 31, 2000, the Company has increased
its capitalization by issuing and restructuring debt and issuing/repurchasing
common stock and equivalents which is summarized in the following table:
For the Years Ended December 31,
---------------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
Senior secured debt:
Beginning balance ....... $ 23,161 $ 33,000 $ --
Issuances ............. 16,000 -- 33,000
Payments .............. (31,161) (9,839) --
Restructuring ......... 30,000 -- --
-------- -------- -------
Ending balance .......... $ 38,000 $ 23,161 $33,000
======== ======== =======
Subordinated debt:
Beginning balance ....... $ 69,000 $ 65,000 $40,000
Issuances ............. -- 5,000 25,000
Payments .............. (1,301) (1,000) --
Restructuring ......... (30,000) -- --
-------- -------- -------
Ending balance .......... $ 37,699 $ 69,000 $65,000
======== ======== =======
Related party debt:
Beginning balance ....... $ 21,500 $ 20,000 $15,000
Issuances ............. -- 1,500 5,000
-------- -------- -------
Ending balance .......... $ 21,500 $ 21,500 $20,000
======== ======== =======
Increase (decrease) of Common
Stock and equivalents .. $ (168) $ 9,888 $10,771
The following review of the terms of such issuances shows that the cost of such
capital increased materially in 1999, and then decreased somewhat in 2000.
In April 1998, the Company borrowed $33.0 million as a senior secured loan,
which commenced amortization in May 1999. This loan bore interest at a rate
equal to 4% of per annum over LIBOR. CPS borrowed $5.0 million from related
parties in August and September 1998, the terms of which were renegotiated in
November 1998, in connection with the issuance of $25.0 million of subordinated
notes to Levine Leichtman Capital Partners II, L.P. ("LLCP"). The $25.0 million
of subordinated notes issued in November 1998 accrued interest at 13.50% per
annum, are due November 2003, and were issued together with warrants that
allowed the investor to purchase up to an aggregate of 3,450,000 shares of the
Company's common stock at $3.00 per share. As renegotiated, the $5.0 million of
related party loans are subordinated both to the Company's general and secured
creditors and also to the LLCP subordinated notes, accrue interest at 12.50% per
annum, are due June 2004, and are convertible into an aggregate of 1,666,667
shares of the Company's common stock at $3.00 per share. A related party also
purchased $5.0 million of Company's common stock in July 1998, at $11.275 per
share.
The cost of capital increased further in 1999. To meet a portion of its capital
requirements, the Company on April 15, 1999, issued $5.0 million in subordinated
notes to LLCP (the "New LLCP Notes"). The notes bear interest at 14.5% per annum
and include warrants to purchase 1,335,000 shares of the
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Company's common stock at $0.01 per share. As part of the agreement to issue the
New LLCP Notes, the Company was required to restructure the terms of the $25.0
million subordinated promissory notes discussed above. Such restructuring
included an increase in the interest rate from 13.5% to 14.5%, a reduction in
the number of warrants issued to purchase the Company's common stock from
3,450,000 to 3,115,000, a waiver by LLCP of certain defaults under the notes
sold to LLCP in November 1998, and a reduction in the exercise price of the
warrants from $3.00 per share to $0.01 per share. Among the agreements entered
into in connection with the issuance of the New LLCP Notes were agreements by
Stanwich Financial Services Corp. ("SFSC"), an affiliate of the chairman of the
Company's board of directors, to purchase an additional $15.0 million of notes
and of the Company to sell such notes. The terms of such notes were to be not
less favorable to the Company then (i) those that would be available in a
transaction with a non-affiliate, and (ii) those applicable to the New LLCP
Notes.
In August and September 1999, the Company issued $1.5 million of such notes,
bearing interest at 14.5% per annum, to SFSC. As part of that transaction, the
Company also agreed to issue to SFSC warrants to purchase up to 207,000 shares
of the Company's common stock at a price of $0.01 per share.
In March 2000, the Company and LLCP restructured the outstanding indebtedness of
the Company in favor of LLCP, which had been in default. In the restructuring
(i) all existing defaults were waived or cured, (ii) LLCP lent an additional $16
million ("Tranche A") to the Company, (iii) the proceeds of that loan (net of
fees and expenses) were used to repay all of the Company's outstanding senior
secured indebtedness, (iv) the outstanding $30 million of subordinated
indebtedness in favor of LLCP was exchanged for senior indebtedness ("Tranche
B"), (v) the Company granted a blanket security interest in favor of LLCP, to
secure both Tranche A and Tranche B, and (vi) LLCP released SFSC and its
affiliates (including Mr. Bradley, Sr., Mr. Bradley, Jr., and Mr. Poole,
directors of the Company) of any liability for failure to invest $15 million in
the Company. Tranche A is due June 2001, and bears interest at 12.50% per annum;
Tranche B is due November 2003, and bears interest at 14.50% per annum. In each
case the interest rate is subject to increase by 2.0% in the event of a default
by the Company. In the restructuring, the Company paid a fee of $325,000, paid
accrued default interest of $300,000, issued 103,500 shares of common stock to
LLCP, and paid out-of-pocket expenses of approximately $214,000. The shares of
common stock issued were valued at approximately $155,000, which is included in
deferred interest expense to be amortized over the remaining life of the related
debt. The terms of the transaction were determined by negotiation between the
Company and LLCP. Also in March 2000, the Company's board of directors
authorized the issuance of 103,500 shares of the Company's common stock to SFSC
in conjunction with a $1.5 million promissory note issued by the Company to SFSC
in August 1999. The shares of common stock issued were valued at approximately
$155,000, which is included in deferred interest expense to be amortized over
the remaining life of the related debt.
In July 2000, the Board of Directors authorized the repurchase of up to
$5,000,000 of outstanding debt and equity securities of the Company, inclusive
of the mandatory annual repurchase or redemption of $1,000,000 of the Company's
outstanding "RISRS" subordinated debt securities, due 2006. As of December 31,
2000, the Company had repurchased $1.3 million in principal amount of the RISRS,
and $1.3 million of its common stock (representing 720,752 shares). During the
first quarter of 2001, the Company repurchased a total of $8,000,000 of
outstanding indebtedness held by LLCP and SFSC. The Company purchased and
retired $4,000,000 of subordinated debt held by SFSC in exchange for payment of
$3,920,000, and purchased and retired $4,000,000 of senior secured debt held by
LLCP in exchange for payment of $4,200,000. The LLCP debt by its terms called
for a prepayment penalty of 3% (or $120,000); the additional 2% (or $80,000)
paid in connection with its February 2001 prepayment was absorbed by SFSC. LLCP
holds approximately 22.6% of the Company's outstanding common shares. SFSC is an
affiliate of the Company's chairman, Charles E. Bradley, Sr., and SFSC and Mr.
Bradley together hold approximately 30.6% of the Company's outstanding common
shares.
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FORWARD-LOOKING STATEMENTS
The descriptions of the Company's business and activities set forth in this
report and in other past and future reports and announcements by the Company may
contain forward-looking statements and assumptions regarding the future
activities and results of operations of the Company. Actual results may be
adversely affected by various factors including the following: increases in
unemployment or other changes in domestic economic conditions which adversely
affect the sales of new and used automobiles and may result in increased
delinquencies, foreclosures and losses on Contracts; adverse economic conditions
in geographic areas in which the Company's business is concentrated; changes in
interest rates, adverse changes in the market for securitized receivables pools,
or a substantial lengthening of the Company's warehousing period, each of which
could restrict the Company's ability to obtain cash for new Contract
originations and purchases; increases in the amounts required to be set aside in
Spread Accounts or to be expended for other forms of credit enhancement to
support future securitizations; the reduction or unavailability of warehouse
lines of credit which the Company uses to accumulate Contracts for
securitization transactions; increased competition from other automobile finance
sources; reduction in the number and amount of acceptable Contracts submitted to
the Company by its automobile Dealer network; changes in government regulations
affecting consumer credit; and other economic, financial and regulatory factors
beyond the Company's control.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt in future periods new accounting pronouncements. For
information on how adoption has affected and will affect the Financial
Statements, see Note 1 of Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
There have been no significant changes in interest rate risk since December 31,
1999. The Company is not currently issuing interest bearing asset-backed
securities nor is it holding any material amount of Contracts for sale. All
Contracts purchased are primarily sold on a flow basis, for a mark-up above what
the Company pays the Dealer. Therefore, any strategies the Company has used in
the past to minimize interest rate risk do not apply currently. Described below
are strategies the Company has used in the past to minimize interest rate risk.
The strategies the Company has used in the past to minimize interest rate risk
include offering only fixed rate contracts to obligors, regular sales of
Contracts to the Trusts, and pre-funding securitizations, whereby the amount of
asset-backed securities issued exceeds the amount of Contracts initially sold to
the Trusts. In pre-funding, the proceeds from the pre-funded portion are held in
an escrow account until the Company sells the additional Contracts to the Trust
in amounts up to the balance of the pre-funded escrow account. In pre-funded
securitizations, the Company locks in the borrowing costs with respect to the
Contracts it subsequently delivers to the Trust. However, the Company incurs an
expense in pre-funded securitizations equal to the difference between the money
market yields earned on the proceeds held in escrow prior to subsequent delivery
of Contracts and the interest rate paid on the asset-backed securities
outstanding.
The Company is subject to market risks due to fluctuations in interest rates
primarily through its outstanding indebtedness and to a lesser extent its
outstanding interest earning assets, and commitments to enter into new
Contracts. The interest rate and maturity profile of the Company's indebtedness
is outlined above (see "Capitalization") and included in note 12 to the
consolidated financial statements. The table below outlines the carrying values
and estimated fair values of such indebtedness as of December 31, 2000 and 1999.
December 31,
--------------------------------------------
2000 1999
-------------------- -------------------
Carrying Fair Carrying Fair
Financial Instrument Value Value Value Value
- -------------------- -------- ------- -------- -------
(in thousands)
Warehouse lines of credit..... $ 2,003 $ 2,003 $ -- $ --
Notes payable................. 2,414 2,414 4,006 4,006
Senior secured debt........... 38,000 38,000 23,161 23,161
Subordinated debt............. 37,699 27,709 69,000 45,678
Related party debt............ 21,500 15,803 21,500 14,233
Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for
a significant portion of the Company's financial instruments, active markets do
not exist. Therefore, considerable judgments were required in estimating fair
value for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 2000 and 1999, the amounts that will actually be
realized or paid at settlement or maturity of the instruments could be
significantly different.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This report includes Consolidated Financial Statements, Notes thereto and an
Independent Auditors' Report, at the pages indicated below. Certain unaudited
quarterly financial information is included in the Notes to Consolidated
Financial Statements, as Note 17.
INDEX TO FINANCIAL STATEMENTS
Page
Reference
Independent Auditors' Report.............................................................................F-1
Consolidated Balance Sheets as of December 31, 2000, and 1999............................................F-2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998..............F-3
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2000, 1998, and 1998..................................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998..............F-5
Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999, and 1998.........F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the registrant is incorporated by reference
to the registrant's definitive proxy statement for its annual meeting of
shareholders to be held in 2001 (the "2001 Proxy Statement"). The 2001 Proxy
Statement will be filed not later than April 30, 2001. Information regarding
executive officers of the registrant appears in Part I of this report, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the 2001 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements listed above under the caption "Index to Financial
Statements" are filed as a part of this report. No financial statement schedules
are filed as the required information is inapplicable or the information is
presented in the consolidated financial statements or the related notes.
Separate financial statements of the Company have been omitted as the Company is
primarily an operating company and its subsidiaries are wholly owned and do not
have minority equity interests and/or indebtedness to any person other than the
Company in amounts which together exceed 5% of the total consolidated assets as
shown by the most recent year-end consolidated balance sheet.
The following exhibits are filed as part of this report:
3.1 Restated Articles of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS")(3)
4.2 First Supplemental Indenture re RISRS(3)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs")(4)
4.4 Form of First Supplemental Indenture re PENs(4)
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder(5)
10.2 1997 Long-Term Incentive Stock Plan(5)
10.3 Lease Agreement re Chesapeake Collection Facility(6)
10.4 Lease of Headquarters Building(7)
10.5 Partially Convertible Subordinated Note(7)
10.6 Registration Rights Agreement(7)
10.7 Residual Interest in Securitizations Revolving Credit and Term Loan
Agre