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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
[ ] 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:
10.50% Participating Equity Notes due 2004
Rising Interest Subordinated Redeemable Securities due 2006
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 26, 2002 (based on the $1.80 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 $27,692,149. The
number of shares of the registrant's Common Stock outstanding on March 26, 2002,
was 19,315,890.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for its 2002 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 purchase
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, 2001 the Company has purchased approximately $4.1 billion of
Contracts, and as of December 31, 2001, had an outstanding servicing portfolio
of approximately $285.5 million. The Company makes the decision to purchase
Contracts exclusively from its headquarters location. The Company has serviced
Contracts from two regional centers, one in its California headquarters, and the
other in Virginia. The Company also services Contracts from a satellite office
in Dallas, Texas. Following the MFN Merger, described below, the Company also
services those Contracts acquired in the MFN Merger from multiple other
locations, acquired in that transaction.
CREDIT RISK RETAINED
The Company purchases Contracts with the intention of reselling them in
securitizations. In a securitization, the Company sells Contracts to a special
purpose subsidiary, which funds the purchase by sale of asset-backed
interest-bearing securities. At the closing of each securitization, the Company
removes the sold Contracts from its consolidated balance sheet. The Company
remains responsible for collecting payments due under the Contracts, and retains
a residual interest in the sold Contracts. The residual interest represents the
discounted value of what the Company expects will be the excess of future
collections on the Contracts over principal and interest due on the asset-backed
securities. That residual interest appears on the Company's balance sheet as
"residual interest in securitizations," and its value is dependent on estimates
of the future performance of the sold Contracts. Further, the special purpose
subsidiary may be prohibited from releasing the excess cash to the Company if
the credit performance of the sold Contracts falls short of pre-determined
standards. Such releases represent a material portion of the cash that the
Company uses to fund its operations. An unexpected deterioration in the
performance of sold Contracts could therefore have a material adverse effect on
both the Company's liquidity and its results of operations. See "--
Securitization and Sale of Contracts," "-- The Servicing Portfolio," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RECENT DEVELOPMENTS
In March 2002, CPS acquired MFN Financial Corporation, a Delaware corporation
("MFN"), and its subsidiaries (collectively, the "MFN Companies") by the merger
(the "MFN Merger") of CPS Mergersub, Inc., a Delaware corporation ("Mergersub")
and a direct wholly owned subsidiary of CPS, with and into MFN. In the Merger,
MFN became a wholly owned direct subsidiary of CPS, and its subsidiaries became
indirect subsidiaries of CPS. The MFN Companies, like CPS, have been engaged
primarily in the business of acquiring Contracts from Dealers, and servicing and
securitizing such Contracts. Information presented in this report on a
historical basis excludes information relating to the MFN Companies.
1
Subsequent to year-end, the purchaser of Contracts under the Company's flow
purchase program (See "Flow Purchase Program.") gave notice that it will cease
purchasing Contracts from the Company effective in early May. The Company
accordingly expects that it will terminate its flow purchase program at that
time.
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 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, 2001, the Company was a party to its standard form dealer
agreements ("Dealer Agreements") with 4,665 Dealers. Approximately 95% 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,
2001, approximately 87% of the Contracts purchased by the Company consisted of
financing for used cars and the remaining 13% for new cars, as compared to 83%
used and 17% new in the year ended December 31, 2000.
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, 2001, the Company had 58 representatives,
57 of whom were employees and 1 of whom was 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 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, 2001, no Dealer accounted for more
than 1% 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, 2001 and 2000. Contracts purchased
by the MFN Companies are not included in the table.
2
CONTRACTS PURCHASED DURING THE YEAR ENDED
--------------------------------------------------------
DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------- --------------------------
NUMBER PERCENT (1) NUMBER PERCENT (1)
----------- ----------- ----------- -----------
Texas................................ 5,811 12.7% 5,023 12.2%
Louisiana............................ 3,288 7.2 3,413 8.3
California........................... 3,229 7.0 5,251 12.8
North Carolina....................... 3,128 6.8 3,691 9.0
Georgia.............................. 2,933 6.4 884 2.2
Illinois............................. 2,529 5.5 1,359 3.3
Florida.............................. 2,426 5.3 3,437 8.4
Michigan............................. 2,338 5.1 2,042 5.0
Alabama.............................. 2,118 4.6 2,631 6.4
Ohio................................. 1,801 3.9 958 2.3
South Carolina....................... 1,781 3.9 1,807 4.4
Pennsylvania......................... 1,752 3.8 2,217 5.4
New York............................. 1,657 3.6 1,375 3.3
Kentucky............................. 1,282 2.8 325 0.8
Virginia............................. 950 2.1 880 2.1
Other States......................... 8,848 19.3 5,775 14.1
------- ---- ------- ----
Total................................ 45,871 100.0% 41,068 100.0%
======= ====== ======= ======
------------
(1) Amounts may not total 100% due to rounding.
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 credit analyst, 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 approve the credit
application.
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 in 2001 sold
immediately most of the Contracts that it purchased, and held the remainder for
its own account. See "Flow Purchase Program." 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
3
perceived credit risk and, in some cases, the interest rate on the Contract. For
the years ended December 31, 2001, 2000 and 1999, the average amount charged per
Contract purchased was $355, $469 and $336, respectively, or 2.42%, 3.17% and
2.32%, respectively, of the amount financed. The Company also purchases certain
Contracts for a premium over the amount financed. The Company is willing to pay
a premium when it estimates the credit risk to be low, compared to that of other
Contracts that it purchases. During 2001, 2000 and 1999, respectively, the
Company purchased 9,962, 2,104 and 2,161 of these Contracts, representing
approximately 21.7%, 5.1% and 7.4% of all Contracts purchased. The average
premium paid to Dealers on these Contracts was $172, $595 and $568,
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,
employment and residence stability, credit history and debt service ability; 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 two
model years old and has less than 25,000 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 Contract.
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 employment 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.
4
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, 2001 was approximately $14,656, with an average original
term of approximately 60.6 months and an average down payment amount of 12.9%.
Based on information contained in customer applications, for this twelve-month
period, the retail purchase price of the related automobiles averaged $14,929
(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 36
years of age, with approximately $35,916 in average annual household income and
an average of 4.3 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.
5
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 automatic 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 Uniform Commercial Code ("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. In general, such proceeds are
insufficient to pay the customer's obligation in full, resulting in a
deficiency.
6
Under the UCC and other laws applicable in most states, a creditor is entitled
to obtain a deficiency judgment from a customer for such a deficiency. However,
some states impose prohibitions or limitations on deficiency judgments. When
obtained, deficiency judgments 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.
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. Contracts held
by the MFN Companies, in which the Company acquired interests in March 2002, are
not included in the tables below.
DELINQUENCY EXPERIENCE(1)
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Gross servicing portfolio(1) .... 44,080 $288,756 60,178 $427,734 92,388 $868,797
Period of delinquency(2)
31-60 days ...................... 2,149 12,409 2,319 16,778 2,781 26,204
61-90 days ...................... 721 4,018 683 4,983 1,130 11,226
91+ days ........................ 552 3,488 418 3,148 652 6,997
--------- --------- --------- --------- --------- ---------
Total delinquencies(2) .......... 3,422 19,915 3,420 24,909 4,563 44,427
Amount in repossession(3) ....... 787 5,757 1,106 8,302 3,424 28,896
--------- --------- --------- --------- --------- ---------
Total delinquencies and amount
in repossession(2) ............ 4,209 $ 25,672 4,526 $ 33,211 7,987 $ 73,323
========= ========= ========= ========= ========= =========
Delinquencies as a percentage of
gross servicing portfolio (4) 7.8% 6.9% 5.7% 5.8% 4.9% 5.1%
Total delinquencies and amount in
repossession as a percentage of
gross servicing portfolio ..... 9.6% 8.9% 7.5% 7.8% 8.7% 8.4%
- ----------
(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.
(4) The increase in delinquency as a percentage of the gross servicing
portfolio is primarily due to the decrease in the gross servicing portfolio
on a year over year basis.
NET CHARGE-OFF EXPERIENCE(1)
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Average servicing portfolio outstanding............................ $ 341,498 $ 578,200 $ 1,223,238
Net charge-offs as a percentage of average servicing
portfolio (2) (3).................................................. 6.2% 11.2% 9.2%
- ------------
(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.
7
(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 fluctuation in net charge-offs as a percentage of the average servicing
portfolio is primarily due to the addition of Contracts held for the
Company's own account, i.e., Contracts purchased on an other than flow
basis, in 2001, compared to the year over year decrease in the Company's
average servicing portfolio. During 2001, the Company added new Contracts
to its servicing portfolio. Newer Contracts would be expected to have a
lower percentage of charge-offs than more seasoned Contracts, which would
be approaching their peak losses and related charge-offs. Additionally, the
Company believes that the Contracts originated during 2001 are of a higher
credit quality than those originated in previous years.
FLOW PURCHASE PROGRAM
From May 1999 through the first quarter of 2002, the Company 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).
One of the two flow purchasers ceased to purchase Contracts in December 2001.
The other flow purchaser has stated that it will cease such purchases in May
2002. The Company accordingly expects the flow purchase program will terminate
in May 2002.
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 did not sell Contracts in a
securitization transaction during 2000 or 1999; however, since November 2000,
8
the Company has been able to purchase Contracts for its own account, which in
all events must be resold into a securitization transaction, using proceeds from
a $75 million revolving note purchase facility. Approximately 75% of the
principal balance of Contracts may be advanced to the Company under that
facility, subject to a collateral test and certain other conditions and
covenants. The note purchase facility was modified during March 2001, with the
effect that sales of Contracts to the facility-related special purpose
subsidiary are treated as an ongoing securitization. On September 7, 2001, the
Company completed a $68.5 million term securitization. In a private placement,
qualified institutional buyers purchased notes ("Notes") backed by automotive
receivables. The Notes, issued by CPS Auto Receivables Trust 2001-A, consist of
two classes: $44.5 million of 4.37% Class A-1 Notes, and $24.0 million of 5.28%
Class A-2 Notes. Substantially all of the proceeds from the September 2001
transaction were used to reduce amounts outstanding under the Company's
revolving note purchase facility. The Company completed an additional
securitization on March 8, 2002. In that transaction, $45.65 million of Notes
backed by automotive receivables were issued by CPS Auto Receivables Trust
2002-A. The Notes consist of two classes: $26.5 million of 3.741% Class A-1
Notes, and $19.15 million of 4.814% Class A-2 Notes. In both transactions, the
Class A-1 and A-2 Notes, rated AAA/Aaa, were priced at par. The ratings,
provided by Standard & Poor's and Moody's Investors Service, were based on a
financial guaranty insurance policy issued by Financial Security Assurance Inc.
There can be no assurance that similar 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.
Upon the sale of a portfolio of Contracts in a securitization transaction,
generally to a trust that is specifically created for such purpose ("Trust"),
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 lockbox account. The Company engages an independent lockbox
processing agent to retrieve and process payments received in the lockbox
account. This results in a daily deposit to the Trust's bank account of the
entire amount of each day's lockbox receipts and the simultaneous electronic
data transfer to the Company of customer payment data records. Pursuant to the
Servicing Agreements, as defined below, 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 lockbox processing agent.
In its securitization transactions, 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, that 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.
9
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% to 2.5%, per annum computed as a percentage of the
declining outstanding principal balance of the non-defaulted Contracts in the
portfolio. 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 Certificate Insurer, as defined below. 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
("Investors") of interests in the Trust the entire principal balance of
Contracts charged off during the month, the trustee draws on the related 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, as defined below, 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, 2001, four of the Company's nine
remaining securitized pools had incurred cumulative losses exceeding certain
predetermined levels, which, in turn, has given the Certificate Insurer the
option to terminate the Servicing Agreements with respect to all of the pools.
10
The Certificate Insurer has held that option at all times from 1999 to the
present, and has consistently waived its right to terminate the Servicing
Agreements. Were the Certificate Insurer in the future to exercise its option to
terminate the Servicing Agreements, such a termination would have a material
adverse effect on the Company's liquidity and results of operations. Subsequent
to December 31, 2001, the Company exercised its optional right to repurchase
receivables pursuant to the terms of the Servicing Agreements on three of the
four pools mentioned above. The Company continues to receive servicer extensions
on a quarterly basis, and has recently received an extension through the second
quarter of 2002. The Company believes that the Certificate Insurer will continue
to waive its right to terminate the Servicing Agreements because (i) there is no
reason to expect that any replacement servicer would improve the performance of
the pools and (ii) there are material costs and transition risks inherent in a
transfer of servicing.
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 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
11
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 an 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 also "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
EMPLOYEES
As of December 31, 2001, the Company had 483 full-time and 8 part-time
employees, of whom 10 are senior management personnel, 211 are collections
personnel, 120 are Contract origination personnel, 70 are marketing personnel
(57 of whom are marketing representatives), 61 are operations and systems
personnel, and 19 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.
12
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 through October 2003, and
increases to $2.1 million for the following five years. The Company has the
option to cancel the lease without penalty in October 2003. In addition to the
foregoing base rent, the Company pays the property taxes, maintenance and other
expenses of the premises.
In March 1997, the Company established a branch collection facility in
Chesapeake, Virginia. The Company leases approximately 28,000 square feet of
general office space in Chesapeake, Virginia, at a base rent that is currently
$419,470 per year, increasing to $504,545 over a ten-year term.
The MFN Companies occupy facilities in thirteen locations across the United
States. Twelve of these facilities are leased, one is owned by MFN. The Company
may maintain such occupancy or sublease the space, depending on future needs and
applicable market conditions.
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. The bankruptcy trustee subsequently filed an adversary
proceeding alleging, INTER ALIA, that certain transfers from LINC to the
Company's wholly owned subsidiaries were avoidable as preferences. The adversary
proceeding was settled in December 2001 upon the Company's agreement to pay an
aggregate of $425,000 to the trustee.
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 subsequently ordered the plaintiffs to file separate lawsuits against
each finance defendant. Such a substitute lawsuit was filed against the Company
by Angela Hicks, on March 8, 2001. The lawsuits were dismissed with prejudice in
September 2001.
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 case was dismissed without
prejudice in September 2001.
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.
STANWICH LITIGATION. The Company is currently a defendant in a class action (the
"Stanwich Case") pending in the California Superior Court, Los Angeles County.
The plaintiffs in that case are persons entitled to receive regular payments
(the "Settlement Payments") under out-of-court settlements reached with third
13
party defendants. Stanwich Financial Services Corp. ("Stanwich"), an affiliate
of the former Chairman of the Board of Directors of the Company, is the entity
that is obligated to pay the Settlement Payments. Stanwich has defaulted on its
payment obligations to the plaintiffs and in June 2001 filed for reorganization
under the Bankruptcy Code, in the federal Bankruptcy Court of Connecticut.
The Company has entered into a "Standstill Agreement," pursuant to which the
plaintiffs have agreed that they will refrain from prosecuting their case
against the Company. The Standstill Agreement may be terminated at will on 60
days' notice. No such notice has been given. The plaintiffs in August 2001 filed
amended complaints, which narrow the claims against the Company from eight to
two: alleged breach of fiduciary duty and alleged intentional interference with
contract. The Company is also a defendant in certain cross-claims brought by
other defendants in the case, which assert claims of equitable and/or
contractual indemnity against the Company.
The outcome of any litigation is uncertain, and there is the possibility that
damages could be awarded against the Company in amounts that could be material.
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., 42, 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 Reunion Industries,
Inc.
WILLIAM L. BRUMMUND, JR., 49, 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, 57, 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.
CURTIS K. POWELL, 45, has been Senior Vice President-Contract Origination since
June 2001. Previously, he was the Company's Senior Vice President - Marketing,
from 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, 42, 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.
14
THURMAN BLIZZARD, 59, 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, 44, 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.
DAVID N. KENNEALLY, 39, has been Senior Vice President - Finance since July
2001. Previously, he was Chief Financial Officer of LoanGenie.com, Inc. from May
2000 to July 2001, and prior to that he served as Vice President - Financial
Reporting of Fidelity National Financial, Inc., from January 1994 through May
2000. From August 1992 through January 1994, Mr. Kenneally was Assistant Vice
President and Controller of Pacific States Casualty Company. Mr. Kenneally began
his professional career with KPMG LLP, leaving as a Senior Manager in July 1992.
ROD RIFAI, 35, has been Senior Vice President - Marketing since July 2001.
Previously, Mr. Rifai had served as the Company's Regional Vice President of
Marketing for the Southeast region, since December 1998, and as a marketing
representative from June 1997 to December 1998. Previous to that time Mr. Rifai
had been in the retail automobile sales and leasing business in various
management capacities for over ten years.
15
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, 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
January 1 - March 31, 2001................................. 1.969 1.438
April 1 - June 30, 2001.................................... 1.950 1.375
July 1 - September 30, 2001................................ 1.840 1.220
October 1 - December 31, 2001.............................. 2.138 1.150
As of March 26, 2002, 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.
16
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gain (loss) on sale of Contracts, net............. $ 32,765 $ 16,234 $ (14,844) $ 58,306 $ 35,045
Interest income................................... 17,205 3,480 3,032 41,841 23,526
Servicing fees.................................... 10,666 15,848 27,761 25,156 14,487
Total revenue..................................... 62,005 35,951 14,805 126,280 75,251
Operating expenses................................ 61,685 68,354 86,968 81,960 43,292
Net income (loss)................................. 320 (22,147) (44,532) 25,703 18,532
Basic earnings (loss) per share................... 0.02 (1.10) (2.38) 1.67 1.29
Diluted earnings (loss) per share................. 0.02 (1.10) (2.38) 1.50 1.17
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Contracts held for sale........................... $ 3,548 $ 18,830 $ 2,421 $ 165,582 $ 68,271
Residual interest in securitizations.............. 106,103 99,199 172,530 217,848 124,616
Total assets...................................... 151,204 175,694 220,314 431,962 225,895
Term debt......................................... 82,555 102,614 119,173 274,546 119,719
Total liabilities................................. 89,518 113,572 135,877 312,881 143,288
Total shareholders' equity........................ 61,686 62,122 84,437 119,081 82,607
17
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 37 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 December 31, 2000, the Company did not sell any Contracts in
securitization transactions, and therefore recognized no gains on sale from
securitization transactions. 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 flow through agreement with a
third party for which the Company earned fees on a per Contract basis, also
known as "the flow purchase program" or "purchases made on a flow basis". During
the year ended December 31, 2000, the Company entered into another flow 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 paid
the Dealer. The Company recorded a loss of $22.7 million related to bulk sales
in 1999. There were no bulk sales during 2000 or 2001. As a result of the
Company's flow through sales during the years ended December 31, 2001 and 2000,
the Company recognized a $16.6 million and $18.4 million gain on sale of
Contracts, respectively, compared to a net loss on sale of Contracts for the
year ended December 31, 1999, of $6.2 million. One of the two flow purchasers
ceased to purchase Contracts in December 2001. The other flow purchaser has
stated that it will cease such purchases in May 2002. The Company accordingly
expects the flow purchase program will terminate in May 2002.
During the year ended December 31, 2001, the Company purchased Contracts other
than on a flow basis to hold pending sale into a securitization, which it had
not done in the two previous years. Funding for the other than flow basis
purchases was available from the Company's $75 million revolving note purchase
facility, established in November 2000. Since November 2000, the Company has
been able to purchase Contracts for its own account using proceeds from that
facility. Approximately 75% of the principal balance of Contracts may be
advanced to the Company under that facility, subject to a collateral test and
certain other conditions and covenants. Notes issued under this facility
currently bear interest at one-month LIBOR plus 0.60% per annum. The note
purchase facility was modified during March 2001, with the effect that sales of
Contracts to the facility-related special purpose subsidiary ("SPS") are treated
18
as an ongoing securitization. The Company, therefore, removes the securitized
Contracts and related debt from its consolidated balance sheet and recognizes a
gain on sale in the Company's consolidated statement of operations. Purchases of
Contracts made other than on a flow basis require that the Company fund the
portion of Contract purchase prices beyond what the related SPS was able to
borrow in the continuous securitization structure, which in the aggregate
required cash of approximately $32.8 million in the year ended December 31,
2001. The Company securitized $141.7 million of Contracts during the year ending
December 31, 2001, resulting in a gain on sale of $9.2 million.
On September 7, 2001, the Company completed a $68.5 million term securitization.
In a private placement, qualified institutional buyers purchased notes backed by
automotive receivables. The Notes, issued by CPS Auto Receivables Trust 2001-A,
consist of two classes: $44.5 million of 4.37% Class A-1 Notes, and $24.0
million of 5.28% Class A-2 Notes. Substantially all of the proceeds from the
September 2001 transaction were used to reduce amounts outstanding under the
Company's revolving note purchase facility. No additional gain on sale was
recognized upon that term securitization.
Total gain (loss) on sale, which also includes the Company's estimate of its
provision for (recovery of) losses and other related expenses was $32.8 million,
$16.2 million and $(14.8 million) for the years ended December 31, 2001, 2000
and 1999, respectively.
Revenues from interest and servicing fees for the years ended December 31, 2001
and 2000, were $17.2 million and $10.7 million, and $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. 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, 2001, was
approximately $3.7 million, compared to net cash provided by operating
activities of approximately $38.7 million for the year ended December 31, 2000,
and net cash used in operating activities of approximately $(180,000) for the
year ended December 31, 1999. See "Liquidity and Capital Resources."
The Company has historically purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities. From
late May 1999 through the first quarter of 2001, the Company primarily purchased
Contracts on a flow basis for third parties; that is, the Company purchased a
Contract from a Dealer, and sold the Contract the immediately 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. As noted above, the Company expects the flow purchase program
will terminate in May 2002.
The Company's securitization structure has generally been as follows:
First, the Company sells a portfolio of Contracts to a wholly owned 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 is a qualifying special purpose
entity and is therefore not consolidated in the Company's consolidated financial
statements. 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 may retain
subordinated Certificates issued by the Trust. 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 or in the form
of subordinated Certificates. The agreements governing the securitization
transactions (collectively referred to as the "Securitization Agreements")
19
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 Securitization
Agreement. The Securitization Agreements generally grant the Company the option
to repurchase the sold Contracts from the Trust when the aggregate outstanding
balance has amortized to 10% or less of the initial aggregate balance.
The revolving note purchase facility continuous securitization structure is
similar to the above, except that (i) the SPS that purchases the Contracts
pledges the Contracts to secure promissory notes issued directly by the SPS,
(ii) the initial purchaser of such notes has the right, but not the obligation,
to require that the Company repurchase the Contracts, (iii) the promissory notes
are in an aggregate principal amount of not more than 75% of the aggregate
principal balance of the Contracts, and (iv) no Spread Account is involved. The
SPS is a qualifying special purpose entity and is therefore not consolidated in
the Company's consolidated financial statements.
At the closing of each securitization, whether a term securitization or the
revolving note purchase facility continuous 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 Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account, if any, (b) subordinated Certificates retained, and
(c) receivables from Trust, which include the net interest receivables ("NIRs").
NIRs represent the estimated discounted cash flows to be received from the Trust
in the future, net of principal and interest payable with respect to the
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 sold and retained based on the relative fair values of those
portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value. The Company is not aware of an active market
for the purchase or sale of 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 and estimating the value of the Company's
optional right to repurchase receivables pursuant to the terms of the Servicing
Agreements. The Company estimates the value of its optional right to repurchase
receivables pursuant to the terms of the Servicing Agreements primarily based on
its estimate of the amount and timing of anticipated cash flows released from
existing receivables then outstanding and previously charged off receivables
repurchased, using a discount rate that the Company believes is appropriate for
the risks involved. 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
20
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 interest at the pass-through rate on the Certificates
plus principal as defined in the Securitization 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 any. If
the cash collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain
Securitization Agreements, excess cash collected during the period is used to
make accelerated principal paydowns on certain Certificates to create excess
collateral (over-collateralization or OC account). 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 Securitization Agreements. Spread Account
balances are held by the Trusts on behalf of the Company's SPS as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly greater
than the pass-through rate 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, and the value of
the Company's optional right to repurchase receivables pursuant to the terms of
the Servicing Agreements 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 prepayment
estimates of approximately 22% to 27% cumulatively over the lives of the related
Contracts. The Company estimates defaults and default loss severity using
available historical loss data for comparable Contracts and the specific
characteristics of the Contracts purchased by the Company. The Company estimates
recovery rates of previously charged off receivables using available historical
recovery data and projected future recovery levels. In valuing the Residuals,
the Company estimates that gross losses as a percentage of the original
principal balance will approximate 16% to 22% cumulatively over the lives of the
related Contracts, with recovery rates approximating 4% to 6%.
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the Contracts is better than the original
estimate, or the Company would increase the estimated fair value of the
Residuals. If the actual performance of the Contracts were worse than the
original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. The authoritative accounting standard setting
bodies are currently deliberating the consolidation of non-qualifying special
purpose entities and the accounting treatment for various off-balance sheet
financing transactions. The effect of such deliberations may require the Company
to treat its securitizations differently. However, the outcome of such
deliberations is currently unknown.
The Certificateholders and the related securitization Trusts have no recourse to
the Company for failure of the Contract obligors to make payments on a timely
basis. The Company's Residuals, however, are subordinate to the Certificates
until the Certificateholders are fully paid.
21
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
REVENUE. During the year ended December 31, 2001, revenues increased $26.1
million, or 72.5%, compared to the year ended December 31, 2000. Net gain on
sale of Contracts increased by $16.5 million, from $16.2 million for the year
ended December 31, 2000, to $32.8 million for the year ended December 31, 2001.
The primary reason for the increase in the gain on sale component of revenue is
the Company's securitization of approximately $141.7 million of Contracts in the
2001 period, resulting in a gain on sale of Contracts of $9.2 million. The
availability and structure of the Company's note purchase facility enabled it to
execute securitization transactions during 2001; no such sales occurred in the
prior year period. In addition, the Company completed a term securitization in
September 2001. Substantially all of the proceeds from the September 2001
transaction were used to reduce amounts outstanding under the Company's
revolving note purchase facility. Additionally, gain on sale of Contracts
includes the effect of fluctuations in the Company's estimate of the required
provision for losses on Contracts and recovery of losses on Contracts. During
2001, recoveries exceeded the provision for losses; in 2000 the provision for
losses was greater than recoveries. The Company makes recoveries on Contracts
previously held on balance sheet or from pools for which the Company has
exercised its optional right to repurchase receivables pursuant to the
Securitization Agreements. The amount of Contracts for which the Company
requires a provision for Contract losses has contracted, while the amounts
recovered has continued to increase. As such the Company is able to recover its
provision for Contract losses. For the year ended December 31, 2001 the Company
recorded a reduction of the provision for Contract losses of $5.7 million,
compared to a charge of $(1.8 million) for the year ended December 31, 2000.
During the year ended December 31, 2001, the Company sold $537.9 million of
Contracts on a flow basis compared to $600.4 million of Contracts in the year
ended December 31, 2000. The Company expects the flow purchase program will
terminate in May 2002.
Interest income increased $13.7 million to $17.2 million in the year ended
December 31, 2001, from $3.5 million in the prior year. The increase in interest
income is primarily due to the increase in residual interest income resulting
from a change in the method residual interest income was calculated beginning in
the second quarter of 2000. The increase in residual interest income is due to
the Company refining its methodology of calculation of such interest income
beginning with the three-month period ended June 30, 2000. The refined method is
designed to accrete residual interest income on a level yield basis. The Company
now uses an accretion rate that approximates the discount rate used to value the
residual interest in securitizations, approximately 14% per annum. Prior to such
period, the Company recognized residual interest income as the excess cash flows
generated by the Trusts over the related obligations of the Trusts, net of any
amortization of the related NIRs. This method of residual interest income
recognition approximated a level yield rate of residual interest income due to
the continued addition of new securitizations. Since the Company had not
securitized any Contracts since December 1998, this method would not have
reflected the appropriate level yield and thus was refined during the second
quarter of 2000. The effect of this refinement has been offset, in part, by the
contraction of the Company's servicing portfolio.
Servicing fees decreased by $5.2 million, or 32.7%, to $10.7 million for the
year ended December 31, 2001, from $15.8 million for the year ended December 31,
2000. Servicing fees are composed of base fees, which are payable at the rate of
2% to 2.5%, 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, 2001, the
servicing portfolio was $285.5 million, compared to $411.9 million as of
December 31, 2000.
22
EXPENSES. During the year ended December 31, 2001, operating expenses decreased
by $6.7 million, or 9.8%, compared to the year ended December 31, 2000.
Personnel costs were effectively flat year over year, decreasing $640,000, or
2.6%, to $24.0 million in 2001 from $24.6 million in 2000. Personnel costs
include base salaries, commissions and bonuses paid to employees, and certain
expenses related to the accounting treatment of outstanding warrants and stock
options, and are one of the Company's most significant operating expenses,
representing approximately 38.9% of total operating expenses. These costs
generally fluctuate with the level of applications and Contracts processed and
serviced, with the mix of revenue and with overall portfolio performance. Other
material operating expenses include facilities expenses, telephone and other
communication services, credit services, computer services (including personnel
costs associated with information technology support), professional services,
marketing and advertising expenses, and depreciation and amortization and
certain expenses related to the accounting treatment of outstanding warrants and
stock options.
General and administrative expenses decreased by $3.1 million, or 19.8%, and
represented 20.5% 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.
Interest expense decreased by $2.9 million, or 16.9%, and represented 23.2% of
total operating expenses. The decrease in interest expense is primarily due to
the reductions in non-warehouse indebtedness from the prior year. See "Liquidity
and Capital Resources."
Marketing expenses increased by $399,000, or 6.5%, and represented 10.6% of
total expenses. The increase is primarily due to the increase in Contracts
purchased during the year ended December 31, 2001. 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 decreased by $241,000, or 7.1%, and represented 5.1% of total
expenses. The decrease is primarily due to additional property taxes paid during
2000, not due in 2001. 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.
Depreciation and amortization expenses decreased by $142,000, or 12.2%, and
represented 1.7% of total expenses.
The results for the years ended December 31, 2001 and 2000, include net earnings
of $161,710 and $19,816, respectively, from the Company's subsidiary CPS
Leasing, Inc. The increase in net earnings of CPS Leasing, Inc. is primarily
attributable to the decision to cease lease receivable origination and to simply
service the existing receivables, resulting in significant expense reductions.
The results for the year ended December 31, 2000, include net operating losses
of $755,000 from the Company's investment in 38% of NAB Asset Corp.
The Company's effective tax rate was zero and 31.7%, for the years ended
December 31, 2001 and 2000, respectively.
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
23
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. The increase in interest income
is primarily due to the increase in residual interest income resulting from a
change in the method residual interest income was calculated beginning in the
second quarter of 2000. The increase in residual interest income is due to the
Company refining its methodology of calculation of such interest income
beginning with the three-month period ended June 30, 2000. The refined method is
designed to accrete residual interest income on a level yield basis. The Company
now uses an accretion rate that approximates the discount rate used to value the
residual interest in securitizations, approximately 14% per annum. Prior to such
period, the Company recognized residual interest income as the excess cash flows
generated by the Trusts over the related obligations of the Trusts, net of any
amortization of the related NIRs. This method of residual interest income
recognition approximated a level yield rate of residual interest income due to
the continued addition of new securitizations. Since the Company had not
securitized any Contracts since December 1998, this method would not have
reflected the appropriate level yield and thus was refined during the second
quarter of 2000. The effect of this refinement has been offset, in part, by the
contraction of the Company's servicing portfolio.
Servicing fees decreased by $11.9 million, or 42.9%, and represented 44.1% of
total revenue. Servicing fees consist of base fees, which are payable at the
rate of 2% to 2.5%, 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
consistent 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 repriced stock options in accordance with generally accepted
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.
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.
24
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.
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 years ended December 31, 2000 and 1999, include net
operating losses of $755,000 and $2.5 million, respectively, from the Company's
investment in 38% of 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.
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
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving lines of credit facilities
(also sometimes known as warehouse lines), servicing fees on portfolios of
Contracts previously sold, customer payments of principal and interest on
Contracts held for sale, fees for origination of Contracts, and releases of cash
from credit enhancements provided by the Company for the financial guaranty
insurer (Certificate Insurer) and Investors, initially made in the form of a
cash deposit to an account (Spread Account), and releases of cash from
securitized pools of Contracts in which the Company has retained a residual
ownership interest. 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" (cash posted to
enhance credit of securitized pools), and income taxes. There can be no
assurance that internally generated cash will be sufficient to meet the
Company's cash demands. The sufficiency of internally generated cash will depend
on: the performance of securitized pools (which determines the level of releases
from Spread Accounts), the rate of expansion or contraction in the Company's
servicing portfolio, and the terms upon which the Company is able to acquire,
sell, and borrow against Contracts.
Net cash provided by (used in) operating activities for the years ended December
31, 2001, 2000 and 1999, was $3.7 million, $38.7 million and $(180,000),
respectively.
Contracts are purchased from Dealers for a cash price approximating their
principal amount, and generate cash flow over a period of years. As a result,
the Company has been dependent on revolving warehouse lines of credit facilities
to purchase Contracts, and on the availability of cash from outside sources in
order to finance its continuing operations, as well as to fund the portion of
Contract purchase prices not financed under lines of revolving credit
facilities. The Company's Contract purchasing program currently comprises both
(i) purchases for the Company's own account made on other than a flow basis,
funded primarily by advances under a revolving warehouse credit facility, and
(ii) flow purchases for immediate resale to non-affiliates. Flow purchases allow
the Company to purchase Contracts with minimal demands on liquidity. The
Company's revenues from the resale of flow purchase Contracts, however, are
materially less than those that may be received by holding Contracts to maturity
25
or by selling Contracts in securitization transactions. During the year ended
December 31, 2001, the Company purchased $537.9 million of Contracts on a flow
basis, and $134.4 million on an other than flow basis for its own account,
compared to $600.4 million and $31.1 million, respectively, of Contracts
purchased in 2000. For the year ended December 31, 1999, the Company purchased
$424.7 million of Contracts on a flow basis and $241.2 million on an other than
flow basis. The Company expects the flow purchase program will terminate in May
2002.
During the year ended December 31, 2001, the Company purchased Contracts to be
held for sale into a securitization, which it had not done in the previous two
years. Funding for the other than flow basis purchases was available from the
Company's $75 million revolving note purchase facility, established in November
2000. Since November 2000, the Company has been able to purchase Contracts for
its own account using proceeds from that facility. Approximately 75% of the
principal balance of Contracts may be advanced to the Company under that
facility, subject to a collateral test and certain other conditions and
covenants. Notes issued under this facility bear interest at one-month LIBOR
plus 0.60% per annum. The note purchase facility was modified during March 2001,
with the effect that sales of Contracts to the facility-related special purpose
subsidiary are treated as an ongoing securitization. The Company, therefore,
removes the securitized Contracts and related debt from its consolidated balance
sheet and recognizes a gain on sale in the Company's consolidated statement of
operations. Such purchases of Contracts made on other than a flow basis require
that the Company fund the portion of Contract purchase prices beyond what the
related special purpose subsidiary was able to borrow in the continuous
securitization structure, which in the aggregate required cash of approximately
$32.8 million in the year ended December 31, 2001. The Company securitized
$141.7 million of Contracts during the year ending December 31, 2001, resulting
in a gain on sale of $9.2 million.
On September 7, 2001, the Company completed a $68.5 million term securitization.
In a private placement, qualified institutional buyers purchased notes backed by
automotive receivables. The Notes, issued by CPS Auto Receivables Trust 2001-A,
consist of two classes: $44.5 million of 4.37% Class A-1 Notes, and $24.0
million of 5.28% Class A-2 Notes. Substantially all of the proceeds from the
September 2001 transaction were used to reduce amounts outstanding under the
Company's revolving note purchase facility.
The Company also purchases Contracts on a flow basis, which, as compared with
purchases of Contracts for the Company's own account, involves a materially
reduced demand on the Company's cash. The Company's plan for meeting its
liquidity needs is to match its levels of Contract purchases to its availability
of cash.
Cash used for subsequent deposits to Spread Accounts for the years ended
December 31, 2001, 2000 and 1999, was $24.6 million, $15.0 million and $23.1
million, respectively. Cash released from Spread Accounts to the Company for the
years ended December 31, 2001, 2000 and 1999, was $43.7 million, $80.6 and $28.0
million, respectively. Changes in deposits to and releases from Spread Accounts
are affected by the relative size, seasoning and performance of the various
pools of Contracts sold that make up the Company's servicing portfolio to which
the respective Spread Accounts are related. As a result of the September term
securitization transaction the Company made an initial deposit to the related
Spread Account of $2.5 million. No such initial deposits were made in 2000 or
1999, as there were no securitizations during those years.
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 agreements
governing the securitizations. Accordingly, pursuant to the Securitization
26
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 the majority 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 asset-backed securities
("Certificates") issued by the related Trusts, which were established in 1998 or
prior. 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 from 21% 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.
As of December 31, 2001, four of the Company's nine remaining securitized pools
had incurred cumulative losses exceeding certain predetermined levels, which, in
turn, has given the Certificate Insurer the option to terminate the Servicing
Agreements with respect to all of the pools. The Certificate Insurer has held
that option at all times from 1999 to the present, and has consistently waived
its right to terminate the Servicing Agreements. Were the Certificate Insurer in
the future to exercise its option to terminate the Servicing Agreements, such a
termination would have a material adverse effect on the Company's liquidity and
results of operations. Subsequent to December 31, 2001, the Company exercised
its optional right to repurchase receivables pursuant to the terms of the
Servicing Agreements on three of the four pools mentioned above. The Company
continues to receive servicer extensions on a quarterly basis, and has recently
received an extension through the second quarter of 2002. The Company believes
that the Certificate Insurer will continue to waive its right to terminate the
Servicing Agreements because (i) there is no reason to expect that any
replacement servicer would improve the performance of the pools and (ii) there
are material costs and transition risks inherent in a transfer of servicing.
The Company's ability to adjust the quantity of Contracts that it purchases and
sells will be subject to general competitive conditions and the continued
availability of the revolving note purchase facility. There can be no assurance
that the desired 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 to maintain the Spread
Accounts 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.
The acquisition of Contracts for subsequent sale in securitization transactions,
and the need to fund Spread Accounts when those transactions take place, results
in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company's Contract purchases (other than flow
purchases), the required level of initial credit enhancement in securitizations,
and the extent to which the previously established Spread Accounts either
release cash to the Company or capture cash from collections on sold Contracts.
27
The Company is currently limited in its ability to purchase contracts due to
certain liquidity constraints. As of December 31, 2001, the Company had cash on
hand of $2.6 million and available Contract purchase commitments from the
revolving note purchase facility of $36.4 million. The Company's plans to manage
the need for liquidity include the completion of additional term securitizations
that would provide additional credit availability from the note purchase
facility. There can be no assurance that the Company will be able to complete
the term securitizations on favorable economic terms or that the Company will be
able to complete term securitizations at all. If the Company is unable to
complete such securitizations, servicing fees and other portfolio related income
would continue to decrease.
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, 2001, 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 $100.0 million at a
variable interest rate of LIBOR plus 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 0.60% per annum. The balance of notes
outstanding at December 31, 2001, was $38.6 million.
Additionally, in March 2002, the Company entered in to a second revolving note
purchase facility, under which up to $100.0 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 1.18% per annum.
28
CAPITAL RESOURCES
Prior to 1999, and again in 2001, the Company has funded increases 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 purchases
made on a flow basis), 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 its capital requirements.
CAPITALIZATION
Over the three-year period ended December 31, 2001, the Company has managed its
capitalization by issuing and restructuring debt and issuing/purchasing common
stock and equivalents, as summarized in the following table:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
Senior secured debt:
Beginning balance......................................... $ 38,000 $ 23,161 $ 33,000
Issuances............................................... -- 16,000 --
Payments................................................ (12,000) (31,161) (9,839)
Restructuring........................................... -- 30,000 --
----------- ----------- -----------
Ending balance............................................ $ 26,000 $ 38,000 $ 23,161
=========== =========== ===========
Subordinated debt:
Beginning balance......................................... $ 37,699 $ 69,000 $ 65,000
Issuances............................................... -- -- 5,000
Payments................................................ (710) (1,301) (1,000)
Restructuring........................................... -- (30,000) --
----------- ----------- -----------
Ending balance............................................ $ 36,989 $ 37,699 $ 69,000
=========== =========== ===========
Related party debt:
Beginning balance......................................... $ 21,500 $ 21,500 $ 20,000
Issuances............................................... -- -- 1,500
Payments................................................ (4,000) -- --
----------- ----------- -----------
Ending balance............................................ $ 17,500 $ 21,500 $ 21,500
=========== =========== ===========
Increase (decrease) of Common Stock and equivalents.......
$ (757) $ (168) $ 9,888
=========== =========== ===========
29
The MFN Merger is not reflected in the table above.
The following review of the terms of such issuances of debt and equity shows
that the Company's cost of capital increased materially in 1999, and then
decreased somewhat in 2000. There were no material issuances in 2001.
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 LIBOR plus 4.0%. 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 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 then 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 has been repaid in accordance with its terms; Tranche B
30
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 the $1.5 million of promissory note issued by the Company to
SFSC in August and September 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.
The Company must comply with certain affirmative and negative covenants related
to debt facilities, which require, among other things, that the Company maintain
certain financial ratios related to liquidity, net worth, capitalization,
investments, acquisitions, restricted payments and certain dividend
restrictions. The Company is in compliance with all of its debt covenants as of
December 31, 2001. Such covenants relate primarily to financial reporting
requirements, restricted payments and the Company's debt coverage ratio as
defined in the various debt agreements.
During the first quarter of 2001, the Company purchased 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 23.6% of the Company's outstanding common shares. SFSC
is an affiliate of the Company's former Chairman, Charles E. Bradley, Sr., and
SFSC and Mr. Bradley, Sr. together hold approximately 14.4% of the Company's
outstanding common shares.
In July 2000, the Board of Directors authorized the purchase of up to $5,000,000
of outstanding debt and equity securities of the Company, inclusive of the
mandatory annual purchase or redemption of $1,000,000 of the Company's
outstanding "RISRS" subordinated debt securities, due 2006. As of December 31,
2001, the Company had purchased $2.0 million in principal amount of the RISRS,
and $2.6 million of its common stock, representing 1,583,911 shares.
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
31
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.
CRITICAL ACCOUNTING POLICIES
The Company believes that its accounting policies related to (a) Residual
Interest in Securitizations and Gain on Sale of Contracts and (b) Income Taxes
could be considered critical. Such policies are described below.
(a) Residual Interest in Securitizations and Gain on Sale of Contracts
Gain on sale may be recognized on the disposition of Contracts either outright
(as in the Company's flow purchase program) or in securitization transactions.
In its securitization transactions, a wholly owned subsidiary of the Company
retains a residual interest in the Contracts that are sold.
The residual interest in term securitizations and the residual interest in the
Contracts sold continuously are reflected in the line item "residual interest in
securitizations" on the Company's consolidated balance sheet.
The Company's securitization structure has generally been as follows:
First, the Company sells a portfolio of Contracts to a wholly owned 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 is a qualifying special purpose
entity and is therefore not consolidated in the Company's consolidated financial
statements. 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 may retain
subordinated Certificates issued by the Trust. 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 or in the form
of subordinated Certificates. The agreements governing the securitization
transactions (collectively referred to as the "Securitization 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 Securitization
Agreement. The Securitization Agreements generally grant the Company the option
to repurchase the sold Contracts from the Trust when the aggregate outstanding
balance has amortized to 10% or less of the initial aggregate balance.
32
The revolving note purchase facility continuous securitization structure is
similar to the above, except that (i) the SPS that purchases the Contracts
pledges the Contracts to secure promissory notes issued directly by the SPS,
(ii) the initial purchaser of such notes has the right, but not the obligation,
to require that the Company repurchase the Contracts, (iii) the promissory notes
are in an aggregate principal amount of not more than 75% of the aggregate
principal balance of the Contracts, and (iv) no Spread Account is involved. The
SPS is a qualifying special purpose entity and is therefore not consolidated in
the Company's consolidated financial statements.
At the closing of each securitization, whether a term securitization or the
revolving note purchase facility continuous 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 Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account, if any, (b) subordinated Certificates retained, and
(c) receivables from Trust, which include the net interest receivables ("NIRs").
NIRs represent the estimated discounted cash flows to be received from the Trust
in the future, net of principal and interest payable with respect to the
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 sold and retained based on the relative fair values of those
portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value. The Company is not aware of an active market
for the purchase or sale of 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 and estimating the value of the Company's
optional right to repurchase receivables pursuant to the terms of the Servicing
Agreements. The Company estimates the value of its optional right to repurchase
receivables pursuant to the terms of the Servicing Agreements primarily based on
its estimate of the amount and timing of anticipated cash flows released from
existing receivables then outstanding and previously charged off receivables
repurchased using a discount rate that the Company believes is appropriate for
the risks involved. 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 interest at the pass-through rate on the Certificates
plus principal as defined in the Securitization 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 any. If
the cash collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain
Securitization Agreements, excess cash collected during the period is used to
make accelerated principal paydowns on certain Certificates to create excess
collateral (over-collateralization or OC account). 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 Securitization Agreements. Spread Account
balances are held by the Trusts on behalf of the Company's SPS as the owner of
the Residuals.
33
The annual percentage rate payable on the Contracts is significantly greater
than the pass-through rate 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, and the value of
the Company's optional right to repurchase receivables pursuant to the terms of
the Servicing Agreements 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 prepayment
estimates of approximately 22% to 27% cumulatively over the lives of the related
Contracts. The Company estimates defaults and default loss severity using
available historical loss data for comparable Contracts and the specific
characteristics of the Contracts purchased by the Company. The Company estimates
recovery rates of previously charged off receivables using available historical
recovery data and projected future recovery levels. In valuing the Residuals,
the Company estimates that gross losses as a percentage of the original
principal balance will approximate16% to 22% cumulatively over the lives of the
related Contracts, with recovery rates approximating 4% to 6%.
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the Contracts is better than the original
estimate, or the Company would increase the estimated fair value of the
Residuals. If the actual performance of the Contracts were worse than the
original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. The authoritative accounting standard setting
bodies are currently deliberating the consolidation of non-qualifying special
purpose entities and the accounting treatment for various off-balance sheet
financing transactions. The effect of such deliberations may require the Company
to treat its securitizations differently. However, the outcome of such
deliberations is currently unknown.
The Certificateholders and the related securitization Trusts have no recourse to
the Company for failure of the Contract obligors to make payments on a timely
basis. The Company's Residuals, however, are subordinate to the Certificates
until the Certificateholders are fully paid.
Of the key economic assumptions used in measuring all retained interests
remaining as of December 31, 2001 and 2000, the discount rate remained constant.
The range of net credit losses used in measuring all retained interests as of
December 31, 2001 and 2000 were as follows:
2001 2000
-------------- --------------
Actual and projected prepayment speed........................... 22% - 27% 20%
Actual and projected credit losses.............................. 12.0% - 17.5% 14.0% - 17.0%
Key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent adverse changes in
those assumptions are as follows:
DECEMBER 31, 2001
-----------------
(DOLLARS IN
THOUSANDS)
Carrying amount/fair value of residual interest in securitizations........... $ 106,103
Weighted average life in years............................................... 1.0
Prepayment Speed Assumption (Cumulative)..................................... 22% - 27%
Estimated fair value assuming 10% adverse change............................. $ 105,785
Estimated fair value assuming 20% adverse change............................. 105,462
Expected Credit Losses (Cumulative).......................................... 12.0% -17.5%
Estimated fair value assuming 10% adverse change............................. $ 104,545
Estimated fair value assuming 20% adverse change............................. 103,396
Residual Cash Flows Discount Rate (Annual)................................... 14.0%
Estimated fair value assuming 10% adverse change............................. $ 94,746
Estimated fair value assuming 20% adverse change............................. 93,520
34
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market rates may result in lower prepayments and
increased credit losses), which could magnify or counteract the sensitivities.
(b) Income Taxes
The Company and its subsidiaries file a consolidated Federal income and combined
state franchise tax returns. The Company utilizes the asset and liability method
of accounting for income taxes, under which deferred income taxes are recognized
for the future tax consequences attributable to the differences between the
financial statement values of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company has estimated a valuation
allowance against that portion of the deferred tax asset whose utilization in
future periods is not more than likely.
In determining the possible realization of deferred tax assets, future taxable
income from the following sources are considered: (a) the reversal of taxable
temporary differences, (b) future operations exclusive of reversing temporary
differences, and (c) tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into periods in which bet operating
losses might otherwise expire.
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
Although the Company utilized its revolving note purchase facility and completed
a term securitization during the year ended December 31, 2001, the structures
did not lend themselves to some of the strategies the Company has used in the
past to minimize interest rate risk, as described below. Specifically, the rate
on the Certificates issued by the revolving note purchase facility is adjustable
and there is no pre-funding component to the revolving note purchase facility or
term securitization. The Company does intend to issue fixed rate Certificates
and to include pre-funding structures for future term securitization
35
transactions, 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 amount as to which there
can be no assurance. In addition, the Contracts the Company does purchase and
securitize have fixed rates of interest, whereas the Company's interest expense
related to the current note purchase facility is based on a variable rate.
Historically, the Company's term securitization facilities had fixed rates of
interest. Therefore, some of the strategies the Company has used in the past to
minimize interest rate risk do not currently apply.
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 table below outlines the carrying values and estimated fair
values of such indebtedness:
DECEMBER 31,
-------------------------------------------
2001 2000
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENT VALUE VALUE VALUE VALUE
-------------------- --------- --------- --------- ---------
(IN THOUSANDS)
Warehouse lines of credit.......................... $ -- $ -- $ 2,003 $ 2,003
Notes payable...................................... 1,590 1,590 2,414 2,414
Senior secured debt................................ 26,000 26,000 38,000 38,000
Subordinated debt.................................. 36,989 24,791 37,699 27,709
Related party debt................................. 17,500 11,974 21,500 15,803
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 and do not reflect amounts of which amounts outstanding could be
settled by the Company, the amounts that will actually be realized or paid at
settlement or maturity of the instruments could be significantly different.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
36
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 2002 (the "2002 Proxy Statement"). The 2002 Proxy
Statement will be filed not later than April 30, 2002. 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 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the 2002 Proxy Statement.
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 exhibits listed below are filed as part of this report, whether filed
herewith or incorporated by reference to an exhibit filed with the report
identified in the parentheses following the description of such exhibit. Unless
otherwise indicated, each such identified report was filed by or with respect to
the registrant.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of November 18, 2001, by and
among the Registrant, CPS Mergersub, Inc. and MFN Financial
Corporation. (Form 8-K filed on November 19, 2001 by MFN Financial
Corporation).
3.1 Restated Articles of Incorporation (Form 10-KSB dated December 31,
1995)
3.2 Amended and Restated Bylaws (Form 10-K dated December 31, 1997)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS") (Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRS (Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs") (Form
S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (Form S-3, no. 333-21289)
4.5 Second Amended and Restated Securities Purchase Agreement, dated as of
March 8, 2002, by and between Levine Leichtman Capital Partners II,
L.P. and the Registrant. (Form 8-K filed on March 25, 2002).
4.6 Secured Senior Note due February 28, 2003 issued by the Registrant to
Levine Leichtman Capital Partners II, L.P. (Form 8-K filed on March 25,
2002).
4.7 Second Amended and Restated Secured Senior Note due November 30, 2003
issued by the Registrant to Levine Leichtman Capital Partners II, L.P.
(Form 8-K filed on March 25, 2002).
4.8 12.00% Secured Senior Note due 2008 issued by the Registrant to Levine
Leichtman Capital Partners II, L.P. (Form 8-K filed on March 25, 2002).
37
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.9 Sale and Servicing Agreement, dated as of March 1, 2002, among the
Registrant, CPS Auto Receivables Trust 2002-A, CPS Receivables Corp.,
Systems & Services Technologies, Inc. and Bank One Trust Company, N.A.
(Form 8-K filed on March 25, 2002).
4.10 Indenture, dated as of March 1, 2002, between CPS Auto Receivables
Trust 2002-A and Bank One Trust Company, N.A. (Form 8-K filed on March
25, 2002).
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder (Form
10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (Form 10-KSB dated March 31, 1994)
10.3 Lease Agreement re Chesapeake Collection Facility (Form 10-K dated
December 31, 1996)
10.4 Lease of Headquarters Building (Form 10-Q dated September 30, 1997)
10.5 Partially Convertible Subordinated Note (Form 10-Q dated September 30,
1997)
10.13 FSA Warrant Agreement dated November 30, 1998 (Form 10-K dated December
31, 1998)
10.29 Warrant to Purchase 1,335,000 Shares of Common Stock (Schedule 13D
filed on April 21, 1999)
10.31 Agreement dated May 29, 1999 for Sale of Contracts on a Flow Basis
(Form 10-Q dated June 30, 1999)
10.32 Amendment to Master Spread Account Agreement (Form 10-K dated December
31, 1999)
23.1 Consent of independent auditors (filed herewith)
(b) Reports on Form 8-K
During the fourth quarter of the fiscal year ended December 31, 2001, the
Company filed a report on Form 8-K dated November 19, 2001, announcing the
signing of a definitive agreement under which the Company subsequently acquired
MFN Financial Corporation.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC. (REGISTRANT)
March 29, 2002 By: /s/ Charles E. Bradley, Jr.
------------------------------------------------------
Charles E. Bradley, Jr., PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 29, 2002 By: /s/ Charles E. Bradley, Jr.
------------------------------------------------------
Charles E. Bradley, Jr., DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
March 29, 2002 By: /s/ Thomas L. Chrystie
------------------------------------------------------
Thomas L. Chrystie, DIRECTOR
March 29, 2002 By: /s/ John E. McConnaughy, Jr.
------------------------------------------------------
John E. McConnaughy, Jr., DIRECTOR
March 29, 2002 By: /s/ John G. Poole
------------------------------------------------------
John G. Poole, DIRECTOR
March 29, 2002 By: /s/ William B. Roberts
------------------------------------------------------
William B. Roberts, DIRECTOR
March 29, 2002 By: /s/ Robert A. Simms
------------------------------------------------------
Robert A. Simms, DIRECTOR
March 29, 2002 By: /s/ Daniel S. Wood
------------------------------------------------------
Daniel S. Wood, DIRECTOR
March 29, 2002 By: /s/ David N. Kenneally
------------------------------------------------------
David N. Kenneally, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
40
INDEX TO FINANCIAL STATEMENTS
PAGE
REFERENCE
---------
Independent Auditors' Report............................................................. F-2
Consolidated Balance Sheets as of December 31, 2001, and 2000............................ F-3
Consolidated Statements of Operations for the years ended December 31,
2001, 2000, and 1999.................................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001,
2000, and 1999........................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and
1999.................................................................................. F-6
Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000,
and 1999.............................................................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Consumer Portfolio Services, Inc.:
We have audited the accompanying consolidated balance sheets of Consumer
Portfolio Services, Inc. and subsidiaries (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consumer
Portfolio Services, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Orange County, California
March 25, 2002
F-2
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2001 2000
-------------- --------------
ASSETS
Cash .................................................................... $ 2,570 $ 19,051
Restricted cash (note 2) ................................................ 11,354 5,264
Contracts held for sale (note 3) ........................................ 3,548 18,830
Servicing fees receivable ............................................... 3,100 3,204
Residual interest in securitizations (note 4) ........................... 106,103 99,199
Furniture and equipment, net (notes 7 and 10) ........................... 2,346 2,559
Deferred financing costs (notes 8 and 12) ............................... 1,584 1,898
Related party receivables (note 8) ...................................... 669 899
Deferred interest expense (notes 9 and 12) .............................. 5,370 8,102
Deferred tax asset, net (note 11) ....................................... 7,429 7,189
Other assets (notes 8 and 9) ............................................ 7,131 9,499
-------------- --------------
$ 151,204 $ 175,694
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses ..................................... $ 6,963 $ 10,958
Warehouse line of credit ................................................ -- 2,003
Capital lease obligation (note 10) ...................................... 476 998
Notes payable (note 12) ................................................. 1,590 2,414
Senior secured debt (note 12) ........................................... 26,000 38,000
Subordinated debt (note 12) ............................................. 36,989 37,699
Related party debt (note 8) ............................................. 17,500 21,500
-------------- --------------
89,518 113,572
Shareholders' Equity (notes 9 and 12)
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued ............................. -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding ............................ -- --
Common stock, no par value; authorized
30,000,000 shares; 20,551,449 and 20,367,901 shares
issued and outstanding at December 31, 2001
and December 31, 2000, respectively .................................. 63,888 64,277
Retained earnings (accumulated deficit) ................................. 189 (131)
Deferred compensation ................................................... (377) (734)
Treasury stock, 1,268,759 shares and 720,752 at
December 31, 2001 and December 31, 2000,
respectively, at cost ................................................ (2,014) (1,290)
-------------- --------------
61,686 62,122
Commitments and contingencies (notes 3, 4, 8, 9, 10, 11, 12, and 13) .... -- --
-------------- --------------
$ 151,204 $ 175,694
============== ==============
See accompanying notes to consolidated financial statements.
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Gain (loss) on sale of contracts, net (notes 3, 4 and 5) .... $ 32,765 $ 16,234 $(14,844)
Interest income (note 6) .................................... 17,205 3,480 3,032
Servicing fees .............................................. 10,666 15,848 27,761
Other income (loss) (note 8) ................................ 1,369 389 (1,144)
--------- --------- ---------
62,005 35,951 14,805
--------- --------- ---------
Expenses:
Employee costs .............................................. 23,994 24,634 29,820
General and administrative (note 8) ......................... 12,645 15,772 19,605
Interest .................................................... 14,335 17,240 27,405
Marketing ................................................... 6,525 6,126 5,423
Occupancy (note 10) ......................................... 3,167 3,408 2,793
Depreciation and amortization ............................... 1,019 1,161 1,595
Related party consulting fees (note 8) ...................... -- 13 327
--------- --------- ---------
61,685 68,354 86,968
--------- --------- ---------
Income (loss) before income taxes ........................... 320 (32,403) (72,163)
Income taxes (benefit) (note 11) ............................ -- (10,256) (27,631)
--------- --------- ---------
Net income (loss) ........................................... $ 320 $(22,147) $(44,532)
========= ========= =========
Earnings (loss) per share (note 1):
Basic ..................................................... $ 0.02 $ (1.10) $ (2.38)
Diluted ................................................... $ 0.02 $ (1.10) $ (2.38)
Number of shares used in computing earnings (loss) per
share (note 1):
Basic ..................................................... 19,480 20,195 18,678
Diluted ................................................... 21,018 20,195 18,678
See accompanying notes to consolidated financial statements.
F-4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SERIES A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998........ -- $ -- -- $ -- 15,659 $ 52,533
Common stock issued upon exercise
of warrants (notes 9 and 12)... -- -- -- -- 4,449 44
Valuation of warrants issued and -- -- -- --
repriced (notes 9 and 12)...... -- 9,844
Net loss............................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999........ -- -- -- -- 20,108 62,421
Common stock issued upon exercise
of options (notes 9 and 12).... -- -- -- -- 53 33
Common stock issued (note 8)........ 207 311
Treasury stock...................... -- -- -- -- --
Increase in deferred compensation
on stock options (note 9)...... -- -- -- -- -- 1,512
Amortization of stock compensation.. -- -- -- -- -- --
Net loss............................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000........ -- -- -- -- 20,368 64,277
Common stock issued upon exercise
of options (notes 9 and 12)......... -- -- -- -- 498 312
Treasury stock...................... -- -- -- -- -- --
Cancellation of treasury stock..... -- -- -- -- (315) (624)
Decrease in deferred compensation
on stock options (note 9)......... -- -- -- -- -- (77)
Amortization of stock compensation.. -- -- -- -- -- --
Net earnings -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001........ -- -- -- -- 20,551 $63,888
========== ========== ========== ========== ========== ==========
continued on next page
continued from previous page
RETAINED
TREASURY STOCK DEFERRED EARNINGS
---------------------- DEFERRED (ACCUMULATED)
SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
---------- ---------- ------------ ------------- -----------
Balance at December 31, 1998........ -- $ -- $ -- $ 66,548 $ 119,081
Common stock issued upon exercise
of warrants (notes 9 and 12)... -- -- -- -- 44
Valuation of warrants issued and -- -- -- --
repriced (notes 9 and 12)...... 9,844
Net loss............................ -- -- -- (44,532) (44,532)
---------- ---------- ------------ ------------- -----------
Balance at December 31, 1999........ -- -- -- 22,016 84,437
Common stock issued upon exercise
of options (notes 9 and 12).... -- -- -- -- 33
Common stock issued (note 8)........ 311
Treasury stock...................... (721) (1,290) -- -- (1,290)
Increase in deferred compensation
on stock options (note 9)...... -- -- (1,512) -- --
Amortization of stock compensation.. -- -- 778 -- 778
Net loss............................ -- -- -- (22,147) (22,147)
---------- ---------- ------------ ------------- -----------
Balance at December 31, 2000........ (721) (1,290) (734) (131) 62,122
Common stock issued upon exercise
of options (notes 9 and 12)......... -- -- -- -- 312
Treasury stock...................... (863) (1,348) -- -- (1,348)
Cancellation of treasury stock..... 315 624 -- -- --
Decrease in deferred compensation
on stock options (note 9)......... -- -- 77 -- --
Amortization of stock compensation.. -- -- 280 -- 280
Net earnings -- -- -- 320 320
---------- ---------- ------------ ------------- -----------
Balance at December 31, 2001........ (1,269) $ (2,014) $ (377) $ 189 $ 61,686
========== ========== ============ ============= ===========
See accompanying notes to consolidated financial statements.
F-5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) ............................................... $ 320 $ (22,147) $ (44,532)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 1,019 1,161 1,595
Amortization of deferred financing costs ...................... 890 1,129 641
Provision for (recovery of) credit losses ..................... (5,695) 1,838 5,323
NIR gains recognized .......................................... (9,211) -- --
Loss on sale of furniture and equipment ....................... -- 14 --
Deferred compensation ......................................... 280 778 --
Equity in net (income) loss of investment in
unconsolidated affiliates ................................... -- 755 2,411
Releases of cash from Trusts to Company ....................... 43,652 80,614 27,974
Initial deposits to spread accounts ........................... (2,477) -- --
Net deposits to spread accounts ............................... (24,581) (15,042) (23,093)
(Increase) decrease in receivables from Trusts and
investment in subordinated certificates ..................... (14,287) 7,758 40,437
Changes in assets and liabilities:
Restricted cash ............................................. (6,090) (3,230) (415)
Purchases of contracts held for sale ........................ (672,281) (631,530) (424,746)
Liquidation of contracts held for sale ...................... 693,258 613,283 582,584
Other assets ................................................ 5,164 12,630 6,792
Accounts payable and accrued expenses ....................... (3,995) (2,679) 4,370
Warehouse lines of credit ................................... (2,003) 2,003 (151,857)
Deferred tax asset/liability ................................ (240) (10,256) (20,929)
Taxes payable/receivable .................................... -- 1,663 (6,735)
---------- ---------- ----------
Net cash provided by (used in) operating activities ...... 3,723 38,742 (180)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of investment in unconsolidated affiliate .... -- -- 979
Net related party receivables ................................... 230 2 2,367
Purchases of furniture and equipment ............................ (766) (625) (33)
---------- ---------- ----------
Net cash provided by (used in) investing activities ...... (536) (623) 3,313
---------- ---------- ----------
Cash flows from financing activities:
Increase in senior secured debt ................................. -- 16,000 --
Issuance of related party debt .................................. -- -- 1,500
Issuance of subordinated debt ................................... -- -- 5,000
Issuance of notes payable ....................................... -- -- 2,147
Repayment of senior secured debt ................................ (12,000) (31,161) (9,839)
Repayment of subordinated debt .................................. (710) (1,301) (1,000)
Repayment of capital lease obligations .......................... (522) (508) (626)
Repayment of notes payable ...................................... (824) (1,592) (697)
Repayment related party debt .................................... (4,000) -- --
Payment of financing costs ...................................... (576) (539) (312)
Purchase of common stock ........................................ (1,348) (1,290) --
Exercise of options and warrants ................................ 312 33 44
---------- ---------- ----------
Net cash (used in) provided by financing activities ...... (19,668) (20,358) (3,783)
---------- ---------- ----------
Increase (decrease) in cash ........................................ (16,481) 17,761 (650)
Cash at beginning of period ........................................ 19,051 1,290 1,940
---------- ---------- ----------
Cash at end of period .............................................. $ 2,570 $ 19,051 $ 1,290
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest ...................................................... $ 10,780 $ 13,362 $ 23,872
Income taxes, net ............................................. 22 (1,663) 62
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock upon restructuring of debt ............. -- 311 --
Revaluation of common stock warrants ............................ -- -- 9,844
Furniture and equipment acquired through capital leases ......... -- 75 --
Reclassification of subordinated debt ........................... -- 30,000 --
Stock compensation .............................................. 280 778 --
Cancellation of treasury shares ................................. 624 -- --
See accompanying notes to consolidated financial statements.
F-7
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on
March 8, 1991. CPS and its subsidiaries (collectively, the "Company") engage
primarily in the business of purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by licensed motor vehicle
dealers ("Dealers") located throughout the United States. The Company
specializes in Contracts with obligors who generally would not be expected to
qualify for traditional financing, such as that provided by commercial banks or
automobile manufacturers' captive finance companies. The Company's headquarters
and principal collection facilities are located in Irvine, California. There is
also a regional collection center located in Chesapeake, Virginia, and a
satellite collection office in Dallas, Texas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Consumer Portfolio
Services, Inc. and its wholly owned subsidiaries, CPS Marketing, Inc., Alton
Receivables Corp. ("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding Corp.
("CPSFC"), CPS Funding LLC ("CPSF2"), CPS Warehouse Corp. ("CPSWC") and Linc
Acceptance Company ("LINC"). Alton, CPSRC, CPSFC and CPSWC are limited purpose
corporations, and CPSF2 is a limited liability company, all of which are special
purpose subsidiaries ("SPS"), formed to accommodate the structures under which
the Company purchases and sells its Contracts. CPS Marketing, Inc. employs
marketing representatives who solicit business from Dealers. The consolidated
financial statements also include the accounts of SAMCO Acceptance Corp. and CPS
Leasing, Inc., which are 80% owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
unconsolidated affiliates that are not majority owned are reported using the
equity method. The excess of the purchase price of such subsidiaries over the
Company's share of the net assets at the acquisition date ("goodwill") is being
amortized over a period of up to fifteen years. Goodwill is reviewed for
possible impairment when events or changed circumstances may affect the
underlying basis of the asset. Impairment is measured by discounting operating
income at an appropriate discount rate.
CONTRACTS HELD FOR SALE
Contracts held for sale include automobile installment sales contracts on which
interest is precomputed and added to the amount financed. The interest on such
Contracts is included in unearned financed charges. Unearned financed charges
are amortized using the interest method over the remaining period to contractual
maturity. Contracts held for sale are stated at the lower of cost or market
value. Market value is determined by purchase commitments from investors and
prevailing market prices where available. Gains and losses are recorded as
appropriate when Contracts are sold. The Company considers a transfer of
Contracts where the Company surrenders control over the Contracts to be a sale
to the extent that consideration other than beneficial interests in the
transferred Contracts is received in exchange for the Contracts.
F-8
CONTRACTS HELD TO MATURITY
Contracts held to maturity are presented at the lower of cost or market and are
included in other assets. Payments received on Contracts held to maturity are
restricted to certain securitized pools, and the related Contracts cannot be
resold.
ALLOWANCE FOR CREDIT LOSSES
The Company estimates an allowance for credit losses, which management believes
provides adequately for known and inherent losses that may develop in the
Contracts held for sale. Provision for loss is charged to gain on sale of
Contracts. Charge offs, net of recoveries, are charged to the allowance.
Management evaluates the adequacy of the allowance by examining current
delinquencies, the characteristics of the portfolio and the value of the
underlying collateral.
CONTRACT ACQUISITION FEES
Upon purchase of a Contract from a Dealer, the Company generally charges or
advances the Dealer an acquisition fee. The acquisition fees associated with
Contract purchases are deferred until the Contracts are sold, at which time the
deferred acquisition fees are recognized as a component of the gain on sale. The
Company also charges the purchaser an origination fee for those Contracts that
are sold on a flow basis. Those fees are recognized at the time the Contracts
are sold and are also a component of the gain on sale.
FLOW PURCHASE PROGRAM
The Company purchases Contracts 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). One of the two flow purchasers ceased to purchase
Contracts in December 2001. The other flow purchaser has stated that it will
cease such purchases in May 2002. The Company accordingly expects the flow
purchase program will terminate in May 2002.
RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS
Gain on sale may be recognized on the disposition of Contracts either outright
(as in the Company's flow purchase program) or in securitization transactions.
In its securitization transactions, a wholly owned subsidiary of the Company
retains a residual interest in the Contracts that are sold.
The residual interest in term securitizations and the residual interest in the
Contracts sold continuously are reflected in the line item "residual interest in
securitizations" on the Company's consolidated balance sheet.
F-9
The Company's securitization structure has generally been as follows:
First, the Company sells a portfolio of Contracts to a wholly owned special
purpose subsidiary ("SPS"), which has been established for the limited purpose
of buying and reselling the Company's Contracts. The SPS then transfers the same
Contracts to either a grantor Trust or an owner Trust. The Trust is a qualifying
special purpose entity and is therefore not consolidated in the Company's
consolidated financial statements. 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 may retain subordinated Certificates issued by the Trust. 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 or in the form of subordinated Certificates. The agreements governing the
securitization transactions (collectively referred to as the "Securitization
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
Securitization Agreement. The Securitization Agreements generally grant the
Company the option to repurchase the sold Contracts from the Trust when the
aggregate outstanding balance has amortized to 10% or less of the initial
aggregate balance.
The revolving note purchase facility continuous securitization structure is
similar to the above, except that (i) the SPS that purchases the Contracts
pledges the Contracts to secure promissory notes issued directly by the SPS,
(ii) the initial purchaser of such notes has the right, but not the obligation,
to require that the Company repurchase the Contracts, (iii) the promissory notes
are in an aggregate principal amount of not more than 75% of the aggregate
principal balance of the Contracts, and (iv) no Spread Account is involved. The
SPS is a qualifying special purpose entity and is therefore not consolidated in
the Company's consolidated financial statements.
At the closing of each securitization, whether a term securitization or the
revolving note purchase facility continuous 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 Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account, if any, (b) subordinated Certificates retained, and
(c) receivables from Trust, which include the net interest receivables ("NIRs").
NIRs represent the estimated discounted cash flows to be received from the Trust
in the future, net of principal and interest payable with respect to the
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 sold and retained based on the relative fair values of those
portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value. The Company is not aware of an active market
for the purchase or sale of interests such as the Residuals; accordingly, the
Company determines the estimated fair value of the Residuals by discounting the
F-10
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 and estimating the value of the Company's
optional right to repurchase receivables pursuant to the terms of the Servicing
Agreements. The Company estimates the value of its optional right to repurchase
receivables pursuant to the terms of the Servicing Agreements primarily based on
its estimate of the amount and timing of anticipated cash flows released from
existing receivables then outstanding and previously charged off receivables
repurchased using a discount rate that the Company believes is appropriate for
the risks involved. 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 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"). 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 interest at the
pass-through rate on the Certificates plus principal as defined in the
Securitization 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 any. If the cash collected during
the period exceeds the amount necessary for the above allocations, and there is
no shortfall in the related Spread Account, the excess is released to the
Company or in certain cases is transferred to other Spread Accounts that may be
below their required levels. Pursuant to certain Securitization Agreements,
excess cash collected during the period is used to make accelerated principal
paydowns on certain Certificates to create excess collateral
(over-collateralization or OC account). 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 Securitization Agreements. Spread Account
balances are held by the Trusts on behalf of the Company's SPS as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly greater
than the pass-through rate 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, and the value of
the Company's optional right to repurchase receivables pursuant to the terms of
the Servicing Agreements 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 prepayment
estimates of approximately 22% to 27% cumulatively over the lives of the related
Contracts. The Company estimates defaults and default loss severity using
available historical loss data for comparable Contracts and the specific
characteristics of the Contracts purchased by the Company. The Company estimates
recovery rates of previously charged off receivables using available historical
recovery data and projected future recovery levels. In valuing the Residuals,
the Company estimates that gross losses as a percentage of the original
principal balance will approximate 16% to 22% cumulatively over the lives of the
related Contracts, with recovery rates approximating 4% to 6%.
F-11
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the Contracts is better than the original
estimate, or the Company would increase the estimated fair value of the
Residuals. If the actual performance of the Contracts were worse than the
original estimate, then a downward adjustment to the carrying value of the
Residuals would be required.
The Certificateholders and the related securitization Trusts have no recourse to
the Company for failure of the Contract obligors to make payments on a timely
basis. The Company's Residuals, however, are subordinate to the Certificates
until the Certificateholders are fully paid.
SERVICING
The Company considers the servicing fee received to approximate adequate
compensation. As a result, no servicing asset or liability has been recognized.
Servicing fees are reported as income when earned. Servicing costs are charged
to expense as incurred. Servicing fees receivable represent fees earned but not
yet remitted to the Company by the trustee.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost net of accumulated depreciation. The
Company calculates depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Assets held under capital leases and leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the related lease
terms.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.
F-12
EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted earnings
(loss) per share:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Numerator for basic earnings (loss) per share--
net income (loss)................................... $ 320 $ (22,147) $ (44,532)
=========== =========== ===========
Numerator for diluted earnings (loss) per share....... $ 320 $ (22,147) $(44,532)
=========== =========== ===========
Denominator:
Denominator for basic earnings (loss) per share
-- weighted average number of common shares
outstanding during the year......................... 19,480 20,195 18,678
Incremental common shares attributable to
exercise of outstanding options and warrants........ 1,538 -- --
----------- ----------- -----------
Denominator for diluted earnings (loss) per share..... 21,018 20,195 18,678
=========== =========== ===========
Basic earnings (loss) per share....................... $ 0.02 $ (1.10) $ (2.38)
=========== =========== ===========
Diluted earnings (loss) per share..................... $ 0.02 $ (1.10) $ (2.38)
=========== =========== ===========
Excluded from the diluted loss per share calculation for the year ended December
31, 2000 and 1999, were 1.7 million shares and 344,256 shares, respectively,
from outstanding options and warrants. There was no such anti-dilution in 2001.
Additionally, for the years ended December 31, 2000, and 1999, an additional 2.4
million from incremental shares attributable to the conversion of certain
subordinated debt were excluded from the diluted share calculation, as these
securities are anti-dilutive. Incremental shares of 1.1 million related to the
conversion of subordinated debt have been excluded from the calculation for the
year ended December 31, 2001.
DEFERRAL AND AMORTIZATION OF DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized on a straight-line basis
over the shorter of the actual or expected term of the related debt.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income and combined
state franchise tax returns. The Company utilizes the asset and liability method
of accounting for income taxes, under which deferred income taxes are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
TREASURY STOCK
The Company records purchases of its own common stock at cost.
F-13
STOCK OPTION PLAN
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company accounts for
stock-based employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The Company provides the pro forma net income (loss), pro forma
earnings per share, and stock based compensation plan disclosure requirements
set forth in SFAS No. 123. The Company accounts for repriced options as variable
awards.
SEGMENT REPORTING
Operations are managed and financial performance is evaluated on a Company-wide
basis by chief decision makers. Accordingly, all of the Company's operations are
considered by management to be aggregated in one reportable operating segment.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "Accounting for Business
Combinations" ("SFAS 141"), and Statement No. 142, "Accounting for Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies certain criteria that intangible assets
acquired in a purchase method business combination must meet in order to be
recognized and reported apart from goodwill noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment.
The Company is required to adopt the provisions of SFAS 141 immediately, and
SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible
asset determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001 will not be amortized. The
adoption of SFAS 142 did not have any impact on the Company's results of
operations, its financial condition or financial reporting.
In June 2001, the FASB issued Statement of Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," ("SFAS 143") which requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if reasonable estimate of fair value can
be made. The associated asset retirement costs would be capitalized as part of
the carrying amount of the long-lived asset and depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The provisions of SFAS 143 are effective for fiscal years beginning
after June 15, 2002. The Company does not believe that the adoption and
implementation of SFAS 143 will have a material effect on the Company's results
of operations, its financial condition or financial reporting.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144")." For long-lived assets to be held and used, SFAS 144 retains the
requirements of SFAS 121 to (a) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (b) measure an impairment loss as the difference between the
F-14
carrying amount and fair value. Further, SFAS 144 eliminates the requirement to
allocate goodwill to long-lived assets to be tested for impairment, describes a
probability-weighted cash flow estimation approach to deal with situations in
which alternative courses of action to recover the carrying amount of a
long-lived asset are under consideration or a range is estimated for the amount
of possible future cash flows, and establishes a "primary-asset" approach to
determine the cash flow estimation period. For long-lived assets to be disposed
of other than by sale (e.g., assets abandoned, exchanged or distributed to
owners in a spinoff), SFAS 144 requires that such assets be considered held and
used until disposed of. Further, an impairment loss should be recognized at the
date an asset is exchanged for a similar productive asset or distributed to
owners in a spinoff if the carrying amount exceeds its fair value. For
long-lived assets to be disposed of by sale, SFAS 144 retains the requirement of
FASB Statement No. 121 to measure a long-lived asset classified as held for sale
at the lower of its carrying amount or fair value less cost to sell and to cease
depreciation. Discontinued operations would no longer be measured on a net
realizable value basis, and future operating losses would no longer be
recognized before they occur. SFAS 144 broadens the presentation of discontinued
operations to include a component of an entity, establishes criteria to
determine when a long-lived asset is held for sale, prohibits retroactive
reclassification of the asset as held for sale at the balance sheet date if the
criteria are met after the balance sheet date but before issuance of the
financial statements, and provides accounting guidance for the reclassification
of an asset from "held for sale" to "held and used." The provisions of SFAS 144
are effective for fiscal years beginning after December 15, 2001. The Company
has not yet determined the effect, if any, of adoption of SFAS 144.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of income and expenses during the reported periods. Specifically, a
number of estimates were made in connection with determining an appropriate
allowance for credit losses, deferred tax asset valuation allowance, valuing the
Residuals and computing the related gain on sale on the transactions that
created the Residuals. Actual results could differ from those estimates
depending on the future performance of the related Contracts.
RECLASSIFICATION
Certain amounts for the prior years have been reclassified to conform to the
current year's presentation.
(2) RESTRICTED CASH
Restricted cash comprised the following components:
DECEMBER 31,
-------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Flow purchases deposit......................... $ 4,100 $ 4,500
Litigation reserve............................. 3,303 --
Note purchase facility reserve................. 3,060 --
Lockbox agreement deposit...................... 500 --
LINC bankruptcy reserve........................ -- 500
Other.......................................... 391 264
--------- ---------
Total restricted cash....................... $ 11,354 $ 5,264
========= =========
Certain of the Company's operating agreements require that the Company establish
cash reserves for the benefit of the other parties to the agreements, in case
those parties are subject to any claims or exposure. In addition, certain of
these agreements require that the Company establish amounts in reserve related
to outstanding litigation. As of the date of this report, the lockbox agreement
has been terminated and the note purchase facility has been repaid, and the
related cash is no longer restricted. No other amounts have been drawn from the
remaining accounts.
F-15
During 2000, the Company established agreements with third parties that purchase
Contracts from the Company on a flow through basis, to expedite payment for
Contracts that the Company sells to such purchasers. As part of the agreements,
the Company agreed to post cash reserves to be used to pay for any Contracts not
ultimately accepted by the respective third parties. During the year ended
December 31, 2000 no amounts had been drawn on any of these accounts. The
Company has the ability to cancel the agreements at any time and require that
the reserve amounts be returned.
In connection with the bankruptcy of LINC, the court had ordered the Company to
post a cash reserve. The adversary proceeding was settled in December 2001 upon
the Company's agreement to pay an aggregate of $425,000 to the trustee (see note
10).
(3) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Gross receivable balance................................................. $ 3,563 $ 21,426
Unearned finance charges................................................. (3) (308)
Deferred acquisition fees and discounts.................................. (12) (121)
Allowance for credit losses.............................................. -- (2,167)
---------- ----------
Net contracts held for sale........................................... $ 3,548 $ 18,830
========== ==========
The following table presents the activity in the allowance for credit losses:
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Balance, beginning of year................................ $ 2,167 $ 863 $ 2,751
Provision (Recovery of allowance)......................... (5,695) 1,838 5,323
Charge-offs............................................... (1,420) (4,286) (8,478)
Allowance (allocated to) reclassed from repossessed
inventory and contracts held to maturity............... 394 1,136 (217)
Recoveries................................................ 4,554 2,616 1,484
---------- ---------- ----------
Balance, end of year...................................... $ -- $ 2,167 $ 863
========== ========== ==========
The Company is required to represent and warrant certain matters with respect to
the Contracts used as collateral in warehouse lines of credit, which generally
duplicate the substance of the representations and warranties made by the
Dealers in connection with the Company's purchase of the Contracts. In the event
of a breach by the Company of any representation or warranty, the Company is
obligated to repurchase the Contracts from the investors at a price equal to the
investors' purchase price less the related credit enhancement and any principal
payments received from the obligor. In most cases, the Company would then be
entitled under the terms of its agreements with Dealers to require the selling
Dealer to repurchase the Contracts at the Company's purchase price less any
principal payments received from the obligor.
F-16
For the year ended December 31, 2001, 12.7% and 7.0% of Contracts purchased by
the Company were purchased from Dealers in Texas and California, respectively.
For the year ended December 31, 2000, 12.8% and 12.2% of Contracts purchased by
the Company were purchased from Dealers in California and Texas, respectively.
As of December 31, 2001 and 2000, respectively, the Company had commitments to
purchase $1.4 million and $2.4 million of Contracts from Dealers in the ordinary
course of business.
(4) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
DECEMBER 31,
----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Cash, commercial paper, US government securities and other
qualifying investments (Spread Account)............................... $ 43,960 $ 60,554
Receivable from Trusts.................................................. 50,251 38,639
Investment in subordinated certificates................................. 11,892 6
---------- ----------
Residual interest in securitizations.................................... $ 106,103 $ 99,199
========== ==========
The following table presents the estimated remaining undiscounted credit losses
included in the fair value estimate of the Residuals as a percentage of the
Company's servicing portfolio subject to recourse provisions:
DECEMBER 31,
----------------------------------------
2001 2000 1999
----------- ----------- ----------
(IN THOUSANDS)
Undiscounted estimated credit losses.............. $ 16,210 $ 17,819 $ 77,480
Servicing subject to recourse provisions.......... $ 281,493 $ 389,602 $ 813,061
=========== =========== ===========
Undiscounted estimated credit losses as
percentage of servicing subject to
recourse provisions............................. 5.76% 4.57% 9.53%
=========== =========== ===========
The Company did not securitize any Contracts in 2000. The key economic
assumptions used in measuring retained interest at the date of securitization
during the year ended December 31, 2001, were as follows:
Prepayment speed (cumulative)................................................. 25%
Weighted average life (in years).............................................. 4.8
Expected credit losses (cumulative)........................................... 12.0%
Residual cash flows discounted at (per annum)................................. 14.0%
Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.
Static pool losses used to measure the retained interest for each subsequent
year ranged from 12.0% to 17.5% and 14.0% to 17.0% at December 31, 2001 and
2000, respectively.
Of the key economic assumptions used in measuring all retained interests
remaining as of December 31, 2001 and 2000, the discount rate remained constant.
The range of net credit losses used in measuring all retained interests as of
December 31, 2001 and 2000 were as follows:
F-17
2001 2000
-------------- --------------
Actual and projected prepayment speed........................... 22% - 27% 20%
Actual and projected credit losses.............................. 12.0% - 17.5% 14.0% - 17.0%
Key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent adverse changes in
those assumptions are as follows:
DECEMBER 31, 2001
-----------------
(DOLLARS IN
THOUSANDS)
Carrying amount/fair value of residual interest in securitizations........... $ 106,103
Weighted average life in years............................................... 1.0
Prepayment Speed Assumption (Cumulative)..................................... 22% - 27%
Estimated fair value assuming 10% adverse change............................. $ 105,785
Estimated fair value assuming 20% adverse change............................. 105,462
Expected Credit Losses (Cumulative).......................................... 12.0% -17.5%
Estimated fair value assuming 10% adverse change............................. $ 104,545
Estimated fair value assuming 20% adverse change............................. 103,396
Residual Cash Flows Discount Rate (Annual)................................... 14.0%
Estimated fair value assuming 10% adverse change............................. $ 94,746
Estimated fair value assuming 20% adverse change............................. 93,520
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market rates may result in lower prepayments and
increased credit losses), which could magnify or counteract the sensitivities.
The following table summarizes the cash flows received from (paid to)
securitization Trusts:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Releases of cash from Spread Accounts................. $ 43,652 $ 80,614 $ 27,974
Servicing fees received............................... 10,208 15,840 26,719
Net deposits to Spread Accounts....................... (24,581) (15,042) (23,093)
Initial deposit to Spread Accounts.................... (2,477) -- --
Purchase of delinquent or foreclosed assets........... (37,620) (83,246) (123,158)
Repurchase of trust assets............................ (2,936) (24,535) --
The following table presents the historical loss and delinquency amounts for the
serviced portfolio:
PRINCIPAL AMOUNT OF
TOTAL PRINCIPAL CONTRACTS 60 DAYS NET CREDIT LOSSES
AMOUNT OF CONTRACTS OR MORE PAST DUE (RECOVERIES)
------------------------ ------------------------ FOR THE YEAR ENDED
AT DECEMBER 31, DECEMBER 31,
-------------------------------------------------- ------------------------
2001 2000 2001 2000 2001 2000
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Securitized Contracts............... $ 281,493 $ 389,602 $ 7,192 $ 7,115 $ 24,446 $ 62,954
Contracts held for sale, includes
repossessions..................... 3,638 21,452 178 649 (3,107) 230
Contracts held to maturity.......... 383 829 55 163 (27) 1,440
----------- ----------- ----------- ----------- ----------- -----------
Total servicing portfolio........... $ 285,514 $ 411,883 $ 7,425 $ 7,927 $ 21,312 $ 64,624
=========== =========== =========== =========== =========== ===========
F-18
(5) GAIN (LOSS) ON SALE OF CONTRACTS
The following table presents the components of the net gain (loss) on sale of
Contracts:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
NIR gains recognized..................................... $ 9,211 $ -- $ --
Gain (loss) on sale of Contracts......................... 16,592 18,352 (15,831)
Deferred acquisition fees and discounts.................. 2,816 162 7,434
Expenses related to sales................................ (1,549) (442) (1,124)
(Provision for) recovery of credit losses................ 5,695 (1,838) (5,323)
----------- ----------- -----------
Net gain (loss) on sale of Contracts..................... $ 32,765 $ 16,234 $ (14,844)
=========== =========== ===========
(6) INTEREST INCOME
The following table presents the components of interest income:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
Interest on Contracts held for sale..................... $ 2,249 $ 1,956 $ 27,802
Residual interest income, net........................... 14,648 653 (24,917)
Other interest income................................... 308 871 147
----------- ----------- -----------
$ 17,205 $ 3,480 $ 3,032
=========== =========== ===========
(7) FURNITURE AND EQUIPMENT
The following table presents the components of furniture and equipment:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Furniture and fixtures................................................... $ 2,999 $ 3,001
Computer equipment....................................................... 3,720 2,732
Leasing assets........................................................... 729 820
Leasehold improvements................................................... 637 637
Other fixed assets....................................................... 17 233
---------- ----------
8,102 7,423
Less accumulated depreciation and amortization (5,756) (4,864)
---------- ----------
$ 2,346 $ 2,559
========== ==========
(8) RELATED PARTY TRANSACTIONS
INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company purchased a 38% interest in NAB Asset Corporation ("NAB") on June 6,
1996, for approximately $4.3 million. At the time of the acquisition, NAB had
approximately $3.5 million in cash and no significant operations. The Company's
purchase price of its investment in NAB exceeded the Company's share of the net
assets of NAB at the acquisition date by approximately $1.4 million. This
amount, which was included in other assets in the accompanying consolidated
balance sheets as goodwill, was being amortized over a period of fifteen years.
During 1999, the Company determined that the value of the goodwill was impaired
and wrote off the remaining balance of the goodwill which is included in other
F-19
income (loss) in the accompanying consolidated statement of operations. Based on
the closing price on the Nasdaq, the market value of the investment in NAB was
approximately $39,000 and $483,674 at December 31, 2000 and 1999, respectively.
During the fourth quarter of 2001, the Company sold its investment in NAB to an
unrelated third party for $204,110 in cash, which is recorded as other income in
the Company's consolidated statement of operations.
Subsequent to the Company's investment in NAB, NAB purchased Mortgage Portfolio
Services, Inc. ("MPS") from the Company for $300,000. MPS, formed by the Company
in April 1996, is a mortgage broker-dealer based in Texas. In July 1996, NAB
formed CARSUSA, Inc. ("CARSUSA"), which purchased, and now owns and operates, a
Mitsubishi automobile dealership in Southern California. On June 27, 1997, NAB
sold CARSUSA to Charles E. Bradley, Sr. and Charles E. Bradley, Jr., for $1.5
million. Included in other income for the years ended December 31, 2000 and
1999, are losses of $755,081 and $2.5 million, respectively, which represents
the Company's share of NAB's net loss. No such loss is included for the year
ended December 31, 2001, as the Company's investment is NAB had been written
down to zero in 2000.
RELATED PARTY RECEIVABLES
The following table presents the components of related party receivables:
DECEMBER 31,
-------------------
RELATED PARTY 2001 2000
-------- --------
(IN THOUSANDS)
CARSUSA, Inc.................................. $ 669 $ 688
Loan to Officer of Subsidiary................. -- 125
NAB Asset Corporation......................... -- 86
-------- --------
$ 669 $ 899
======== ========
The Company purchased 16, 28 and 57 Contracts from CARSUSA, with an aggregate
principal balance of approximately $233,431, $414,052 and $827,434,
respectively, in 2001, 2000 and 1999.
Stanwich Partners, Inc. is an affiliate of Charles E. Bradley, Sr., former
Chairman of the Board of Directors of the Company. The Company was previously
party to a consulting agreement with Stanwich Partners, Inc. that called for
monthly payments of $6,250 per month. Included in the accompanying consolidated
statements of operations for the years ended December 31 2000 and 1999, is
$12,500 and $75,000, respectively, of consulting expense related to this
consulting agreement. There was no such consulting expense paid in 2001.
In November 1998, the Company issued $25 million of subordinated promissory
notes due November 30, 2003, to an affiliate of Levine Leichtman Capital
Partners, Inc. ("LLCP") (see note 13). As part of the transaction, the Company
entered into a consulting agreement with LLCP, calling for monthly consulting
fees of $22,917 through November 1999. Included in the accompanying consolidated
statement of operations is $252,083 of consulting fees for the year ended
December 31, 1999, related to this consulting agreement.
CPS LEASING, INC. RELATED PARTY DIRECT LEASE RECEIVABLES
Included in other assets recorded in the Company's consolidated balance sheet
are direct lease receivables due to CPS Leasing, Inc. from related parties,
primarily companies affiliated with the Company's former Chairman of the Board
of Directors. Such related party direct lease receivables totaled approximately
$3.1 million and $3.7 million at December 31, 2001 and 2000, respectively.
F-20
RELATED PARTY DEBT
In June 1997 the Company borrowed $15 million on an unsecured and subordinated
basis from Stanwich Financial Services Corp. ("SFSC"), an affiliate of Charles
E. Bradley, Sr., the former Chairman of the Company's Board of Directors. This
loan ("RPL") is due 2004, and has a fixed rate of interest of 9% per annum,
payable monthly beginning July 1997. The Company may pre-pay the RPL without
penalty at any time after three years. At maturity or repayment of the RPL, the
holder thereof will have an option to convert 20% of the principal amount into
common stock of the Company, at a conversion rate of $11.86 per share. The
balance of the RPL at December 31, 2001 and 2000, was $15.0 million.
During 1998, the Company borrowed an additional $4 million on an unsecured basis
from SFSC. This loan ("RPL2") is due 2004, and has a fixed rate of interest of
12.5% per annum payable monthly beginning December 1998. The Company had the
right to pre-pay the RPL2, without penalty, at any time after June 12, 2000. At
maturity or repayment of the RPL2, the holder thereof would have the option to
convert the entire principal balance of the note, or a portion thereof, into
common stock of the Company, at a conversion rate of $3 per share. The $4.0
million balance of the RPL2 outstanding at December 31, 2000 was repaid during
the first quarter of 2001.
During 1998, the Company borrowed $1.0 million on an unsecured basis from John
G. Poole, a director of the Company. The terms of this note ("RPL3") are the
same as RPL2. The balance of the RPL3 at December 31, 2001 and 2000 was $1.0
million.
During 1999, the Company borrowed $1.5 million on an unsecured basis from SFSC.
This loan ("RPL4") is due 2004, has a fixed rate of interest of 14.5% per annum
payable monthly beginning October 1999. In conjunction with the issuance of
RPL4, the Company issued warrants to purchase 103,500 shares of the Company's
common stock at a price of $0.01 per share. The balance of the RPL4 at December
31, 2001 and 2000 was $1.5 million.
RELATED PARTY STOCK SALE AND PURCHASE
In July 1998, the Company sold 443,459 shares of common stock in a private
placement to SFSC for $5 million. As of December 31, 2001, such shares of common
stock had not been registered for public sale.
In December 2000, the Company purchased 315,152 shares of common stock from SFSC
for $624,000, or $1.98 per share.
(9) SHAREHOLDERS' EQUITY
COMMON STOCK
Holders of the common stock are entitled to such dividends as the Company's
Board of Directors, in its discretion, may declare out of funds available,
subject to the terms of any outstanding shares of preferred stock and other
restrictions. In the event of liquidation of the Company, holders of common
stock are entitled to receive, pro rata, all of the assets of the Company
available for distribution, after payment of any liquidation preference to the
holders of outstanding shares of preferred stock. Holders of the shares of
common stock have no conversion or preemptive or other subscription rights and
there are no redemption or sinking fund provisions applicable to the common
stock.
F-21
The Company is required to comply with various operating and financial covenants
defined in the agreements governing the warehouse lines, senior debt,
subordinated debt, and related party debt. The covenants restrict the payment of
certain distributions, including dividends. (See note 12.)
Included in common stock at December 31, 2001 and 2000, is additional paid in
capital related to the valuation of certain stock options as required by
Financial Interpretation No. 44 ("FIN 44"). Based on the adoption of FIN 44,
common stock decreased by $(77,000) at December 31, 2001, of which $280,000
relates to the effect of options and $(357,000) relates to deferred
compensation. For the year ended December 31, 2000, common stock increased by
approximately $1.5 million, $778,000 relates to the effect of options and
$734,000 relates to deferred compensation.
STOCK PURCHASES
During 2000, the Company's Board of Directors authorized the Company to purchase
up to $5 million of Company securities. Through December 31, 2001, the Company
had purchased 1,583,911 shares of common stock for approximately $2.6 million,
or an average of $1.63 per share.
OPTIONS AND WARRANTS
In 1991, the Company adopted and its sole shareholder approved the 1991 Stock
Option Plan (the "1991 Plan") pursuant to which the Company's Board of Directors
may grant stock options to officers and key employees. The Plan, as amended,
authorizes grants of options to purchase up to 2,700,000 shares of authorized
but unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Stock options have
terms that range from 7 to 10 years and vest over a range of 0 to 7 years. In
addition to the 1991 Plan, in fiscal 1995, the Company granted 60,000 options to
certain directors of the Company that vest over three years and expire nine
years from the grant date. The Plan terminated in December 2001, without
affecting the validity of the outstanding options.
In July 1997, the Company adopted and its shareholders approved the 1997
Long-Term Incentive Plan (the "1997 Plan") pursuant to which the Company's Board
of Directors may grant stock options, restricted stock and stock appreciation
rights to employees, directors or employees of entities in which the Company has
a controlling or significant equity interest. Options that have been granted
under the 1997 Plan have in all cases been granted at an exercise price equal to
the stock's fair market value at the date of the grant, with terms of 10 years
and vesting over 5 years. In 2001, the shareholders of the Company approved an
amendment to the 1997 Plan providing that an aggregate maximum of 3,400,000
shares of the Company's common shares may be subject to awards under the 1997
Plan.
In October 1998, the Company's Board of Directors approved a plan to cancel and
reissue certain stock options previously granted to key employees of the
Company. All options granted prior to October 22, 1998, with an option price
greater than $3.25 per share, were repriced to $3.25 per share. In conjunction
with the repricing, a one-year period of non-exercisability was placed on all
repriced options, which period ended on October 21, 1999.
In October 1999, the Company's Board of Directors approved a plan to cancel and
reissue certain stock options previously granted to key employees of the
Company. All options granted prior to October 29, 1999, with an option price
greater than $0.625 per share, were repriced to $0.625 per share. In conjunction
with the repricing, a six-month period of non-exercisability was placed on all
repriced options, which period ended on April 29, 2000.
F-22
At December 31, 2001, there were a total of 627,601 additional shares available
for grant under the 1997 Plan. Of the options outstanding at December 31, 2001,
2000 and 1999, 1,715,767, 1,532,590, and 24,800, respectively, were then
exercisable, with weighted-average exercise prices of $0.84, $0.63, and $0.69,
respectively. The per share weighted-average fair value of stock options granted
during the years ended December 31, 2001, 2000 and 1999, was $1.79, $2.74, and
$1.11, respectively, at the date of grant. That fair value was computed using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Expected life (years).............................. 6.50 6.50 6.09
Risk-free interest rate............................ 4.70% 6.05% 5.96%
Volatility......................................... 128.56% 278.98% 114.79%
Expected dividend yield............................ -- -- --
Compensation cost has been recognized for stock options in the consolidated
financial statements in accordance with APB Opinion No. 25. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," the Company's net income
(loss) and earnings per share would have been reduced to the pro forma amounts
indicated below.
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)
As reported................................ $ 320 $ (22,147) $ (44,532)
Pro forma.................................. (1,040) $ (22,995) $ (46,236)
Earnings (loss) per share-- basic
As reported................................ $ 0.02 $ (1.10) $ (2.38)
Pro forma.................................. (0.05) $ (1.14) $ (2.48)
Earnings (loss) per share-- diluted
As reported................................ $ 0.02 $ (1.10) $ (2.38)
Pro forma.................................. (0.05) $ (1.14) $ (2.48)
Pro forma net income (loss) and earnings (loss) per share reflect only options
granted in the years ended December 31, 1996 to 2001. Therefore, the full effect
of calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma amounts presented above, because compensation cost is
reflected over the options' vesting period and compensation cost for options
granted prior to 1996 is not considered.
F-23
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Balance at December 31, 1998 2,505 $ 3.25
Granted.................................................... 3,965 1.28
Exercised.................................................. -- 0.63
Canceled................................................... 3,448 3.27
-------- --------
Balance at December 31, 1999 3,022 0.64
Granted.................................................... 833 1.70
Exercised.................................................. 53 0.63
Canceled................................................... 298 1.02
-------- --------
Balance at December 31, 2000 3,504 0.86
Granted.................................................... 1,033 2.59
Exercised.................................................. 498 0.63
Canceled................................................... 282 1.06
-------- --------
Balance at December 31, 2001 3,757 $ 1.35
======== ========
At December 31, 2001, the range of exercise prices, the number, weighted-average
exercise price and weighted-average remaining term of options outstanding and
the number and weighted-average price of options currently exercisable are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------ -----------------------------
WEIGHTED WEIGHTED
WEIGHTED- AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER REMAINING PRICE PER NUMBER PRICE PER
(PER SHARE) OUTSTANDING TERM (YEARS) SHARE EXERCISABLE SHARE
- ---------------------- --------------- --------------- --------------- ----------- --------------
(IN THOUSANDS, EXCEPT TERM AND PER SHARE DATA)
$ 0.63 - $ 0.63................ 2,060 5.57 $ 0.63 1,376 $ 0.63
$ 0.69 - $ 1.95................ 1,131 9.03 $ 1.67 340 $ 1.72
$ 2.50 - $ 4.25................ 566 9.05 $ 3.38 -- --
On November 17, 1998, in conjunction with the issuance of a $25.0 million
subordinated promissory note to an affiliate of LLCP, the Company issued
warrants to purchase up to 3,450,000 shares of common stock at $3.00 per share,
exercisable through November 30, 2005. In April 1999, in conjunction with the
issuance of $5.0 million of an additional subordinated promissory note to an
affiliate of LLCP, the Company issued additional warrants to purchase 1,335,000
shares of the Company's common stock at $0.01 per share to LLCP. As part of the
purchase agreement, the existing warrants to purchase 3,450,000 shares at $3.00
per share were exchanged for warrants to purchase 3,115,000 shares at a price of
$0.01 per share. The aggregate value of the warrants, $12.9 million, which is
comprised of $3.0 million from the original warrants issued in November 1998 and
$9.9 million from the repricing and additional warrants issued in April 1999, is
reported as deferred interest expense to be amortized over the expected life of
the related debt, five years. As of December 31, 2000, 1,000 warrants remained
unexercised. As of December 31, 2001, the remaining warrants, and the common
stock issued in conjunction with the exercise of 4,449,000 of warrants had not
been registered for public sale. However, the holder of the remaining warrants
has the right to require the Company register the warrants and common stock for
public sale in the future.
F-24
Also in November 1998, the Company entered into an agreement with the
Certificate Insurer of its asset-backed securities. The agreement commits the
Certificate Insurer to provide insurance for the securitization of $560.0
million in asset-backed securities, of which $250.0 million remained at December
31, 1998. The agreement provides for a 3% initial Spread Account deposit. As
consideration for the agreement, the Company issued warrants to purchase up to
2,525,114 shares of common stock at $3.00 per share, subject to anti-dilution
adjustments. The warrants are fully exercisable on the date of grant and expire
in November 2003. The value of the warrants, $2.2 million, is included in other
assets as deferred securitization expense to be amortized over five years. As of
December 31, 2001, the warrants had not been registered for public sale.
However, the holder of the warrants has the right to require the Company to
register the warrants for public sale in the future.
(10) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain computer equipment under
non-cancelable operating and capital leases, which expire through 2009. Future
minimum lease payments at December 31, 2001, under these leases are as follows:
CAPITAL OPERATING
----------- ------------
(IN THOUSANDS)
2002................................................................... $ 429 $ 2,790
2003................................................................... 70 2,757
2004................................................................... -- 2,624
2005................................................................... -- 2,625
2006................................................................... -- 2,628
Thereafter............................................................. -- 4,219
----------- ---------
Total minimum lease payments........................................... 499 $ 17,643
=========
Less: amount representing interest..................................... 23
-----------
Present value of net minimum lease payments............................ $ 476
===========
Included in furniture and equipment in the accompanying consolidated balance
sheet are the following assets held under capital leases at December 31, 2001:
Furniture and fixtures................................................................ $ 2,044
Computer equipment.................................................................... 152
--------
2,196
Less: accumulated depreciation........................................................ 1,723
--------
$ 473
========
Rent expense for the years ended December 31, 2001, 2000 and 1999, was $2.6
million, $3.2 million, and $3.1 million, respectively.
The Company's facility lease contains certain rental concessions and escalating
rental payments, which are recognized as adjustments to rental expense and are
amortized on a straight-line basis over the term of the lease.
F-25
In November 1998, the Company entered into a sublease agreement for the space
that had been the Company's headquarters in Irvine, California. The sublease
agreement extends beyond the term of the lease and provides for the tenant to
pay a base rent in excess of the lease payment required of the Company, plus all
common area maintenance charges and property taxes. During 2001, 2000 and 1999,
the Company received $270,486, $968,920 and $875,215, respectively, of sublease
income, which is included in occupancy expense. Future minimum sublease payments
totaled $60,000 at December 31, 2001.
LITIGATION
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. The bankruptcy trustee subsequently filed an adversary
proceeding alleging, INTER ALIA, that certain transfers from LINC to the
Company's wholly owned subsidiaries were avoidable as preferences. The adversary
proceeding was settled in December 2001 upon the Company's agreement to pay an
aggregate of $425,000 to the trustee.
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 subsequently ordered the plaintiffs to file separate lawsuits against
each finance defendant. Such a substitute lawsuit was filed against the Company
by Angela Hicks, on March 8, 2001. The lawsuits were dismissed with prejudice in
September 2001.
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 case was dismissed without
prejudice in September 2001.
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.
The Company is currently a defendant in a class action (the "Stanwich Case")
pending in the California Superior Court, Los Angeles County. The plaintiffs in
that case are persons entitled to receive regular payments (the "Settlement
Payments") under out-of-court settlements reached with third party defendants.
Stanwich Financial Services Corp. ("Stanwich"), an affiliate of the former
Chairman of the Company's Board of Directors, is the entity that is obligated to
pay the Settlement Payments. Stanwich has defaulted on its payment obligations
to the plaintiffs and in June 2001 filed for reorganization under the Bankruptcy
Code, in the federal Bankruptcy Court of Connecticut.
The Company has entered into a "Standstill Agreement," pursuant to which the
plaintiffs have agreed that they will refrain from prosecuting their case
against the Company. The Standstill Agreement may be terminated at will on 60
days' notice. No such notice has been given. The plaintiffs in August 2001 filed
amended complaints, which narrow the claims against the Company from eight to
two: alleged breach of fiduciary duty and alleged intentional interference with
contract. The Company is also a defendant in certain cross-claims brought by
other defendants in the case, which assert claims of equitable and/or
contractual indemnity against the Company.
F-26
The outcome of any litigation is uncertain, and there is the possibility that
damages could be awarded against the Company in amounts that could be material.
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.
(11) INCOME TAXES
Income taxes consist of the following:
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal .................. $ 366 $ -- $ (3,450)
State .................... (126) -- --
--------- --------- ---------
240 -- (3,450)
Deferred:
Federal .................. (277) (10,458) (17,926)
State .................... 485 (3,466) (6,255)
Valuation allowance ...... (448) 3,668 --
--------- --------- ---------
(240) (10,256) (24,181)
--------- --------- ---------
Income taxes (benefit) $ -- $(10,256) $(27,631)
========= ========= =========
The Company's effective tax expense benefit for the years ended December 31,
2001, 2000 and 1999, differs from the amount determined by applying the
statutory federal rate of 35% to income (loss) before income taxes as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Expense (benefit) at federal
tax rate .................... 112 $(11,341) $(25,258)
California franchise tax, net
of federal income tax benefit 233 (2,253) (4,066)
Other ......................... 103 (330) 1,693
Valuation allowance ........... (448) 3,668 --
--------- --------- ---------
$ -- $(10,256) $(27,631)
========= ========= =========
The tax effected cumulative temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2001 and 2000, are as follows:
DECEMBER 31,
2001 2000
--------- ---------
(IN THOUSANDS)
Deferred Tax Assets:
Accrued liabilities .................... $ 1,030 $ 1,815
Furniture and equipment ................ -- 210
Equity investment ...................... 751 751
NOL carryforward ....................... 16,522 11,031
Minimum tax credit ..................... 334 334
Other .................................. 115 465
--------- ---------
Total deferred tax assets .......... 18,752 14,606
Valuation allowance .................... (3,219) (3,668)
--------- ---------
15,533 10,938
F-27
Deferred Tax Liabilities:
NIRs ................................... (8,036) (1,856)
Provision for credit losses ............ -- (1,158)
Federal effect of state NOL carryforward -- (735)
Furniture and equipment ................ (68) --
--------- ---------
Total deferred tax liabilities ..... (8,104) (3,749)
--------- ---------
Net deferred tax asset ............. $ 7,429 $ 7,189
========= =========
As of December 31, 2001, the Company has net operating loss carry-forwards for
federal and state income tax purposes of $42.1 million and $30.1 million,
respectively, which are available to offset future taxable income, if any,
through 2020 and 2010, respectively. In addition, the Company has an alternative
minimum tax credit carry-forward of approximately $334,000, which is available
to reduce future federal regular income taxes, if any, over an indefinite
period.
As of December 31, 2001, the Company has estimated a valuation allowance against
the deferred tax asset of $3.2 million as it is not more than likely that the
amounts will be utilized in the future. However, the Company believes that the
remaining deferred tax asset will more likely than not be realized due to the
reversal of the deferred tax liability and the expected future taxable income.
In determining the possible future realization of deferred tax assets, future
taxable income from the following sources are taken into account: (a) reversal
of taxable temporary differences, (b) future operations exclusive of reversing
temporary differences, and (c) tax planning strategies that, if necessary, would
be implemented to accelerate taxable income into years in which net operating
losses might otherwise expire. The realization of the net deferred tax asset is
dependent on material improvements over present levels of consolidated pre-tax
income. Cumulative sources of taxable income must reach approximately $18.0
million during the tax net operating loss carryforward period, which management
anticipates achieving in an 18 to 24 month period. Management anticipates
improvements in pre-tax income due to significant increases in Contract
originations held for sale and the continuation of securitization transactions
in 2002. However, due to uncertainty surrounding the ability of the Company to
achieve future pre-tax income beyond this time frame, management has established
a valuation allowance, for remaining net deferred tax assets. Although
realization is not assured, management believes it is more likely than not that
the recognized net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
The Company files its tax returns on a fiscal year ending March 31.
(12) DEBT
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 $100.0 million at a
variable interest rate of LIBOR plus 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
F-28
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 April 1998, the Company established a $33.3 million senior secured credit
line (the "Senior Secured Line") with State Street Bank and Trust Company,
Prudential Insurance and an affiliate of Prudential. Borrowings under the Senior
Secured Line were secured by all the Company's assets, including its residual
interest in securitizations. The Senior Secured Line was a revolving facility
for one year, after which it converted into a loan with a maximum term of four
years. The lenders under the Senior Secured Line declared a default in August
1999, and in November 1999 reached an agreement with the Company under which
such lenders agreed to refrain from exercising their remedies occasioned by such
default, and under which the Company and such lenders agreed to a repayment
schedule with respect to all indebtedness under the senior secured loan. As part
of the agreement to restructure the repayment schedule of the senior secured
loan, the interest rate was increased from LIBOR plus 4.0% to LIBOR plus 5.0%.
At December 31, 1999, the balance outstanding under the Senior Secured Line was
$23.2 million. In March 2000, all amounts owed under the Senior Secured Line
were paid in full and the agreement was terminated. Proceeds used to repay the
balance owed under the Senior Secured Line were obtained as a result of
restructuring certain subordinated debt as discussed below.
In November 1998, the Company issued $25.0 million of subordinated promissory
notes due November 30, 2003, to an affiliate of Levine Leichtman Capital
Partners, Inc. ("LLCP"), and received the proceeds (net of $1.3 million of
capitalized issuance costs), of approximately $23.7 million. The Company also
issued warrants to purchase up to 3,450,000 shares of common stock at $3.00 per
share, exercisable through November 30, 2005 (see note 10). The debt bears
interest at 13.5% per annum, and may not be prepaid without penalty prior to
November 1, 2002. Simultaneously with the consummation of that transaction,
certain affiliates of the Company, who had lent the Company an aggregate of $5.0
million on a short-term basis in August and September 1998, agreed to
subordinate their indebtedness to the indebtedness in favor of LLCP, to extend
the maturity of their debt until June 2004, and to reduce their interest rate
from 15% to 12.5%. Such affiliates received in return the option to convert such
debt into an aggregate of 1,666,667 shares of common stock at the rate of $3.00
per share through maturity at June 30, 2004. Additionally, SFSC also agreed to
subordinate $6.0 million, or 40%, of its RPL in favor of LLCP. (See note 8.)
In April 1999, the Company issued an additional $5.0 million of subordinated
promissory notes due April 30, 2004, to the same affiliate of LLCP as noted
above, and received proceeds (net of $312,000 of capitalized issuance costs) of
$4.7 million. The Company also issued warrants to purchase 1,335,000 shares of
the Company's common stock at $0.01 per share to LLCP, exercisable through April
2009. The debt bears interest at 14.5% per annum, and may be prepaid without
penalty at anytime. As part of the purchase agreement, the interest rate on the
previously issued LLCP notes was increased to 14.5% per annum, and the warrant
to purchase 3,450,000 shares of the Company's common stock at $3.00 per share
was exchanged for a warrant to purchase 3,115,000 shares at a price of $0.01 per
share.
F-29
In March 2000, the Company issued $16.0 million of senior secured debt to LLCP.
The proceeds from the issuance were used to repay in full all amounts owed under
the Senior Secured Line. As part of the agreement, all of LLCP's existing debt
of $30.0 million was restructured as senior secured debt, making the Company's
aggregate principal indebtedness to LLCP equal to $46.0 million. The $16.0
million bears interest at 12.5% per annum and the interest rate on the $30.0
million is unchanged at 14.5% per annum. As part of the agreement, all prior
defaults were either waived or cured. As of December 31, 2000, the amount
outstanding of the $16.0 million portion of senior secured debt was $8.0
million. The outstanding balance on the $16.0 million LLCP debt was repaid
during the first quarter of 2001. In addition, during the first quarter of 2001,
the Company made a $4.0 million principal prepayment on the remaining
outstanding LLCP debt, incurring $200,000 in prepayment penalties and waiver
fees. The outstanding balance of LLCP debt at December 31, 2001 was $26.0
million.
On April 15, 1997, the Company issued $20.0 million in subordinated
participating equity notes ("PENs") due April 15, 2004. The PENs are unsecured
general obligations of the Company. Interest on the PENs is payable on the
fifteenth of each month, commencing May 15, 1997, at an interest rate of 10.5%
per annum. In connection with the issuance of the PENs, the Company incurred and
capitalized issuance costs of $1.2 million. The Company recognizes interest and
amortization expense related to the PENs using the effective interest method
over the expected redemption period. The PENs are subordinated to certain
existing and future indebtedness of the Company as defined in the indenture
agreement. The Company may at its option elect to redeem the PENs from the
registered holders, in whole but not in part, at any time on or after April 15,
2000, at 100% of their principal amount, subject to limited conversion rights,
plus accrued interest to and including the date of redemption. At maturity, upon
the exercise by the Company of an optional redemption, or upon the occurrence of
a "Special Redemption Event," each holder will have the right to convert into
common stock of the Company ("Common Stock"), 25% of the aggregate principal
amount of the PENs held by such holder at the conversion price of $10.15 per
share of Common Stock. "Special Redemption Events" are certain events related to
a change in control of the Company.
On December 20, 1995, the Company issued $20.0 million in rising interest
subordinated redeemable securities due January 1, 2006 (the "Notes"). The Notes
are unsecured general obligations of the Company. Interest on the Notes is
payable on the first day of each month, commencing February 1, 1996, at an
interest rate of 10.0% per annum. The interest rate increases 0.25% on each
January 1 for the first nine years and 0.50% in the last year. In connection
with the issuance of the Notes, the Company incurred and capitalized issuance
costs of $1.1 million. The Notes are subordinated to certain existing and future
indebtedness of the Company as defined in the indenture agreement. The Company
is required to redeem on an annual basis, subject to certain adjustments, $1.0
million of the aggregate principal amount of the Notes through the operation of
a sinking fund on or before of January 1, 2000, 2001, 2002, 2003, 2004 and 2005.
The Company may at its option elect to redeem the Notes from the registered
holders of the Notes, in whole or in part at 100% of their principal amount,
plus accrued interest to and including the date of redemption. During each of
2000 and 1999, the Company redeemed $1.0 million of principal amount of the
notes in conjunction with the requirements of the related sinking fund
agreement. The balance outstanding of the Notes at December 31, 2001 and 2000,
was $17.0 million and $17.7 million, respectively.
During the year ended December 31, 1997 the Company acquired CPS Leasing, Inc.
At December 31, 2001 and 2000, CPS Leasing, Inc., had borrowings to banks of
$1.6 million and $2.4 million, respectively.
With respect to all borrowings listed above, the Company was in compliance with
all related financial covenants as of December 31, 2001. Such covenants relate
primarily to financial reporting requirements, restricted payments and the
Company's debt coverage ratio as defined in the various debt agreements.
F-30
The following table summarizes the amount of senior secured, subordinated and
related party debt maturing over the next 5 years and thereafter:
PRINCIPAL AMOUNT
----------------
(IN THOUSANDS)
2002 ..................................... $ 989
2003 ..................................... 27,000
2004 ..................................... 38,500
2005 ..................................... --
2006 ..................................... 14,000
Thereafter ............................... --
--------
Total .................................. $80,489
========
(13) EMPLOYEE BENEFITS
The Company sponsors a pretax savings and profit sharing plan (the "401(k)
Plan") qualified under section 401(k) of the Internal Revenue Code. Under the
401(k) Plan, eligible employees are able to contribute up to 15% of their
compensation (subject to stricter limitation in the case of highly compensated
employees). The Company, may, at its discretion, match 100% of employees'
contributions up to $600 per employee per calendar year. The Company's
contributions to the 401(k) Plan were $213,045 and $300,791 for the years ended
December 31, 2000 and 1999, respectively. The Company did not make a matching
contribution in 2001.
F-31
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of 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, 2001 and 2000, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different. The estimated fair values of
financial assets and liabilities at December 31, 2001 and 2000, were as follows:
DECEMBER 31,
----------------------------------------------
2001 2000
--------------------- ---------------------
CARRYING CARRYING
VALUE OR VALUE OR
NOTIONAL FAIR NOTIONAL FAIR
FINANCIAL INSTRUMENT AMOUNT VALUE AMOUNT VALUE
-------------------- --------- --------- --------- ---------
(IN THOUSANDS)
Cash ............................... $ 2,570 $ 2,570 $ 19,051 $ 19,051
Restricted cash .................... 11,354 11,354 5,264 5,264
Contracts held for sale ............ 3,548 3,548 18,830 18,830
Residual interest in securitizations 106,103 106,103 99,199 99,199
Related party receivables .......... 669 669 899 899
Commitments ........................ 1,350 42 2,403 64
Warehouse lines of credit .......... -- -- 2,003 2,003
Notes payable ...................... 1,590 1,590 2,414 2,414
Senior secured debt ................ 26,000 26,000 38,000 38,000
Subordinated debt .................. 36,989 24,791 37,699 27,709
Related party debt ................. 17,500 11,974 21,500 15,803
CASH AND RESTRICTED CASH
The carrying value equals fair value.
CONTRACTS HELD FOR SALE
The fair value of the Company's contracts held for sale is determined by
purchase commitments from investors and prevailing market rates.
RESIDUAL INTEREST IN SECURITIZATIONS
The fair value is estimated by discounting future cash flows using credit and
discount rates that the Company believes reflect the estimated credit, interest
rate and prepayment risks associated with similar types of instruments.
RELATED PARTY RECEIVABLES
The carrying value approximates fair value because the related interest rates
are estimated to reflect current conditions for similar types of investments.
F-32
COMMITMENTS
The fair value of commitments to purchase contracts from Dealers is determined
by purchase commitments from investors and prevailing market rates.
WAREHOUSE LINE OF CREDIT
The carrying value approximates fair value because the warehouse line of credit
is short-term in nature and the related interest rates are estimated to reflect
current market conditions for similar types of instruments.
NOTES PAYABLE AND SENIOR SECURED DEBT
The carrying value approximates fair value because the related interest rates
are estimated to reflect current market conditions for similar types of secured
instruments.
SUBORDINATED DEBT
The fair value is based on average trading activity occurring in the last 5 days
of the respective periods.
RELATED PARTY DEBT
The fair value is based on the fair value of subordinated debt, as the terms and
structure are similar.
(15) LIQUIDITY
The Company's business requires substantial cash to support its purchases of
Contracts and other operating activities. The Company's primary sources of cash
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving lines of credit facilities
(also sometimes known as warehouse lines), servicing fees on portfolios of
Contracts previously sold, customer payments of principal and interest on
Contracts held for sale, fees for origination of Contracts, and releases of cash
from credit enhancements provided by the Company for the financial guaranty
insurer (Certificate Insurer) and Investors, initially made in the form of a
cash deposit to an account (Spread Account), and releases of cash from
securitized pools of Contracts in which the Company has retained a residual
ownership interest. 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" (cash posted to
enhance credit of securitized pools), and income taxes. There can be no
assurance that internally generated cash will be sufficient to meet the
Company's cash demands. The sufficiency of internally generated cash will depend
on: the performance of securitized pools (which determines the level of releases
from Spread Accounts), the rate of expansion or contraction in the Company's
servicing portfolio, and the terms upon which the Company is able to acquire,
sell, and borrow against Contracts.
Net cash provided by (used in) operating activities for the years ended December
31, 2001, 2000 and 1999, was $3.7 million, $38.7 million and $(180,000),
respectively.
Contracts are purchased from Dealers for a cash price approximating their
principal amount, and generate cash flow over a period of years. As a result,
the Company has been dependent on revolving warehouse lines of credit facilities
to purchase Contracts, and on the availability of cash from outside sources in
order to finance its continuing operations, as well as to fund the portion of
Contract purchase prices not financed under lines of revolving credit
facilities. The Company's Contract purchasing program currently comprises both
F-33
(i) purchases for the Company's own account made on other than a flow basis,
funded primarily by advances under a revolving warehouse credit facility, and
(ii) flow purchases for immediate resale to non-affiliates. Flow purchases allow
the Company to purchase Contracts with minimal demands on liquidity. The
Company's revenues from the resale of flow purchase Contracts, however, are
materially less than those that may be received by holding Contracts to maturity
or by selling Contracts in securitization transactions. During the year ended
December 31, 2001, the Company purchased $537.9 million of Contracts on a flow
basis, and $134.4 million on an other than flow basis for its own account,
compared to $600.4 million and $31.1 million, respectively, of Contracts
purchased in 2000. For the year ended December 31, 1999, the Company purchased
$424.7 million of Contracts on a flow basis and $241.2 million on an other than
flow basis. The Company expects the flow purchase program will terminate in May
2002.
During the year ended December 31, 2001, the Company purchased Contracts to be
held for sale into a securitization, which it had not done in the previous two
years. Funding for the other than flow basis purchases was available from the
Company's $75 million revolving note purchase facility, established in November
2000. Since November 2000, the Company has been able to purchase Contracts for
its own account, which in all events must be resold into a securitization
transaction, using proceeds from that facility. Approximately 75% of the
principal balance of Contracts may be advanced to the Company under that
facility, subject to a collateral test and certain other conditions and
covenants. Notes issued under this facility bear interest at one-month LIBOR
plus 0.60% per annum. The note purchase facility was modified during March 2001,
with the effect that sales of Contracts to the facility-related special purpose
subsidiary are treated as an ongoing securitization. The Company, therefore,
removes the securitized Contracts and related debt from its consolidated balance
sheet and recognizes a gain on sale in the Company's consolidated statement of
operations. Such purchases of Contracts made on other than a flow basis require
that the Company fund the portion of Contract purchase prices beyond what the
related special purpose subsidiary was able to borrow in the continuous
securitization structure, which in the aggregate required cash of approximately
$32.8 million in the year ended December 31, 2001. The Company securitized
$141.7 million of Contracts during the year ending December 31, 2001, resulting
in a gain on sale of $9.2 million.
On September 7, 2001, the Company completed a $68.5 million term securitization.
In a private placement, qualified institutional buyers purchased notes backed by
automotive receivables. The Notes, issued by CPS Auto Receivables Trust 2001-A,
consist of two classes: $44.5 million of 4.37% Class A-1 Notes, and $24.0
million of 5.28% Class A-2 Notes. Substantially all of the proceeds from the
September 2001 transaction were used to reduce amounts outstanding under the
Company's revolving note purchase facility.
The Company also purchases Contracts on a flow basis, which, as compared with
purchases of Contracts for the Company's own account, involves a materially
reduced demand on the Company's cash. The Company's plan for meeting its
liquidity needs is to adjust its levels of Contract purchases to match its
availability of cash.
Cash used for subsequent deposits to Spread Accounts for the years ended
December 31, 2001, 2000 and 1999, was $24.6 million, $15.0 million and $23.1
million, respectively. Cash released from Spread Accounts to the Company for the
years ended December 31, 2001, 2000 and 1999, was $43.7 million, $80.6 and $28.0
million, respectively. Changes in deposits to and releases from Spread Accounts
are affected by the relative size, seasoning and performance of the various
pools of Contracts sold that make up the Company's servicing portfolio to which
the respective Spread Accounts are related. As a result of the September term
securitization transaction the Company made an initial deposit to the related
Spread Account of $2.5 million. No such initial deposits were made in 2000 or
1999, as there were no securitizations during those years.
F-34
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 agreements
governing the securitizations. 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 the majority 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 asset-backed securities
("Certificates") issued by the related Trusts, which were established in 1998 or
prior. 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 from 21% 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.
As of December 31, 2001, four of the Company's nine remaining securitized pools
had incurred cumulative losses exceeding certain predetermined levels, which, in
turn, has given the Certificate Insurer the option to terminate the Servicing
Agreements with respect to all of the pools. The Certificate Insurer has held
that option at all times from 1999 to the present and has consistently waived
its right to terminate the Servicing Agreements. Were the Certificate Insurer in
the future to exercise its option to terminate the Servicing Agreements, such a
termination would have a material adverse effect on the Company's liquidity and
results of operations. Subsequent to December 31, 2001, the Company exercised
its optional right to repurchase receivables pursuant to the terms of the
Servicing Agreements on three of the four pools mentioned above. The Company
continues to receive servicer extensions on a quarterly basis, and has recently
received an extension through the second quarter of 2002.
The Company's ability to adjust the quantity of Contracts that it purchases and
sells will be subject to general competitive conditions and the continued
availability of the revolving note purchase facility. There can be no assurance
that the desired 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 to maintain the Spread
Accounts 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.
F-35
The acquisition of Contracts for subsequent sale in securitization transactions,
and the need to fund Spread Accounts when those transactions take place, results
in a continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company's Contract purchases (other than flow
purchases), the required level of initial credit enhancement in securitizations,
and the extent to which the previously established Spread Accounts either
release cash to the Company or capture cash from collections on sold Contracts.
The Company is currently limited in its ability to purchase contracts due to
certain liquidity constraints. As of December 31, 2001, the Company had cash on
hand of $2.6 million and available Contract purchase commitments from the
revolving note purchase facility of $36.4 million. The Company's plans to manage
the need for liquidity include the completion of additional term securitizations
that would provide additional credit availability from the note purchase
facility. There can be no assurance that the Company will be able to complete
the term securitizations on favorable economic terms or that the Company will be
able to complete term securitizations at all. If the Company is unable to
complete such securitizations, servicing fees and other portfolio related income
would continue to decrease.
(16) SUBSEQUENT EVENTS (Unaudited)
On March 8, 2002, the CPS acquired MFN Financial Corporation, a Delaware
corporation ("MFN") and its subsidiaries, by the merger (the "Merger") of CPS
Mergersub, Inc., a Delaware corporation ("Mergersub") and a direct wholly owned
subsidiary of CPS, with and into MFN. The Merger took place pursuant to an
Agreement and Plan of Merger, dated as of November 18, 2001 (the "Merger
Agreement"), among CPS, Mergersub and MFN. In the Merger MFN became a wholly
owned subsidiary of CPS. CPS thus acquired the assets of MFN, consisting
principally of interests in motor vehicle installment sales finance contracts
and the facilities for originating and servicing such contracts.
MFN, through its primary operating subsidiary, Mercury Finance Company, LLC, is
in the business of purchasing motor vehicle installment sales finance contracts
from automobile dealers, and securitizing and servicing such contracts. CPS
intends to continue to use the assets acquired in the Merger in the automobile
finance business, but a portion of such assets will be disposed of, and the
level of activity may change. In particular, CPS will temporarily cease to use
such assets for the purchase of motor vehicle installment sales finance
contracts, and may or may not recommence such use.
At the closing of the Merger, each share of common stock, $.01 par value per
share, of MFN, issued and outstanding immediately prior to the closing of the
Merger, was cancelled and extinguished and automatically converted into and
became a right to receive $10.00 per share in cash, pursuant to the Merger
Agreement, upon surrender of the certificates that evidenced such shares. The
total merger consideration payable to stockholders of MFN was approximately
$99.9 million. The amount of such consideration was agreed to as the result of
arms'-length negotiations between CPS and MFN.
Acquisition financing was provided to CPS by Westdeutsche Landesbank
Girozentrale, New York Branch ("WestLB") and LLCP. CPS obtained acquisition
financing from LLCP through its issuance and sale of certain senior secured
notes to LLCP in the aggregate principal amount of $35 million.
On March 8, 2002, CPS (through a subsidiary) sold motor vehicle installment
sales finance contracts to CPS Auto Receivables Trust 2002-A in a securitization
transaction, retaining a residual interest therein. CPS Auto Receivables Trust
2002-A funded the acquisition by issuance of $45.65 million in notes backed by
automotive receivables.
F-36
On March 8, 2002, MFN (through a subsidiary) sold motor vehicle installment
sales finance contracts to MFN Auto Receivables Trust 2002-A in a securitization
transaction, retaining a residual interest therein. MFN Auto Receivables Trust
2002-A funded the acquisition by issuance of approximately $100 million in notes
backed by automotive receivables.
On March 7, 2002, CPS entered into a new warehouse credit facility. The new
warehouse facility is structured to allow CPS to fund a portion of the purchase
price of automotive receivables by drawing against a variable funding note
issued by CPS Warehouse Trust, in the maximum amount of $100.0 million.
(17) SELECTED QUARTERLY DATA (Unaudited)
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Revenues.................................... $ 17,325 $ 16,320 $ 14,271 $ 14,089
Earnings (loss) before income taxes......... 306 241 253 (360)
Net earnings (loss)......................... 186 241 253 (360)
Earnings (loss) per share:
Basic..................................... $ 0.01 $ 0.01 $ 0.01 $ (0.01)
Diluted................................... 0.01 0.01 0.01 (0.01)
2000
Revenues.................................... $ 374 $ 13,550 $ 14,256 $ 7,771
Loss before income taxes.................... (17,517) (3,186) (1,491) (10,209)
Net loss.................................... (11,097) (3,186) (1,178) (6,686)
Loss per share:
Basic..................................... $ (0.55) $ (0.16) $ (0.06) $ (0.33)
Diluted................................... (0.55) (0.16) (0.06) (0.33)
1999
Revenues.................................... $ 20,824 $ 13,406 $ (9,204) $ (10,221)
Loss before income taxes.................... (3,667) (11,925) (28,559) (28,012)
Net income.................................. (2,127) (6,910) (16,569) (18,926)
Loss per share:
Basic..................................... $ (0.14) $ (0.37) $ (0.82) $ (0.94)
Diluted................................... (0.14) (0.37) (0.82) (0.94)
F-37
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of November 18, 2001, by and
among the Registrant, CPS Mergersub, Inc. and MFN Financial
Corporation. (Form 8-K filed on November 19, 2001 by MFN Financial
Corporation).
3.1 Restated Articles of Incorporation (Form 10-KSB dated December 31,
1995)
3.2 Amended and Restated Bylaws (Form 10-K dated December 31, 1997)
4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS") (Form 8-K filed December 26, 1995)
4.2 First Supplemental Indenture re RISRS (Form 8-K filed December 26,
1995)
4.3 Form of Indenture re 10.50% Participating Equity Notes ("PENs") (Form
S-3, no. 333-21289)
4.4 Form of First Supplemental Indenture re PENs (Form S-3, no. 333-21289)
4.5 Second Amended and Restated Securities Purchase Agreement, dated as of
March 8, 2002, by and between Levine Leichtman Capital Partners II,
L.P. and the Registrant. (Form 8-K filed on March 25, 2002).
4.6 Secured Senior Note due February 28, 2003 issued by the Registrant to
Levine Leichtman Capital Partners II, L.P. (Form 8-K filed on March 25,
2002).
4.7 Second Amended and Restated Secured Senior Note due November 30, 2003
issued by the Registrant to Levine Leichtman Capital Partners II, L.P.
(Form 8-K filed on March 25, 2002).
4.8 12.00% Secured Senior Note due 2008 issued by the Registrant to Levine
Leichtman Capital Partners II, L.P. (Form 8-K filed on March 25, 2002).
4.9 Sale and Servicing Agreement, dated as of March 1, 2002, among the
Registrant, CPS Auto Receivables Trust 2002-A, CPS Receivables Corp.,
Systems & Services Technologies, Inc. and Bank One Trust Company, N.A.
(Form 8-K filed on March 25, 2002).
4.10 Indenture, dated as of March 1, 2002, between CPS Auto Receivables
Trust 2002-A and Bank One Trust Company, N.A. (Form 8-K filed on March
25, 2002).
10.1 1991 Stock Option Plan & forms of Option Agreements thereunder (Form
10-KSB dated March 31, 1994)
10.2 1997 Long-Term Incentive Stock Plan (Form 10-KSB dated March 31, 1994)
10.3 Lease Agreement re Chesapeake Collection Facility (Form 10-K dated
December 31, 1996)
10.4 Lease of Headquarters Building (Form 10-Q dated September 30, 1997)
10.5 Partially Convertible Subordinated Note (Form 10-Q dated September 30,
1997)
10.13 FSA Warrant Agreement dated November 30, 1998 (Form 10-K dated December
31, 1998)
10.29 Warrant to Purchase 1,335,000 Shares of Common Stock (Schedule 13D
filed on April 21, 1999)
10.31 Agreement dated May 29, 1999 for Sale of Contracts on a Flow Basis
(Form 10-Q dated June 30, 1999)
10.32 Amendment to Master Spread Account Agreement (Form 10-K dated December
31, 1999)
23.1 Consent of independent auditors (filed herewith)