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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
COMMISSION FILE NUMBER: 1-11416
CONSUMER PORTFOLIO SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16355 Laguna Canyon Road, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (949) 753-6800
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 8, 2006 the registrant had 21,859,968 common shares outstanding.
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005...... 3
Unaudited Condensed Consolidated Statements of Operations for the three-month periods
ended March 31, 2006 and 2005 .................................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 2006 and 2005................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 24
Item 4. Controls and Procedures......................................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 25
Item 1A. Risk factors.................................................................................... 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................... 25
Item 6. Exhibits........................................................................................ 26
Signatures...................................................................................................... 27
Certifications.................................................................................................. 28
2
ITEM 1. FINANCIAL STATEMENTS
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
ASSETS
Cash and cash equivalents $ 25,504 $ 17,789
Restricted cash and equivalents 212,428 157,662
Finance receivables 1,114,671 971,304
Less: Allowance for finance credit losses (63,846) (57,728)
------------- -------------
Finance receivables, net 1,050,825 913,576
Residual interest in securitizations 22,608 25,220
Furniture and equipment, net 1,042 1,079
Deferred financing costs 9,872 8,596
Deferred tax assets, net 8,295 7,532
Accrued interest receivable 10,733 10,930
Other assets 12,916 12,760
------------- -------------
$ 1,354,223 $ 1,155,144
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 18,721 $ 19,568
Warehouse lines of credit 75,056 35,350
Notes payable 172 211
Residual interest financing 37,728 43,745
Securitization trust debt 1,100,606 924,026
Senior secured debt, related party 40,000 40,000
Subordinated renewable notes 6,314 4,655
Subordinated debt -- 14,000
------------- -------------
1,278,597 1,081,555
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 21,819,333 and 21,687,584
shares issued and outstanding at March 31, 2006 and
December 31, 2005, respectively 66,995 66,748
Additional paid in capital, warrants 794 794
Retained earnings 10,266 8,476
Accumulated other comprehensive loss (2,429) (2,429)
------------- -------------
75,626 73,589
------------- -------------
$ 1,354,223 $ 1,155,144
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
------------ ------------
REVENUES:
Interest income $ 54,527 $ 36,172
Servicing fees 1,005 2,265
Other income 2,492 3,396
------------ ------------
58,024 41,833
------------ ------------
EXPENSES:
Employee costs 9,357 10,450
General and administrative 5,111 5,138
Interest 16,781 8,506
Interest, related party 1,254 1,878
Provision for credit losses 19,099 12,312
Marketing 3,536 2,799
Occupancy 903 782
Depreciation and amortization 193 207
------------ ------------
56,234 42,072
------------ ------------
Income (loss) before income tax expense 1,790 (239)
Income tax expense -- --
------------ ------------
Net income (loss) $ 1,790 $ (239)
============ ============
Earnings (loss) per share:
Basic $ 0.08 $ (0.01)
Diluted 0.07 (0.01)
Number of shares used in computing earnings (loss) per share:
Basic 21,732 21,528
Diluted 24,188 21,528
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,790 $ (239)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of deferred acquisition fees (2,620) (2,614)
Amortization of discount on Class B Notes 554 281
Depreciation and amortization 193 207
Amortization of deferred financing costs 1,242 755
Provision for credit losses 19,099 12,312
Deferred compensation -- 56
Releases of cash from Trusts to Company 3,943 8,010
Net deposits to Trusts to increase Spread Accounts (6,070) (3,234)
Interest income on residual assets (961) (1,683)
Cash received from residual interest in securitizations 3,573 7,980
Changes in assets and liabilities:
Payments on restructuring accrual (351) (193)
Restricted cash (52,638) (29,720)
Accrued interest receivable 197 (406)
Other assets (191) 752
Tax assets (763) --
Accounts payable and accrued expenses (496) (1,314)
Tax liabilities -- (155)
------------ ------------
Net cash used in operating activities (33,499) (9,205)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of finance receivables held for investment (255,586) (144,165)
Proceeds received on finance receivables held for investment 101,858 64,355
Purchase of furniture and equipment (121) (22)
------------ ------------
Net cash used in investing activities (153,849) (79,832)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of securitization trust debt 280,977 135,924
Proceeds from issuance of retail notes payable 1,660 --
Net proceeds (repayments) from warehouse lines of credit 39,706 16,256
Repayment of residual interest financing debt (6,018) (5,793)
Repayment of securitization trust debt (104,951) (59,590)
Repayment of subordinated debt (14,000) (1,000)
Repayment of notes payable (40) (560)
Payment of financing costs (2,518) (1,094)
Repurchase of common stock (756) --
Tax benefit from exercise of stock options 337 --
Exercise of options and warrants 666 258
------------ ------------
Net cash provided by financing activities 195,063 84,401
------------ ------------
Increase (decrease) in cash 7,715 (4,636)
Cash at beginning of period 17,789 14,366
------------ ------------
Cash at end of period $ 25,504 $ 9,730
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 14,713 $ 9,410
Income taxes $ 312 $ 155
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on
March 8, 1991. CPS and its subsidiaries (collectively, the "Company") specialize
primarily in purchasing, selling and servicing retail automobile installment
sale contracts ("Contracts" or "finance receivables") originated by licensed
motor vehicle dealers located throughout the United States ("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 for
borrowers 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 based on its financing
programs (the "CPS Programs").
BASIS OF PRESENTATION
The Unaudited Condensed Consolidated Financial Statements of the Company have
been prepared in conformity with accounting principles generally accepted in the
United States of America, with the instructions to Form 10-Q and with Article 10
of Regulation S-X of the Securities and Exchange Commission, and include all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements may have been
reclassified for comparability to current period presentation. Results for the
three-month period ended March 31, 2006 are not necessarily indicative of the
operating results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted from these
Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
OTHER INCOME
Other Income consists primarily of recoveries on previously charged off MFN
contracts and fees paid to the Company by Dealers for certain direct mail
services the Company provides. The recoveries on the charged-off MFN contracts
were $937,000 and $1.6 million for the three months ended March 31, 2006 and
2005, respectively. The direct mail revenues were $897,000 and $1.2 million for
the same periods in 2006 and 2005, respectively.
STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment, revised 2004" (SFAS 123R"),
prospectively for all option awards granted, modified or settled after January
1, 2006 using the modified prospective method. Under this method, the Company
recognizes compensation costs in the financial statements for all share-based
payments granted subsequent to January 1, 2006 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). Results for
prior periods have not been restated.
For the three months ended March 31, 2006, the Company recorded no stock-based
compensation costs as there were no option awards granted during the three-month
period ended March 31, 2006 and there was no vesting of option awards for
options granted prior to January 1, 2006 since all options outstanding as of
December 31, 2005 were fully vested at that time. As of March 31, 2006, there
are no unrecognized stock-based compensation costs to be recognized over future
periods.
6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following represents stock option activity for the three months ended March
31, 2006:
WEIGHTED
NUMBER OF WEIGHTED AVERAGE
SHARES AVERAGE REMAINING
(IN THOUSANDS) EXERCISE PRICE CONTRACTUAL TERM
-------------- -------------- --------------
Options outstanding at the beginning of period ..... 4,864 $ 3.38
Granted ......................................... -- --
Exercised ....................................... (251) 2.66
Forefited ....................................... (4) 3.27
-------------- -------------- --------------
Options outstanding at the end of period ........... 4,609 $ 3.42 7.33 years
============== ============== ==============
Options exercisable at the end of period ........... 4,609 $ 3.42 7.33 years
============== ============== ==============
At March 31, 2006 the aggregate intrinsic value of options outstanding and
exercisable was $22.0 million. The total intrinsic value of options exercised
was $1.0 million and $399,000 for the three months ended March 31, 2006 and
2005, respectively. New shares were issued for all options exercised during the
three-month periods ended March 31, 2006 and 2005. There were 169,261 shares
available for future stock option grants under existing plans as of March 31,
2006.
Prior to January 1, 2006, as was permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company accounted for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, whereby stock options are recorded at
intrinsic value equal to the excess of the share price over the exercise price
at the date of grant. The Company provided the pro forma net income (loss), pro
forma earnings (loss) per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123. The Company accounted for repriced
options as variable awards.
Compensation cost was recognized for certain stock options in the Unaudited
Condensed 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 (loss) and (loss) per share would have been increased to the pro
forma amounts indicated below.
THREE MONTHS ENDED
MARCH 31
-------------
2005
------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net (loss), as reported ............................................ $ (239)
Stock-based employee compensation expense, fair value
method, net of tax ............................................... (200)
Previously recorded stock-based employee compensation
expense, intrinsic value method, net of tax ...................... 32
------------
Pro forma net (loss) ............................................... $ (407)
============
Net (loss) per share
Basic, as reported ................................................. $ (0.01)
Diluted, as reported ............................................... $ (0.01)
Pro forma Basic .................................................... $ (0.02)
Pro forma Diluted .................................................. $ (0.02)
7
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the Black-Scholes-Merton option valuation model to estimate the
fair value of each option on the date of grant using the assumptions noted in
the following table. The Company utilizes assumptions on expected life,
risk-free rate, expected volatility, and dividend yield to determine such
values. The Company did not disclose assumptions for the three months ended
March 31, 2006 because there were no options granted in the period. The expected
term of options granted is derived from historical data on employee exercise and
post-vesting termination behavior. The risk-free rate is based on treasury
instruments in effect at the time of grant whose terms are consistent with the
expected term of the Company's stock options. Expected volatility is based on
historical volatility of the Company's stock. The dividend yield is based on
historical experience and expected future changes.
Three Months Ended
March 31,
------------------
2005
------------------
Risk-free interest rate....................................... 4.30%
Expected term. in term........................................ 6.5
Expected volatility........................................... 52.53%
Dividend yield................................................ 0%
PURCHASES OF COMPANY STOCK
During the three-month periods ended March 31, 2006 and 2005, the Company
purchased 118,751 and zero shares, respectively, of its common stock. The shares
purchased during the three-month period ended March 31, 2006 were purchased at
an average price of $6.37.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for the
Servicing of Financial Assets an Amendment to FASB Statement No. 140" (FAS 156).
With respect to the accounting for separately recognized servicing assets and
servicing liabilities, this statement: (1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a specific types of servicing
contracts identified in the statement, (2) requires that all separately
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable, (3) permits an entity to choose subsequent
measurement methods for each class of separately recognized servicing assets and
servicing liabilities, (4) permits a one-time reclassification of
available-for-sale securities to trading securities by entities with recognized
servicing rights at the initial adoption of this statement, and (5) requires a
separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities. FAS 156 will be effective for the Company on January 1, 2007. The
Company is currently in the process of evaluating the effects of this Standard,
but does not believe it will have a significant effect on its financial position
or results of operations.
(2) FINANCE RECEIVABLES
The following table presents the components of Finance Receivables, net of
unearned interest and deferred acquisition fees:
MARCH 31 DECEMBER 31,
2006 2005
----------- -----------
(IN THOUSANDS)
Finance Receivables
Automobile
Simple Interest ........................................... $ 1,087,048 $ 933,510
Pre-compute, net of unearned interest ..................... 46,882 54,693
----------- -----------
Finance Receivables, net of unearned interest ............. 1,133,930 988,203
Less: Unearned acquisition fees and originations costs .... (19,259) (16,899)
----------- -----------
Finance Receivables ....................................... $ 1,114,671 $ 971,304
=========== ===========
8
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the activity for the allowance for
credit losses for the three-month periods ended March 31, 2006 and 2005:
MARCH 31, MARCH 31,
2006 2005
------------ ------------
(IN THOUSANDS)
Balance at beginning of period ................................. $ 57,728 $ 42,615
Provision for credit losses on finance receivables ............. 19,099 12,312
Recoveries ..................................................... (19,235) (11,436)
Charge offs .................................................... 6,254 2,793
------------ ------------
Balance at end of period ....................................... $ 63,846 $ 46,284
============ ============
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The residual interest in securitizations represents the discounted sum of
expected future cash flows from securitization trusts. The following table
presents the components of the residual interest in securitizations and are
shown at their discounted amounts:
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
(IN THOUSANDS)
Cash, commercial paper, United States government securities
and other qualifying investments (Spread Accounts) ........... $ 13,201 $ 12,748
Receivables from Trusts (NIRs) ................................. 3,913 5,798
Overcollateralization .......................................... 5,494 6,674
------------ ------------
Residual interest in securitizations ........................... $ 22,608 $ 25,220
============ ============
The following table presents estimated remaining undiscounted credit losses
included in the fair value estimate of the Residuals as a percentage of the
Company's managed portfolio held by non-consolidated subsidiaries subject to
recourse provisions:
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
(DOLLARS IN THOUSANDS)
Undiscounted estimated credit losses ........................... $ 4,648 $ 5,724
Managed portfolio held by non-consolidated subsidiaries ........ 83,162 103,130
Undiscounted estimated credit losses as percentage of managed
portfolio held by non-consolidated subsidiaries .............. 5.6% 5.6%
The key economic assumptions used in measuring all residual interest in
securitizations as of March 31, 2006 and December 31, 2005 are included in the
table below. The pre-tax discount rate remained constant from previous periods
at 14%, except for certain cash flows from charged off receivables related to
the Company's securitizations from 2001 to 2003 where the Company has used a
discount rate of 25%, which is also consistent with previous periods.
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
Prepayment speed (Cumulative)................................... 22.2% - 35.3% 22.2% - 35.8%
Net credit losses (Cumulative).................................. 12.3% - 20.0% 11.9% - 20.2%
9
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) SECURITIZATION TRUST DEBT
The Company has completed a number of securitization transactions that are
structured as secured borrowings for financial accounting purposes. The debt
issued in these transactions is shown on the Company's Unaudited Condensed
Consolidated Balance Sheets as "Securitization Trust Debt," and the components
of such debt are summarized in the following table:
WEIGHTED
FINAL RECEIVABLES OUTSTANDING OUTSTANDING AVERAGE
SCHEDULED PLEDGED AT PRINCIPAL AT PRINCIPAL AT INTEREST RATE AT
PAYMENT MARCH 31, INITIAL MARCH 31 DECEMBER 31, MARCH 31,
SERIES DATE (1) 2006 PRINCIPAL 2006 2005 2006
- -------------------------------------- ----------------------------- -------------- -------------------------------
MFN 2001-A June 2007 $ - $ 301,000 $ - $ - N/A
TFC 2002-1 August 2007 - 64,552 - - N/A
TFC 2002-2 March 2008 - 62,589 - - N/A
TFC 2003-1 January 2009 5,413 52,365 4,741 6,557 2.69%
CPS 2003-C March 2010 26,859 87,500 25,835 30,550 3.57%
CPS 2003-D October 2010 26,481 75,000 25,384 29,688 3.81%
CPS 2004-A October 2010 34,626 82,094 34,695 40,225 3.84%
PCR 2004-1 March 2010 21,361 76,257 17,671 22,873 3.80%
CPS 2004-B February 2011 46,279 96,369 46,394 52,704 4.17%
CPS 2004-C April 2011 54,594 100,000 54,507 61,779 3.95%
CPS 2004-D December 2011 73,473 120,000 72,530 82,801 4.44%
CPS 2005-A October 2011 96,983 137,500 97,113 110,021 5.11%
CPS 2005-B February 2012 109,360 130,625 107,749 113,194 4.56%
CPS 2005-C March 2012 172,025 183,300 169,778 173,509 5.00%
CPS 2005-TFC July 2012 71,941 72,525 62,432 72,525 5.79%
CPS 2005-D July 2012 138,293 145,000 136,777 127,600 5.63%
CPS 2006-A (2) November 2012 142,446 245,000 245,000 - 5.87%
---------------- -------------- -------------- ---------------
$ 1,020,134 $ 2,031,676 $ 1,100,606 $ 924,026
================ ============== ============== ===============
(1) THE FINAL SCHEDULED PAYMENT DATE REPRESENTS FINAL LEGAL MATURITY OF THE
SECURITIZATION TRUST DEBT. SECURITIZATION TRUST DEBT IS EXPECTED TO BECOME
DUE AND TO BE PAID PRIOR TO THOSE DATES, BASED ON AMORTIZATION OF THE
FINANCE RECEIVABLES PLEDGED TO THE TRUSTS. EXPECTED PAYMENTS, WHICH WILL
DEPEND ON THE PERFORMANCE OF SUCH RECEIVABLES, AS TO WHICH THERE CAN BE NO
ASSURANCE, ARE $290.2 MILLION IN 2006, $289.8 MILLION IN 2007, $211.1
MILLION IN 2008, $154.6 MILLION IN 2009, $110.6 MILLION IN 2010 AND $44.4
MILLION IN 2012.
(2) RECEIVABLES PLEDGED AT MARCH 31, 2006 EXCLUDES APPROXIMATELY $100.7 MILLION
IN CONTRACTS DELIVERED TO THIS TRUST IN APRIL 2006 PURSUANT TO A
PRE-FUNDING STRUCTURE.
All of the securitization trust debt was sold in private placement transactions
to qualified institutional buyers. The debt was issued through wholly-owned
bankruptcy remote subsidiaries of CPS, TFC or MFN, and is secured by the assets
of such subsidiaries, but not by other assets of the Company. Principal of $1.0
billion, and the related interest payments, are guaranteed by financial guaranty
insurance policies issued by third party financial institutions.
The terms of the various Securitization Agreements related to the issuance of
the securitization trust debt and the warehouse credit facilities require that
certain delinquency and credit loss criteria be met with respect to the
collateral pool, and require that the Company maintain minimum levels of
liquidity and net worth and not exceed maximum leverage levels and maximum
financial losses. In addition, certain securitization and non-securitization
related debt contain cross-default provisions, which would allow certain
creditors to declare a default if a default were declared under a different
facility. As of March 31, 2006, the Company was in compliance with all such
financial covenants.
10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company is responsible for the administration and collection of the
Contracts. The Securitization Agreements also require certain funds be held in
restricted cash accounts to provide additional collateral for the borrowings or
to be applied to make payments on the securitization trust debt. As of March 31,
2006, restricted cash under the various agreements totaled approximately $212.4
million. Interest expense on the securitization trust debt is composed of the
stated rate of interest plus amortization of additional costs of borrowing.
Additional costs of borrowing include facility fees, insurance and amortization
of deferred financing costs. Deferred financing costs related to the
securitization trust debt are amortized using a level yield method. Accordingly,
the effective cost of borrowing of the securitization trust debt is greater than
the stated rate of interest.
The wholly-owned, bankruptcy remote subsidiaries of CPS, MFN and TFC were formed
to facilitate the above asset-backed financing transactions. Similar bankruptcy
remote subsidiaries issue the debt outstanding under the Company's warehouse
lines of credit. Bankruptcy remote refers to a legal structure in which it is
expected that the applicable entity would not be included in any bankruptcy
filing by its parent or affiliates. All of the assets of these subsidiaries have
been pledged as collateral for the related debt. All such transactions, treated
as secured financings for accounting and tax purposes, are treated as sales for
all other purposes, including legal and bankruptcy purposes. None of the assets
of these subsidiaries are available to pay other creditors of the Company or its
affiliates.
(5) INTEREST INCOME
The following table presents the components of interest income:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2006 2005
------------ ------------
Interest on Finance Receivables .................................. 52,360 33,985
Residual interest income ......................................... 961 1,683
Other interest income ............................................ 1,206 504
------------ ------------
Net interest income .............................................. 54,527 36,172
============ ============
(6) EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the three-month periods ended March 31, 2006 and
2005 were calculated using the weighted average number of shares outstanding for
the related period. The following table reconciles the number of shares used in
the computations of basic and diluted earnings (loss) per share for the
three-month periods ended March 31, 2006 and 2005:
THREE MONTHS ENDED
MARCH 31
------------------------------
2006 2005
------------ ------------
Weighted average number of common shares outstanding during
the period used to compute basic earnings (loss) per share .... 21,732 21,528
Incremental common shares attributable to exercise of
outstanding options and warrants .............................. 2,456 --
------------ ------------
Weighted average number of common shares used to compute
diluted earnings (loss) per share ............................. 24,188 21,528
============ ============
11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
If the anti-dilutive effects of common stock equivalents were considered,
additional shares included in the diluted earnings (loss) per share calculation
for the three-month period ended March 31, 2005 would have included an
additional 2.0 million shares attributable to the exercise of outstanding
options and warrants. No such anti-dilution adjustment was applicable to the
three-month period ended March 31, 2006.
(7) INCOME TAXES
As of December 31, 2005, the Company had net deferred tax assets of $7.5
million, which included a valuation allowance of $43.7 million against gross
deferred tax assets of $53.1 million. There were also offsetting gross deferred
tax liabilities of $1.8 million. Net tax assets at March 31, 2006 were $8.3
million compared with net tax assets at December 31, 2005 of $7.5 million. The
Company decreased its valuation allowance by the income tax expense for the
period to result in no net income tax provision for the three-month period ended
March 31, 2006. The Company has evaluated its deferred tax assets and believes
that it is more likely than not that certain deferred tax assets will not be
realized due to limitations imposed by the Internal Revenue Code and expected
future taxable income.
(8) LEGAL PROCEEDINGS
STANWICH LITIGATION. CPS was for some time a defendant in a class action (the
"Stanwich Case") brought in the California Superior Court, Los Angeles County.
The original plaintiffs in that case were persons entitled to receive regular
payments (the "Settlement Payments") under out-of-court settlements reached with
third party defendants. Stanwich Financial Services Corp. ("Stanwich"), an
affiliate of the former chairman of the board of directors of CPS, is the entity
that was obligated to pay the Settlement Payments. Stanwich 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. At
December 31, 2004, CPS was a defendant only in a cross-claim brought by one of
the other defendants in the case, Bankers Trust Company, which asserted a claim
of contractual indemnity against CPS.
CPS subsequently settled the cross-claim of Bankers Trust by payment of $3.24
million, on or about February 8, 2005. Pursuant to that settlement, the court
has dismissed the cross-claim, with prejudice. The amount paid by the Company
was accrued for and included in Accounts payable and accrued expenses in the
Company's balance sheet as of December 31, 2004.
In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The action of Mr. Pardee against CPS is stayed, awaiting resolution of an
adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.
The reader should consider that any adverse judgment against CPS in the Stanwich
Case (or the related case in Rhode Island) for indemnification, in an amount
materially in excess of any liability already recorded in respect thereof, could
have a material adverse effect on the Company's financial position.
OTHER LITIGATION. On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit
court of Tuscaloosa, Alabama, alleging that plaintiff Coleman was harmed by an
alleged failure to refer, in the notice given after repossession of his vehicle,
to the right to purchase the vehicle by tender of the full amount owed under the
retail installment contract. Plaintiff seeks damages in an unspecified amount,
on behalf of a purported nationwide class. CPS removed the case to federal
bankruptcy court, and filed a motion for summary judgment as part of its
adversary proceeding against the plaintiff in the bankruptcy court. The federal
bankruptcy court granted the plaintiff's motion to send the matter back to
Alabama state court. CPS appealed the ruling, and the federal district court, in
which the appeal was heard, has since ordered the bankruptcy court to decide
whether the plaintiff has standing to pursue her claims, and, if standing is
found, to reconsider its remand decision. It is possible that plaintiff may in
turn appeal from the order of the district court. Although CPS believes that it
has one or more defenses to each of the claims made in this lawsuit, no
discovery has yet been conducted and the case remains in its earliest stages.
Accordingly, there can be no assurance as to its outcome.
12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 2004, Plaintiff Jeremy Henry filed a lawsuit against the Company in the
California Superior Court, San Diego County, alleging improper practices related
to the notice given after repossession of a vehicle that he purchased.
Plaintiff's motion for a certification of a class has been denied, and is the
subject of an appeal now before the California Court of Appeal. Irrespective of
the outcome of that appeal, as to which there can be no assurance, the Company
has a number of defenses that may be asserted with respect to the claims of
plaintiff Henry.
In August and September 2005, two plaintiffs represented by the same law firm
filed substantially identical lawsuits in the federal district court for the
northern district of Illinois, each of which purports to be a class action, and
each of which alleges that CPS improperly accessed consumer credit information.
CPS has reached agreements in principle to settle these cases, which await
confirmation by the court.
The Company has recorded a liability as of March 31, 2006 that it believes
represents a sufficient allowance for legal contingencies, including those
described above. Any adverse judgment against the Company, if in an amount
materially in excess of the recorded liability, could have a material adverse
effect on the financial position of the Company.
The Company is routinely involved in various legal proceedings resulting from
its consumer finance activities and practices, both continuing and discontinued.
The Company believes that there are substantive legal defenses to such claims,
and intends to defend them vigorously. There can be no assurance, however, as to
the outcome.
(9) EMPLOYEE BENEFITS
The Company sponsors the MFN Financial Corporation Benefit Plan ("the Plan").
Plan benefits were frozen September 30, 2001. The table below sets forth the
Plan's net periodic benefit cost for the three months ended March 31, 2006 and
2005.
THREE MONTHS ENDED
MARCH 31
------------------------------
2006 2005
------------ ------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ..................................................... $ -- $ --
Interest Cost .................................................... 213 211
Expected return on assets ........................................ (287) (292)
Amortization of transition (asset)/obligation .................... (2) (9)
Amortization of net (gain) / loss ................................ 34 12
------------ ------------
Net periodic benefit cost ..................................... $ (42) $ (78)
============ ============
(10) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED
MARCH 31
------------------------------
2006 2005
------------ ------------
Net income (loss) ................................................ $ 1,790 $ (239)
Minimum pension liability, net of tax ............................ -- (185)
------------ ------------
Comprehensive income (loss) ................................... $ 1,790 $ (424)
============ ============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries,
the "Company") is a consumer finance company specializing in 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. In March 2002, CPS
acquired by merger (the "MFN Merger") MFN Financial Corp. and its subsidiaries.
In May 2003, CPS acquired by merger (the "TFC Merger") TFC Enterprises Inc. and
its subsidiaries. Both MFN Financial Corp and TFC Enterprises Inc., through
their respective subsidiaries, were engaged in businesses substantially similar
to that of CPS, and in each merger CPS acquired a portfolio of receivables that
had been held by the acquired company. Each merger was accounted for as a
purchase. The indirect financing programs of subsidiaries of TFC Enterprises,
Inc. were directed principally to members of the United States armed forces. The
Company has continued to offer such financing programs (the "TFC Programs")
subsequent to the TFC merger, in addition to its other financing programs (the
"CPS Programs").
On April 2, 2004, the Company purchased a portfolio of Contracts and certain
other assets (the "SeaWest Asset Acquisition") from SeaWest Financial
Corporation ("SeaWest"). In addition, the Company was named the successor
servicer for three term securitization transactions originally sponsored by
SeaWest (the "SeaWest Third Party Portfolio"). The Company does not intend to
offer financing programs similar to those previously offered by SeaWest.
SECURITIZATION
GENERALLY
Throughout the periods for which information is presented in this report, the
Company has purchased Contracts with the intention of repackaging them in
securitizations. All such securitizations have involved identification of
specific Contracts, sale of those Contracts (and associated rights) to a special
purpose subsidiary of the Company, and issuance of asset-backed securities to
fund the transactions. Depending on the structure of the securitization, the
transaction may be properly accounted for as a sale of the Contracts, or as a
secured financing.
When the transaction is structured as a secured financing, the subsidiary is
consolidated with the Company. Accordingly, the sold Contracts and the related
securitization trust debt appear as assets and liabilities, respectively, of the
Company on its Unaudited Condensed Consolidated Balance Sheet. The Company then
periodically (i) recognizes interest and fee income on the receivables, (ii)
recognizes interest expense on the securities issued in the securitization, and
(iii) records as expense a provision for credit losses on the receivables.
When structured as a sale, the subsidiary is not consolidated with the Company.
Accordingly, the securitization removes the sold Contracts from the Company's
Unaudited Condensed Consolidated Balance Sheet, the asset-backed securities
(debt of the non-consolidated subsidiary) do not appear as debt of the Company,
and the Company shows as an asset a retained residual interest in the sold
Contracts. The residual interest represents the discounted value of what the
Company expects to receive from these transactions, which includes the excess of
future collections on the Contracts over principal and interest due on the
asset-backed securities. The residual interest appears on the Company's balance
sheet as "Residual interest in securitizations," and the determination of its
value is dependent on estimates of the future performance of the sold Contracts.
14
CHANGE IN POLICY
Effective with the third quarter of 2003, the Company announced that it would
structure its future securitization transactions related to Contracts purchased
under the CPS Programs as secured financings for financial accounting purposes.
Its subsequent term securitizations of finance receivables have been so
structured. Prior to August 2003, the Company had structured its term
securitization transactions related to the CPS Programs as sales for financial
accounting purposes. In the MFN Merger and in the TFC Merger the Company
acquired finance receivables that had been previously securitized in term
securitization transactions that were reflected as secured financings. As of
March 31, 2006, the Company's Unaudited Condensed Consolidated Balance Sheet
included net finance receivables of approximately $19.0 million and
securitization trust debt of $4.7 million related to finance receivables
acquired in the two mergers and the SeaWest Asset Acquisition, out of totals of
net finance receivables of approximately $1.1 billion and securitization trust
debt of approximately $1.1 billion.
CREDIT RISK RETAINED
Whether a securitization is treated as a secured financing or as a sale for
financial accounting purposes, the related special purpose subsidiary may be
unable to release excess cash to the Company if the credit performance of the
securitized 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 securitized
Contracts could therefore have a material adverse effect on both the Company's
liquidity and its results of operations, regardless of whether such Contracts
are treated as having been sold or as having been financed. For estimation of
the magnitude of such risk, it may be appropriate to look to the size of the
Company's "managed portfolio," which represents both financed and sold Contracts
as to which such credit risk is retained. The Company's managed portfolio as of
March 31, 2006 was approximately $1.2 billion (this amount includes $12.5
million related to the SeaWest Third Party Portfolio on which the Company earns
only servicing fees and has no credit risk).
RESULTS OF OPERATIONS
EFFECTS OF CHANGE IN SECURITIZATION STRUCTURE
The Company's decision in the third quarter of 2003 to structure securitization
transactions as borrowings secured by receivables for financial accounting
purposes, rather than as sales of receivables, has affected and will affect the
way in which the transactions are reported. The major effects are these: (i) the
finance receivables are shown as assets of the Company on its balance sheet;
(ii) the debt issued in the transactions is shown as indebtedness of the
Company; (iii) cash deposited to enhance the credit of the securitization
transactions ("Spread Accounts") is shown as "Restricted cash" on the Company's
balance sheet; (iv) cash collected from borrowers and other sources related to
the receivables prior to making the required payments under the Securitization
Agreements is also shown as "Restricted cash" on the Company's balance sheet;
(v) the servicing fee that the Company receives in connection with such
receivables is recorded as a portion of the interest earned on such receivables
in the Company's statements of operations; (vi) the Company has initially and
periodically recorded as expense a provision for estimated credit losses on the
receivables in the Company's statements of operations; (vii) the portion
representing interest payments on the receivables is recorded as interest income
in the Company's statements of operations; and (viii) interest expense on the
debt issued in the transaction is recorded on the Company's statements of
operations.
These changes collectively represent a deferral of revenue and acceleration of
expenses, and thus a more conservative approach to accounting for the Company's
operations compared to the previous term securitization transactions, which were
accounted for as sales at the consummation of the transaction. The changes have
resulted in the Company's initially reporting lower earnings than it would have
reported if it had continued to structure its securitizations to require
recognition of gain on sale. It should also be noted that growth in the
Company's portfolio of receivables in excess of current expectations would
result in an increase in expenses in the form of provision for credit losses,
and would initially have a negative effect on net earnings. The Company's cash
availability and cash requirements should be unaffected by the change in
structure.
15
The change in the securitization structure became effective in the third quarter
of 2003. In each quarterly period subsequent to the third quarter of 2003, the
Company's results have been more reflective of receivables owned by consolidated
subsidiaries and less reflective of receivables in non-consolidated
subsidiaries. From March 31, 2005 to March 31, 2006, receivables owned by
non-consolidated subsidiaries decreased from 20.9% to 6.7% of the Company's
total managed portfolio. During that same period, receivables owned by
consolidated subsidiaries increased from 74.7% to 92.3% of the Company's total
managed portfolio. Ultimately, receivables in non-consolidated subsidiaries will
have no material effect on the Company's results of operations.
Beginning with the third quarter of 2003, the Company has conducted 11 term
securitizations of Contracts originated under the CPS Programs structured as
secured financings, generally on a quarterly basis. In March 2004 and November
2005, the Company completed securitizations of its retained interests in other
securitizations previously sponsored by the Company and its affiliates. The debt
from the March 2004 transaction was repaid in August 2005. In June 2004, the
Company completed a term securitization of Contracts purchased in the SeaWest
Asset Acquisition and under the TFC Programs. In December 2005, the Company
completed a securitization that included Contracts purchased under the TFC
Programs, the CPS Programs and Contracts re-acquired by the Company as a result
of its exercise of the clean-up call provisions of certain prior securitizations
of its MFN and TFC subsidiaries. Beginning with the third quarter of 2003, all
of the Company's securitizations have been structured as secured financings.
THE THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2005
REVENUES. During the three months ended March 31, 2006, revenues were $58.0
million, an increase of $16.2 million, or 38.7%, from the prior year period
revenue of $41.8 million. The primary reason for the increase in revenues is an
increase in interest income. Interest income for the three months ended March
31, 2006 increased $18.4 million, or 50.7%, to $54.5 million from $36.2 million
in the prior year period. The primary reason for the increase in interest income
is the increase in finance receivables held by consolidated subsidiaries (an
increase of $22.5 million). This increase was partially offset by the decline in
the balance of the portfolios of Contracts acquired in the MFN and TFC Mergers
and the SeaWest Asset Acquisition (in the aggregate, resulting in a decrease of
$3.4 million in interest income), and a decrease in interest earned on the
Company's residual asset of $723,000.
Servicing fees totaling $1.0 million in the three months ended March 31, 2006
decreased $1.3 million, or 55.6%, from $2.3 million in the same period a year
earlier. The decrease in servicing fees is the result of the change in
securitization structure and the consequent decline in the Company's managed
portfolio held by non-consolidated subsidiaries. As a result of the decision to
structure future securitizations as secured financings, the Company's managed
portfolio held by non-consolidated subsidiaries will continue to decline in
future periods, and servicing fee revenue is anticipated to decline
proportionately. As of March 31, 2006 and 2005, the Company's managed portfolio
owned by consolidated vs. non-consolidated subsidiaries and other third parties
were as follows:
MARCH 31, 2006 MARCH 31, 2005
--------------------- --------------------
AMOUNT % AMOUNT %
---------- ------- --------- -------
($ IN MILLIONS)
TOTAL MANAGED PORTFOLIO
Owned by Consolidated Subsidiaries ........ $ 1,144.3 92.3% $ 692.0 74.7%
Owned by Non-Consolidated Subsidiaries .... 83.2 6.7% 193.8 20.9%
SeaWest Third Party Portfolio ............. 12.5 1.0% 40.5 4.4%
---------- ------- --------- -------
Total ..................................... $ 1,240.0 100.0% $ 926.3 100.0%
========== ======= ========= =======
16
At March 31, 2006, the Company was generating income and fees on a managed
portfolio with an outstanding principal balance approximating $1.2 billion (this
amount includes $12.5 million related to the SeaWest Third Party Portfolio on
which the Company earns only servicing fees), compared to a managed portfolio
with an outstanding principal balance approximating $926.3 million as of March
31, 2005. As the portfolios of Contracts acquired in the MFN Merger, the TFC
Merger and the SeaWest Asset Acquisition decrease, the portfolio of Contracts
originated under the CPS Programs continues to expand. At March 31, 2006 and
2005, the managed portfolio composition was as follows:
MARCH 31, 2006 MARCH 31, 2005
--------------------- --------------------
AMOUNT % AMOUNT %
---------- ------- --------- -------
($ IN MILLIONS)
ORIGINATING ENTITY
CPS ................................... $ 1,150.5 92.8% $ 760.1 82.1%
TFC ................................... 64.7 5.2% 83.5 9.0%
MFN ................................... 1.3 0.1% 11.1 1.2%
SeaWest ............................... 11.0 0.9% 31.1 3.4%
SeaWest Third Party Portfolio ......... 12.5 1.0% 40.5 4.4%
---------- ------- --------- -------
Total ................................. $ 1,240.0 100.0% $ 926.3 100.0%
========== ======= ========= =======
Other income decreased $904,000, or 26.6%, to $2.5 million in the three-month
period ended March 31, 2006 from $3.4 million during the same period a year
earlier. The period over period decrease resulted primarily from decreases in
recoveries on MFN and certain other Contracts ( a decrease of $792,000) compared
to the same period of the prior year and decreased revenue on the Company's
direct mail services ( a decrease of $340,000). These direct mail services are
provided to the Company's Dealers and consist of customized solicitations
targeted to prospective vehicle purchasers, in proximity to the Dealer, who
appear to meet the Company's credit criteria. Decreases in other income for the
period were somewhat offset by increases in convenience fees charged to obligors
for certain transaction types (an increase of $228,000).
EXPENSES. The Company's operating expenses consist primarily of provisions for
credit losses, interest, employee costs and general and administrative expenses.
Provisions for credit losses and interest expense are significantly impacted by
the volume of Contracts purchased by the Company during a period and by the
outstanding balance of finance receivables held by consolidated subsidiaries.
Employee costs and general and administrative expeses are incurred as
applications and Contracts are received, processed and serviced. Factors that
affect margins and net income include changes in the automobile and automobile
finance market environments, and macroeconomic factors such as interest rates
and the unemployment level.
Employee costs include base salaries, commissions and bonuses paid to employees,
and certain expenses related to the accounting treatment of outstanding warrants
and stock options, and are one of the Company's most significant operating
expenses. These costs (other than those relating to stock options) generally
fluctuate with the level of applications and Contracts processed and serviced.
Other operating expenses consist primarily of facilities expenses, telephone and
other communication services, credit services, computer services (including
employee costs associated with information technology support), professional
services, marketing and advertising expenses, and depreciation and amortization.
Total operating expenses were $56.2 million for the three months ended March 31,
2006, compared to $42.1 million for the same period a year earlier, an increase
of $14.2 million, or 33.7%. The increase is primarily due to increases in
provision for credit losses and interest expense, which increased by $6.8
million and $7.7 million, or 55.1% and 73.7% respectively. Both interest expense
and provision for credit losses are directly affected by the growth in the
Company's portfolio of Contracts held by consolidated affiliates.
17
Employee costs decreased slightly to $9.4 million during the three months ended
March 31, 2006, representing 16.6 % of total operating expenses, from $10.5
million for the same period a year earlier, or 24.8% of total operating
expenses. During the period ended March 31, 2006, the Company deferred $946,000
of direct employee costs associated with the purchase of Contracts in the
period, in accordance with Statement of Financial Accounting Standard No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases (SFAS 91). Historically, the
Company has not deferred and amortized such costs as the Company's analyses
indicated that the effect of such deferral and amortization would not have been
material. However, due to continued increases in volumes of Contract purchases
and refinements in the Company's methodology to measure direct costs associated
with Contract purchases, the Company's estimate of direct costs has increased,
resulting in the need to defer such costs and amortize them over the lives of
the related Contracts as an adjustment to the yield in accordance with SFAS 91.
The decrease as a percentage of total operating expenses reflects the higher
total of operating expenses, primarily a result of the increased provision for
credit losses and interest expense.
General and administrative expenses decreased slightly by $27,000 or 0.5% and
represented 9.1% of total operating expenses in the three-month period ending
March 31, 2006, as compared to the prior year period when general and
administrative expenses represented 12.2% of total operating expenses. The
decrease as a percentage of total operating expenses reflects the higher
operating expenses primarily a result of the provision for credit losses and
interest expense.
Interest expense for the three-month period ended March 31, 2006 increased $7.7
million, or 73.7%, to $18.0 million, compared to $10.4 million in the same
period of the previous year. The increase is primarily the result of changes in
the amount and composition of securitization trust debt carried on the Company's
Consolidated Balance Sheet. Such debt increased as a result of the change in
securitization structure implemented in the third quarter of 2003 (an increase
of approximately $8.9 million), partially offset by the decrease in the balance
of the securitization trust debt acquired in the MFN Merger and the TFC Merger
(resulting in a decrease of approximately $309,000 in interest expense) and a
decrease in interest expense on certain long term debt (a decrease of $870,000).
Marketing expenses increased by $737,000, or 26.3%, and represented 6.3% of
total operating expenses. The increase is primarily due to the increase in
Contracts purchased by the Company during the three months ended March 31, 2006
as compared to the prior year period. During the period ended March 31, 2006,
the Company purchased 16,953 Contracts aggregating $255.6 million, compared to
10,130 Contracts aggregating $144.2 million in the same period of the prior
year.
Occupancy expenses increased by $121,000, or 15.5%, and represented 1.6% of
total operating expenses.
Depreciation and amortization expenses decreased by $14,000, or 6.8%, to
$193,000 from $207,000.
CREDIT EXPERIENCE
The Company's financial results are dependent on the performance of the
Contracts in which it retains an ownership interest. The table below documents
the delinquency, repossession and net credit loss experience of all Contracts
that the Company was servicing (excluding Contracts from the SeaWest Third Party
Portfolio) as of the respective dates shown. Credit experience for CPS, MFN
(since the date of the MFN Merger), TFC (since the date of the TFC Merger) and
SeaWest (since the date of the SeaWest Asset Acquisition) is shown on a combined
basis in the table below. The Company attributes the decrease in delinquencies
and charge offs during the three-month period ended March 31, 2006 (compared to
the 12-month period ended December 31, 2005) to normal seasonality of its
business and also to the increase in the average servicing portfolio outstanding
as of March 31, 2006 compared to December 31, 2005.
18
DELINQUENCY EXPERIENCE (1)
CPS, MFN, TFC AND SEAWEST COMBINED
MARCH 31, 2006 DECEMBER 31, 2005
------------------------- -------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
DELINQUENCY EXPERIENCE
Gross servicing portfolio (1) ................................. 103,828 $1,238,460 95,942 $1,117,085
Period of delinquency (2)
31-60 days ................................................. 1,250 12,795 2,353 24,050
61-90 days ................................................. 564 5,215 1,076 10,190
91+ days ................................................... 575 4,065 1,056 7,985
---------- ---------- ---------- ----------
Total delinquencies (2) ....................................... 2,389 22,075 4,485 42,225
Amount in repossession (3) .................................... 1,090 11,782 1,337 13,538
---------- ---------- ---------- ----------
Total delinquencies and amount in repossession (2) ............ 3,479 $ 33,857 5,822 $ 55,763
========== ========== ========== ==========
Delinquencies as a percentage of gross servicing portfolio .... 2.3 % 1.8 % 4.7 % 3.8 %
Total delinquencies and amount in repossession as a
percentage of gross servicing portfolio .................... 3.4 % 2.7 % 6.1 % 5.0 %
(1) ALL AMOUNTS AND PERCENTAGES ARE BASED ON THE AMOUNT REMAINING TO BE REPAID
ON EACH CONTRACT, INCLUDING, FOR PRE-COMPUTED CONTRACTS, ANY UNEARNED INTEREST.
THE INFORMATION IN THE TABLE REPRESENTS THE GROSS PRINCIPAL AMOUNT OF ALL
CONTRACTS PURCHASED BY THE COMPANY, INCLUDING CONTRACTS SUBSEQUENTLY SOLD BY THE
COMPANY IN SECURITIZATION TRANSACTIONS THAT IT CONTINUES TO SERVICE. THE TABLE
DOES NOT INCLUDE CONTRACTS FROM THE SEAWEST THIRD PARTY PORTFOLIO.
(2) THE COMPANY CONSIDERS A CONTRACT DELINQUENT WHEN AN OBLIGOR FAILS TO MAKE AT
LEAST 90% OF A CONTRACTUALLY DUE PAYMENT BY THE FOLLOWING DUE DATE, WHICH DATE
MAY HAVE BEEN EXTENDED WITHIN LIMITS SPECIFIED IN THE SERVICING AGREEMENTS. THE
PERIOD OF DELINQUENCY IS BASED ON THE NUMBER OF DAYS PAYMENTS ARE CONTRACTUALLY
PAST DUE. CONTRACTS LESS THAN 31 DAYS DELINQUENT ARE NOT INCLUDED.
(3) AMOUNT IN REPOSSESSION REPRESENTS FINANCED VEHICLES THAT HAVE BEEN
REPOSSESSED BUT NOT YET LIQUIDATED.
NET CHARGE-OFF EXPERIENCE (1)
CPS, MFN, TFC AND SEAWEST COMBINED
MARCH 31 DECEMBER 31,
2006 2005
---------- -----------
(DOLLARS IN THOUSANDS)
Average servicing portfolio outstanding .......... $1,176,879 $ 966,295
Annualized net charge-offs as a percentage of
average servicing portfolio (2) ................ 4.8 % 5.3 %
- ----------------
(1) ALL AMOUNTS AND PERCENTAGES ARE BASED ON THE PRINCIPAL AMOUNT SCHEDULED TO
BE PAID ON EACH CONTRACT, NET OF UNEARNED INCOME ON PRE-COMPUTED CONTRACTS. THE
INFORMATION IN THE TABLE REPRESENTS ALL CONTRACTS SERVICED BY THE COMPANY
(EXCLUDING CONTRACTS FROM THE SEAWEST THIRD PARTY PORTFOLIO).
(2) NET CHARGE-OFFS INCLUDE THE REMAINING PRINCIPAL BALANCE, AFTER THE
APPLICATION OF THE NET PROCEEDS FROM THE LIQUIDATION OF THE VEHICLE (EXCLUDING
ACCRUED AND UNPAID INTEREST) AND AMOUNTS COLLECTED SUBSEQUENT TO THE DATE OF
CHARGE-OFF. MARCH 31, 2006 PERCENTAGE REPRESENTS THREE MONTHS ENDED MARCH 31,
2006, ANNUALIZED. DECEMBER 31, 2005 REPRESENTS 12 MONTHS ENDED DECEMBER 31,
2005.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its purchases of
Contracts and other operating activities. The Company's primary sources of cash
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving credit facilities (also
sometimes known as warehouse credit facilities), servicing fees on portfolios of
Contracts previously sold in securitization transactions or serviced for third
parties, customer payments of principal and interest on finance receivables, and
releases of cash from securitized pools of Contracts in which the Company has
retained a residual ownership interest and from the Spread Accounts associated
with such pools. The Company's primary uses of cash have been the purchases of
Contracts, repayment of amounts borrowed under lines of credit and otherwise,
operating expenses such as employee, interest, occupancy expenses and other
general and administrative expenses, the establishment of Spread Accounts and
initial overcollateralization, if any, and the increase of credit enhancement to
required levels in securitization transactions, and income taxes. There can be
no assurance that internally generated cash will be sufficient to meet 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 those pools and their related Spread Accounts), the rate of expansion or
contraction in the Company's managed portfolio, and the terms upon which the
Company is able to acquire, sell, and borrow against Contracts.
Net cash used in operating activities for the three-month period ended March 31,
2006 was $33.5 million compared to net cash used in operating activities for the
three-month period ended March 31, 2005 of $9.2 million. Cash used in operating
activities is affected by the increase in restricted cash as a result of the
Company's pre-funding structure used in the securitization of the Company's
finance receivables. The pre-funding structure allows the Company to issue
securitization debt approximately one month prior to purchasing finance
receivables that collateralize the debt. In those cases, certain of the proceeds
of the securitization debt are held as restricted cash until such time as the
additional collateral is delivered to the related trust. Increases in restricted
cash are offset somewhat by the Company's increased net earnings before the
significant increase in the provision for credit losses.
Net cash used in investing activities for the three-month periods ended March
31, 2006 and 2005 was $153.9 million and $79.8 million, respectively. Cash used
in investing activities has generally related to purchases of Contracts.
Net cash provided by financing activities for the three months ended March 31,
2006 and 2005, was $195.1 million and $84.4 million respectively. Cash provided
by financing activities is generally related to the issuance of new
securitization trust debt. The Company issued $280.9 million and $135.9 million
of such debt in the three-month periods ended March 31, 2006 and 2005
respectively. Cash used in financing activities is includes the repayment of
securitization trust debt of $105.0 million and $59.6 million for the
three-month periods ended March 31, 2006 and 2005 respectively.
Contracts are purchased from Dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee that may either increase or
decrease the Contract purchase price, and generate cash flow over a period of
years. As a result, the Company has been dependent on warehouse credit
facilities to purchase Contracts, and on the availability of cash from outside
sources in order to finance its continuing operations, as well as to fund the
portion of Contract purchase prices not financed under revolving warehouse
credit facilities. As of March 31, 2006, the Company had $350 million in
warehouse credit capacity, in the form of separate $200 million and $150 million
facilities. The first facility provides funding for Contracts purchased under
the TFC Programs while both warehouse facilities provide funding for Contracts
purchased under the CPS Programs.
20
The $150 million warehouse facility is structured to allow CPS to fund a portion
of the purchase price of Contracts by drawing against a floating rate variable
funding note issued by its consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expires on November 14, 2006,
although it is renewable with the mutual agreement of the parties. Up to 80% of
the principal balance of Contracts may be advanced to the Company under this
facility, subject to collateral tests and certain other conditions and
covenants. Notes under this facility accrue interest at a rate of one-month
LIBOR plus 2.00% per annum. At March 31, 2006, $171,000 was outstanding under
this facility.
The $200 million warehouse facility is similarly structured to allow CPS to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by its consolidated subsidiary Page Funding LLC.
This facility was entered into on June 30, 2004. On June 29, 2005 the facility
was increased from $100 million to $125 million and further amended to provide
for funding for Contracts purchased under the TFC Programs. It was increased
again to $200 million on August 31, 2005. Up to 80.0% of the principal balance
of Contracts may be advanced to the Company under this facility, subject to
collateral tests and certain other conditions and covenants. Notes under this
facility accrue interest at a rate of one-month LIBOR plus 2.00% per annum. The
lender has annual termination options at its sole discretion on each June 30
through 2007, at which time the agreement expires. At March 31, 2006, $74.9
million was outstanding under this facility.
For the portfolio owned by consolidated subsidiaries, cash used to establish or
increase Spread Accounts for the three-month periods ended March 31, 2006 and
2005 was $6.1 million and $3.2 million, respectively. Cash released from Trusts
and their related Spread Accounts to the Company for the three-month periods
ended March 31, 2006 and 2005, was $3.9 million and $8.0 million, respectively.
Changes in the amount of credit enhancement required for term securitization
transactions and releases from Trusts and their related Spread Accounts are
affected by the relative size, seasoning and performance of the various pools of
Contracts securitized that make up the Company's managed portfolio to which the
respective Spread Accounts are related.
The acquisition of Contracts for subsequent sale in securitization transactions,
and the need to fund Spread Accounts and initial overcollateralization, if any,
and increase credit enhancement levels when those transactions take place,
results in a continuing need for capital. The amount of capital required is most
heavily dependent on the rate of the Company's Contract purchases, the advance
rate on the warehouse facilities, the required level of initial credit
enhancement in securitizations, and the extent to which the previously
established Trusts and their related Spread Accounts either release cash to the
Company or capture cash from collections on securitized Contracts. The Company
is limited in its ability to purchase Contracts by its available cash and the
capacity of its warehouse facilities. As of March 31, 2006, the Company had
unrestricted cash on hand of $25.5 million and available capacity from its
warehouse credit facilities of $274.9 million, subject to the availability of
suitable Contracts to serve as collateral and of sufficient cash to fund the
portion of such Contracts purchase price not advaced under the warehouse
facilities. The Company's plans to manage its need for liquidity include the
completion of additional term securitizations that may result in additional
unrestricted cash through repayment of the warehouse facilities, and matching
its levels of Contract purchases to its availability of cash. There can be no
assurance that the Company will be able to complete 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, interest income and other portfolio related income would
decrease.
The Company's primary means of ensuring that its cash demands do not exceed its
cash resources is to match its levels of Contract purchases to its availability
of cash. The Company's ability to adjust the quantity of Contracts that it
purchases and securitizes will be subject to general competitive conditions and
the continued availability of warehouse credit facilities. There can be no
assurance that the desired level of Contract acquisition can be maintained or
increased. While the specific terms and mechanics of each Spread Account vary
among transactions, the Company's Securitization Agreements generally provide
that the Company will receive excess cash flows only if the amount of credit
enhancement has reached specified levels and/or the delinquency, defaults or net
losses related to the Contracts in the pool are below certain predetermined
21
levels. In the event delinquencies, defaults or net losses on the Contracts
exceed such levels, the terms of the securitization: (i) may require increased
credit enhancement to be accumulated for the particular pool; (ii) may restrict
the distribution to the Company of excess cash flows associated with other
pools; or (iii) in certain circumstances, may permit the Note Insurers to
require the transfer of servicing on some or all of the Contracts to another
servicer. There can be no assurance that collections from the related Trusts
will continue to generate sufficient cash.
The terms of the various Securitization Agreements related to the issuance of
the securitization trust debt and the warehouse credit facilities require that
certain delinquency and credit loss criteria be met with respect to the
collateral pool, and require that the Company maintain minimum levels of
liquidity and net worth and not exceed maximum leverage levels and maximum
financial losses. In addition, certain securitization and non-securitization
related debt contain cross-default provisions, which would allow certain
creditors to declare a default if a default were declared under a different
facility. As of March 31, 2006, the Company was in compliance with all such
financial covenants.
The Securitization Agreements of the Company's term securitization transactions
are terminable by the Note Insurers in the event of certain defaults by the
Company and under certain other circumstances. Similar termination rights are
held by the lenders in the warehouse credit facilities. Were a Note Insurer (or
the lenders in such warehouse facilities) in the future to exercise its option
to terminate the Securitization Agreements, such a termination would have a
material adverse effect on the Company's liquidity and results of operations.
The Company continues to receive Servicer extensions on a monthly and/or
quarterly basis, pursuant to the Securitization Agreements.
CRITICAL ACCOUNTING POLICIES
(a) ALLOWANCE FOR FINANCE CREDIT LOSSES
In order to estimate an appropriate allowance for losses incurred on finance
receivables held on the Company's Unaudited Condensed Consolidated Balance
Sheet, the Company uses a loss allowance methodology commonly referred to as
"static pooling," which stratifies its finance receivable portfolio into
separately identified pools. Using analytical and formula-driven techniques, the
Company estimates an allowance for finance credit losses, which management
believes is adequate for probable credit losses that can be reasonably estimated
in its portfolio of finance receivable Contracts. Provision for losses is
charged to the Company's Unaudited Consolidated Statement of Operations. Net
losses incurred on finance receivables are charged to the allowance. Management
evaluates the adequacy of the allowance by examining current delinquencies, the
characteristics of the portfolio and the value of the underlying collateral. As
conditions change, the Company's level of provisioning and/or allowance may
change as well.
(b) TREATMENT OF SECURITIZATIONS
Gain on sale may be recognized on the disposition of Contracts either outright
or in securitization transactions. In those securitization transactions that
were treated as sales for financial accounting purposes, the Company, or a
wholly-owned, consolidated subsidiary of the Company, retained a residual
interest in the Contracts that were sold to a wholly-owned, unconsolidated
special purpose subsidiary. The Company's securitization transactions included
"term" securitizations (the purchaser holds the Contracts for substantially
their entire term) and "continuous" or "warehouse" securitizations (which
financed the acquisition of the Contracts for future sale into term
securitizations).
As of March 31, 2006 and December 31, 2005 the line item "Residual interest in
securitizations" on the Company's Unaudited Consolidated Balance Sheet
represents the residual interests in certain term securitizations that were
accounted for as sales. Warehouse securitizations accounted for as secured
financings are accordingly reflected in the line items "Finance receivables" and
"Warehouse lines of credit" on the Company's Unaudited Condensed Consolidated
Balance Sheet, and the term securitizations accounted for as secured financings
are reflected in the line items "Finance receivables" and "Securitization trust
22
debt." The "Residual interest in securitizations" represents the discounted sum
of expected future releases from securitization trusts held by non-consolidated
subsidiaries. Accordingly, the valuation of the residual is heavily dependent on
estimates of future performance.
(c) INCOME TAXES
The Company and its subsidiaries file 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 net operating
losses might otherwise expire.
(d) STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment, revised 2004" ("SFAS 123R"),
prospectively for all option awards granted, modified or settled on or after
January 1, 2006, using the modified prospective method. Under this method, the
Company recognizes compensation costs in the financial statements for all
share-based payments granted subsequent to December 31, 2005 based on the grant
date fair value estimated in accordance with the provisions of SFAS 123(R).
Results for prior periods have not been restated.
In December 2005, the Compensation Committee of the Board of Directors approved
accelerated vesting of all the outstanding stock options issued by the Company.
Options to purchase 2,113,998 shares of the Company's common stock, which would
otherwise have vested from time to time through 2010, became immediately
exercisable as a result of the acceleration of vesting. The decision to
accelerate the vesting of the options was made primarily to reduce non-cash
compensation expenses that would have been recorded in the Company's income
statement in future periods upon the adoption of Financial Accounting Standards
Board Statement No. 123R in January 2006.
For the three months ended March 31, 2006, the Company recorded no stock-based
compensation costs. There were no option awards granted during the three-month
period ended March 31, 2006, and there was no vesting of option awards for
options granted prior to January 1, 2006, because all options outstanding as of
December 31, 2005 were fully vested at that time. As of March 31, 2006, there
are no unrecognized stock-based compensation costs to be recognized over future
periods.
Prior to January 1, 2006, as was permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company accounted for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, whereby stock options are recorded at
intrinsic value equal to the excess of the share price over the exercise price
at the date of grant. The Company provided the pro forma net income (loss), pro
forma earnings (loss) per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q includes certain "forward-looking statements,"
including, without limitation, the statements or implications to the effect that
prepayments as a percentage of original balances will approximate 22.2% to 35.3%
cumulatively over the lives of the related Contracts, that net credit losses as
a percentage of original balances will approximate 12.3% to 20.0% cumulatively
over the lives of the related Contracts. Other forward-looking statements may be
identified by the use of words such as "anticipates," "expects," "plans,"
"estimates," or words of like meaning. As to the specifically identified
forward-looking statements, factors that could affect charge-offs and recovery
rates include changes in the general economic climate, which could affect the
willingness or ability of obligors to pay pursuant to the terms of Contracts,
changes in laws respecting consumer finance, which could affect the ability of
the Company to enforce rights under Contracts, and changes in the market for
used vehicles, which could affect the levels of recoveries upon sale of
repossessed vehicles. Factors that could affect the Company's revenues in the
current year include the levels of cash releases from existing pools of
Contracts, which would affect the Company's ability to purchase Contracts, the
terms on which the Company is able to finance such purchases, the willingness of
Dealers to sell Contracts to the Company on the terms that it offers, and the
terms on which the Company is able to complete term securitizations once
Contracts are acquired. Factors that could affect the Company's expenses in the
current year include competitive conditions in the market for qualified
23
personnel, and interest rates (which affect the rates that the Company pays on
Notes issued in its securitizations). The statements concerning the Company
structuring future securitization transactions as secured financings and the
effects of such structures on financial items and on the Company's future
profitability also are forward-looking statements. Any change to the structure
of the Company's securitization transaction could cause such forward-looking
statements not to be accurate. Both the amount of the effect of the change in
structure on the Company's profitability and the duration of the period in which
the Company's profitability would be affected by the change in securitization
structure are estimates. The accuracy of such estimates will be affected by the
rate at which the Company purchases and sells Contracts, any changes in that
rate, the credit performance of such Contracts, the financial terms of future
securitizations, any changes in such terms over time, and other factors that
generally affect the Company's profitability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is subject to interest rate risk during the period between when
Contracts are purchased from Dealers and when such Contracts become part of a
term securitization. Specifically, the interest rates on the warehouse
facilities are adjustable while the interest rates on the Contracts are fixed.
Historically, the Company's term securitization facilities have had fixed rates
of interest. To mitigate some of this risk, the Company has in the past, and
intends to continue to, structure certain of its securitization transactions to
include pre-funding structures, whereby the amount of Notes issued exceeds the
amount of Contracts initially sold to the Trusts. In pre-funding, the proceeds
from the pre-funded portion are held in an escrow account until 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 Notes outstanding, the amount as to which there can be no assurance.
There have been no material changes in market risks since December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
CPS maintains a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of its published financial statements
and other disclosures included in this report. As of the end of the period
covered by this report, CPS evaluated the effectiveness of the design and
operation of such disclosure controls and procedures. Based upon that
evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the
principal financial officer (Jeffrey P. Fritz) concluded that the disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, material information relating to CPS that is
required to be included in its reports filed under the Securities Exchange Act
of 1934. There have been no significant changes in our internal controls over
financial reporting during our most recently completed fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information provided under the caption "Legal Proceedings" in the Company's
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated
herein by reference. In addition, the reader should be aware of the following:
The Annual Report on Form 10-K disclosed that a purported class action filed in
Alabama state court had been removed to federal bankruptcy court, that the
bankruptcy court had remanded the matter to state court, and that the Company
had appealed that ruling. The federal district court, in which the appeal was
heard, has since ordered the bankruptcy court to decide whether the plaintiff
has standing to pursue her claims, and, if standing is found, to reconsider its
remand decision. It is possible that plaintiff may in turn appeal from the order
of the District Court. Although CPS believes that it has one or more defenses to
each of the claims made in this lawsuit, no discovery has yet been conducted and
the case remains in its earliest stages. Accordingly, there can be no assurance
as to its outcome.
The Company is routinely involved in various legal proceedings resulting from
its consumer finance activities and practices, both continuing and discontinued.
The Company believes that there are substantive legal defenses to such claims,
and intends to defend them vigorously. There can be no assurance, however, as to
the outcome.
ITEM 1A. RISK FACTORS
The Company reminds the reader that risk factors are set forth in Item 1A of the
Company's report on Form 10-K, filed with the U.S. Securities and Exchange
Commission on March 13, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2006, the Company purchased a total of
118,751 shares of its common stock, as described in the following table:
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF APPROXIMATE DOLLAR
TOTAL SHARES PURCHASED AS VALUE OF SHARES THAT
NUMBER OF AVERAGE PART OF PUBLICLY MAY YET BE PURCHASED
SHARES PRICE PAID ANNOUNCED PLANS OR UNDER THE PLANS OR
PERIOD (1) PURCHASED PER SHARE PROGRAMS(2) PROGRAMS
---------------- --------------- --------------------------- -----------------------------
January 2006 58,776 $ 5.86 58,776 $ 4,677,366
February 2006 35,975 6.71 35,975 4,436,092
March 2006 24,000 7.12 24,000 4,265,296
---------------- --------------- ---------------------------
118,751 $ 6.37 118,751
================ =============== ===========================
(1) EACH MONTHLY PERIOD IS THE CALENDAR MONTH.
(2) THE COMPANY ANNOUNCED IN AUGUST 2000 ITS INTENTION TO PURCHASE UP TO $5
MILLION OF ITS OUTSTANDING SECURITIES, INCLUSIVE OF ANNUAL $1 MILLION SINKING
FUND REDEMPTIONS ON ITS RISING INTEREST REDEEMABLE SUBORDINATED SECURITIES DUE
2006. IN OCTOBER 2002, THE JULY 2000 PROGRAM HAVING BEEN EXHAUSTED, THE
COMPANY'S BOARD OF DIRECTORS AUTHORIZED THE PURCHASE OF UP TO AN ADDITIONAL $5
MILLION OF SUCH SECURITIES. AN ADDITIONAL $5 MILLION WAS LATER AUTHORIZED BY THE
COMPANY'S BOARD OF DIRECTORS IN OCTOBER 2004.
25
ITEM 6. EXHIBITS
The exhibits listed below are filed with this report. The Company disclaims any
implication that the agreements filed as exhibits 10.5, 10.7 and 10.8 are other
than agreements entered into in the ordinary course of its business.
4.11 Form of Indenture, dated as of September 1, 2005, respecting notes
issued by CPS Auto Receivables Trust 2005-C.
4.12 Form of Indenture, dated as of December 1, 2005, respecting notes
issued by CPS Auto Receivables Trust 2005-D.
4.13 Form of Indenture, dated as of March 1, 2006, respecting notes issued
by CPS Auto Receivables Trust 2006-A.
4.14 Instruments defining the rights of holders of long-term debt of certain
consolidated subsidiaries of the registrant are omitted pursuant to the
exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item
601 of Regulation S-K (17 CFR 229.601). The registrant agrees to
provide copies of such instruments to the United States Securities and
Exchange Commission upon request.
10.5 Amended & Restated Sale and Servicing Agreement dated April 14, 2006,
by and among Page Funding LLC ("PFLLC"), the registrant and Wells Fargo
Bank, N.A. ("WFBNA")
10.7 Amended and Restated Indenture dated as of April 14, 2006, by and among
PFLLC, UBS Real Estate Securities, Inc. ("UBSRES") and WFBNA.
10.8 Amended and Restated Note Purchase Agreement dated as of April 14,
2006, by and among PFLLC, UBSRES and WFBNA.
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer of the
registrant.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer of the
registrant.
32 Section 1350 Certifications.*
* These Certifications shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section. These Certifications shall not be
deemed to be incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except to the extent that the
registration statement specifically states that such Certifications are
incorporated therein.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)
Date: May 12, 2006
/s/ CHARLES E. BRADLEY, JR.
-------------------------------------
Charles E. Bradley, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Date: May 12, 2006
/s/ JEFFREY P. FRITZ
-------------------------------------------------
Jeffrey P. Fritz
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
27