Overview

We are a specialty finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories, low incomes or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in three merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) originated ourselves an immaterial amount of vehicle purchase money loans by lending money directly to consumers. In this report, we refer to all of such contracts and loans as "automobile contracts."

We were incorporated and began our operations in March 1991. From inception through June 30, 2009, we have purchased a total of approximately $8.7 billion of automobile contracts from dealers. In addition, we obtained a total of approximately $605.0 million of automobile contracts in mergers and acquisitions we made in 2002, 2003 and 2004. Unlike recent prior years, our managed portfolio decreased from the previous year due to our strategy of decreasing contract purchases to conserve our liquidity in response to adverse economic conditions as discussed further below. Our total managed portfolio, net of unearned interest on pre-computed automobile contracts, was approximately $1,333.9 million at June 30, 2009 compared to $1,979.5 million at June 30, 2008.

We are headquartered in Irvine, California, where most operational and administrative functions are centralized. All credit and underwriting functions are performed in our California headquarters, and we service our automobile contracts from our California headquarters and from three servicing branches in Virginia, Florida and Illinois.

We purchase contracts in our own name ("CPS") and, until July 2008, also in the name of our wholly-owned subsidiary, TFC. Programs marketed under the CPS name are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. Our TFC program served vehicle purchasers enlisted in the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we suspended contract purchases under our TFC program.

We purchase automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us. Depending on the structure of the securitization, the transaction may be treated, for financial accounting purposes, as a sale of the contracts or as a secured financing.

Securitization and Warehouse Credit Facilities

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through our warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to fund the transactions. Depending on the structure, these transactions may properly be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on

Since the third quarter of 2003, we have conducted 24 term securitizations. Of these 24, 19 were periodic (generally quarterly) securitizations of automobile contracts that we purchased from automobile dealers under our regular programs. In addition, in March 2004 and November 2005, we completed securitizations of our retained interests in other securitizations that we and our affiliates previously sponsored. The debt from the March 2004 transaction was repaid in August 2005, and the debt from the November 2005 transaction was repaid in May 2007. Also, in June 2004, we completed a securitization of automobile contracts purchased in the SeaWest asset acquisition and under our TFC programs. Further, in December 2005 and May 2007 we completed securitizations that included automobile contracts purchased under the TFC programs, automobile contracts purchased under the CPS programs and automobile contracts we repurchased upon termination of prior securitizations of our MFN and TFC subsidiaries. Since July 2003 all such securitizations have been structured as secured financings, except that our September 2008 securitization was in substance a sale of the underlying receivables, and is treated as a sale for financial accounting purposes.

Uncertainty of Capital Markets and General Economic Conditions

Historically, we have depended upon the availability of warehouse credit facilities and access to long-term financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have completed 49 term securitizations of approximately $6.6 billion in contracts. We conducted four term securitizations in 2006, four in 2007, and two in 2008. From July 2003 through April 2008 all of our securitizations were structured as secured financings. The second of our two securitization transactions in 2008 (completed in September 2008) was in substance a sale of the related contracts, and is treated as a sale for financial accounting purposes.

Since the fourth quarter of 2007, we have observed unprecedented adverse changes in the market for securitized pools of automobile contracts. These changes include reduced liquidity, and reduced demand for asset-backed securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime automobile receivables. Moreover, many of the firms that previously provided financial guarantees, which were an integral part of our securitization program, are no longer offering such guarantees. As of June 30, 2009, we have no available warehouse credit facilities and no immediate plans to complete a term securitization. The adverse changes that have taken place in the market have caused us to seek to conserve liquidity by reducing our purchases of automobile contracts to nominal levels. If the current adverse circumstances that have affected the capital markets should continue or worsen, we may curtail further or cease our purchases of new automobile contracts, which could lead to a material adverse effect on our operations.

Current economic conditions have negatively affected many aspects of our industry. First, as stated above, there is reduced demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile receivables. Second, lenders who previously provided short-term warehouse financing for sub-prime automobile finance companies such as ours are reluctant to provide such short-term financing due to the uncertainty regarding the prospects of obtaining long-term financing through the issuance of asset-backed securities. In addition, many capital market participants such as investment banks, financial guaranty providers and institutional investors who previously played a role in the sub-prime auto finance industry have withdrawn from the industry, or in some cases, have ceased to do business. Finally, the broad economic weakness and increasing unemployment has made many of the obligors under our receivables less willing or able to pay, resulting in higher delinquency, charge-offs and losses. Each of these factors has adversely affected our results of operations. Should existing economic conditions worsen, both our ability to purchase new contracts and the performance of our existing managed portfolio may be impaired, which, in turn, could have a further material adverse effect on our results of operations.

Financial Covenants

Certain of our securitization transactions and our warehouse credit facility contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining

The agreements under which we receive periodic fees for servicing automobile contracts in securitizations are terminable by the respective financial guaranty insurance companies (also referred to as note insurers) upon defined events of default, and, in some cases, at the will of the insurance company. Without the waivers we have received from the related note insurers we would have been in violation of certain financial and operating covenants relating to minimum net worth and maintenance of active warehouse facilities with respect to eight of our 17 currently outstanding securitization transactions with this filing. Upon such an event of default, and subject to the right of the related note insurers to waive such terms, the agreements governing the securitizations call for payment of a default insurance premium, ranging from 25 to 100 basis points per annum on the aggregate outstanding balance of the related insured senior notes, and for the diversion of all excess cash generated by the assets of the respective securitization pools into the related spread accounts to increase the credit enhancement associated with those transactions. The cash so diverted into the spread accounts would otherwise be used to make principal payments on the subordinated notes in each related securitization or would be released to us. In addition, upon an event of default, the note insurers have the right to terminate us as servicer. Although the diversion of such cash and our termination as servicer have been waived, we are paying default premiums, or their equivalent, with respect to insured notes representing $655.7 million of the $1,128.2 million of securitization trust debt outstanding at June 30, 2009. It should be noted that the principal amount of such securitization trust debt is not increased, but that the increased insurance premium is reflected as increased interest expense. Furthermore, such waivers as we have obtained are temporary, and there can be no assurance as to their future extension. We do, however, believe that we will obtain such future extensions of our servicing agreements because it is generally not in the interest of any party to the securitization transaction to transfer servicing. Nevertheless, there can be no assurance as to our belief being correct. Were an insurance company in the future to exercise its option to terminate such agreements or to pursue other remedies, such remedies could have a material adverse effect on our liquidity and results of operations, depending on the number and value of the affected transactions. Our note insurers continue to extend our term as servicer on a monthly and/or quarterly basis, pursuant to the servicing agreements.

Results of Operations

Comparison of Operating Results for the three months ended June 30, 2009 with the three months ended June 30, 2008

Revenues. During the three months ended June 30, 2009, revenues were $58.3 million, a decrease of $40.5 million, or 41.0%, from the prior year revenue of $98.8 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the three months ended June 30, 2009 decreased $39.9 million, or 42.1%, to $55.0 million from $94.9 million in the prior year. The primary reason for the decrease in interest income is the decrease in finance receivables held by consolidated subsidiaries.

Servicing fees totaling $942,000 in the three months ended June 30, 2009 increased $662,000, or 236.0%, from $280,000 in the prior year. The increase in servicing fees is the result of our September 2008 securitization that was structured as a sale for financial accounting purposes and on which we earn a base servicing fee. During 2008 we also earned base servicing fees on a portfolio which we have serviced for SeaWest Financial Corporation since April 2004, which has declined to an immaterial amount as of June 30, 2009. As of June 30, 2009 and 2008, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                               June 30, 2009            June 30, 2008
                                            Amount         %          Amount          %
Total Managed Portfolio                                   ($ in millions)
Owned by Consolidated Subsidiaries       $ 1,173.1        87.9 %   $  1,979.4       100.0 %
Owned by Non-Consolidated Subsidiaries       160.8        12.1 %            -         0.0 %
Third Party Portfolio                            -         0.0 %          0.1         0.0 %
Total                                    $ 1,333.9       100.0 %    $ 1,979.5       100.0 %

At June 30, 2009, we were generating income and fees on a managed portfolio with an outstanding principal balance of $1,333.9 million (this amount includes $160.8 million of automobile contracts on which we earn servicing fees, own 5.0% of the asset-backed notes issued by the related trust, and own a residual interest), compared to a managed portfolio with an outstanding principal balance of $1,979.5 million as of June 30, 2008. At June 30, 2009 and 2008, the managed portfolio composition was as follows:

                               June 30, 2009            June 30, 2008
                           Amount          %        Amount           %
Originating Entity                        ($ in millions)
CPS                     $  1,301.0        97.5 %   $ 1,834.6        96.5 %
TFC                           32.7         2.5 %        62.1         3.3 %
MFN                              -         0.0 %         0.2         0.0 %
SeaWest                        0.2         0.0 %         2.1         0.1 %
Third Party Portfolio            -         0.0 %         1.3         0.1 %
Total                    $ 1,333.9       100.0 %   $ 1,900.3       100.0 %

Other income decreased by $1.2 million, or 33.6%, to $2.4 million in the three months ended June 30, 2009 from $3.6 million during the prior year. Other income consists primarily of convenience fees charged to our borrowers for certain electronic payments, fees paid to us by dealers for training, potential customer targeting and certain direct mail products that we offer, and recoveries on portfolios that we previously acquired through acquisitions.

Expenses. Our operating expenses consist largely of provision for credit losses, interest expense, employee costs and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income (loss) 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 stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $64.3 million for the three months ended June 30, 2009, compared to $96.1 million for the prior year, a decrease of $31.8 million, or 33.1%. The decrease is primarily due to the continued decline in the balance of our outstanding managed portfolio and the related costs to service it, plus reduced expenses associated with significantly lower volumes of new contract purchases compared to the prior period.

Employee costs decreased by $3.9 million, or 30.3%, to $9.0 million during the three months ended June 30, 2009, representing 14.0% of total operating expenses, from $12.9 million for the prior year, or 13.4% of total operating expenses. Since January 2008, we have reduced staff through attrition and reductions in force as a

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $5.8 million, a decrease of 22.9%, compared to the previous year and represented 9.1% of total operating expenses.

Interest expense for the three months ended June 30, 2009 decreased $12.0 million, or 29.3%, to $29.0 million, compared to $41.0 million in the previous year. The decrease is primarily the result of changes in the amount and composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust debt decreased by $10.8 million in the three months ended June 30, 2009 compared to the prior year. Interest expense on senior secured and subordinated debt increased by $1.1 million as a result of our issuance in June 2008 and July 2008 of senior secured notes of $10.0 million $15.0 million, respectively. Interest expense on residual interest financing decreased $213,000 in the three months ended June 30, 2009 compared to the prior year. Interest expense on warehouse debt decreased by $2.1 million for the three months ended June 30, 2009 compared to the prior year. In the prior year period, we had access to two warehouse credit facilities totaling $400 million in financing capacity. During that period we were actively purchasing new contracts and financing such purchases with these facilities that had, in the aggregate, an outstanding balance of $148.1 million at June 30, 2008. As of June 30, 2009, our remaining warehouse facility has an outstanding balance of $5.1 million and has been amended to provide for no further advances.

As stated above, we have issued $25.0 million in new senior secured debt since June 2008. In addition, in July 2008 we amended our existing residual financing facility resulting in a higher interest rate. As a result, we can expect that our interest expense on these components of debt will increase in future periods although such increases may be somewhat offset by decreases in our securitization trust and warehouse debt should our level of contract purchases and our portfolio of managed receivables continue to decline.

Provision for credit losses was $18.5 million for the three months ended June 30, 2009, a decrease of $12.4 million, or 67.1% compared to the prior year and represented 28.8% of total operating expenses. The provision for credit losses maintains the allowance for loan losses at levels that we feel are adequate for probable credit losses that can be reasonable estimated. The decrease in provision expense is the result of the decrease in the size of the portfolio and the smaller volumes of new originations in the current period compared to the prior period.

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives who earn salary and commissions based on our volume of contract purchases and also based on sales of training programs, potential customer targeting, and direct mail products that we offer our dealers. Marketing expenses decreased by $1.7 million, or 65.4%, to $908,000, compared to $2.6 million in the previous year, and represented 2.7% of total operating expenses. The decrease is primarily due to the decrease in automobile contracts we purchased during the three months ended June 30, 2009 as compared to the prior year. During the three months ended June 30, 2009, we purchased 71 automobile contracts aggregating $937,000, compared to 5,268 automobile contracts aggregating $79.8 million in the prior year. The adverse changes that have taken place in the securitization market since the fourth quarter of 2007 have caused us to curtail our purchases of automobile contracts in order to preserve liquidity.

Occupancy expenses decreased by $154,000 or 14.7%, to $889,000 compared to $1.0 million in the previous year and represented 1.1% of total operating expenses.

Depreciation and amortization expenses increased $97,000, or 99.0%, to $196,000 from $98,000 in the previous year.

For the three months ended June 30, 2009, we recorded no tax provision or benefit. As of June 30, 2009, our net deferred tax asset of $52.7 million is net of a valuation allowance of $3.0 million and consists of approximately $48.8 million of net U.S. federal deferred tax assets and $3.9 million of net state deferred tax assets. The major components of the deferred tax asset are $27.4 million in net operating loss carryforwards

Comparison of Operating Results for the six months ended June 30, 2009 with the six months ended June 30, 2008

Revenues. During the six months ended June 30, 2009, revenues were $124.4 million, a decrease of $77.7 million, or 38.5%, from the prior year revenue of $202.1 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the six months ended June 30, 2009 decreased $78.1 million, or 40.2%, to $116.1 million from $194.2 million in the prior year. The primary reason for the decrease in interest income is the decrease in finance receivables held by consolidated subsidiaries.

Servicing fees totaling $2.0 million in the six months ended June 30, 2009 increased $1.3 million, or 178.3%, from $708,000 in the prior year. The increase in servicing fees is the result of our September 2008 securitization that was structured as a sale for financial accounting purposes and on which we earn a base servicing fee. During 2008 we also earned base servicing fees on a portfolio which we have serviced for SeaWest Financial Corporation since April 2004, which has declined to an immaterial amount as of June 30, 2009. As of June 30, 2009 and 2008, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                          June 30, 2009              June 30, 2008
                                         Amount         %         Amount           %
Total Managed Portfolio                                ($ in millions)
Owned by Consolidated Subsidiaries     $  1,173.1      87.9 %     $ 1,979.4       100.0 %
Owned by Non-Consolidated Subsidiaries      160.8      12.1 %            -          0.0 %
Third Party Portfolio                          -        0.0 %           0.1         0.0 %
Total                                   $ 1,333.9     100.0 %     $ 1,979.5       100.0 %

At June 30, 2009, we were generating income and fees on a managed portfolio with an outstanding principal balance of $1,333.9 million (this amount includes $160.8 million of automobile contracts on which we earn servicing fees, own 5.0% of the asset-backed notes issued by the related trust, and own a residual interest), compared to a managed portfolio with an outstanding principal balance of $1,979.5 million as of June 30, 2008. At June 30, 2009 and 2008, the managed portfolio composition was as follows:

                              June 30, 2009            June 30, 2008
                           Amount         %         Amount          %
Originating Entity                        ($ in millions)
CPS                     $  1,301.0        97.5 %   $ 1,834.6        96.5 %
TFC                           32.7         2.5 %        62.1         3.3 %
MFN                              -         0.0 %         0.2         0.0 %
SeaWest                        0.2         0.0 %         2.1         0.1 %
Third Party Portfolio            -         0.0 %         1.3         0.1 %
Total                    $ 1,333.9       100.0 %   $ 1,900.3       100.0 %

Other income decreased by $895,000, or 12.5%, to $6.3 million in the six months ended June 30, 2009 from $7.2 million during the prior year. Other income consists primarily of convenience fees charged to our borrowers for certain electronic payments, fees paid to us by dealers for training, potential customer targeting and certain direct mail products that we offer, and recoveries on portfolios that we previously acquired through acquisitions.

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level . . .