CONSUMER PORTFOLIO SERVICES INC, 10-K/A, 1997-04-14

CONSUMER PORTFOLIO SERVICES INC
10-K/A, 1997-04-14
SHORT-TERM BUSINESS CREDIT INSTITUTIONS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A

[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

Commission file number: 1-14116

CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)

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

2 Ada, Irvine, California 92618
(Address of principal executive (Zip Code)
offices)

Registrant's telephone number, including area code: (714) 753-6800

Securities registered pursuant to section 12(b) of the Act:
Title of each class: Rising Interest Subordinated Redeemable Securities due
2006
Name of each exchange on which registered: New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: Common stock, no
par value

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

Indicate by check mark if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

The aggregate market value on March 31, 1996 (based on the $8.00 average of
closing bid and asked prices on Nasdaq Stock Market on that date) of the voting
stock beneficially held by non-affiliates of the registrant was $76,457,112.
The number of shares of the registrant's Common Stock outstanding on March 31,
1997 was 14,279,442

DOCUMENTS INCORPORATED BY REFERENCE: The registrant's proxy statement for its
1997 annual meeting of shareholders is incorporated by reference into Part III
of this report.

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PART I

ITEM 1. BUSINESS

GENERAL

Consumer Portfolio Services, Inc. (the "Company" or the "registrant") is a
consumer finance company specializing in the business of purchasing, selling and
servicing retail automobile installment contracts ("Contracts") originated by
dealers ("Dealers") in the sale of new and used automobiles, light trucks and
passenger vans. Through its purchases, the Company provides indirect financing
to borrowers with limited credit histories, low incomes or past credit problems
("Sub-Prime Borrowers"). The Company serves as an alternative source of
financing for Dealers, allowing sales to customers who otherwise might not be
able to obtain financing from more traditional sources of automobile financing
such as banks, credit unions or finance companies affiliated with major
automobile manufacturers.

HISTORY

The Company was incorporated in March 1991 as a wholly owned subsidiary of
CPS Holdings, Inc. ("Holdings") (formerly known as FWB Acceptance Corp.).
Holdings was formed in April 1990 by Charles E. Bradley, Sr., the Chairman of
the Board of the Company, in order to enter into the automobile financing
business. Mr. Bradley believed that the Sub-Prime Borrower segment of this
business had the potential for growth and profit due in part to the withdrawal
from such business by many savings and loan associations and other financial
institutions. In December 1995, Holdings was merged with and into the Company.

The period from March 8, 1991 (the Company's inception) through May 1991
was devoted to the start-up of the Company's operations. On May 31, 1991, the
Company first acquired certain third-party loan servicing contracts and in
June 1991 began earning servicing fee income. The Company thereafter added to
its third-party loan servicing portfolio and, in October 1991, began acquiring
Contracts and selling them to General Electric Capital Corporation ("GECC"). To
date, the Company has sold $42.6 million in Contracts to GECC and an additional
$100.1 million to Sun Life Insurance Company of America ("Sun Life"). Since June
1994, the Company has issued an additional $642.6 million of "AAA"-rated and
$27.3 million of "BB"-rated certificates backed by Contracts to various
institutional investors. Since June 1996, all sales of "AAA"-rated certificates
have been made in public offerings pursuant to registration statements filed
with the Securities and Exchange Commission. See "Servicing of Contracts--
Third-Party Loan Servicing" and "Purchase and Sale of Contracts--Securitization
and Sale of Contracts to Institutional Investors."

AUTOMOBILE FINANCING INDUSTRY

Automobile financing is the largest category, by dollar amount, of consumer
installment debt in the United States. Most traditional sources of automobile
financing, such as commercial banks, credit unions and captive finance companies
affiliated with major automobile manufacturers, generally provide automobile
financing for the most creditworthy, or so-called "prime" borrowers. The
Company believes that the strong credit performance and large size of the market
have led to intense price competition in the financing market for prime
borrowers, and, in turn, low profit margins, effectively limiting this market to
only the largest participants. In addition, special low-rate financing programs
offered by automobile manufacturers' captive finance companies to promote the
sale of specific automobiles have added to the competition within the prime
borrower market.

Although prime borrowers represent the largest segment of the automobile
financing market, there are many potential purchasers of automobiles who do not
qualify as prime borrowers. Purchasers considered by the Company to be Sub-
Prime Borrowers have limited credit histories, low incomes or past credit
problems and, therefore, are unable to obtain credit from traditional sources of
automobile financing, such as commercial banks, credit unions or captive finance
companies affiliated with major automobile manufacturers. (The terms "prime"
and "sub-prime" reflect the Company's categorization of borrowers and bear no
relationship to the prime rate of interest or persons who are able to borrow at
that rate.) The Company believes that, because these potential purchasers
represent a substantial market, there is a demand by automobile dealers for Sub-
Prime Borrower financing that has not been effectively served by traditional
automobile financing sources.

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According to the Board of Governors of the Federal Reserve System, as of
March 1996, there was approximately $359 billion in automobile-related
installment credit outstanding. The Company is unaware of any authoritative
estimates of the size of the "non-prime" portion of this market, although
various sources have estimated that the potential loan base in this portion of
the market is between $50 billion and $70 billion. Based on these figures, the
Company's "Servicing Portfolio" (the aggregate principal amount of Contracts for
which the Company performs collection services) represents less than one percent
of the market.

BUSINESS STRATEGY

The Company's primary objective is to increase revenue and earnings through
the expansion of its sales and servicing of Contracts purchased from Dealers.
The Company has substantial operational and administrative capacity to expand
its business. The Company's strategy is to:

- - Maintain consistent underwriting standards and portfolio performance.

- - Increase the number of Contracts it purchases from its existing Dealers.

- - Expand its Dealer network, in part by entry into other geographic areas.
During the year ended December 31, 1996, 52.1% of the Contracts acquired by
the Company related to borrowers who resided in California, Florida,
Pennsylvania and Texas (see "Purchase and Sale of Contracts--Dealer
Contract Purchase Program").

- - Control and/or reduce its cost of funds by proper structuring of its
securitization offerings and by obtaining the necessary ratings from
nationally recognized credit rating agencies.

- - Evaluate opportunities to provide additional products and services, such as
automobile insurance, credit cards and extended maintenance contracts.

EXPANSION AND DIVERSIFICATION

In March 1996, the Company formed Samco Acceptance Corp. ("Samco"), an 80
percent-owned subsidiary based in Dallas, Texas. Samco's business plan is to
provide the Company's sub-prime auto finance products to rural areas through
independently owned finance companies. The Company believes that many rural
areas are not adequately served by other industry participants due to their
distance from large metropolitan areas where a Dealer marketing representative
is most likely to be based.

Samco employees call on independent finance companies ("IFCs"), primarily
in the southeastern United States and present them with financing programs that
are essentially identical to those which the Company markets directly to Dealers
through its marketing representatives. The Company believes that a typical
rural IFC has relationships with many local automobile purchasers as well as
Dealers who, because of their financial resources or capital structure are
generally unable to provide 36, 48 or 60 month financing for an automobile.
IFCs may offer Samco's financing programs to borrowers directly or to local
Dealers. Upon submission of applications to Samco, credit personnel who have
been trained by the Company use the Company's proprietary systems to evaluate
the borrower and the proposed Contract terms. Samco purchases Contracts from
the IFCs after its credit personnel have performed all of the underwriting and
verification procedures that the Company performs for Contracts it purchases
from Dealers. Servicing and collection procedures on Samco Contracts are
performed by the Company at its headquarters in Irvine, California. However,
Samco may solicit aid from the IFC in collecting accounts that are seriously
past due. As of December 31, 1996, Samco had purchased 399 Contracts with
original balances aggregating $4.7 million.

In May 1996, the Company formed LINC Acceptance Corp. ("LINC"), an 80
percent-owned subsidiary based in Norwalk, Connecticut. LINC's business plan is
to provide the Company's sub-prime auto finance products to credit unions, banks
and savings and loans ("Deposit Institutions"). The Company believes that
credit unions, banks and savings and loans do not generally make loans to sub-
prime borrowers, even though they may have relationships with Dealers and have
sub-prime borrowers as deposit customers.

LINC proposes to have certain of its employees call on various Deposit
Institutions and present them with a financing program that is similar to those
which the Company markets directly to Dealers through its

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marketing representatives. The LINC program is intended to result in a slightly
more creditworthy borrower than the Company's regular programs by requiring
slightly higher income and lower debt-to-income ratios. LINC's customers may
offer its financing program to borrowers directly or to local Dealers. Unlike
Samco, which has employees who evaluate applications and make decisions to
purchase Contracts, LINC applications will be submitted by the Deposit
Institution directly to the Company, where the approval, underwriting and
purchase procedures will be performed by Company staff who will work with LINC
as well as with the Company's Dealers. Servicing and collection procedures on
LINC Contracts will be performed entirely by the Company using its personnel. As
of December 31, 1996, LINC had purchased seven Contracts with original balances
aggregating $81,000.

In June 1996, the Company acquired 38% of the outstanding shares of NAB
Asset Corporation ("NAB") for $4.3 million. At the time of the acquisition, NAB
had approximately $3.5 million in cash and no significant operations.
Subsequent to the Company's investment in NAB, NAB purchased Mortgage Portfolio
Services, Inc. ("MPS") from the Company for $300,000. MPS is a Dallas, Texas-
based mortgage broker-dealer which the Company formed in April 1996. MPS
specializes in the origination and sale of sub-prime residential mortgages. In
July 1996, NAB formed CARSUSA, Inc., which subsequently purchased a Mitsubishi
dealership in Riverside, California. The Company provides CARSUSA with an
$800,000 line of credit for financing its vehicle inventory. In November 1996,
NAB purchased Mack Financial Ltd, a small appliance "rent to own" company based
in Dallas, Texas.

In January 1997, the Company purchased 80% of the outstanding shares of an
equipment financing company, Stanwich Leasing, Inc. ("SLI"), from its
shareholders, who included two directors of the Company, Charles E. Bradley, Sr.
and John G. Poole. The purchase price was $100,000 in cash. As of December 31,
1996, SLI owned and serviced an outstanding equipment lease portfolio of
approximately $2.0 million, and had a book value of approximately $37,000.

PURCHASE AND SALE OF CONTRACTS

DEALER CONTRACT PURCHASE PROGRAM. As of December 31, 1996, the Company was
a party to its standard form dealer agreements ("Dealer Agreements") with 2,182
Dealers. Approximately 93.2% of these Dealers are franchised new car dealers
that sell both new and used cars and the remainder are independent used car
dealers. For the year ended December 31, 1996, approximately 88.5% of the
Contracts purchased by the Company consisted of financing for used cars and the
remaining 11.5% for new cars. Most of these Dealers regularly submit Contracts
to the Company for purchase, although such Dealers are under no obligation to
submit any Contracts to the Company, nor is the Company obligated to purchase
any Contracts. During the year ended December 31, 1996, no Dealer accounted for
more than 2.3% of the total number of Contracts purchased by the Company. In
addition, the Company continues to diversify geographically, and has reduced its
concentration of Contract purchases in California from 35.0% for the year ended
December 31, 1995, to 25.8% for the year ended December 31, 1996. The following
table sets forth the geographical sources of the Contracts purchased by the
Company (based on the addresses of the borrowers as stated on the Company's
records) during each of the years ended December 31, 1996 and December 31, 1995.

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CONTRACTS PURCHASED DURING YEAR ENDED
---------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- -----------------------------
NUMBER PERCENT NUMBER PERCENT
--------- ----------- ----------- -----------
California 7,296 25.8% 5,157 35.0%
Pennsylvania 2,730 9.6% 1,432 9.7%
Florida 2,638 9.3% 1,555 10.6%
Texas 2,073 7.3% 1,046 7.1%
Illinois 1,385 4.9% 963 6.5%
Tennessee 1,225 4.3% 221 1.5%
New York 1,201 4.2% 384 2.6%
Louisiana 1,184 4.2% 271 1.8%
Ohio 1,180 4.2% 119 0.8%
Nevada 1,060 3.7% 750 5.1%
Maryland 920 3.3% 106 0.7%
Alabama 906 3.2% 93 0.6%
Michigan 788 2.8% 598 4.1%
New Jersey 625 2.2% 308 2.1%
Hawaii 507 1.8% 452 3.1%
Other states 2,587 9.1% 1,283 8.7%
--------- -----------
Total 28,305 14,738
--------- -----------
--------- -----------

When a retail automobile buyer elects to obtain financing from a Dealer, an
application is taken for submission by the Dealer to its financing sources.
Typically, a Dealer will submit the buyer's application to more than one
financing source for review. The Company believes the Dealer's decision to
finance the automobile purchase with the Company, rather than other financing
sources, is based primarily upon an analysis of the discounted purchase price
offered for the Contract, the timeliness, consistency and predictability of
response, the cash resources of the financing source, and any conditions to
purchase.

Upon receipt of an application from a Dealer, the Company's administrative
personnel order a report containing information from the three major national
credit bureaus on the applicant to document the buyer's credit history. If,
upon review by a Company loan officer, it is determined that the application
meets the Company's underwriting criteria, or would meet such criteria with
modification, the Company requests and reviews further information and
supporting documentation and, ultimately, decides whether to purchase the
Contract. When presented with an application, the Company attempts to notify
the Dealer within four hours as to whether it intends to purchase such Contract.
The Company buys Contracts directly from Dealers and does not make loans
directly to purchasers of automobiles.

The Company has historically purchased Contracts from Dealers at discounts
ranging from 0% to 10% of the total amount financed under the Contracts,
depending on the perceived credit risk of the Contract, plus a flat acquisition
fee, generally $200, for each Contract purchased. Discounts averaged 4.1% and
2.8% for the years ended December 31, 1995 and 1996, respectively. The Company
believes that the level of discounts and fees are a significant factor in the
Dealer's decision to submit a Contract to the Company for purchase, and will
continue to play such a role in the future. Effective January 10, 1997, the
Company began purchasing all Contracts without a percentage discount, charging
Dealers only an acquisition fee ranging from zero to $1,195 for each Contract
purchased. The fees vary based on the perceived credit risk and, in some cases,
the interest rate on the Contract. The acquisition fees instituted in January
1997 are larger, on average, than the acquisition fees previously charged in
conjunction with percentage discounts, so as to result in a similar net purchase
price on a typical Contract.

The Company attempts to control Dealer misrepresentation by carefully
screening the Contracts it purchases, by establishing and maintaining
professional business relationships with Dealers, and by including certain
representations and warranties by the Dealer in the Dealer Agreement. Pursuant
to the Dealer

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Agreement, the Company may require the Dealer to repurchase any Contract in the
event that the Dealer breaches its representations or warranties or if a
borrower fails, for any reason, to make timely payment of the first installment
due under a Contract. There can be no assurance, however, that any Dealer will
have the financial resources to satisfy its repurchase obligations to the
Company.

BULK PURCHASES. The Company has purchased portfolios of Contracts in bulk
("Bulk Purchases") from other companies that had previously purchased the
Contracts from Dealers, and assumed the servicing thereon. To date, the Company
has made four such Bulk Purchases aggregating approximately $22.9 million. In
considering Bulk Purchases, the Company carefully evaluates the credit profile
and payment history of each portfolio and negotiates the purchase price
accordingly. The credit profiles of the Contracts in each of the portfolios
purchased are similar to those in the underwriting standards used by the Company
in its normal course of business. The Bulk Purchases were made at purchase
prices ranging from 93.0% to 100.0% of the aggregate principal balance of the
Contracts. The Company may consider the purchase of additional portfolios from
third parties, but has not made any such purchases since August 1995. As of
December 31, 1996, Contracts that were acquired in Bulk Purchases and not yet
sold account for 0.2% of the Servicing Portfolio.

CONTRACT PURCHASE CRITERIA. To be eligible for purchase by the Company, a
Contract must have been originated by a Dealer that has entered into a Dealer
Agreement to sell Contracts to the Company. The Contracts must be secured by a
first priority lien on a new or used automobile, light truck or passenger van
and must meet the Company's underwriting criteria. In addition, each Contract
requires the borrower to maintain physical damage insurance covering the
financed vehicle and naming the Company as a loss payee. The Company or any
purchaser of the Contract from the Company may, nonetheless, suffer a loss upon
theft or physical damage of any financed vehicle if the borrower fails to
maintain insurance as required by the Contract and is unable to pay for repairs
to or replacement of the vehicle or is otherwise unable to fulfill its
obligations under the Contract.

The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Sub-Prime Borrowers and the
adequacy of the financed vehicle as security for a Contract. These criteria
include standards for price; term; amount of down payment, installment payment
and add-on interest rate; mileage, age and type of vehicle; amount of the
Contract in relation to the value of the vehicle; borrower's income level, job
and residence stability, credit history and debt serviceability; and other
factors. Specifically, the Company's guidelines limit the maximum principal
amount of a purchased Contract to 115% of wholesale book value in the case of
used vehicles or to 110% of the manufacturer's invoice in the case of new
vehicles, plus, in each case, sales tax, licensing and, when the customer
purchases such additional items, a service contract or a credit life or
disability policy. The Company does not finance vehicles that are more than
eight model years old or have in excess of 85,000 miles. The maximum term of a
purchased Contract is 60 months; a shorter maximum term may be applied based on
the year and mileage of the vehicle. These criteria are subject to change from
time to time as circumstances may warrant. Upon receiving this information with
the borrower's application, the Company's underwriters will verify the
borrower's employment, residency, insurance and credit information provided by
the borrower by contacting various parties noted on the borrower's application,
credit information bureaus and other sources. The Company typically completes
its credit review and responds to the Dealer within four hours.

CREDIT SCORING. From inception through December 31, 1996, the Company
has purchased $729.1 million in Contracts and, as of that date, had an
outstanding Servicing Portfolio of $505.9 million. The Company's management
information systems are structured to include a variety of credit and
demographic data for each Contract as well as maintaining data which indicate
each Contract's past or current performance characteristics. Furthermore,
the Company's technical staff have the ability to interrogate the database to
compare performing and non-performing Contracts and to ascertain which
demographic and credit related data elements may be predictors of credit
performance.

In November 1996, the Company implemented a scoring model which assigns
each Contract a numeric value (a "credit score") at the time the application is
received from the Dealer and the borrower's credit information is retrieved from
the credit reporting agencies. The credit score is based on a variety of
parameters such as the borrower's job and residence stability, the amount of the
down payment, and the age and mileage of the vehicle. The Company has developed
the credit score as a means of improving its productivity by

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identifying Contracts where the characteristics are so strong (or alternatively,
so weak), that the initial notification to the Dealer can be given without the
more extensive analysis that a Company loan officer would give to a more average
scoring Contract. Regardless of the credit score a Contract originally
receives, the Company's underwriters perform the same extensive review and
verification procedures on all Contracts. In addition to productivity
improvements, the credit score is used to identify Contracts for which review by
a supervisor or manager prior to approval and purchase may be appropriate.

Once an application is approved, financing documents are generated by the
Dealer and the Company obtains a certificate of title for the vehicle when a
lien is recorded, and various other documents pertaining to the borrower's
credit application. After the documents are signed by the Dealer and the
borrower, the Dealer sells the Contract to the Company. The borrower then
receives monthly billing statements.

All of the Contracts purchased by the Company are fully amortizing and
provide for level payments over the term of the Contract. The average original
principal amount financed under Contracts purchased in the year ended December
31, 1996 was approximately $12,606, with an average original term of
approximately 54.0 months and an average down payment of 15.3%. Based on
information contained in borrower applications, for this twelve-month period,
the retail purchase price of the related automobiles averaged $12,855 (which
excludes tax and license fees, and any additional costs such as a maintenance
contract), the average age of the vehicle at the time the Contract was purchased
was 3 years, and the Company's average borrower at the time of purchase was
approximately 37.0 years old, with approximately $32,007 in average household
income and an average of 4.6 years' history with his or her current employer.

All Contracts may be prepaid at any time without penalty. In the event a
borrower elects to prepay a Contract in full, the payoff amount is calculated by
deducting the unearned interest (as determined by the "Rule of 78s" method,
where applicable) from the Contract balance. When a partial prepayment is made
on a Contract originated in California, at the option of the borrower, the
future monthly payments may be reduced pro rata by the aggregate amount of the
prepayment, payment of the next succeeding regular monthly payments may be
suspended, or the borrower may continue to make the regular monthly payments and
thereby pay the Contract in full prior to its scheduled amortization. With
respect to Contracts originated outside of California, the portion of each
payment on the Contracts allocated to principal and interest and the payoff
amount in the event of a full prepayment would be determined by the Rule of 78s
method or such other interest amortization method as is permitted by applicable
state law.

Each Contract purchased by the Company prohibits the sale or transfer of
the financed vehicle without the Company's consent and allows for the
acceleration of the maturity of a Contract upon a sale or transfer without such
consent. In most circumstances, the Company will not consent to a sale or
transfer of a financed vehicle unless the related Contract is prepaid in full.

The Company believes that the most important requirements to succeed in the
sub-prime automobile financing market are the ability to control borrower and
Dealer misrepresentation at the point of origination; the development and
consistent implementation of objective underwriting criteria specifically
designed to evaluate the creditworthiness of Sub-Prime Borrowers; and the
maintenance of an active program to monitor performance and collect payments.

SECURITIZATION AND SALE OF CONTRACTS TO INSTITUTIONAL INVESTORS. The
Company purchases Contracts with the intention of reselling them to
institutional investors ("Investors") either as bulk sales or as asset-backed
securities. Asset-backed securities are generally structured as follows:
First, the Company sells a portfolio of Contracts to a wholly-owned subsidiary
which has been established for the limited purpose of buying and reselling the
Company's Contracts. The subsidiary then sells the same Contracts to a grantor
trust, and the grantor trust in turn issues interest-bearing asset-backed
securities in an amount equal to the aggregate principal balance of the
Contracts. One or more Investors purchase these asset-backed securities, the
proceeds of which are used by the grantor trust to purchase the Contracts from
the subsidiary, which uses such proceeds to purchase the Contracts from the
Company. In addition, the Company provides a credit enhancement for the benefit
of investors in the form of an initial cash deposit to a specific trust account
("Spread Account") and a deposit of certain excess servicing cash flows. Since
its September 1995 securitization, and, it is expected, on an ongoing basis in
the future, the Company altered the credit enhancement mechanism used in its
securitizations to create and sell a subordinated security ("B Piece") in order
to reduce the size of the required

6
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initial deposit to the Spread Account. The B Piece provides an additional
credit enhancement to the senior security holders because distributions of
interest on the B Piece are subordinated in priority of payment to interest due
on the senior certificates and distributions of principal on the B Piece are
subordinated in priority of payment to interest and principal due on the senior
certificates. This revised structure may, if the Company is able to continue to
sell the B Piece, reduce the amount of cash effectively used in securitizations.
The Company continues to hold the B Piece associated with the June 1995
securitization but has sold all subsequent B Pieces. The Company believes it
will be able to continue to sell the B Pieces created in its future
securitizations. Purchasers of the asset-backed securities receive a particular
coupon rate (the "Pass-Through Rate") established at the time of the sale. The
Company receives periodic base servicing fees for its duties relating to the
accounting for and collection of the Contracts. In addition, the Company is
entitled to certain excess servicing fees that represent collections on the
Contracts in excess of the amounts required to pay investor principal and
interest, the base servicing fees and certain other fees such as trustee and
custodial fees. Generally, the Company sells the Contracts at face value and
without recourse except that the representations and warranties provided by the
Dealer to the Company are similarly provided by the Company to the investor.

At the end of the month, the aggregate cash collections are allocated first
to the base servicing fees and certain other fees such as trustee and custodial
fees for the period, then to the asset-backed securities certificateholder in an
amount equal to the interest accrued at the Pass-Through Rate on the portfolio
plus the amount by which the portfolio balance decreased (due to payments,
payoffs or charge-offs) during the period. If the amount of cash required for
the above allocations exceeds the amount collected during the monthly period,
the shortfall is drawn from the Spread Account. If the cash collected during
the period exceeds the amount necessary for the above allocations, and there is
no shortfall in the related Spread Account, the excess is returned to the
Company or one of its subsidiaries. The excess cash flows are considered by the
Company to be excess servicing fees, part of which the Company recognizes as a
gain on sale based on an estimate of the discounted present value of the excess
cash flows.

Each sale of asset-backed securities results in an increase in the Excess
Servicing Receivables account on the Company's Consolidated Balance Sheet and
the recognition of a "Net Gain on Sale of Contracts" on the Company's
Consolidated Statement of Operations for the period in which the sale was made.
The Excess Servicing Receivables account is increased by a portion of the gain
recognized on each securitization which represents principally the net present
value of estimated future cash flows relating to the Contracts which were sold,
calculated as follows:

(i) the present value of all future interest and principal payments
expected to be received by the Company over the remaining life of the Contracts;

less

(ii) the Contracts' principal payments which are required to be passed
through to the investors in the period in which they were received plus interest
payments required to be made to investors at the Pass-Through Rate established
at the time of securitization, and certain other fees and expenses associated
with the securitization transaction, including the base servicing fee paid to
the Company in respect of its obligations to service the borrowers' Contracts.

Because the annual percentage rate ("APR") on the Contracts received by the
Company is relatively high in comparison to the Pass-Through Rate paid to
investors, the net present value described above can be significant. In
calculating the net gain on sale described above, the Company must estimate the
future rates of prepayments, delinquencies, defaults and default loss severity
as they impact the amount and timing of the cash flows in the net present value
calculation. The cash flows received by the Company are then discounted at an
interest rate that the Company believes a third-party purchaser would require as
a rate of return. Expected losses are discounted using a rate equivalent to the
risk free rate for securities with a duration similar to that estimated for the
underlying Contracts.

In future periods, the Company will recognize additional revenue in the
Servicing Fees account if the actual performance of the Contracts is better than
the original discounted estimate. Although the Company has never recognized a
writedown against the Excess Servicing Receivables account, if the actual
performance of the Contracts is worse than the original discounted estimate,
then such a writedown would be required. The

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Company's actual excess servicing cash flows, however, historically have
exceeded the Company's original discounted estimates.

The Company's first significant sales consisted of an aggregate of $17.6
million of Contracts sold from October 1, 1991 through January 31, 1993 to GECC
pursuant to an agreement that expired on December 31, 1992. On March 16, 1995,
the Company sold an additional $25.0 million in Contracts to GECC for an
aggregate total of $42.6 million sold to GECC. On April 7, 1993, the Company
began selling Contracts to Sun Life pursuant to various agreements. As of
December 31, 1996, the Company had sold approximately $100.1 million in
Contracts to Sun Life, $42.1 million of which was sold in the form of "Aaa/AAA"
rated securities, as discussed below. As of December 31, 1996, the unpaid
balance of the Contracts sold to Sun Life was approximately $25.0 million and
the unpaid balance of Contracts sold to GECC was approximately $11.2 million.

Contract sales to GECC were in the form of whole loan sales. All of the
Contracts sold to Sun Life have been in the form of asset-backed securities
issued by grantor trusts to which a wholly-owned subsidiary of the Company has
sold the Contracts. The first $58.1 million of the certificates sold to Sun
Life were rated "A" by Duff & Phelps Credit Rating Co. The principal and
interest due on the remaining $42.0 million of the certificates sold to Sun Life
are guaranteed by Financial Security Assurance Inc. ("FSA"), and, as a result,
such certificates were rated "Aaa" by Moody's Investors Service and "AAA" by
Standard & Poor's Corporation.

On June 23, 1994, the Company began using various investment banking
firms to place its asset-backed securities issues. The certificates have
been issued by grantor trusts to which a wholly owned subsidiary of the
Company has sold the related Contracts. Through December 31, 1996, the
Company had delivered approximately $612.3 million principal amount of
Contracts (of which approximately $461.7 million was outstanding at December
31, 1996) to twelve grantor trusts pursuant to these arrangements.
Subsequent to December 31, 1996, the Company delivered an additional $102.3
million of Contracts to a thirteenth grantor trust. The principal and
interest due on the certificates issued pursuant to these arrangements are
guaranteed by FSA and, as a result, such certificates are rated "Aaa" by
Moody's Investors Services and "AAA" by Standard & Poor's Corporation. Since
June 1996, the Company has sold such "AAA"-rated certificates in public
offerings pursuant to registration statements filed with the Securities and
Exchange Commission.

In connection with the sale of the Contracts, the Company is required to
make certain representations and warranties, which generally duplicate the
substance of the representations and warranties made by Dealers in connection
with the Company's purchase of the Contracts. If the Company breaches any of
its representations or warranties to a purchaser of the Contracts, the Company
will be obligated to repurchase the Contract from such purchaser at a price
equal to such purchaser's purchase price less the related cash securitization
reserve and any payments received by such purchaser on the Contract. In most
cases, the Company would then be entitled under the terms of its Dealer
Agreement to require the selling Dealer to repurchase the Contract at a price
equal to the Company's purchase price, less any payments made by the borrower.
Subject to any recourse against Dealers, the Company will bear the risk of loss
on repossession and resale of vehicles under Contracts repurchased by it.

TERMS OF SERVICING AGREEMENTS. The Company currently services all
Contracts sold and expects to service all Contracts that it purchases and sells
in the future, whether structured as whole loan sales or sales of asset-backed
securities. Pursuant to the Company's usual form of servicing agreement (the
Company's servicing agreements are collectively referred to as the "Servicing
Agreements"), the Company is obligated to service all Contracts sold to the
investors or trusts in accordance with the Company's standard procedures. The
Servicing Agreements generally provide that the Company will bear all costs and
expenses incurred in connection with the management, administration and
collection of the Contracts serviced. The Servicing Agreements also provide
that the Company will take all actions necessary or reasonably requested by the
investor to maintain perfection and priority of the investor's or the trust's
security interest in the financed vehicles.

Upon the sale of a portfolio of Contracts to an investor or a trust, the
Company mails to borrowers monthly billing statements directing them to mail
payments on the Contracts to a lock-box account. The Company engages an
independent lock-box processing agent to retrieve and process payments received
in the lock-box account. This results in a daily deposit to the investor's or
the trust's bank account of the entire amount of each day's lock-box receipts
and the simultaneous electronic data transfer to the Company of borrower payment
data

<PAGE>

for posting to the Company's computerized records. Pursuant to the Servicing
Agreements, the Company is required to deliver monthly reports to the investor
or the trust reflecting all transaction activity with respect to the Contracts.
The reports contain, among other information, a reconciliation of the change in
the aggregate principal balance of the Contracts in the portfolio to the amounts
deposited into the investor's or the trust's bank account as reflected in the
daily reports of the lock-box processing agent.

The Company is entitled under most of the Servicing Agreements to receive a
base monthly servicing fee of 2.0% per annum computed as a percentage of the
declining outstanding principal balance of each Contract in the portfolio that
is not in default as of the beginning of the month. Each month, after payment
of the Company's base monthly servicing fee and certain other fees, the investor
receives the paid principal reduction of the Contracts in its portfolios and
interest thereon at the Pass-Through Rate. If, in any month, collections on the
Contracts are insufficient to pay such amounts and any principal reduction due
to charge-offs, the shortfall is satisfied from the Spread Account established
in connection with the sale of the portfolio. (If the Spread Account is not
sufficient to satisfy a shortfall, then the investor or trust may suffer a loss
to the extent that the shortfall exceeds the Spread Account.) If collections on
the Contracts exceed such amounts, the excess is utilized, first, to build up or
replenish the Spread Account to the extent required, next, to cover deficiencies
in Spread Accounts for other portfolios, and the balance, if any, constitutes
excess servicing fees, which are distributed to the Company. If, in any month,
the Spread Account balance is in excess of that required under the commitment or
the Servicing Agreements, the Company is entitled to receive such excess. The
Servicing Agreements also provide that the Company is entitled to receive
certain late fees collected from borrowers.

Pursuant to the Servicing Agreements, the Company is generally required to
charge off the balance of any Contract by the earlier of the end of the month in
which the Contract becomes five scheduled installments past due or, in the case
of repossessions, the month that the proceeds from the liquidation of the
financed vehicle are received by the Company. In the case of a repossession,
the amount of the charge-off is the difference between the outstanding principal
balance of the defaulted Contract and the repossession sale proceeds. In the
event collections on the Contracts are not sufficient to pay to the investor the
entire principal balance of any Contracts charged off during the month, the
Spread Account established in connection with the sale of the Contracts is
reduced by the unpaid principal amount of such Contracts. Such amount would
then have to be restored to the Spread Account from future collections on the
Contracts remaining in the portfolio before the Company would again be entitled
to excess servicing fees. In addition, the Company would not be entitled to
receive any further base monthly servicing fees with respect to the defaulted
Contracts. Subject to any recourse against the Company in the event of a breach
of the Company's representations and warranties with respect to any Contracts
and after any recourse to any FSA guarantees backing the certificates, the
investor bears the risk of all charge-offs on the Contracts in excess of the
Spread Account. However, the Company would experience a reduction of excess
servicing fees in the event of greater than anticipated charge-offs or
prepayments on Contracts sold and serviced by the Company.

The Servicing Agreements are terminable by the investor in the event of
certain defaults by the Company and under certain other circumstances.

SERVICING OF CONTRACTS

GENERAL. The Company's servicing activities, both with respect to
portfolios of Contracts sold by it and with respect to loans owned or originated
by third parties, consist of collecting, accounting for and posting of all
payments received; responding to borrower inquiries; taking all necessary action
to maintain the security interest granted in the financed vehicle or other
collateral; investigating delinquencies; communicating with the borrower to
obtain timely payments; repossessing and reselling the collateral when
necessary; and generally monitoring each Contract and any related collateral.

<PAGE>

COLLECTION PROCEDURES. The Company believes that its ability to monitor
performance and collect payments owed from Sub-Prime Borrowers is primarily a
function of its collection approach and support systems. The Company believes
that if payment problems are identified early and the Company's collection staff
works closely with borrowers to address these problems, it is possible to
correct many of them before they deteriorate further. To this end, the Company
utilizes pro-active collection procedures, which include making early and
frequent contact with delinquent borrowers; educating borrowers as to the
importance of maintaining good credit; and employing a consultative and customer
service approach to assist the borrower in meeting his or her obligations, which
includes attempting to identify the underlying causes of delinquency and cure
them whenever possible. In support of its collection activities, the Company
maintains a computerized collection system specifically designed to service
automobile installment sale contracts with Sub-Prime Borrowers and similar
consumer loan contracts. See "Business -- Management Information Systems."

With the aid of its high penetration auto dialer, the Company typically
attempts to make telephonic contact with delinquent borrowers on the sixth day
after their monthly payment due date. Using coded instructions from a
collection supervisor, the automatic dialer will attempt to contact borrowers
based on their physical location, state of delinquency, size of balance or other
parameters. If the automatic dialer obtains a "no-answer" or a busy signal, it
records the attempt on the borrower's record and moves on to the next call. If
a live voice answers the automatic dialer's call, the call is transferred to a
waiting collector at the same time that the borrower's pertinent information is
simultaneously displayed on the collector's workstation. The collector then
inquires of the borrower the reason for the delinquency and when the Company can
expect to receive the payment. The collector will attempt to get the borrower
to make a promise for the delinquent payment for a time generally not to exceed
one week from the date of the call. If the borrower makes such a promise, the
account is routed to a pending queue and is not contacted until the outcome of
the promise is known. If the payment is made by the promise date and the
account is no longer delinquent, the account is routed out of the collection
system. If the payment is not made, or if the payment is made, but the account
remains delinquent, the account is returned to the automatic dialing queue for
subsequent contacts.

If a borrower fails to make or keep promises for payments, or if the
borrower is uncooperative or attempts to evade contact or hide the vehicle, a
supervisor will review the collection activity relating to the account to
determine if repossession of the vehicle is warranted. Generally, such a
decision will occur between the 45th and 90th day past the borrower's payment
due date, but could occur sooner or later, depending on the specific
circumstances.

If a decision to repossess is made by a supervisor, such assignment is
given to one of many licensed, bonded repossession agents used by the Company.
When the vehicle is recovered, the repossession agent delivers it to a wholesale
auto auction where it is kept until it is liquidated, usually within 30 days of
the repossession. Liquidation proceeds are applied to the borrower's
outstanding obligation under the Contract and the borrower is advised of his
obligation to pay any deficiency balance that remains. The Company uses all
practical means available to collect deficiency balances, including filing for
judgments against borrowers where applicable.

A repossession in the event of default generally does not yield proceeds
sufficient to pay all amounts owing under a Contract. The actual cash value of
the vehicle may be less than the amount financed at inception of the Contract,
and also thereafter, because the amount financed may be as much as 115% of the
wholesale book value in the case of used vehicles or 110% of manufacturer's
invoice in the case of new vehicles, plus sales tax, licensing fees, and any
service contract or credit life or disability policy purchased by the borrower,
less the borrower's down payment and/or trade-in allowance (generally not less
than 10% of the vehicle sales price). In addition, the proceeds available upon
resale are reduced by statutory liens, such as those for repairs, storage,
unpaid taxes and unpaid parking fines, and by the costs incurred in the
repossession and resale. Unless the Contract is sufficiently seasoned that the
borrower has substantial equity in the vehicle, the proceeds of sale are
generally insufficient to pay all amounts owing. For that reason, the Company's
collection policies aim to avoid repossession to the extent possible. In order
to do so the Company may extend the payment due date of a Contract within limits
specified in the Servicing Agreements. Included in the Servicing Portfolio at
December 31, 1996 are 5,680 Contracts for which the purchaser of the underlying
vehicle had been granted at least a one month payment extension. Of such
extended Contracts, 4,814 were current based on the modified payment terms.

<PAGE>

The Company's excess servicing fees are impacted by the relative
performance of the portfolios of Contracts it has sold to institutional
investors. The tables below document the delinquency, repossession and net
credit loss experience of all Contracts originated by the Company since its
inception:

Delinquency Experience(1)
December 31, 1996 December 31, 1995 March 31, 1995
----------------- ----------------- --------------
Number Number Number
of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Servicing Portfolio . . . . 47,187 $604,092 27,129 $356,114 18,104 $248,550
Period of delinquency (2)
31-60 days . . . . . . . . . . 1,801 22,099 910 11,525 299 3,878
61-90 days . . . . . . . . . . 724 9,068 203 2,654 70 948
91+ days . . . . . . . . . . . 768 9,906 273 3,912 101 1,487
------- -------- ------- --------- ------- --------
Total delinquencies(2) . . . . . 3,293 41,073 1,386 18,091 470 6,313
Amount in repossession (3) 1,168 14,563 836 10,179 367 5,271
------- -------- ------- --------- ------- --------
Total delinquencies and amount in
repossession (2) 4,461 55,636 2,222 28,270 837 11,584
------- -------- ------- --------- ------- --------
------- -------- ------- --------- ------- --------
Delinquencies as a percent
of gross Servicing Portfolio 7.0% 6.8% 5.1% 5.1% 2.6% 2.5%
Total delinquencies and amount in
repossession as a percent of gross
Servicing Portfolio . . . . . . . 9.5% 9.2% 8.2% 7.9% 4.6% 4.7%

</TABLE>

- --------------

(1) All amounts and percentages are based on the full amount remaining to be
repaid on each Contract, including, for Rule of 78s Contracts, any unearned
finance charges. The information in the table represents the principal amount
of all Contracts purchased by the Company, including Contracts subsequently sold
by the Company which it continues to service.
(2) The Company considers a Contract delinquent when an obligor fails to make
at least 90% of a contractually due payment by the following due date, which
date may have been extended within limits specified in the Servicing Agreements,
as discussed above. 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 which have been
repossessed but not yet liquidated.

Net Charge-Off Experience(1)
<TABLE>
<CAPTION>
Transition Period Fiscal Year
Year Ended Ended Ended
December 31, 1996 December 31, 1995 March 31, 1995
----------------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Average Servicing Portfolio
outstanding . . . . . . . . . . . . . $397,430 $240,864 $128,004
Net charge-offs as a percent of
average Servicing Portfolio(3 . . . . 5.1% 4.9% 4.0%
</TABLE>
- --------------
(1) All amounts and percentages are based on the principal amount scheduled
to be paid on each Contract. The information in the table represents all
Contracts purchased by the Company including Contracts subsequently sold by
the Company which it continues to service.

11
<PAGE>

(2) The percentages set forth for the nine-month transition period ended
December 31, 1995, are computed using annualized operating data which do not
necessarily represent comparable data for a full twelve-month period.

(3) 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). For periods prior to the year ended December 31,
1996, post liquidation amounts received on previously charged off Contracts were
applied to the period in which the related Contract was originally charged off.
These prior period allocations were made only for the purpose of calculating
this ratio. For financial statement purposes, post liquidation amounts are
recognized in the period received. Effective January 1, 1996, post liquidation
amounts received on previously charged off Contracts are applied in the period
in which they are received, both for this ratio and financial statement
purposes. Excludes uninsured casualty losses which for the year ended December
31, 1996, the nine-month transition period ended December 31, 1995, and the year
ended March 31, 1995 was $1.7 million, $604,000 and $205,000, respectively.

MANAGEMENT INFORMATION SYSTEMS

The Company maintains sophisticated data processing support and management
information systems. To support its collection efforts, the Company utilizes
Digital Systems International's Intelligent Dialing SystemJ, a high-penetration
automatic dialer, in conjunction with the American Management Systems' Computer
Assisted Collection System software, which has been customized by the Company,
and numerous accounting software programs. All systems are operated at the
Company's offices on an Advance System IBM AS/400 computer.

The Company's high-penetration automatic dialer controls multiple telephone
lines and automatically dials numbers from file records in accordance with
programmed instructions established by management. If the dialer receives a
busy signal or no answer, it will generally route the number for a subsequent
re-call. The dialer has the ability to distinguish a pre-recorded voice and
will leave the appropriate digitized human voice message on the borrower's
answering machine. Generally, the dialer transfers the call to a collector only
after it has determined that there is a live voice on the line. In most
instances, this is accomplished so rapidly that the individual receiving the
call is unaware that an automatic dialer has been used. The efficiency of the
auto dialer allows the Company to place as many as 5,000 telephone calls per
day.

The high-penetration automatic dialer also monitors telephone activity and
activates more telephone lines when connect rates are low or shuts down lines
when connect rates are high. Once a live call is passed to a collector, all
relevant account information, including one of 99 account status codes,
automatically appears on the collector's video screen. The Company believes the
capabilities of the automatic dialer reduce the likelihood that an account will
remain delinquent for a prolonged period without appropriate follow-up.

The Company's automation allows it to electronically sort and prioritize
each collector's workload as well as to implement specific collection
strategies. Moreover, the Company has adopted certain procedural controls
designed to ensure that certain important decisions, such as ordering a
repossession, initiating legal action or materially modifying an account, are
automatically routed to a supervisor for review and approval.

The Company believes that the capacity of its existing data processing
support and management information systems is sufficient to allow the Company to
substantially expand its business without significant additional capital
expenditures.

COMPETITION

12
<PAGE>

resources than the Company. Moreover, the Company's future profitability
will be directly related to the availability and cost of its capital in relation
to the availability and cost of capital to its competitors. The Company's
competitors and potential competitors include far larger, more established
companies that have access to capital markets for unsecured commercial paper and
investment grade-rated debt instruments and to other funding sources which may
be unavailable to the Company. Many of these companies also have long-standing
relationships with Dealers and may provide other financing to dealers, including
floor plan financing for the Dealers' purchase of automobiles from
manufacturers, which is not offered by the Company.

The Company believes that the principal competitive factors affecting a
Dealer's decision to offer Contracts for sale to a particular financing source
are the purchase price offered for the Contracts, the reasonableness of the
financing source's underwriting guidelines and documentation requests, the
predictability and timeliness of purchases and the financial stability of the
funding source. The Company believes that it can obtain from Dealers sufficient
Contracts for purchase at attractive prices by consistently applying reasonable
underwriting criteria and making timely purchases of qualifying Contracts.

The Company believes that it can compete effectively for the interest of
institutional investors in purchasing Contracts acquired by the Company based
upon the historical performance of portfolios of Contracts sold and serviced by
it and its willingness to establish substantial Spread Accounts for the benefit
of investors and to derive a portion of its revenues from excess servicing fees
paid on a monthly basis rather than up-front fees paid at the time of sale of
the Contracts.

MARKETING

The Company establishes relationships with Dealers through Company
representatives that contact a prospective Dealer to explain the Company's
Contract purchases and thereafter provide Dealer training and support services.
As of December 31, 1996, the Company had 48 representatives, 31 of whom are
employees and 17 of whom are independent. The independent representatives are
contractually obligated to represent the Company's financing program
exclusively. The Company's representatives present the Dealer with a marketing
package, which includes the Company's promotional material containing the
current discount rate offered by the Company for the purchase of Contracts, a
copy of the Company's standard-form Dealer Agreement, examples of monthly
reports and required documentation relating to Contracts, but they have no
authority relating to the decision to purchase Contracts from Dealers. The
Company's acceptance of a Dealer is subject to its analysis of, among other
things, the Dealer's operating history.

The Company has not actively advertised its automobile financing or
third-party loan servicing businesses, although it may do so selectively in the
future.

GOVERNMENT REGULATION

The Company intends to obtain and maintain all licenses necessary to the
lawful conduct of its business and operations. The Company is not licensed to
make loans directly to borrowers.

Several federal and state consumer protection laws, including the Federal
Truth-In-Lending Act, the Federal Equal Credit Opportunity Act, the Federal Fair
Debt Collection Practices Act and the Federal Trade Commission Act, regulate the
extension of credit in consumer credit transactions. These laws mandate certain
disclosures with respect to finance charges on Contracts and impose certain
other restrictions on Dealers. In addition, laws in a number of states impose
limitations on the amount of finance charges that may be charged by Dealers on
credit sales. The so-called Lemon Laws enacted by the federal government and
various states provide certain rights to purchasers with respect to motor
vehicles that fail to satisfy express warranties. The application of Lemon Laws
or violation of such other federal and state laws may give rise to a claim or
defense of a borrower against a Dealer and its assignees, including the Company
and purchasers of Contracts from the Company. The Dealer Agreement contains
representations by the Dealer that, as of the date of assignment of Contracts,
no such claims or defenses have been asserted or threatened with respect to the
Contracts and that all requirements of such federal and state laws have been
complied with in all material respects. Although a Dealer would be obligated to
repurchase Contracts that involve a breach of such warranty, there can be no
assurance that the Dealer will have the financial resources to satisfy its
repurchase obligations to the Company. Certain of these laws also regulate the
Company's servicing activities, including its methods of collection.

13
<PAGE>
Although the Company believes that it is currently in compliance with
applicable statutes and regulations, there can be no assurance that the Company
will be able to maintain such compliance. The failure to comply with such
statutes and regulations could have a material adverse effect upon the Company.
Furthermore, the adoption of additional statutes and regulations, changes in the
interpretation and enforcement of current statutes and regulations or the
expansion of the Company's business into jurisdictions that have adopted more
stringent regulatory requirements than those in which the Company currently
conducts business could have a material adverse effect upon the Company. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the application of certain laws and regulations, industry
participants are regularly named as defendants in litigation involving alleged
violations of federal and state laws and regulations and consumer law torts,
including fraud. Many of these actions involve alleged violations of consumer
protection laws. Although the Company is not involved in any material
litigation, a significant judgment against the Company or within the industry in
connection with any such litigation could have a material adverse effect on the
Company's financial condition and results of operations.

Upon the purchase of Contracts by the Company, the original Contracts and
related title documents for the financed vehicles are delivered by the selling
Dealers to the Company. Upon the sale of each portfolio of Contracts by the
Company, a financing statement is filed under the Uniform Commercial Code as
adopted in the applicable state (the "UCC") to perfect and give notice of the
purchaser's security interest in the Contracts.

The Dealer Agreement and related assignment contain representations and
warranties by the Dealer that an application for state registration of each
financed vehicle, naming the Company as secured party with respect to the
vehicle, was effected at the time of sale of the related Contract to the
Company, and that all necessary steps have been taken to obtain a perfected
first priority security interest in each financed vehicle in favor of the
Company under the laws of the state in which the financed vehicle is registered.
If a Dealer or the Company, because of clerical error or otherwise, has failed
to take such action in a timely manner, or to maintain such interest with
respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in
the financed vehicle and its security interest may be subordinate to the
interest of, among others, subsequent purchasers of the financed vehicle,
holders of perfected security interests and a trustee in bankruptcy of the
borrower. The security interest of the Company or the purchaser of a Contract
may also be subordinate to the interests of third parties if the interest is not
perfected due to administrative error by state recording officials. Moreover,
fraud or forgery by the borrower could render a Contract unenforceable against
third parties. In such events, the Company could be required by the purchaser
to repurchase the Contract. In the event the Company is required to repurchase
a Contract, it will generally have recourse against the Dealer from which it
purchased the Contract. This recourse will be unsecured except for a lien on
the vehicle covered by the Contract, and there can be no assurance that any
Dealer will have the financial resources to satisfy its repurchase obligations
to the Company. Subject to any recourse against Dealers, the Company will bear
any loss on repossession and resale of vehicles financed under Contracts
repurchased by it from investors.

Under the laws of many states, liens for storage and repairs performed on a
vehicle and for unpaid taxes take priority over a perfected security interest in
the vehicle. Pursuant to its securitization purchase commitments, the Company
generally warrants that, to the best of the Company's knowledge, no such liens
or claims are pending or threatened with respect to a financed vehicle, which
may be or become prior to or equal with the lien of the related Contracts. In
the event that any of the Company's representations or warranties proves to be
incorrect, the trust or the investor would be entitled to require the Company to
repurchase the Contract relating to such financed vehicle.

The Company, on behalf of purchasers of Contracts, may take action to
enforce the security interest in financed vehicles with respect to any related
Contracts in default by repossession and resale of the financed vehicles. The
UCC and other state laws regulate repossession sales by requiring that the
secured party provide the borrower with reasonable notice of the date, time and
place of any public sale of the collateral, the date after which any private
sale of the collateral may be held and of the borrower's right to redeem the
financed vehicle prior to any such sale and by providing that any such sale be
conducted in a commercially reasonable manner. Financed vehicles repossessed
generally are resold by the Company through unaffiliated wholesale automobile
networks or auctions, which are attended principally by used car dealers.

14
<PAGE>

In the event of a repossession and resale of a financed vehicle, after
payment of outstanding liens for storage, repairs and unpaid taxes, to the
extent those liens take priority over the Company's security interest, and after
payment of the reasonable costs of retaking, holding and selling the vehicle,
the secured party would be entitled to be paid the full outstanding balance of
the Contract out of the sale proceeds before payments are made to the holders of
junior security interests in the financed vehicles, to unsecured creditors of
the borrower, or, thereafter, to the borrower. Under the UCC and other laws
applicable in most states (including California), a creditor is entitled to
obtain a deficiency judgment from a borrower for any deficiency on repossession
and resale of the motor vehicle securing the unpaid balance of such borrower's
Contract. However, some states impose prohibitions or limitations on deficiency
judgments. If a deficiency judgment were granted, the judgment would be a
personal judgment against the borrower for the shortfall, and a defaulting
borrower may often have very little capital or few sources of income available
following repossession. Therefore, in many cases, it may not be useful to seek
a deficiency judgment against a borrower or, if one is obtained, it may be
settled at a significant discount.

EMPLOYEES

As of December 31, 1996, the Company had 325 full-time and 5 part-time
employees, of whom 10 are management personnel, 102 are collections personnel,
119 are Contract origination personnel, 37 are marketing representatives, 53 are
operations personnel, and 9 are accounting personnel. The Company believes that
its relations with its employees are good. The Company is not a party to any
collective bargaining agreement.

15
<PAGE>

ITEM 2. PROPERTY

The Company's headquarters are located in Irvine, California, where it
leases approximately 51,400 square feet of general office space from an
unaffiliated lessor. The annual rent is $524,596 through the year 2000, the
final year of the lease. In addition, the Company pays the property taxes,
maintenance and other common area expenses of the premises, currently at the
approximate annual rate of $98,000. All such amounts are payable monthly. The
Company has an option to extend the lease for an additional five years upon
terms substantially similar to those of the existing lease.

The Company in March 1997 established a branch facility in Chesapeake,
Virginia. The Company leases approximately 18,600 square feet of general
office space in Chesapeake at an initial annual rent of $260,666, increasing
to $333,652 over a ten-year term. In addition, the Company is in discussions
with its current landlord in California regarding a lease of a larger
headquarters location or of additional space. Although the terms of any such
lease have not been fixed as yet, the Company believes that adequate facilities
are available.

ITEM 3. LEGAL PROCEEDINGS

As of the date of this report, the Company was not involved in any material
litigation in which it is the defendant. The Company regularly initiates legal
proceedings as a plaintiff in connection with its routine collection activities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the Company's executive officers follows:

CHARLES E. BRADLEY, JR., 37, has been the President and a director of the
Company since its formation in March 1991. In January 1992, Mr. Bradley was
appointed Chief Executive Officer of the Company. From March 1991 until December
1995 he served as Vice President and a director of CPS Holdings, Inc. From
April 1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr.
Bradley, Jr. was an associate of The Harding Group, a private investment banking
firm. Mr. Bradley, Jr. is currently serving as a director of NAB Asset
Corporation, Chatwins Group, Inc., Texon Energy Corporation, Thomas Nix
Distributor, Inc., and CARS USA. Charles E. Bradley, Sr. is his father.

JEFFREY P. FRITZ, 37, has been Senior Vice President - Chief Financial
Officer and Secretary of the Company since March 1991. From December 1988 to
March 1991, Mr. Fritz was Vice President and Chief Financial Officer of Far
Western Bank. From 1985 to December 1988, Mr. Fritz was a management consultant
for Price Waterhouse in St. Louis, Missouri.

WILLIAM L. BRUMMUND, JR., 44, has been Senior Vice President - Systems
Administration since March 1991. From 1986 to March 1991, Mr. Brummund was Vice
President and Systems Administrator for Far Western Bank.

NICHOLAS P. BROCKMAN, 52, has been Senior Vice President - Asset Recovery &
Liquidation since January 1996. He was Senior Vice President of Contract
Originations from April 1991 to January 1996. From 1986 to March 1991, Mr.
Brockman served as a Vice President and Branch Manager of Far Western Bank.

RICHARD P. TROTTER, 53, has been Senior Vice President-Contract Origination
since January 1995. He was Senior Vice President of Administration from April
1995 to December 1995. From January 1994 to April 1995 he was Senior Vice
President-Marketing of the Company. From December 1992 to January 1994, Mr.
Trotter was Executive Vice President of Lange Financial Corporation, Newport
Beach, California. From May 1992 to December 1992, he was Executive Director of
Fabozzi, Prenovost & Normandin, Santa Ana, California. From December 1990 to
May 1992 he was Executive Vice President/Chief Operating Officer of R. Thomas
Ashley, Newport Beach, California. From April 1984 to December 1990, he was
President/Chief Executive Officer of Far Western Bank, Tustin, California.

16
<PAGE>

CURTIS K. POWELL, 40, has been Senior Vice President - Marketing of the
Company since April 1995. He joined the Company in January 1993 as an
independent marketing representative until being appointed Regional Vice
President of Marketing for Southern California in November 1994. From June 1985
through January 1993, Mr. Powell was in the retail automobile sales and leasing
business.

MARK A. CREATURA, 37, has been Senior Vice President - General Counsel
since October 1996. From October 1993 through October 1996, he was Vice
President and General Counsel at Urethane Technologies, Inc., a polyurethane
chemicals formulator. Mr. Creatura was previously engaged in the private
practice of law with the Los Angeles law firm of Troy & Gould Professional
Corporation, from October 1985 through October 1993.

17
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market, under the
symbol "CPSS." The following table sets forth the high and low bid prices quoted
for the Common Stock for the periods indicated. Such quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.

High Low
---- -----
January 1-March 31, 1995................. $ 8.375 $ 6.625
April 1-June 30, 1995.................... 9.313 7.000
July 1-September 30, 1995................ 12.875 9.250
October 1-December 31, 1995............... 11.625 8.500

January 1-March 31, 1996................. 10.438 7.375
April 1-June 30, 1996.................... 10.250 8.250
July 1-September 30, 1996................ 12.750 7.500
October 1-December 31, 1996.............. 14.375 10.625

As of March 26, 1997, there were 84 holders of record of the Company's
Common Stock.

To date, the Company has not declared or paid any dividends on its Common
Stock. The payment of future dividends, if any, on the Company's Common Stock
is within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition, and other
relevant factors. The Company does not intend to declare any dividends on its
Common Stock in the foreseeable future, but instead intends to retain any
earnings for use in the Company's operations. See "Description of Common
Stock."

18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents certain summary consolidated financial
information for the year ended December 31, 1996, the nine-month transition
period ended December 31, 1995, and the fiscal years ended March 31, 1995, 1994
and 1993, which has been derived from the Company's Consolidated Financial
Statements audited by KPMG Peat Marwick LLP, independent certified public
accountants, certain of which have been included elsewhere herein. The following
information should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.

<TABLE>
<CAPTION>
NINE-MONTH
TRANSITION
YEAR ENDED PERIOD
DECEMBER 31, ENDED FISCAL YEAR ENDED MARCH 31,
----------- ----------- ---------------------------
1996 12/31/95 1995 1994(1) 1993
------- -------- ---- ------ ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net gain on sale of Contracts.$ 23,321 $ 11,549 $ 9,455 $ 5,425 $ 523
Servicing fees................ 16,169 6,475 7,201 3,556 1,538
Interest income............... 11,704 6,230 5,849 1,443 400
------------ ----------- ------------- ------- --------
Total revenue................. 51,194 24,254 22,505 10,424 2,461
Operating expenses (1)........ 27,502 11,597 11,358 11,712 3,963
Income taxes.................. 9,595 5,082 4,481 490 0
------------ ---------- ------------- -------- --------
------------ ---------- ------------- -------- --------
Net income (loss)............ $ 14,097 7,575 $ 6,666 $(1,778) $(1,502)
------------ ---------- ------------- -------- --------
------------ ---------- ------------- -------- --------
Primary net income (loss)
per common share........... $ .95 $ .53 $ .60 $ (.21) $ (.24)
------------ ----------- ------------- -------- --------
------------ ---------- ------------- -------- --------
Weighted average common and
common equivalent shares.... 14,849,609 14,323,592 11,143,268 8,520,548 6,378,082
Fully diluted net income
(loss) per common share..... $ .93 $ .52 $ .56 $ (.21) $ (.24)
------------ ----------- ------------- -------- --------
Fully diluted weighted
average common and common
equivalent shares........... 15,410,044 14,803,592 12,538,352 8,520,548 6,378,082

OTHER DATA:
Principal amount of Contracts
purchased during period
(excluding Bulk Purchases).. $ 351,350 $ 150,943 $ 150,573 $ 53,103 $ 19,484
Principal amount of Contracts
sold during period......... 340,990 155,719 140,617 58,095 14,103
Outstanding Servicing Portfolio
at end of period(2)........ 505,934 288,927 192,800 63,208 20,436
Net charge-offs(3)........... 20,328 8,331 4,349 964 276
Servicing fees as a percentage
of average principal balance
of Contracts being serviced
(4)......................... 4.1% 3.6% 5.3% 7.5% 4.7%
Delinquencies as a percentage
of gross Servicing Portfolio
at end ofperiod(5)(6)....... 6.8% 5.1% 2.5% 1.3% 1.0%
Delinquencies and amount in
repossession as a percent of
gross Servicing Portfolio(5)
(6)(10)..................... 9.2% 7.9% 4.4% 2.0% 2.0%
Net charge-offs as a percentage
of average Servicing Portfolio
(3)(6)...................... 5.1% 4.9% 4.0% 2.5% 2.2%
Operating expenses (before
interest and provisions for
credit losses) as a percentage
of average Servicing Portfolio
(2)(4)...................... 4.8% 4.4% 5.4% 28.9% 31.5%
Servicing subject to recourse
provisions(6)............... 483,106 268,163 169,331 62,464 14,736
Discounted allowance for credit
losses as a percentage of
servicing subject to recourse
provisions(7)............... 9.7% 8.7% 8.5% 8.1% 10.2%
Ratio of earnings to fixed
charges(8)(9)............... 5.0x 5.5x 4.2x - -
Cash flows provided by (used
in) operating activities.... $ (9,661) $ (18,533) $ (6,115) $(2,816) $ (6,718)
</TABLE>
19

<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................. $ 154 $ 10,895 $ 5,767 $ 2,089 $ 245
Investments in credit enhancements... 43,597 30,478 23,201 10,497 0
Contracts held for sale.............. 21,657 19,549 21,896 647 5,054
Excess servicing receivables......... 23,654 11,108 5,154 2,294 503
Total assets......................... 101,946 77,878 57,975 16,538 6,922
Total liabilities.................... 44,989 36,397 30,981 6,337 2,833
Total shareholders' equity........... 56,957 41,481 26,994 10,201 4,089
</TABLE>

- -----------------
(1) In October 1992, as a condition to the initial public offering of Common
Stock of the Company, the then majority shareholder of the Company
deposited 1,200,000 shares of Common Stock (the "Escrow Shares") in
escrow. The escrow agreement provided that part or all of the Escrow
Shares would be released if the Company's net income after taxes (as
defined in the escrow agreement) or the average market price of the
Common Stock for specified periods exceeded specified levels. The
Company's net income (as defined in the escrow agreement) for fiscal
1994 (prior to the accounting effect of the release of the Escrow
Shares) exceeded the specified level and, accordingly, all 1,200,000
Escrow Shares were released. The release of the Escrow Shares was
deemed compensatory for accounting purposes, resulting in a one-time,
non-cash charge of $6,450,000 against earnings for fiscal 1994. Without
that charge, net income, primary net income per share and fully diluted
net income per share for fiscal 1994 would have been $4,672,000, $.46
and $44, respectively.

(2) Includes the outstanding principal amount of all Contracts purchased by
the Company, including Contracts subsequently sold by the Company which
it continues to service. Excludes loans serviced for third parties but
not purchased by the Company. As of December 31, 1994, the Company had
ceased servicing loans for third parties.

(3) 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). For periods prior to the year
ended December 31, 1996, post liquidation amounts received on previously
charged off Contracts were applied to the period in which the related
Contract was originally charged off. These prior period allocations were
made only for the purpose of calculating this ratio. For financial
statement purposes, post liquidation amounts are recognized in the
period received. Effective January 1, 1996, post liquidation amounts
received on previously charged off Contracts are applied in the period
in which they are received, both for this ratio and financial statement
purposes. This ratio excludes uninsured casualty losses, which, for the
year ended December 31, 1996, the nine-month transition period ended
December 31, 1995, and the years ended March 31, 1995, 1994 and 1993
were $1.7 million, $604,000, $205,000, $111,000 and $15,000,
respectively.

(4) The percentages set forth for the nine-month transition period ended
December 31, 1995, are computed using annualized operating data, which
do not necessarily represent comparable data for a full twelve-month
period.

(5) 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
and the vehicle securing the Contract has not been repossessed. All
amounts and percentages are based on the full amount remaining to be
repaid on each Contract, including, for Rule of 78s Contracts, any
unearned finance charges.

(6) Includes the outstanding principal amount of all Contracts purchased and
subsequently sold by the Company which it continues to service.
Excludes loans serviced for third parties and Contracts purchased but
not yet sold by the Company.

(7) Discounted allowance for credit losses represents the discounted present
value calculated at a risk free rate, of future estimated credit
losses as determined by the Company in conjunction with the
recognition of its gains on sale of Contracts.

(8) The ratio of earnings to fixed charges has been computed by dividing
income before taxes and fixed charges by fixed charges. Fixed charges
include interest expense and the portion of rent expense that is
representative of the interest factor (deemed by the Company to be
one-third).

(9) The Company incurred losses in fiscal 1994 and fiscal 1993. Earnings were
inadequate to cover fixed charges by $1.3 million and $1.5 million for
fiscal 1994 and fiscal 1993, respectively. Adjusted to eliminate the
one-time non-

20
<PAGE>
cash charge of $6,450,000 referred to in footnote (1) above, the ratio of
earnings to fixed charges for fiscal 1994 would have been 10.1x.

(10) Amount in repossession represents financed vehicles which have been
repossessed but not yet liquidated

21
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition of the Company should be
read in conjunction with "Selected Financial Data" and the Company's
Consolidated and Condensed Consolidated Financial Statements and the Notes
thereto and the other financial data included elsewhere in this report.

OVERVIEW

The Company specializes in the business of purchasing, selling and
servicing retail automobile installment sales Contracts originated by Dealers in
the sale of new and used automobiles, light trucks and passenger vans and has
done so since its inception on March 8, 1991. Through its purchases, the
Company provides indirect financing to borrowers with limited credit histories,
low incomes or past credit problems.

The Company generates earnings primarily from the gains recognized on the
sale or securitization of its Contracts, servicing fees earned on Contracts
sold, and interest earned on Contracts held for sale. Earnings from gains on
sale, servicing fees and interest for the year ended December 31, 1996, were
$23.3 million, $16.2 million, and $11.7 million, respectively. Such earnings
for the nine-month transition period ended December 31, 1995, were $11.5
million, $6.5 million, and $6.2 million, respectively. For the fiscal year
ended March 31, 1995, such earnings were $9.5 million, $7.2 million and $5.8
million, respectively. The Company's income is affected by losses incurred on
Contracts, whether such Contracts are held for sale or have been sold in
securitizations. The Company's cash requirements have been and will continue to
be significant. Net cash used in operating activities for the year ended
December 31, 1996, the nine-month transition period ended December 31, 1995 and
the year ended March 31, 1995 were $9.7 million, $18.5 million and $6.1 million,
respectively.

In each securitization, the Company sells Contracts to a trust which, in
turn, sells asset-backed securities to Investors. The terms of the
securitization transactions generally provide for the Company to earn a base
servicing fee computed as a percentage of the outstanding balance of the
Contracts as compensation for its duties as servicer. In addition, the Company
is entitled to certain excess servicing fees which represent collections on the
Contracts in excess of the amounts necessary to pay principal and interest to
Investors and the expenses of the trust, including, primarily, base servicing
fees. Excess servicing fees are first deposited into a Spread Account in order
to meet the predetermined credit enhancement levels of the securitization
trusts. To the extent cash in excess of the predetermined level is generated,
such cash is either transferred to cover deficiencies, if any, in Spread
Accounts for other pools, or is released to the Company. For the year ended
December 31, 1996, initial deposits to Spread Accounts, excess servicing
deposited to Spread Accounts and cash released from Spread Accounts was $12.3
million, $18.8 million, and $17.9 million, respectively. For the nine-month
transition period ended December 31, 1995, initial deposits to Spread Accounts,
excess servicing deposited to Spread Accounts and cash released from Spread
Accounts was $4.9 million, $7.6 million, and $7.7 million, respectively. For the
year ended March 31, 1995, initial deposits to Spread Accounts, excess servicing
deposited to Spread Accounts and cash released from Spread Accounts was $13.2
million, $5.4 million, and $5.9 million, respectively.

The Company also recognizes gains on its sales of Contracts. Gains are
determined based upon the difference between the sales proceeds for the portion
of Contracts sold and the Company's recorded investment in the Contracts sold.
The Company allocates the recorded investment in the Contracts between the
portion of the Contracts sold and the portion retained based on the relative
fair values of those portions on the date of the sale. In addition, the Company
recognizes gains attributable to its estimates of excess servicing receivables
for each pool of Contracts it securitizes. Excess servicing receivables are
determined by computing the difference between the weighted average yield of the
Contracts sold and the yield to the purchaser, adjusted for the normal servicing
fee based on the agreements between the Company and the purchaser. The
resulting differential is recorded as a gain at the time of sale equal to the
present value of the estimated cash flows, net of any portion of the excess that
may be due to the purchaser and adjusted for anticipated prepayments,
repossessions, liquidations and other losses. To the extent that the actual
future performance of the Contracts results in less excess cash flows than the
Company estimated, the Company's excess servicing receivables will be adjusted
at least quarterly, with corresponding charges recorded against income in the
period in which the

22
<PAGE>

adjustment is made. To the extent that the actual cash flows exceed the
Company's discounted estimates, the Company will record additional servicing
fees in the periods in which the excess cash is received.

RESULTS OF OPERATIONS

THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE NINE-MONTH TRANSITION PERIOD
ENDED DECEMBER 31, 1995

The Company changed its fiscal year-end from March 31 to December 31,
effective with the nine-month transition period ended December 31, 1995.
Accordingly, readers should take into account that the following discussion
compares figures for a full twelve month year to a nine-month period. The
discussion below does not attempt to explain, for each item discussed, the
extent to which the differing length of these periods has affected the figures.

REVENUE. During the year ended December 31, 1996, revenue increased $26.9
million, or 111.1%, compared to the nine-month transition period ended December
31, 1995. Net gain on sale of Contracts includes (i) the excess of the amount
realized on the sale of Contracts over the Company's net cost, (ii) the net
present value of estimated excess servicing fees on sold contracts, and (iii)
the recognition of deferred acquisition fees paid by Dealers net of related
acquisition costs. Net gain on sale of Contracts increased by $11.8 million, or
101.9%, and represented 45.6% of total revenue for the year ended December 31,
1996. The increase in gain on sale is largely due to the volume of Contracts
which were sold in the period. During the year ended December 31, 1996, the
Company sold $341.0 million in Contracts, compared to $155.7 million in the
nine-month transition period ended December 31, 1995.

Servicing fees increased by $9.7 million, or 149.7%, and represented 31.6%
of total revenue. The increase in servicing fees is due to the Company's
continued expansion of its Contract purchase, sale and servicing activities. As
of December 31, 1996, the Company was earning servicing fees on 45,363 Contracts
approximating $483.1 million compared to 25,398 Contracts approximating $268.2
million as of December 31, 1995. In addition to the $483.1 million in sold
Contracts on which servicing fees were earned, the Company was holding for sale
and servicing an additional $22.8 million in Contracts for an aggregate
servicing portfolio of $505.9 million. Amortization of excess servicing
increased by $4.1 million and represented 27.5% of gross loan servicing fees for
the year ended December 31, 1996 versus 23.8% for the nine-month transition
period ended December 31, 1995. The increase is primarily due to the increase
in the average age of the Contracts making up the Company's Servicing Portfolio
and consequently the increase in charge-offs and corresponding reduction of
servicing fees. The Company expects these increases in the ratio of
amortization of excess servicing to gross loan servicing fees to continue until
the size and average age of the Servicing Portfolio stabilizes.

Interest income on Contracts held for sale increased by $5.5 million, or
87.9%, representing 22.9% of total revenues for the year ended December 31,
1996. The increase is due to the increase in the volume of contracts purchased
and held for sale. During the year ended December 31, 1996, the Company
purchased $351.4 million in Contracts from Dealers, compared to $160.1 million
in the nine-month transition period ended December 31, 1995.

EXPENSES. During the year ended December 31, 1996, operating expenses
increased $15.9 million, or 137.1%, compared to the nine-month transition period
ended December 31, 1995. Employee costs increased by $5.6 million, or 169.6%,
and represented 32.4% of total operating expenses. The increase is due to the
addition of staff necessary to accommodate the Company's growth and certain
increases in salaries of existing staff. General and administrative expenses
increased by $4.4 million, or 158.9% and represented 26.4% of total operating
expenses. Increases in general and administrative expenses included increases
in telecommunications, stationery, credit reports and other related items as a
result of increases in the volume of purchasing and servicing of Contracts.
Additionally, general and administrative expenses increased by $595,000 as a
result of including the company's share of losses incurred by NAB Asset
Corporation, in which the Company made a 38% equity investment on June 6, 1996.

Marketing expenses increased by $448,000, or 36.4%, and represented 6.1% of
total expenses. The increase is primarily due to the increase in the volume of
contracts purchased as marketing representatives are compensated directly in
proportion to the number of Contracts the Company purchases from Dealers
serviced

<PAGE>

by the marketing representative. Additional increases in marketing expense
relate to other marketing expenses such as travel, promotion and convention
expenses.

Interest expense increased $3.1 million, or 112.2%, and represented
21.0% of total operating expenses. The increase is primarily due to the
interest paid on the $20.0 million in subordinated debt securities issued on
December 20, 1995. Interest expense was also impacted by the volume of
Contracts held for sale as well as by the Company's cost of borrowed funds.

During the year ended December 31, 1996, the provision for losses on
Contracts held for sale increased by $1.9 million, or 232.6%, and represented
10.0% of total operating expenses. The increase in the provision reflects
somewhat higher charge-off rates and a larger volume of Contracts held prior
to sale when compared to the nine-month transition period ended December 31,
1995.

The results for the year ended December 31, 1996 include net operating
losses of $491,000 from the Company's subsidiary Samco Acceptance Corp.
("Samco"). Samco was formed in March 1996 and provides the Company's
products and services to Dealers and independent finance companies primarily
in rural areas of the southeastern portion of the United States.

The results for the year ended December 31, 1996 also include net
operating losses of $324,000 from the Company's subsidiary LINC Acceptance
LLC ("LINC"). LINC was formed in May 1996 and provides the Company's
products and services to credit unions and other depository institutions.

NINE-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
MARCH 31, 1995

The Company changed its fiscal year-end from March 31 to December 31,
effective with the nine-month transition period ended December 31, 1995.
Accordingly, readers should take into account that the following discussion
compares figures for a nine-month period to a full twelve-month year. The
discussion below does not attempt to explain, for each item discussed, the
extent to which the differing length of these periods has affected the
figures.

REVENUES. During the nine months ended December 31, 1995, revenues
increased $1.7 million, or 7.8%, compared to the year ended March 31, 1995.
Net gain on sale of Contracts, which includes (i) the excess of the amount
realized on the sale of Contracts over the Company's net cost, (ii) the net
present value of estimated excess servicing fees on sold Contracts, and (iii)
the recognition of acquisition fees paid by Dealers and deferred by the
Company, increased by $2.1 million, or 22.2%, and represented 47.6% of total
revenues for the nine months ended December 31, 1995. The increase in gain
on sale is largely due to the volume of Contracts which were sold in the
period. During the nine months ended December 31, 1995, the Company sold
$155.7 million in Contracts, compared to $140.6 million in the year ended
March 31, 1995.

Servicing fees decreased by $726,000, or 10.1%, and represented 26.7% of
total revenues. Servicing fees consist primarily of base and excess monthly
servicing fees earned on Contracts sold and serviced by the Company, as well
as servicing fees for certain third-party originated portfolios for which it
has been engaged as servicer. Servicing fees have been impacted by the
Company's continued expansion of its Contract purchase, sale and servicing
activities. As of December 31, 1995, the Company was earning servicing fees
on 25,398 Contracts and loans approximating $268.2 million compared to 16,077
Contracts and loans approximating $169.3 million as of March 31, 1995. In
addition to the $268.2 million in sold Contracts and loans on which servicing
fees were earned, the Company was holding for sale and servicing an
additional $20.8 million in Contracts for an aggregate total servicing
portfolio of $288.9 million at December 31, 1995. Amortization of excess
servicing increased by $819,000 and represented 23.8% of gross loan servicing
fees for the nine-month transition period ended December 31, 1995 versus
14.3% for the year ended March 31, 1995. The increase is primarily due to the
increase in the average age of the Contracts making up the Company's
securitized portfolio and consequently the increase in charge-offs and
corresponding reduction of servicing fees.

Interest income on Contracts warehoused for sale increased by $381,000,
or 6.5%, representing 25.7% of total revenues for the nine months ended
December 31, 1995. Interest income is closely related to the volume of
Contracts purchased and the length of time they are held by the Company prior
to their sale. During the nine months ended December 31, 1995, the Company
purchased $151.0 million in Contracts from Dealers,

<PAGE>

compared to $150.6 million in the year ended March 31, 1995. In addition to
Contracts purchased from Dealers, the Company made two bulk purchases of
portfolios of Contracts having an aggregate principal balance of $9.2 million
during the nine months ended December 31, 1995.

EXPENSES. During the nine months ended December 31, 1995, operating
expenses increased $239,131, or 2.1%, compared to the year ended March 31,
1995. Employee costs increased by $318,886 or 10.7%, and represented 28.5% of
total operating expenses. The increase is due to the addition of staff
necessary to accommodate the Company's growth in its business as well as
certain increases in salaries of existing staff. General and administrative
expenses increased by $894,444, or 46.9% and represented 24.1% of total
operating expenses. Increases in general and administrative expenses included
increases in telephone, stationery, credit bureaus and other related items as
a result of increases in the volume of purchases and servicing of Contracts.

Marketing expenses decreased by $533,011 or 30.2%, and represented 10.6%
of total expenses. The Company uses a combination of independent contractor
and employee marketing representatives all of whom are compensated directly
in proportion to the number of Contracts the Company purchases from Dealers
serviced by the marketing representative. Marketing expense is further
impacted by the Company's estimates for direct expenses made in accordance
with deferring contract origination costs.

Interest expense decreased by $683,195, or 20.0%, and represented 23.5%
of total operating expenses. During the nine-month period ended December 31,
1995, the Company's interest expense was affected by improved pricing on the
Line, a more favorable interest rate environment, and less reliance on other
short term financing, in part, as a result of the proceeds from the Company's
issuance of two million shares of common stock in March 1995.

During the nine months ended December 31, 1995, the provision for losses
on Contracts held for sale increased by $295,511 or 55.4% and represented
7.1% of total operating expenses. The increase in the provision reflects a
larger volume of Contracts held for a longer period of time prior to sale
when compared to the year ended March 31, 1995, and certain losses associated
with Bulk Purchases in the nine months ended December 31, 1995.

CHANGE OF FISCAL YEAR; 1994 RELEASE OF ESCROW SHARES

In 1995, the Company changed its fiscal year-end from March 31 to
December 31. For that reason, much of the information contained herein
compares a fiscal year ended March 31, 1995 with a nine-month transition
period ended December 31, 1995, and then with a full fiscal year ended
December 31, 1996. The table below presents certain information on a
calendar-year basis, for the calendar years 1994, 1995 and 1996. In that
table, two columns present information regarding the year ended December 31,
1994, one column including and one column excluding the effect of a charge
for release of Escrow Shares (as described below).

Upon consummation of the Company's initial public offering which became
effective on October 22, 1992, the Company's then controlling shareholder,
Holdings, deposited 1,200,000 shares of Common Stock (the "Escrow Shares") in
escrow, subject to release upon attainment of certain net income goals or
stock price levels. As of March 31, 1994, the Company exceeded the requisite
levels. The release of the Escrow Shares was deemed compensatory and resulted
in a one-time, non-cash charge for fiscal 1994 of $6.5 million which was
equal to the market value of the Escrow Shares at the time of their release.
This one-time, non-cash charge was offset by an identical increase in common
stock and was not tax deductible. Consequently, there was no impact on total
shareholders' equity on the Company's financial statements as a result of the
release of the Escrow Shares and the corresponding charge. The following
table presents three-year comparative information.

<PAGE>

12 Months Ended December 31,
-------------------------------------------
1996 1995 1994 (1) 1994 (2)
(In thousands, except per share data)
REVENUES:
Net gain on sale of contracts $ 23,321 $ 13,719 $ 9,980 $ 9,980
Servicing fees 16,169 9,019 6,175 6,175
Interest 11,704 7,869 4,403 4,403
-------------------------------------------
51,194 30,607 20,558 20,558
EXPENSES:
Charge from release of escrow shares -- -- 6,450 --
Selling, general and administrative 9,694 5,276 3,651 3,651
Employee costs 8,921 3,888 3,253 3,253
Interest 5,781 3,842 2,520 2,520
Provision for losses 2,756 1,008 384 384
Depreciation 275 209 169 169
Related party consulting fees 75 350 350 350
-------------------------------------------
27,502 14,573 16,777 10,327

-------------------------------------------
Income before taxes 23,692 16,034 3,781 10,231

Income taxes 9,595 6,440 3,613 3,613

-------------------------------------------
Net income $ 14,097 $ 9,594 $ 168 $ 6,618
-------------------------------------------

Primary income per share $0.95 $0.71 $0.02 $0.61
Weighted average primary shares 14,850 13,431 10,932 10,932
Fully diluted income per share $0.93 $0.70 $0.02 $0.57
Fully diluted weighted average shares 15,410 13,911 12,182 12,182
- ----------------
(1) Results include the non-cash one time charge from the release of Escrow
Shares.
(2) Results exclude the non-cash one time charge from the release of Escrow
Shares.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of cash from operating activities include
base and excess servicing fees it earns on portfolios of Contracts it has
previously sold, proceeds on the sales of Contracts in excess of its recorded
investment of the Contracts, amortization and release of investments in
credit enhancement balances pledged in conjunction with the securitization of
its Contracts, borrower payments on Contracts held for sale, and interest
earned on Contracts held for sale. The Company's primary uses of cash
include its normal operating expenses, the establishment and build-up of
Spread Accounts used for credit enhancement to their maintenance levels, and
income taxes.

Net cash used in operating activities was $9.7 million during the year
ended December 31, 1996 compared to net cash used of $18.5 million during the
nine month transition period ended December 31, 1995. Cash used for
purchasing Contracts was $351.4 million, an increase of $191.2 million, or
119.4%, over cash used for purchasing Contracts in the nine month transition
period ended December 31, 1995. Cash provided from the liquidation of
Contracts was $346.5 million, an increase of $189.6 million, or 120.8%, over
cash provided from liquidation of Contracts in the nine month transition
period ended December 31, 1995.

During the year ended December 31, 1996, cash used for initial deposits
to Spread Accounts was $12.3 million, an increase of $7.3 million, or 149.0%,
from the amount of cash used for initial deposits to Spread Accounts in the
nine month transition period ended December 31, 1995. Cash from excess
servicing deposited to Spread Accounts for the year ended December 31, 1996,
was $18.8 million, an increase of $11.2 million, or 148.8%, over cash from
excess servicing deposited to Spread Accounts in the nine month transition
period

<PAGE>

ended December 31, 1995. Cash released from Spread Accounts for the year
ended December 31, 1996, was $17.9 million, an increase of $10.2 million, or
133.2%, over cash released from Spread Accounts in the nine month transition
period ended December 31, 1995. Changes in deposits to and releases from
Spread Accounts are impacted by the relative size, seasoning and performance
of the various pools of sold Contracts that make up the Company's Servicing
Portfolio.

Delinquencies as a percent of the gross Servicing Portfolio increased
from 5.1% at December 31, 1995 to 6.8% at December 31, 1996. Increases in
delinquency can be attributed to the continued aging of the Company's
Servicing Portfolio, and to the fact that during 1996 the Company often
allowed a borrower more time to resolve a delinquency prior to ordering
repossession than it had allowed in prior periods. To accommodate the
resulting higher levels of delinquency, the Company restructured certain
aspects of its agreements with FSA in November 1996. Under the restructured
agreements, the levels of delinquency that trigger increased Spread Account
requirements have been raised, so that the higher delinquency levels
currently experienced by the Company would not result in increased Spread
Account requirements. The Company cannot predict with assurance whether
delinquency and loss rates will continue to increase, but a further increase
in average delinquency and in losses should be expected if the average age of
the Servicing Portfolio continues to rise. Whether the average age of the
Servicing Portfolio increases will depend in part on the rate of the
Company's continued growth (rapid growth in originations decreases the
average age of the Servicing Portfolio), as to which there can be no
assurance.

During the year ended December 31, 1996, the Company purchased 38% of
the outstanding common stock of NAB Asset Corporation for approximately $4.3
million. See "Business--Expansion and Diversification".

The Company's cash requirements have been and will continue to be
significant. The agreements under which the Company has securitized and sold
its Contracts required the Company to make a significant initial cash
deposit, for purposes of credit enhancement, to a Spread Account which is
pledged to support the related asset-backed securities, and is invested in
high quality liquid securities. Excess cash flows from the securitized
Contracts are deposited into the Spread Accounts until such time as the
Spread Account balance reaches a specified percent of the outstanding balance
of the related asset-backed securities. Since its June 1995 securitization,
and, it is expected, on an ongoing basis, the Company altered the credit
enhancement mechanism used in its securitizations to create a subordinated
class of asset-backed securities (a "B Piece") in order to reduce the size of
the required initial deposit to the Spread Accounts. This revised structure
may, if the Company is able to continue to sell the B Piece, reduce the
amount of cash that the Company must invest or set aside in Spread Accounts
in future securitizations. The Company continues to hold the B Piece
associated with its June 1995 transaction, but has sold and believes it will
be able to continue to sell the B Pieces created in subsequent
securitizations. The aggregate balances of the Spread Accounts associated
with each securitization of Contracts, together with the one B Piece held by
the Company, are reflected as "Investments in credit enhancements" on the
Company's consolidated balance sheet.

The table below documents the Company's history of Contract securitizations,
comprising sales to 17 securitization trusts.

STRUCTURED CONTRACT SECURITIZATIONS
<TABLE>
<CAPTION>

27
<PAGE>

PERIOD SECURITIZED RATING
FUNDED DOLLAR AMOUNT RATINGS(1) AGENCY POOL NAME
- ---------- ------------- ---------- -------------- ---------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
November 1993 1,816 A Duff & Phelps Alton Grantor Trust 1993-3
December 1993 6,694 A Duff & Phelps Alton Grantor Trust 1993-3
January 1994 1,998 A Duff & Phelps Alton Grantor Trust 1993-3
March 1994 20,787 A Duff & Phelps Alton Grantor Trust 1993-4
June 1994 24,592 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-1
September 1994 28,916 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-2
October 1994 13,136 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-3
December 1994 28,893 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1994-4
February 1995 20,084 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-1
June 1995 49,290 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-2
September 1995 45,009 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-3
September 1995 2,369 BB S&P CPS Auto Grantor Trust 1995-3
December 1995 53,634 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1995-4
December 1995 2,823 BB S&P CPS Auto Grantor Trust 1995-4
March 1996 63,747 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-1
March 1996 3,355 BB S&P CPS Auto Grantor Trust 1996-1
June 1996 (2) 84,456 Aaa/AAA Moody's/S&P Fasco Auto Grantor Trust 1996-1
June 1996 4,445 BB S&P Fasco Auto Grantor Trust 1996-1
September 1996 87,523 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-2
September 1996 4,606 BB S&P CPS Auto Grantor Trust 1996-2
December 1996 88,215 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1996-3
December 1996 4,643 BB S&P CPS Auto Grantor Trust 1996-3
March 1997 97,211 Aaa/AAA Moody's/S&P CPS Auto Grantor Trust 1997-1
March 1997 5,116 BB S&P CPS Auto Grantor Trust 1997-1
---------
$ 770,158
---------
---------
</TABLE>
- ------------------
(1) Commencing with the securitization completed on June 28, 1994, the
principal and interest due on the asset-backed securities issued by the
various grantor trusts are guaranteed by Financial Security Assurance Inc.
("FSA"), enabling the issuer to obtain Aaa/AAA ratings for the asset-backed
securities issued in such transactions. See "Business -- Purchase and Sale
of Contracts -- Securitization and Sale of Contracts to Institutional
Investors."
(2) Commencing with the securitization completed on June 27, 1996,
asset-backed securities with Aaa/AAA ratings have been sold through public
offerings pursuant to registration statements filed with the Securities and
Exchange Commission.

Cash flows are impacted by the use of the "Warehouse Line of Credit" (as
defined below) which is in turn impacted by the amount of Contracts the
Company holds for sale. At December 31, 1996, the Warehouse Line of Credit
had an outstanding balance of $13.3 million compared to $7.5 million at
December 31, 1995. Borrowings under the Warehouse Line of Credit rise during
each fiscal quarter and then are substantially repaid when the Company
completes a Contract securitization, which has occurred near the end of each
quarter during the past two fiscal years. The maximum amount outstanding
under the Warehouse Line of Credit during 1996 was $92.1 million and the
average was $41.2 million. In June 1995 the Company entered into two new
agreements which restructured the Warehouse Line of Credit and increased the
maximum available amount to $100.0 million. The primary agreement provides
for loans by Redwood Receivables Corporation ("Redwood") to the Company, to
be funded by commercial paper issued by Redwood and secured by Contracts
pledged periodically by the Company. The Redwood facility provides for a
maximum of $100.0 million of advances to the Company, with interest at a
variable rate tied to prevailing commercial paper rates.

<PAGE>

When the Company wishes to securitize these Contracts, a substantial part of
the proceeds received from Investors is paid to Redwood, which simultaneously
releases the pledged Contracts for transfer to a pass-through securitization
trust. The second agreement is a standby line of credit with GECC, also with
a $100.0 million maximum, which the Company may use only if and to the extent
that Redwood does not provide funding as described above. The GECC line is
secured by Contracts and substantially all the other assets of the Company.
Both agreements extend through November 30, 1998. The two agreements are
viewed as a single short-term warehouse line of credit, with advances varying
according to the amount of pledged Contracts. All references in this report
to the Warehouse Line of Credit refer, since June 1995, to the Redwood
facility and, unless the context indicates otherwise, the standby line of
credit with GECC.

Prior to October 29, 1992, the Company was dependent on capital
contributions and loans by Holdings (which was then the sole shareholder of
the Company) to satisfy its cash requirements. On October 29, 1992, the
Company raised approximately $4.9 million (net of offering expenses) in an
initial public offering. On March 12, 1993, the Company borrowed $2.0
million from Sun Life through the issuance of a convertible note in
conjunction with an agreement by that investor to purchase up to $50.0
million of the Company's Contracts. On July 5, 1995, Sun Life converted this
note into 533,334 shares of the Company's Common Stock. On November 16,
1993, the Company borrowed an additional $3.0 million from Sun Life through
the issuance of a convertible note in conjunction with that investor's
commitment to purchase an additional $50.0 million in Contracts. On January
17, 1997, Sun Life converted this note into 480,000 shares of Common Stock.
On November 23, 1993, the Company issued and sold 333,334 shares of Common
Stock in a private transaction at a price of $4.50 per share ($1.5 million in
the aggregate). In May and October, 1994, the Company borrowed an aggregate
of $5.0 million pursuant to three short term notes, all of which were repaid
in March 1995 with proceeds from the March 7, 1995 public offering of 2.0
million shares of the Company's stock at a price of $7.38 per share. In
December 1995, the Company issued $20 million of debt in the form of Rising
Interest Subordinated Redeemable Securities ("RISRS"). In the month of April
1997 the Company plans to issue additional debt securities (partially
convertible into common stock) in a registered public offering.

The Company anticipates that the proceeds from the intended April 1997
offering of debt securities, the funds available under the Warehouse Line of
Credit, proceeds from the sale of Contracts, and cash from operations will be
sufficient to satisfy the Company's estimated cash requirements for at least
the next 12 months, assuming that the Company continues to have a means by
which to sell its warehoused Contracts. If for any reason the Company is
unable to sell its Contracts, or if the Company's available cash otherwise
proves to be insufficient to fund operations (because of future changes in
the industry, general economic conditions, unanticipated increases in
expenses, or other factors), the Company may be required to seek additional
financing.

On November 1, 1996, the Company began to rent an additional 7,000
square feet of contiguous office space in accordance with the Company's lease
agreement. In addition, the Company recently acquired an additional, and
significantly upgraded, IBM AS/400 computer. This hardware serves as the
primary platform on which the Company processes its Contracts. The Company
anticipates that it will incur certain limited capital expenditures during
the next twelve months as its business continues to grow. The Company
expects to incur occupancy expenses of approximately $50,000 per month in
connection with its Chesapeake, Virginia satellite facility, which were not
incurred in fiscal 1996. Personnel and other expenses may also increase,
depending on the extent of any continuing growth in the Company's business
(as to which there can be no assurance) and the availability of personnel.

<PAGE>

FORWARD-LOOKING STATEMENTS

The descriptions of the Company's business and activities set forth in this
report and in other past and future reports and announcements by the Company
may contain forward-looking statements and assumptions regarding the future
activities and results of operations of the Company. Actual results may be
adversely affected by various factors including the following: increases in
unemployment or other changes in domestic economic conditions which adversely
affect the sales of new and used automobiles and may result in increased
delinquencies, foreclosures and losses on Contracts; adverse economic
conditions in geographic areas in which the Company's business is
concentrated; changes in interest rates, adverse changes in the market for
securitized receivables pools, or a substantial lengthening of the Company's
warehousing period, each of which could restrict the Company's ability to
obtain cash for new Contract originations and purchases; increases in the
amounts required to be set aside in Spread Accounts or to be expended for
other forms of credit enhancement to support future securitizations; the
reduction or unavailability or warehouse lines of credit which the Company
uses to accumulate Contracts for securitization transactions; increased
competition from other automobile finance sources; reduction in the number
and amount of acceptable Contracts submitted to the Company by its
automobile dealer network; changes in government regulations affecting
consumer credit; and other economic, financial and regulatory factors beyond
the Company's control. A further discussion of factors that may cause actual
results to differ, or may otherwise have an adverse effect on the Company's
financial condition or results of operations, is contained in the exhibit to
this report titled "risk factors," incorporated herein by this reference.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1996, the Financial Accounting Standards board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Management of the Company does not expect that
adoption of SFAS No. 125 will have a material impact on the Company's
financial position, results of operations or liquidity.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This report includes Consolidated Financial Statements, Notes thereto and an
Independent Auditors' Report, at the pages indicated below. Certain subsequent
events and quarterly financial information (not audited) are included in the
Notes to Consolidated Financial Statements, as Notes 14 and 15.

INDEX TO FINANCIAL STATEMENTS PAGE REFERENCE
<S> <C>
Independent Auditors' Report............................................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995............................. F-2
Consolidated Statements of Operations for the year ended December 31, 1996,
the nine-month period ended December 31, 1995, and the year ended March 31, 1995........ F-3
Consolidated Statements of Shareholders' Equity for the year ended December 31,
1996, the nine-month period ended December 31, 1995, and the year ended March 31, 1995.. F-4
Consolidated Statements of Cash Flows for the year ended December 31, 1996,
the nine-month period ended December 31, 1995, and the year ended March 31, 1995........ F-5
Notes to Consolidated Financial Statements for the year ended December 31, 1996,
the nine-month period ended December 31, 1995 and the year ended March 31, 1995......... F-6
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Information regarding directors of the registrant is incorporated by
reference to the registrant's definitive proxy statement for its annual
meeting of shareholders to be held in 1997 (the "1997 Proxy Statement"). The
1997 Proxy Statement will be filed not later than April 30, 1997.
Information regarding executive officers of the registrant appears in Part I
of this report, and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the 1997 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to the 1997 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the 1997 Proxy Statement.

PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
- ------------

The following exhibits are filed as part of this report:

Exhibit No.

<PAGE>

Exhibit 10.7...Amended and Restated Motor Vehicle Installment Contract Loan and
Security Agreement, dated June 1, 1995, between Consumer
Portfolio Services, Inc., and General Electric Capital
Corporation. (A)
Exhibit 10.8...Agreement and Plan of Merger, dated August 30, 1995, between
Consumer Portfolio Services, Inc., and CPS Holdings, Inc. (F)
Exhibit 10.9...Promissory Note, dated September 27, 1995, made by the Company in
favor of Charles E. Bradley, Sr., in the aggregate principal
amount of $2,000,000.(A)
Exhibit 10.10..Promissory Note, dated July 6, 1995, made by the Company in favor
of SunAmerica, Inc., in the aggregate principal amount of
$2,000,000. (A)
Exhibit 10.11..Lease Agreement dated December 9, 1996 between the Company and
The Prudential Insurance Company of America, relating to the
Company's branch facility in Chesapeake, Virginia. (G)
Exhibit 11.0...Statement re Computation of Per Share Earnings.
Exhibit 12.....Statement re Computation of Ratios. (H)
Exhibit 21.1...Subsidiaries of the Company. (G)
Exhibit 23.1...Consent of independent auditors.
Exhibit 24.1...Powers of Attorney. (G)
Exhibit 27.....Financial Data Schedule. (G)
Exhibit 99.....Risk Factors

- -----------------
A. Previously filed as an exhibit to the Company's Form 10-KSB for the
transition period ended December 31, 1995, and incorporated herein by
reference.
B. Previously filed as an exhibit to the Company's Form 10-KSB for the fiscal
year ended March 31, 1994, and incorporated herein by reference.
C. Previously filed as an exhibit to the Company's Form 8-K, filed on December
26, 1995, and incorporated herein by reference.
D. Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-49770, as amended, and incorporated herein by reference.
E. Previously filed as an exhibit to the Company's Form 10-KSB for the fiscal
year ended March 31, 1995, and incorporated herein by reference.
F. Previously filed as an exhibit to the Company's Proxy Statement for the
September 26, 1995, Annual Meeting, and incorporated herein by reference.
G. Previously filed as an exhibit to this report, on March 31, 1997.
H. Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, No. 333-21289, as amended on March 4, 1997, and incorporated herein
by reference.

(b) REPORTS ON FORM 8-K

During the last quarter of the fiscal ended December 1996, two reports on
Form 8-K were filed by the Company. Each of such two reports included
responses to Items 5 and 7 of Form 8-K relating to "Other Information," and
"Financial Statement and Exhibits," respectively. No financial statements
were filed with either of such reports on Form 8-K. Each of such two reports
related to the Company's December 1996 sale of Contracts in a securitization
transaction.

The first of the two reports, dated December 19, 1996 and filed December 23,
1996, filed the forms of Underwriting Agreement, Pooling and Servicing
Agreement and Receivables Purchase Agreement relating to that transaction,
and the second, dated December 11, 1996 and filed December 19, 1996, filed
computational materials relating to the securitization transaction.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to Form
10-K report to be signed on its behalf by the undersigned, thereunto duly
authorized.

CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)

/s/ Jeffrey P. Fritz Date: April 14, 1997
- ---------------------------
Jeffrey P. Fritz
Senior Vice President and Chief Financial Officer

S-1

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Consumer Portfolio Services, Inc.

We have audited the accompanying consolidated balance sheets of Consumer
Portfolio Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1996, for the nine-month period ended
December 31, 1995, and for the year ended March 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consumer
Portfolio Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the year ended December
31, 1996, for the nine-month period ended December 31, 1995, and for the year
ended March 31, 1995, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Orange County, California
February 14, 1997

F-1
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS (note 11)
Cash.............................................................................. $ 153,958 $ 10,895,157
Contracts held for sale (notes 5 and 11).......................................... 21,656,773 19,548,842
Servicing fees receivable......................................................... 3,086,194 1,454,707
Investment in subordinated certificates........................................... -- 2,174,666
Investments in credit enhancements (note 2)....................................... 43,597,472 30,477,793
Excess servicing receivables (note 7)............................................. 23,654,461 11,108,251
Furniture and equipment, net (note 3)............................................. 629,774 548,535
Taxes receivable.................................................................. 610,913 --
Deferred financing costs (note 11)................................................ 943,222 1,100,430
Investment in unconsolidated affiliate (note 4)................................... 2,263,768 --
Other assets (note 4)............................................................. 5,349,885 569,944
-------------- -------------
$ 101,946,420 $ 77,878,325
-------------- -------------
-------------- -------------

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses............................................... $ 1,697,051 $ 1,341,905
Warehouse line of credit (note 11)................................................ 13,264,585 7,500,000
Taxes payable..................................................................... -- 2,912,084
Deferred tax liability (note 10).................................................. 7,027,251 1,643,254
Notes payable (note 11)........................................................... 20,000,000 20,000,000
Convertible subordinated debt (note 11)........................................... 3,000,000 3,000,000
-------------- -------------
44,988,887 36,397,243
SHAREHOLDERS' EQUITY (notes 8 and 11)
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; 13,779,242 and
13,298,642 shares issued and outstanding at December 31, 1996 and 1995,
respectively.................................................................... 34,644,314 33,265,239
Retained earnings................................................................. 22,313,219 8,215,843
-------------- -------------
56,957,533 41,481,082
Commitments and contingencies (notes 4, 5, 6, 8, 9 and 12)
Subsequent events (notes 9, 11 and 14)
-------------- -------------
$ 101,946,420 $ 77,878,325
-------------- -------------
-------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements

F-2
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Net gain on sale of contracts (note 7).............................. $ 23,321,015 $ 11,549,413 $ 9,454,620
Servicing fees (note 6)............................................. 16,168,867 6,475,405 7,201,062
Interest............................................................ 11,703,921 6,229,895 5,849,154
------------- ------------- -------------
51,193,803 24,254,713 22,504,836
------------- ------------- -------------
EXPENSES:
Employee costs...................................................... 8,920,521 3,309,139 2,990,253
General and administrative.......................................... 7,247,011 2,799,599 1,905,155
Interest............................................................ 5,780,529 2,724,403 3,407,598
Provision for credit losses (note 5)................................ 2,755,803 828,458 532,947
Marketing........................................................... 1,678,674 1,231,110 1,764,121
Occupancy........................................................... 768,521 267,641 254,845
Depreciation and amortization....................................... 275,348 174,555 153,355
Related party consulting fees (note 4).............................. 75,000 262,500 350,000
------------- ------------- -------------
27,501,407 11,597,405 11,358,274
------------- ------------- -------------
Income before income taxes.......................................... 23,692,396 12,657,308 11,146,562
Income taxes (note 10).............................................. 9,595,020 5,082,186 4,480,932
------------- ------------- -------------
Net income.......................................................... $ 14,097,376 $ 7,575,122 $ 6,665,630
------------- ------------- -------------
------------- ------------- -------------
Net income per common and common equivalent share................... $ 0.95 $ 0.53 $ 0.60
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common and common equivalent shares...... 14,849,609 14,323,592 11,143,268
------------- ------------- -------------
------------- ------------- -------------
Fully diluted net income per common and common equivalent share..... $ 0.93 $ 0.52 $ 0.56
------------- ------------- -------------
------------- ------------- -------------
Fully diluted weighted average number of common and common
equivalent shares.................................................. 15,410,044 14,803,592 12,538,352
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS
-------------------------- --------------------------- (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT) TOTAL
----------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.......... 3,415,000 $ 3,415,000 8,733,334 $ 12,810,689 $ (6,024,909) $ 10,200,780
Common stock issued upon exercise
of warrants....................... -- -- 39,466 118,398 -- 118,398
Common stock issued upon exercise
of options........................ -- -- 48,000 120,000 -- 120,000
Common stock issuance, net (note
8)................................ -- -- 2,000,000 13,304,550 -- 13,304,550
Redemption of Preferred Stock (note
8)................................ (3,415,000) (3,415,000) -- -- -- (3,415,000)
Net income......................... -- -- -- -- 6,665,630 6,665,630
----------- ------------- ------------ ------------- ------------- -------------
Balance at March 31, 1995.......... -- $ -- 10,820,800 $ 26,353,637 $ 640,721 $ 26,994,358
Common stock issued upon exercise
of warrants....................... -- -- 100,534 301,602 -- 301,602
Common stock issued upon exercise
of options........................ -- -- 1,843,974 4,610,000 -- 4,610,000
Common stock issued upon conversion
of debt (note 11)................. -- -- 533,334 2,000,000 -- 2,000,000
Net income......................... -- -- -- -- 7,575,122 7,575,122
----------- ------------- ------------ ------------- ------------- -------------
Balance at December 31, 1995....... -- $ -- 13,298,642 $ 33,265,239 $ 8,215,843 $ 41,481,082
Common stock issued upon exercise
of warrants....................... -- -- 86,000 258,000 -- 258,000
Common stock issued upon exercise
of options........................ -- -- 394,600 1,121,075 -- 1,121,075
Net income......................... -- -- -- -- 14,097,376 14,097,376
----------- ------------- ------------ ------------- ------------- -------------
Balance at December 31, 1996....... -- $ -- 13,779,242 $ 34,644,314 $ 22,313,219 $ 56,957,533
----------- ------------- ------------ ------------- ------------- -------------
----------- ------------- ------------ ------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED
1996 1995 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 14,097,376 $ 7,575,122 $ 6,665,630
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization................................... 275,348 174,555 153,355
Amortization of purchased and excess servicing receivables...... 6,119,219 2,023,938 1,210,120
Amortization of deferred financing costs........................ 157,208 5,265 --
Provision for credit losses..................................... 2,755,803 828,458 532,947
Gain on sale of contracts from excess servicing receivables..... (18,665,429) (7,977,828) (4,065,899)
Loss on investment in unconsolidated affiliate.................. 595,352 -- --
Changes in operating assets and liabilities:
Purchases of contracts held for sale.......................... (351,350,070) (160,150,781) (164,263,577)
Liquidation of contracts held for sale........................ 346,486,336 156,890,700 142,472,028
Servicing fees receivable..................................... (1,631,487) (658,385) (615,063)
Prepaid related party expenses................................ -- -- 233,333
Initial deposits to credit enhancement accounts............... (12,270,168) (4,931,325) (13,237,454)
Excess servicing deposited to credit enhancement accounts..... (18,790,430) (7,553,086) (5,390,422)
Release of cash from credit enhancement accounts.............. 17,940,919 7,693,839 5,923,201
Deferred taxes................................................ 5,383,997 2,199,068 (381,616)
Other assets.................................................. (3,361,654) (425,695) 3,810
Accounts payable and accrued expenses......................... 355,146 (131,382) 528,256
Warehouse line of credit...................................... 5,764,585 (12,230,389) 19,730,389
Taxes payable/receivable...................................... (3,522,997) (1,865,464) 4,385,724
-------------- -------------- --------------
Net cash used in operating activities....................... (9,660,946) (18,533,390) (6,115,238)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subordinated certificates 2,022,220 -- --
Investment in unconsolidated affiliate.......................... (4,277,407) -- --
Purchases of furniture and equipment............................ (356,587) (263,496) (334,458)
Payments received on subordinated certificates.................. 152,446 118,764 --
-------------- -------------- --------------
Net cash used in investing activities....................... (2,459,328) (144,732) (334,458)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of promissory notes.................................... -- 2,000,000 5,000,000
Issuance of note to related party............................... -- 2,000,000 --
Issuance of long term notes..................................... -- 20,000,000 --
Payment of financing costs...................................... -- (1,105,695) --
Repayment of promissory notes................................... -- (2,000,000) (5,000,000)
Repayment of note to related party.............................. -- (2,000,000) --
Issuance of common stock........................................ -- -- 13,304,550
Redemption of preferred stock................................... -- -- (3,415,000)
Exercise of options and warrants................................ 1,379,075 4,911,602 238,398
-------------- -------------- --------------
Net cash provided by financing activities................... 1,379,075 23,805,907 10,127,948
-------------- -------------- --------------
Increase (decrease) in cash....................................... (10,741,199) 5,127,785 3,678,252
Cash at beginning of period....................................... 10,895,157 5,767,372 2,089,120
-------------- -------------- --------------
Cash at end of period............................................. $ 153,958 $ 10,895,157 $ 5,767,372
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest...................................................... $ 5,213,912 $ 2,542,718 $ 3,288,848
Income taxes.................................................. $ 6,679,000 $ 4,759,050 $ 523,000
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock upon conversion of debt................ $ -- $ 2,000,000 $ --
Investments in subordinated certificates........................ $ -- $ 4,779,166 $ --
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Consumer Portfolio Services, Inc. ("the Company") was incorporated in
California on March 8, 1991. The Company and its subsidiaries engage primarily
in the business of purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by dealers located
throughout the United States. The Company specializes in Contracts with
borrowers who generally would not be expected to qualify for traditional
financing such as that provided by commercial banks or automobile manufacturers'
captive finance companies. The Company's operations are centralized in Irvine,
California and it has purchased Contracts from Dealers in California since its
inception. During the year ended December 31, 1996, Contract purchases relating
to borrowers who resided in California totaled 25.8% of all contract purchases.
Moreover, at December 31, 1996, borrowers who resided in California made up
33.3% of the Servicing Portfolio. A significant adverse change in the economic
climate in California could result in fewer Contracts available for sale and
potentially less gain on sale and servicing fee revenue.

The automobile financing business is highly competitive. The Company
competes with a number of national, local and regional finance companies with
operations similar to those of the Company. In addition, competitors or
potential competitors include other types of financial services companies, such
as commercial banks, savings and loan associations, leasing companies, credit
unions providing retail loan financing and lease financing for new and used
vehicles, and captive finance companies affiliated with major automobile
manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit
Corporation, Chrysler Credit Corporation and Nissan Motors Acceptance
Corporation. Many of the Company's competitors and potential competitors possess
substantially greater financial, marketing, technical, personnel and other
resources than the Company. Moreover, the Company's future profitability will be
directly related to the availability and cost of its capital in relation to the
availability and cost of capital to its competitors. The Company's competitors
and potential competitors include far larger, more established companies that
have access to capital markets for unsecured commercial paper and investment
grade-rated debt instruments and to other funding sources which may be
unavailable to the Company. Many of these companies also have long-standing
relationships with dealers and may provide other financing to dealers, including
floor plan financing for the dealers' purchase of automobiles from
manufacturers, which is not offered by the Company.

The Company purchases Contracts with the intent to re-sell them to
institutional investors either as bulk sales or in the form of securities backed
by the Contracts. Purchasers of the Contracts receive a pass through rate of
interest set at the time of the sale and the Company receives a base servicing
fee for its duties relating to the accounting for and collection of the
Contracts. In addition, the Company is entitled to certain excess servicing fees
which represent collections on the Contracts in excess of those required to pay
investor principal and interest, base servicing fees and any other expenses of
the trust.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Consumer
Portfolio Services, Inc. and its wholly-owned subsidiaries, Alton Receivables
Corp. ("Alton") , CPS Receivables Corp. ("CPSRC") and CPS Funding Corp.
("CPSFC"). Alton, CPSRC and CPSFC are limited purpose corporations formed to
accommodate the structures under which the Company sells its Contracts. The
consolidated financial statements also include the accounts of SAMCO Acceptance
Corp. and LINC Acceptance Company, LLC,

F-6
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

both of which are 80% owned subsidiaries formed by the Company in fiscal 1996.
All significant intercompany balances and transactions have been eliminated in
consolidation. Investments in unconsolidated affiliates which are not majority
owned are reported using the equity method. The excess of the cost of the stock
over the Company's share of the net assets at the acquisition date ("goodwill")
is being amortized over fifteen years.

CONTRACTS HELD FOR SALE

The Contracts which the Company purchases from dealers provide for finance
charges of approximately 20% per annum, in most cases. Each Contract provides
for full amortization, equal monthly payments and can be fully prepaid by the
borrower at any time without penalty. The Company typically purchases the
Contracts from dealers at a discount from the amount financed under the Contract
with such discounts deferred and recognized as revenue upon sale of the related
Contracts. Effective January 10, 1997, the Company began purchasing all
Contracts without a percentage discount, charging dealers only a flat
acquisition fee for each Contract purchased based on the perceived credit risk
and, in some cases, the interest rate on the Contract. Contracts are generally
sold to institutional investors at par. In the case of whole loan sales, the
investor withholds a portion of the purchase price as an initial credit
enhancement. In the case of Contracts sold in the form of asset backed
securities, the Company pledges certain cash balances as an initial credit
enhancement. Contracts are generally sold by the Company within one to three
months of their purchase, although they may be held longer.

Contracts held for sale are stated at the lower of cost or market value.
Market value is determined by purchase commitments from investors and prevailing
market prices. Gains and losses are recorded as appropriate when Contracts are
sold.

ALLOWANCE FOR CREDIT LOSSES

The Company provides an allowance for credit losses which management
believes provides adequately for current and possible future losses that may
develop in the Contracts held for sale. Management evaluates the adequacy of the
allowance by examining current delinquencies, the characteristics of the
portfolio, the value of underlying collateral, and general economic conditions
and trends.

CONTRACT ACQUISITION FEES AND COSTS

The Company generally receives an acquisition fee from the dealer for each
Contract purchased. Fee proceeds are used to offset the direct expenses
associated with the purchase of the Contracts, with any excess amount deferred
until the Contracts are sold at which time the deferred portions are recognized
as a component of the gain on sale.

INVESTMENTS

The Company determines the appropriate classification of its investments in
debt securities at the time of purchase or creation. Debt securities for which
the Company does not have the intent or ability to hold to maturity are
classified as available for sale. Securities available for sale are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity.

F-7
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The amortized cost of debt securities classified as available for sale is
adjusted for amortization of premiums and accretion of discounts, over the
estimated life of the security. Such amortization and interest earned on the
debt securities are included in interest income.

GAIN ON SALE OF CONTRACTS

Gains or losses are determined based upon the difference between the sales
proceeds for the portion of Contracts sold and the Company's recorded investment
in the Contracts sold. The Company allocates the recorded investment in the
Contracts between the portion of the Contracts sold and the portion retained
based on the relative fair values of those portions on the date of sale.

EXCESS SERVICING RECEIVABLES

Excess servicing receivables ("ESR") result from the sale of Contracts on
which the Company retains servicing rights and all, or a portion of, the excess
cash flows. ESRs are determined by computing the difference between the weighted
average yield of the Contracts sold and the yield to the purchaser, adjusted for
the normal servicing fee based on the agreements between the Company and the
purchaser. The resulting differential is recorded as a gain at the time of the
sale equal to the present value of the estimated cash flows, net of any portion
of the excess that may be due to the purchaser and adjusted for anticipated
prepayments, repossessions, liquidations and other losses. The excess servicing
cash flows over the estimated remaining life of the Contracts have been
calculated for all applicable periods using estimates for prepayments, losses
(charge-offs) and weighted average discount rates, which the Company expects
market participants would use for similar instruments. Losses are discounted at
an assumed risk free rate. The ESRs are amortized using the interest method and
are offset against servicing fees. To the extent that the actual future
performance of the Contracts results in less excess cash flows than the Company
estimated, the Company's ESRs will be adjusted at least quarterly, with
corresponding charges recorded against income in the period in which the
adjustment is made. To the extent that the actual cash flows exceed the
Company's estimates the Company will record additional servicing fees. Excess
servicing receivables are evaluated quarterly for impairment by reassessing the
discounted future estimated excess servicing fees, on individual securitized
pools, which consist predominantly of pools of Contracts purchased in the
quarter of each securitization. If the carrying value of the ESR is greater than
the future estimated ESR, a charge to earnings is made through a valuation
allowance.

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost net of accumulated depreciation
which is calculated using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the related lease term.

SERVICING

Servicing fees are reported as income when earned, net of related
amortization of purchased and excess servicing. Servicing costs are charged to
expense as incurred.

F-8
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME PER SHARE

The computation of net income per common and common equivalent share is
based upon the Treasury Stock Method using the weighted average number of common
shares outstanding during the period plus (in periods in which they have a
dilutive effect) the effect of common shares contingently issuable, primarily
from stock options and warrants. The fully diluted net income per share
computation reflects the effect of common shares contingently issuable upon the
conversion of convertible debt in which such conversion would cause dilution.
Fully diluted net income per common share also reflects additional dilution
related to stock options and warrants due to the use of the market price at the
end of the period, when higher than the average price for the period.

INCOME TAXES

The Company and its subsidiaries file a consolidated Federal income and
combined state franchise tax return on a fiscal year basis. The Company utilizes
the asset and liability method of accounting for income taxes under which
deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. The
Company has accounted for income taxes in this manner since its inception.

STOCK SPLIT

On February 16, 1996, the Board of Directors authorized a two-for-one stock
split to be distributed on or about March 14, 1996, to shareholders of record on
March 7, 1996. All references in the consolidated financial statements to number
of shares, per share amounts and market prices of the Company's common stock
have been retroactively restated to reflect the increased number of common
shares outstanding.

STOCK OPTION PLAN

Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based methods defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and to provide the pro forma disclosure provisions of SFAS No.
123.

F-9
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations or liquidity.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Management of the Company does not expect that adoption of SFAS No.
125 will have a material impact on the Company's financial position, results of
operations or liquidity.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of income and
expenses during the reported periods. Specifically, a number of estimates were
made in connection with the recording of the allowance for credit losses and
excess servicing receivables and the related gain. Actual results could differ
from those estimates.

RECLASSIFICATION

Certain amounts for the prior periods have been reclassified to conform to
the current presentation.

(2) INVESTMENTS

The Company is a party to various agreements with institutional investors
and investment banks for the sale of the Company's Contracts. The agreements
call for the Company to sell Contracts to one of its special purpose corporation
subsidiaries, either Alton or CPSRC (the "SPCs"), which subsequently transfer
the Contracts to various grantor trusts (the "Trusts") which then issue interest
bearing certificates which are purchased by institutional investors. The terms
of the agreements provide that simultaneous with

F-10
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(2) INVESTMENTS (CONTINUED)

each purchase of certificates by the investor, the Company is required to
provide a credit enhancement in the form of a cash capital contribution to the
SPC equal to a specified percentage of the amount of the certificates purchased
by the investor. The SPC then deposits the initial cash, and subsequent excess
servicing cash flows as required by the terms of the various agreements, to an
account held by a trustee (the "Spread Account") and pledges the cash to the
Trust, which in turn invests the cash in high quality liquid investment
securities as defined by the various agreements. In the securitizations since
June 1995, the Company altered the credit enhancement mechanism to create a
subordinated class of asset-backed securities ("B Piece") in order to reduce the
size of the required initial deposit to the Spread Account. All of the B Pieces
through December 31, 1996, had an initial principal balance equal to 5% of the
aggregate principal balance of the asset-backed securities. As of December 31,
1996, all of the B Pieces have been sold except the B Piece related to the June
1995 securitization. In the event that the cash flows generated by the Contracts
transferred to the Trust are insufficient to pay obligations of the Trust,
including principal or interest due to certificateholders or expenses of the
Trust, the trustee will draw an amount necessary from the Spread Accounts to pay
the obligations of the Trust.

The agreements provide that the Spread Accounts shall be maintained at a
specified percent of the principal balance of the certificates, which can be
increased in the event delinquencies and/or losses exceed certain specified
levels. In the event delinquencies and/or losses on the Contracts serviced
exceed specified levels defined in certain of the Company's securitization
agreements, the terms of those securitizations may require the transfer of
servicing to another servicer. Consequently, as principal payments are made to
the certificateholders, and if the Spread Accounts are in excess of the
specified percent of the principal balance of the certificates, the trustee
shall release to the SPC the portion of the pledged cash that is in excess of
the amount necessary to meet the specified percent of the principal balance of
the certificates. To the extent cash in excess of the predetermined level is
generated, such cash is either transferred to cover deficiencies, if any, in
Spread Accounts for other pools, or is released to the Company. Except for
releases in this manner, the cash in the Spread Accounts is restricted from use
by the SPC or the Company. Investments in credit enhancements were made up of
the following components:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Funds held by investor.............................................. $ 1,263,660 $ 2,211,363
Investment in subordinated certificates............................. 1,530,950 2,137,333
US government securities............................................ 40,802,862 26,129,097
------------- -------------
$ 43,597,472 $ 30,477,793
------------- -------------
------------- -------------
</TABLE>

F-11
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(3) FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Furniture and fixtures.............................................. $ 759,783 $ 629,613
Computer equipment.................................................. 875,870 682,541
Leasehold improvements.............................................. 91,700 65,103
------------- ------------
1,727,353 1,377,257
Less accumulated depreciation and amortization.................. (1,097,579) (828,722)
------------- ------------
$ 629,774 $ 548,535
------------- ------------
------------- ------------
</TABLE>

(4) RELATED PARTY TRANSACTIONS

Prior to December 11, 1995, the Company was a majority-owned subsidiary of
CPS Holdings, Inc., a Delaware corporation ("Holdings"). In September 1995, the
shareholders of the Company approved the merger of Holdings into the Company.
The merger was completed on December 11, 1995, and had no effect on the
Company's consolidated financial statements. Prior to the merger, Charles E.
Bradley, Sr., the Company's Chairman of the Board, was the principal shareholder
of Holdings.

The Company is a party to a consulting agreement with Stanwich Partners,
Inc. ("SPI") that call for monthly payments of $6,250 through December 31, 1998.
Included in the accompanying consolidated statements of operations for the year
ended December 31, 1996, for the nine months ended December 31, 1995, and for
the year ended March 31, 1995, is $75,000, $262,500 and $350,000, respectively,
of consulting expense related to this consulting agreement. The Chairman of the
Board of Directors of the Company is a principal shareholder of SPI.

During the year ended March 31, 1995, the Company advanced to Holdings
$714,494, pursuant to various notes which were to mature on or before July 1,
1995. As of March 31, 1995, all principal and interest under the notes had been
paid in full.

On September 27, 1995, the Company borrowed $2 million through a promissory
note to Charles E. Bradley, Sr., Chairman of the Board of Directors. Interest
accrued at 11.5% and was payable on the maturity date, December 31, 1995, or
upon the exercise of an option by Holdings for the purchase of 1,800,000 shares
of the Company's common stock at $2.50 per share, whichever was earlier. On
December 6, 1995, Holdings exercised its option and the note was repaid in full.

Included in other assets at December 31, 1996, is a receivable for
approximately $100,000 from SPI related to investment banking services performed
by the Company in connection with the Company's January 2, 1997 acquisition of
Stanwich Leasing, Inc. ("SLI") (see note 14).

Investment in unconsolidated affiliate consists of a 38% interest in NAB
Asset Corporation ("NAB") that was acquired by the Company on June 6, 1996, for
approximately $4,300,000. At the time of the acquisition, NAB had approximately
$3.5 million in cash and no significant operations. The Company's investment in
NAB exceeded the Company's share of the net assets of NAB at the acquisition
date by approximately $1,418,000. This amount, which is included in other assets
in the accompanying balance

F-12
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(4) RELATED PARTY TRANSACTIONS (CONTINUED)

sheet, has been recorded by the Company as goodwill. Based on the closing price
on the Nasdaq, the market value of the investment in NAB was approximately $7.5
million at December 31, 1996. Charles E. Bradley, Sr., Chairman of the Company's
Board of Directors and principal shareholder and Charles E. Bradley, Jr.,
President, Chief Executive Officer and a member of the Company's Board of
Directors are both on the Board of Directors of NAB.

Subsequent to the Company's investment in NAB, NAB purchased Mortgage
Portfolio Services, Inc. ("MPS") from the Company for $300,000. MPS, formed by
the Company in April, 1996, is a mortgage broker-dealer based in Texas
specializing in "B" and "C" mortgages. In July 1996, NAB formed CARSUSA, Inc.
("CARSUSA"), which purchased, and now owns and operates, a Mitsubishi automobile
dealership in Southern California. Included in general and administrative
expenses for the year ended December 31, 1996, is $595,352, which represents the
Company's share of NAB's loss since June 6, 1996. Included in other assets at
December 31, 1996, are amounts due from NAB amounting to $1,098,000. Of this
amount, $800,000 relates to a flooring line of credit provided to CARSUSA and
the remainder relates to fees owed by MPS and CARSUSA for services rendered by
the Company in fiscal 1996.

During fiscal 1996, the Company sold 69 automobiles to CARSUSA and received
proceeds of $458,650. Additionally, the Company purchased 39 contracts from
CARSUSA. The aggregate principal balance of the Contracts purchased was
$517,264.

(5) CONTRACTS HELD FOR SALE

The balance of Contracts held for sale was made up of the following
components:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Gross receivable balance............................................ $ 28,095,461 $ 24,584,472
Unearned finance charges............................................ (5,268,107) (3,820,267)
Dealer discounts.................................................... (509,266) (944,284)
Deferred loan origination costs (net of related fees)............... 61,774 59,077
Allowance for credit losses......................................... (723,089) (330,156)
------------- -------------
Net contracts held for sale..................................... $ 21,656,773 $ 19,548,842
------------- -------------
------------- -------------
</TABLE>

Activity in the allowance for credit losses consisted of the following:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------- ------------- -----------
<S> <C> <C> <C>
Balance, beginning of period............................ $ 330,156 $ 323,631 $ 50,169
Provisions.............................................. 2,755,803 828,458 532,947
Charge-offs............................................. (2,755,303) (1,076,982) (386,408)
Recoveries.............................................. 392,433 255,049 126,923
------------- ------------- -----------
Balance, end of period.............................. $ 723,089 $ 330,156 $ 323,631
------------- ------------- -----------
------------- ------------- -----------
</TABLE>

F-13
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

The Company is required to represent and warrant certain matters with
respect to the Contracts sold to the investors, which generally duplicate the
substance of the representations and warranties made by the dealers in
connection with the Company's purchase of the Contracts. In the event of a
breach by the Company of any representation or warranty, the Company is
obligated to repurchase the Contracts from the investors at a price equal to the
investors' purchase price less the related credit enhancement and any principal
payments received from the borrower. In most cases, the Company would then be
entitled under the terms of its agreements with its dealers to require the
selling dealer to repurchase the Contracts at the Company's purchase price less
any principal payments received from the borrower.

As of December 31, 1996, December 31, 1995, and March 31, 1995, the Company
had commitments to purchase $1,109,595, $910,325, and $706,720, respectively of
Contracts from Dealers in the ordinary course of business.

(6) SERVICING

Servicing fees are reported as income when earned, net of related
amortization of purchased and excess servicing. Servicing costs are charged to
expense as incurred. Servicing fees included the following components:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Gross loan servicing fees............................. $ 22,288,086 $ 8,499,343 $ 8,411,182
Amortization of purchased servicing................... -- -- (4,849)
Amortization of excess servicing...................... (6,119,219) (2,023,938) (1,205,271)
------------- ------------- -------------
Net Servicing fees................................ $ 16,168,867 $ 6,475,405 $ 7,201,062
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The Company services Contracts and loans to borrowers residing in
approximately 49 states, with the largest concentrations of loans in California,
Florida, Pennsylvania and Texas. Servicing balances were made up of the
following components:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Contracts held for sale.......................... $ 22,827,354 $ 20,764,205 $ 23,469,223
Servicing subject to recourse provisions:
Whole loan portfolios........................ 11,212,010 21,213,050 29,754,103
Alton Receivables Corp....................... 10,240,973 22,732,021 35,324,463
CPS Receivables Corp......................... 461,653,273 224,218,079 104,252,042
-------------- -------------- --------------
$ 505,933,610 $ 288,927,355 $ 192,799,831
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

F-14
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(7) EXCESS SERVICING RECEIVABLES

The following table summarizes ESR activity:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of period.......................... $ 11,108,251 $ 5,154,361 $ 2,293,733
ESR gains recognized.................................. 18,665,429 7,977,828 4,065,899
Amortization of ESR................................... (6,119,219) (2,023,938) (1,205,271)
------------- ------------- -------------
Balance, end of period............................ $ 23,654,461 $ 11,108,251 $ 5,154,361
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

ESR balances were made up of the following components:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
1996 1995 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Present value of future cash flows............... $ 70,339,711 $ 34,538,442 $ 19,551,370
Discounted allowance for credit losses........... (46,685,250) (23,430,191) (14,397,009)
-------------- -------------- --------------
Net ESR balance.............................. $ 23,654,461 $ 11,108,251 $ 5,154,361
-------------- -------------- --------------
-------------- -------------- --------------
Servicing subject to recourse provisions..... $ 483,106,256 $ 268,163,150 $ 169,330,608
-------------- -------------- --------------
-------------- -------------- --------------
Discounted allowance as percentage of servicing
subject to recourse provisions............... 9.66% 8.74% 8.50%
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

Net gain on sale on Contracts was made up of the following components:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Dealer discount...................................... $ 8,271,777 $ 5,573,371 $ 6,750,955
ESR gains recognized................................. 18,665,429 7,977,828 4,065,899
Deferred acquisition fees (expenses)................. (1,381,436) (528,870) 647,766
Expenses related to sales............................ (2,234,755) (1,472,916) (2,010,000)
------------- ------------- -------------
$ 23,321,015 $ 11,549,413 $ 9,454,620
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

(8) SHAREHOLDERS' EQUITY

PREFERRED STOCK

The holders of the Series A Preferred Stock were entitled to receive
non-cumulative annual dividends equal to 6% of par value, payable quarterly in
cash (or, at the option of the Company, in-kind in additional shares of Series A
Preferred Stock), when and as declared by the Board of Directors, after the
Company's cumulative net income from the date of the Company's initial public
offering reached $5,000,000. No dividends or other distributions may be made
with respect to the common stock until accrued dividends

F-15
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(8) SHAREHOLDERS' EQUITY (CONTINUED)

have been declared and paid (or reserved for payment) on the Series A Preferred
Stock. Upon liquidation, the Series A Preferred Stock is entitled to receive, in
preference to any payment on the common stock, an amount equal to par value plus
any accrued and unpaid dividends. After March 31, 1994, the Series A Preferred
Stock was subject to redemption at the option of the Company at a price of $1.00
per share plus accrued and unpaid dividends. On March 15, 1995, the Company
redeemed, for an aggregate price of $3.4 million, all of the outstanding Series
A Preferred Stock with proceeds from the March 7, 1995, public offering of
2,000,000 shares of its common stock.

COMMON STOCK

On March 7, 1995, the Company completed a second public offering of
2,000,000 shares of its common stock. Net of related offering expenses of
$1,445,450, the Company raised $13,304,550 in this offering.

Holders of the common stock are entitled to such dividends as the Company's
Board of Directors, in its discretion, may declare out of funds available,
subject to the terms of any outstanding shares of preferred stock and other
restrictions. In the event of liquidation of the Company, holders of common
stock are entitled to receive, pro rata, all of the assets of the Company
available for distribution, after payment of any liquidation preference to the
holders of outstanding shares of preferred stock. Holders of the shares of
common stock have no conversion or preemptive or other subscription rights and
there are no redemption or sinking fund provisions applicable to the common
stock.

OPTIONS AND WARRANTS

In 1991, the Company adopted and gained sole shareholder approval of the
1991 Stock Option Plan (the "Plan") pursuant to which the Company's Board of
Directors may grant stock options to officers and key employees. The Plan, as
amended, authorizes grants of options to purchase up to 2,700,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. Stock options
have terms that range from 7 to 10 years and vest over a range of 0 to 7 years.
In addition to the Plan, in fiscal 1995, the Company granted 60,000 options to
certain directors of the Company that vest over three years and expire nine
years from the grant date.

At December 31, 1996, there were 97,000 additional shares available for
grant under the Plan. Of the options outstanding at December 31, 1996 and 1995
and March 31, 1995, 1,319,420, 1,296,786 and 1,191,872 were exercisable with
weighted-average exercise prices of $4.02, $2.71 and $2.62, respectively. The
per share weighted-average fair value of stock options granted during the year
ended December 31,

F-16
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(8) SHAREHOLDERS' EQUITY (CONTINUED)

1996 and the nine months ended December 31, 1995 was $4.99 and $4.17 at the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED DECEMBER
1996 31, 1995
--------------- ---------------
<S> <C> <C>
Expected life (years)................................................. 5.86 6.33
Risk-free interest rate............................................... 6.23% 6.80%
Volatility............................................................ 46.20% 46.20%
Expected dividend yield............................................... -- --
</TABLE>

The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. 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, "Accounting for Stock Based
Compensation", the Company's net income and net income per share would have been
reduced to the pro forma amounts indicted below.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Net income
As reported...................................................... $ 14,097,376 $7,575,122
Pro forma........................................................ 13,550,000 7,505,000

Net income per share
As reported...................................................... $ 0.95 $ 0.53
Pro forma........................................................ $ 0.92 $ 0.53

Net income per fully-diluted share
As reported...................................................... $ 0.93 $ 0.52
Pro forma........................................................ $ 0.90 $ 0.52
</TABLE>

Pro forma net income and net income per share reflects only options granted
in the year ended December 31, 1996 and the nine months ended December 31, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.

F-17
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(8) SHAREHOLDERS' EQUITY (CONTINUED)

Stock options activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at March 31, 1994........................................... 1,677,840 $ 2.63
Granted......................................................... 415,200 5.54
Exercised....................................................... 48,000 2.50
Canceled........................................................ -- --
---------- ----------------
Balance at March 31, 1995........................................... 2,045,040 3.23
Granted......................................................... 159,360 7.61
Exercised....................................................... 44,000 2.50
Canceled........................................................ -- --
---------- ----------------
Balance at December 31, 1995........................................ 2,160,400 3.56
Granted......................................................... 513,400 9.60
Exercised....................................................... 394,600 2.82
Canceled........................................................ 124,800 5.23
---------- ----------------
Balance at December 31, 1996........................................ 2,154,400 $ 5.04
---------- ----------------
---------- ----------------
</TABLE>

At December 31, 1996, the range of exercise prices, the number,
weighted-average exercise price and weighted-average remaining term of options
outstanding and the number and weighted-average price of options currently
exercisable are as follows:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING TERM PRICE EXERCISABLE PRICE
- ---------------------------------------------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 2.50--$ 2.50...................................... 874,920 1.80 $ 2.50 874,920 $ 2.50
$ 2.69--$ 2.69...................................... 228,920 4.96 $ 2.89 91,840 $ 2.69
$ 4.38--$ 4.38...................................... 70,000 7.25 $ 4.38 34,000 $ 4.38
$ 5.38--$ 5.38...................................... 301,200 7.25 $ 5.38 27,200 $ 5.38
$ 6.78--$ 8.38...................................... 201,760 8.09 $ 7.42 57,700 $ 7.41
$ 8.63--$ 8.63...................................... 15,000 9.53 $ 8.63 3,000 $ 8.63
$ 8.88--$ 8.88...................................... 326,400 9.25 $ 8.88 205,760 $ 8.88
$11.00--$11.00...................................... 15,200 7.83 $ 11.00 -- --
$12.00--$12.00...................................... 119,000 9.82 $ 12.00 23,800 $ 12.00
$12.13--$12.13...................................... 2,000 9.83 $ 12.13 400 $ 12.13
</TABLE>

In connection with the Company's initial public offering, the Company sold
to the underwriter of the offering, for an aggregate price of $120, warrants to
purchase up to 240,000 shares of the Company's common stock at an exercise price
of $3.00 per share. The warrants are exercisable during the four year period
commencing one year from the date of the offering. The shares represented by the
warrants have been registered for public sale. During the year ended December
31, 1996, the nine months ended

F-18
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(8) SHAREHOLDERS' EQUITY (CONTINUED)

December 31, 1995, and the year ended March 31, 1995, the underwriter exercised
86,000, 100,534, and 39,466 warrants, respectively, leaving a balance of 14,000
at December 31, 1996.

(9) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its facilities and certain computer equipment under
non-cancelable operating leases which expire through 2007. Future minimum lease
payments at December 31, 1996, under these leases are as follows:

Subsequent to December 31, 1996, the Company entered into a building lease
for a new collection facility in Chesapeake, Virginia. The lease calls for 126
monthly payments of $21,722 for total minimum lease payments of $2,736,993.

Rent expense for the year ended December 31, 1996, the nine months ended
December 31, 1995, and the year ended March 31, 1995, was $463,592, $186,483 and
$219,835, respectively. The Company's facility lease contains certain rental
concessions and escalating rental payments which are recognized as adjustments
to rental expense and are amortized on a straight-line basis over the term of
the lease.

LITIGATION

The Company is subject to lawsuits which arise in the ordinary course of its
business. Management is of the opinion, based in part upon consultation with its
counsel, that the liability of the Company, if any, arising from existing and
threatened lawsuits would not have a material adverse effect on the Company's
financial position and results of operations.

F-19
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(10) INCOME TAXES

Income taxes are comprised of the following:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal.................................................... $3,060,164 $2,156,799 $ 3,718,390
State...................................................... 1,150,859 726,319 1,144,158
------------ ------------ ------------
4,211,023 2,883,118 4,862,548
Deferred
Federal.................................................... 4,565,383 1,683,960 (353,739)
State...................................................... 818,614 515,108 (27,877)
------------ ------------ ------------
5,383,997 2,199,068 (381,616)
------------ ------------ ------------
Total tax expense........................................ $9,595,020 $5,082,186 $ 4,480,932
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The Company's effective tax expense differs from the amount determined by
applying the statutory Federal rate of 35% for the year ended December 31, 1996,
and for the nine months ended December 31, 1995, and the year ended March 31,
1995, to income before income taxes as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Expense at Federal tax rate.................................. $8,292,338 $4,430,058 $ 3,901,297
California franchise tax, net of............................. 1,280,157
Federal income tax benefit................................... 737,192 727,267
Other........................................................ 22,525 (85,064) (147,632)
------------ ------------ ------------
$9,595,020 $5,082,186 $ 4,480,932
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-20
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(10) INCOME TAXES (CONTINUED)

The tax effected cumulative temporary differences that give rise to deferred
tax assets and liabilities as of December 31, 1996, and December 31, 1995, are
as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Accrued Liabilities...................................................... $ 13,670 $ 77,716
Furniture and equipment.................................................. 23,095 52,938
Provision for credit losses.............................................. 301,357 33,727
State taxes.............................................................. 508,219 489,856
------------ ------------
846,341 654,237
Valuation allowance........................................................ -- --
------------ ------------
846,341 654,237
Deferred Tax Liabilities--
Excess servicing receivables............................................. 7,873,592 2,297,491
------------ ------------
Net deferred tax liability............................................. $7,027,251 $1,643,254
------------ ------------
------------ ------------
</TABLE>

In determining the possible future realization of deferred tax assets,
future taxable income from the following sources are taken into account: (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 years in which
net operating losses might otherwise expire.

The Company believes that the deferred tax asset will more likely than not
be realized due to the reversal of the deferred tax liability and expected
future taxable income.

(11) DEBT

In June 1995, the Company entered into two warehouse line of credit
agreements (collectively the "Line"). The Line provides the Company with an
interim financing facility to hold Contracts for sale in greater numbers and for
longer periods of time prior to their sale to other institutional investors. The
primary agreement provides for loans by Redwood Receivables Corporation
("Redwood") to the Company, to be funded by commercial paper issued by Redwood
and secured by Contracts pledged periodically by the Company. The Redwood
facility provides for a maximum of $100.0 million of advances to the Company,
with interest at a variable rate tied to prevailing commercial paper rates
(6.99% at December 31, 1996). When the Company wishes to securitize these
Contracts, a substantial part of the proceeds received from investors is paid to
Redwood, which simultaneously releases the pledged Contracts for transfer to a
pass-through securitization trust.

The second agreement is a standby line of credit with General Electric
Capital Corporation ("GECC"), also with a $100.0 million maximum, which the
Company may use only if and to the extent that Redwood does not provide funding
as described above. The GECC line is secured by Contracts and substantially all
the other assets of the Company. Both agreements extend through November 30,
1998.

F-21
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(11) DEBT (CONTINUED)

The two agreements are viewed as a single short-term warehouse line of
credit, with advances varying according to the amount of pledged Contracts. The
Company is charged a non-utilization fee of .25% per annum on the unused portion
of the Line.

In December 1996, the Company entered into a overdraft financing facility
with, a bank that provides for maximum borrowings of $2.0 million. Interest is
charged on the outstanding balance at the bank's reference rate (8.25% at
December 31, 1996) plus 1.75%. There were no borrowings outstanding under this
facility at December 31, 1996. The facility expires on June 1, 1998. Both the
Line and the overdraft financing facility contain various restrictive and
financial covenants that the Company was in compliance with at December 31,
1996.

On December 20, 1995, the Company issued $20.0 million in rising interest
subordinated redeemable securities due January 1, 2006 (the "Notes"). The Notes
are unsecured general obligations of the Company. Interest on the Notes is
payable on the first day of each month, commencing February 1, 1996, at an
interest rate of 10.0% per annum. The interest rate increases 0.25% on each
January 1 for the first nine years and 0.50% in the last year. In connection
with the issuance of the Notes, the Company incurred and capitalized issuance
costs of $1,105,695. The Company recognizes interest and amortization expense
related to the Notes using a method which approximates the effective interest
method over the expected redemption period. The Notes are subordinated to
certain existing and future indebtedness of the Company as defined in the
indenture agreement. The Company is required to redeem, subject to certain
adjustments, $1.0 million of the aggregate principal amount of the Notes through
the operation of a sinking fund on each of January 1, 2000, 2001, 2002, 2003,
2004 and 2005. The Notes are not redeemable at the option of the Company prior
to January 1, 1998. The Company may at its option elect to redeem the Notes from
the registered holders of the Notes, in whole or in part, at any time, on or
after January 1, 1998, and prior to January 1, 1999, at 102% of their principal
amount, on or after January 1, 1999, and prior to January 1, 2000, at 101% of
their principal amount, and on or after January 1, 2000, at 100% of their
principal amount, in each case plus accrued interest to and including the date
of redemption.

On March 12, 1993, the Company issued a $2 million five year convertible
subordinated note ("Note 1") to an institutional investor in conjunction with an
agreement by that investor to commit to purchase up to $50 million of the
Company's Contracts. Interest accrued at 11% and was payable semi-annually. On
July 5, 1995, the holder converted Note 1 to 533,334 shares of the Company's
common stock. On November 16, 1993, the Company issued a $3 million five year
convertible subordinated note ("Note 2") to the same institutional investor in
conjunction with an agreement by that investor to commit to purchase an
additional $50 million of the Company's Contracts. Interest accrued at 9.5% and
was payable semi-annually. On January 17, 1997, the holder converted Note 2 into
480,000 shares of the Company's common stock.

On May 15, 1994, the Company issued a promissory note in the amount of $2.0
million to the same institutional investor who held Note 2. On October 25, 1994,
the Company borrowed an additional $3.0 million under two new promissory notes
from two different institutional investors. These promissory notes bore interest
at 400 basis points over the Citibank Base Rate and matured on February 28,
1995, with provisions for extensions to April 30, 1995, at the option of the
Company. The Company repaid each of these notes with the proceeds from its March
7, 1995, public common stock offering.

F-22
<PAGE>

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(11) DEBT (CONTINUED)

On July 6, 1995, the Company issued a promissory note in the amount of $2.0
million to the same institutional investor who held Note 2. The note bore
interest at 200 basis points over the Citibank Base Rate and matured on December
31, 1995. On December 6, 1995, this note was repaid in full.

(12) EMPLOYEE BENEFITS

The Company sponsors a pretax savings and profit sharing plan (the "401(K)
Plan") under section 401(k) of the Internal Revenue Code. Under the 401(K) Plan,
eligible employees are able to contribute up to 15% of their compensation
(subject to stricter limitation in the case of highly compensated employees).
The Company matches 40% of employees' contributions up to $500 per employee per
calendar year. The Company's contribution to the 401(K) Plan was $63,801,
$13,811, and $16,245 for the year ended December 31, 1996, for the nine months
ended December 31, 1995, and for the year ended March 31, 1995, respectively.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active market values do not exist. Therefore, considerable
judgments were required in estimating fair value for certain items. The
subjective factors include, among other things, the estimated timing and amount
of cash flows, risk characteristics, credit quality and interest rates, all of
which are subject to change. Since the fair value is estimated as of December
31, 1996, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different. The estimated fair
values of financial assets and liabilities at December 31, 1996, were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENT VALUE VALUE VALUE VALUE
- ---------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash................................................ $ 153,958 $ 153,958 $ 10,895,157 $ 10,895,157
Contracts held for sale............................. 21,656,773 22,800,000 19,548,842 20,700,000
Investment in subordinated certificates............. -- -- 2,174,666 2,174,666
Investment in credit enhancements................... 43,597,472 43,597,472 30,477,793 30,477,793
Excess servicing receivable......................... 23,654,461 23,654,461 11,108,251 11,108,251
Warehouse line of credit............................ 13,264,585 13,264,585 7,500,000 7,500,000
Notes payable....................................... 20,000,000 20,000,000 20,000,000 20,000,000
Convertible subordinated debt....................... $ 3,000,000 $ 3,000,000 $ 3,000,000 $ 3,000,000
</TABLE>

CASH

The carrying value equals fair value.

F-23
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

CONTRACTS HELD FOR SALE

The fair value of the Company's contracts held for sale is determined in the
aggregate based upon current investor yield requirements and by discounting the
future cash flows using the current credit and discount rates that the Company
believes reflect the estimated credit, interest rate and prepayment risks
associated with similar types of instruments.

INVESTMENTS IN SUBORDINATED CERTIFICATES

The fair value is estimated by discounting future cash flows using credit
and discount rates that the Company believes reflect the estimated credit,
interest rate and prepayment risks associated with similar types of instruments.

INVESTMENTS IN CREDIT ENHANCEMENTS

EXCESS SERVICING RECEIVABLES

WAREHOUSE LINE OF CREDIT

The carrying value approximates fair value because the warehouse line of
credit is short-term in nature and the related interest rates are estimated to
reflect current market conditions for similar types of instruments.

NOTES PAYABLE

The fair value is estimated based on quoted market prices and on current
rates for similar debt with similar remaining maturities.

CONVERTIBLE SUBORDINATED DEBT

The carrying value approximates fair value because the related interest
rates are estimated to reflect current market conditions for similar types of
instruments.

(14) SUBSEQUENT EVENTS (UNAUDITED)

In January 1997, the Company purchased 80% of the outstanding stock of SLI
from Charles E. Bradley, Sr., Chairman of the Board of Directors and principal
shareholder, and John G. Poole, a director of the Company, for a purchase price
of $100,000. The transaction was considered and approved by the independent
members of the Board of Directors of the Company.

F-24
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1996, NINE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED MARCH 31, 1995

(14) SUBSEQUENT EVENTS (UNAUDITED, CONTINUED)

The Company has filed a Form S-3 Registration Statement with the Securities
and Exchange Commission pursuant to which it plans to sell approximately $22
million in unsecured Participating Equity Notes due in 2004. Twenty-five
percent of each note is convertible into common stock of the Company at
maturity or in connection with redemption. The notes will be subordinate to
all existing and future senior indebtedness. There can be no assurance that
all or any of such notes will be sold.

(15) SELECTED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1996
Revenues........................................ $ 9,907,581 $ 12,485,185 $ 13,758,526 $ 15,042,511
Income before income taxes...................... 5,101,297 5,517,249 6,451,297 6,622,553
Net income...................................... 3,051,297 3,271,229 3,834,297 3,940,553
Net income per common and common equivalent
share......................................... 0.21 0.22 0.26 0.26
Fully diluted net income per common and common
equivalent share.............................. 0.20 0.22 0.25 0.26

1995
Revenues........................................ $ 6,518,853 $ 8,089,304 $ 7,852,191 $ 8,313,218
Income before income taxes...................... 3,376,694 4,075,286 4,175,663 4,406,359
Net income...................................... 2,019,189 2,342,207 2,532,645 2,700,270
Net income per common and common equivalent
share......................................... 0.18 0.18 0.18 0.18
Fully diluted net income per common and common
equivalent share.............................. 0.18 0.16 0.18 0.18
</TABLE>

F-25
<PAGE>

EXHIBIT INDEX

Exhibit 3.1....Restated Articles of Incorporation of the Company, as amended on
December 13, 1993, and March 7, 1996. (A)
Exhibit 3.2....Amended and Restated By-Laws of the Company, adopted November 30,
1993. (B)
Exhibit 4.1....The Indenture dated December 15, 1995, between Consumer Portfolio
Services, Inc., and Harris Trust and Savings Bank. (C)
Exhibit 4.2....First Supplemental Indenture dated December 15, 1995, between
Consumer Portfolio Services, Inc., and Harris Trust and Savings
Bank. (C)
Exhibit 10.1...1991 Stock Option Plan as amended on April 27, 1994, and forms of
Stock Option Agreement. (B)
Exhibit 10.2...Lease Agreement dated February 14, 1991 between Holdings and
Irvine Technology Partners ("ITP"), First Amendment to Lease
dated as of June 26, 1992 by and among ITP, Holdings and the
Company and Assignment and Assumption of Lease dated April 1,
1992 by and between Holdings and the Company. (D)
Exhibit 10.3...Amendment #2, dated January 17, 1995, between ITP and Consumer
Portfolio Services, Inc., to Lease Agreement dated February 14,
1991, between Holdings and Irvine Technology Partners ("ITP"),
First Amendment to Lease dated as of June 26, 1992, by and among
ITP, Holdings and the Company and Assignment and Assumption of
Lease dated April 1, 1992, by and between Holdings and the
Company. (E)
Exhibit 10.4...Form of Automobile Dealer Agreement between the Company and its
Dealers and the related Assignment. (D)
Exhibit 10.5...Consulting Agreement dated February 14, 1996, by and between the
Company and Stanwich Partners, Inc. (A)
Exhibit 10.6...The Receivables Funding and Servicing Agreement, dated June 1,
1995, between Consumer Portfolio Services, Inc., CPS Funding
Corp., Redwood Receivables Corporation and General Electric
Capital Corporation. (A)
Exhibit 10.7...Amended and Restated Motor Vehicle Installment Contract Loan and
Security Agreement, dated June 1, 1995, between Consumer
Portfolio Services, Inc., and General Electric Capital
Corporation. (A)
Exhibit 10.8...Agreement and Plan of Merger, dated August 30, 1995, between
Consumer Portfolio Services, Inc., and CPS Holdings, Inc. (F)
Exhibit 10.9...Promissory Note, dated September 27, 1995, made by the Company in
favor of Charles E. Bradley, Sr., in the aggregate principal
amount of $2,000,000.(A)
Exhibit 10.10..Promissory Note, dated July 6, 1995, made by the Company in favor
of SunAmerica, Inc., in the aggregate principal amount of
$2,000,000. (A)
Exhibit 10.11..Lease Agreement dated December 9, 1996 between the Company and
The Prudential Insurance Company of America, relating to the
Company's branch facility in Chesapeake, Virginia. (G)
Exhibit 11.0...Statement re Computation of Per Share Earnings.
Exhibit 12.....Statement re Computation of Ratios. (H)
Exhibit 21.1...Subsidiaries of the Company. (G)
Exhibit 23.1...Consent of independent auditors.
Exhibit 24.1...Powers of Attorney. (G)
Exhibit 27.....Financial Data Schedule. (G)
Exhibit 99.....Risk Factors
- -----------------
A. Previously filed as an exhibit to the Company's Form 10-KSB for the
transition period ended December 31, 1995, and incorporated herein by
reference.
B. Previously filed as an exhibit to the Company's Form 10-KSB for the fiscal
year ended March 31, 1994, and incorporated herein by reference.
C. Previously filed as an exhibit to the Company's Form 8-K, filed on
December 26, 1995, and incorporated herein by reference.
D. Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-49770, as amended, and incorporated herein by reference.

<PAGE>

E. Previously filed as an exhibit to the Company's Form 10-KSB for the fiscal
year ended March 31, 1995, and incorporated herein by reference.
F. Previously filed as an exhibit to the Company's Proxy Statement for the
September 26, 1995, Annual Meeting, and incorporated herein by reference.
G. Previously filed as an exhibit to this report, on March 31, 1997.
H. Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, No. 333-21289, as amended on March 4, 1997, and incorporated herein
by reference.

<PAGE>

Consumer Portfolio Services, Inc.
Statement Regarding Computation of Per Share Earnings (Loss)
Exhibit 11

Nine month transition
Primary earnings (loss) per share Year ended period ended
December 31, December 31, Year ended March 31,
------------------- --------------------- -------------------------------------

1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Computation for Statement of Operations;
Net earnings (loss) per statement of
operations used in primary
earnings (loss) per share computation

Net earnings (loss) $ 14,097,376 $ 7,575,122 $6,665,630 $(1,778,069) $(1,502,272)

Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess
of 20% limitations - - - - -

------------------- --------------------- ---------- ----------- ------------
Net earnings (loss) as adjusted $ 14,097,376 $ 7,575,122 $6,665,630 $(1,778,069) $(1,502,272)
------------------- --------------------- ---------- ----------- ------------
------------------- --------------------- ---------- ----------- ------------

Weighted average number
of shares outstanding 13,489,247 11,582,625 8,903,596 8,520,548 6,378,082

Net shares issuable from assumed exercise
of warrants and options, as determined by
the application of the Treasury
Stock Method 1,360,362 2,740,967 2,240,172 - -

Weighted average number of -------------------- --------------------- ---------- ----------- ------------
shares outstanding 14,849,609 14,323,592 11,143,268 8,520,548 6,378,582
-------------------- --------------------- ---------- ----------- ------------
-------------------- --------------------- ---------- ----------- ------------

Primary earnings (loss) per -------------------- --------------------- ---------- ----------- ------------
share, as adjusted $ 0.95 $ 0.53 $ 0.60 $ (.21) $ (0.24)
-------------------- --------------------- ---------- ----------- ------------
-------------------- --------------------- ---------- ----------- ------------

</TABLE>

<PAGE>

Consumer Portfolio Services, Inc.
Statement Regarding Computation of Per Share Earnings (Loss) - (continued)
Exhibit 11
<TABLE>
<CAPTION>

Nine month transition
Fully diluted earnings (loss) per share Year ended period ended
December 31, December 31, Year ended March 31,
-------------- -------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Computation for Statement of Operations: 1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Net earnings (loss) per statement of
operations used in fully diluted
earnings (loss) per share computation

Net earnings (loss) $ 14,097,376 $ 7,575,122 $ 6,665,630 $ (1,778,069) $ (1,502,272)

Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess
of 20% limitations - - - - -

Interest on borrowings, net of tax effect
on conversion of convertible
subordinated debt 169,575 127,823 301,990 - -

--------------- -------------- -------------- --------------- ---------------
Net earnings (loss) as adjusted $ 14,266,951 $ 7,702,945 $ 6,967,620 $ (1,778,069) $ (1,502,272)
--------------- -------------- -------------- --------------- ---------------
--------------- -------------- -------------- --------------- ---------------

Weighted average number
of shares outstanding 13,489,247 11,582,625 8,903,096 8,520,548 6,378,082

Net shares issuable from assumed exercise
of warrants and options, as determined by
the application of the Treasury
Stock Method 1,440,797 2,740,967 2,621,922 - -

Shares issuable from assumed conversion 480,000 480,000 1,013,334 - -
of subordinated debt

Weighted average number of --------------- -------------- -------------- --------------- ---------------
shares outstanding 15,410,044 14,803,592 12,538,352 8,520,548 6,378,082
--------------- -------------- -------------- --------------- ---------------
--------------- -------------- -------------- --------------- ---------------

Fully diluted earnings (loss) per --------------- -------------- -------------- --------------- ---------------
share, as adjusted $ 0.93 $ 0.52 $ 0.56 $ (0.21) $ (0.24)
--------------- -------------- -------------- --------------- ---------------
--------------- -------------- -------------- --------------- ---------------
</TABLE>

<PAGE>

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Consumer Portfolio Services, Inc.:

We consent to incorporation by reference in the registration statements (Nos.
33-77314, 33-82778, 333-00880, 333-00736 and 333-21289) on Form S-3 and (Nos.
33-78680 and 33-80327) on Form S-8 of Consumer Portfolio Services, Inc. of our
report dated February 14, 1997, relating to the consolidated balance sheets of
Consumer Portfolio Services, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1996, for the nine-month
period ended December 31, 1995, and for the year ended March 31, 1995, which
report appears in the December 31, 1996 annual report on Form 10-K/A of
Consumer Portfolio Services, Inc.

KPMG PEAT MARWICK LLP

Orange County, California
April 14, 1997

<PAGE>

EXHIBIT 99

RISK FACTORS

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY. The Company requires significant operating cash to purchase
Contracts. As a result of the Company's expansion since inception and its
program of securitizing and selling Contracts, the Company's cash requirements
have in the past exceeded cash generated from operations. The Company's
primary operating cash requirements include the funding of (a) purchases of
Contracts pending their pooling and sale, (b) Spread Accounts in connection with
sales or securitizations of Contracts, (c) fees and expenses incurred in
connection with its sales and securitizations of Contracts, (d) tax payments
and (e) ongoing administrative and other operating expenses. Net cash used in
operating activities during fiscal 1995, the nine-month transition period ended
December 31, 1995, and the year ended December 31, 1996 was $6.1 million, $18.5
million, and $9.7 million, respectively. The Company has obtained these funds in
three ways: (a) loans and warehouse financing arrangements, pursuant to which
Contracts are financed on a temporary basis; (b) securitizations or sales of
Contracts, pursuant to which Contracts are sold; and (c) external financing.
At December 31, 1996 the Company had cash of approximately $154,000.

CASH REQUIREMENTS ASSOCIATED WITH SECURITIZATION TRUSTS. Under the
financial structures the Company has used to date in its seventeen
securitizations, certain excess servicing cash flows generated by the
Contracts are retained in a Spread Account within the securitization trusts to
provide liquidity and credit enhancement. While the specific terms and mechanics
of the Spread Account vary slightly among transactions, the Company's agreements
with Financial Security Assurance, Inc. ("FSA"), the financial guaranty insurer
that has provided credit enhancements in connection with the Company's
securitizations since June 1994, generally provide that the Company is not
entitled to receive any excess servicing cash flows unless certain Spread
Account balances have been attained and/or the delinquency or losses related
to the Contracts in the pool are below certain predetermined levels. In the
event delinquencies and losses on the Contracts exceed such levels, the terms of
the securitization may require increased Spread Account balances to be
accumulated for the particular pool; may restrict the distribution to the
Company of excess cash flows associated with other pools in which asset-backed
securities are insured by FSA; or, in certain circumstances, may require the
transfer of servicing on some or all of the Contracts in FSA-insured pools to
another servicer. The imposition by FSA of any of these conditions could
materially adversely affect the Company's liquidity and financial condition. In
the past, delinquency and loss levels on ten of the FSA-insured pools have
attained levels which temporarily resulted in increased Spread Account
requirements for those pools. As of December 31, 1996, all FSA-insured pools
were performing within the guidelines required by their related insurance
policies and therefore were not subject to increased Spread Account
requirements.

<PAGE>

DEPENDENCE ON WAREHOUSE FINANCING. One of the Company's primary sources
of financing is its $100.0 million warehouse line of credit (the "Warehouse Line
of Credit"), under which the Company borrows against Contracts held for sale,
pending their sale in securitization transactions. The Warehouse Line of
Credit expires in 1998. The Company expects to be able to maintain existing
warehouse arrangements (or to obtain replacement or additional financing) as
current arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms. To the
extent that the Company is unable to maintain its existing Warehouse Line of
Credit or is unable to arrange new warehouse lines of credit, the Company may
have to curtail Contract purchasing activities, which could have a material
adverse effect on the Company's financial condition and results of operations.

DEPENDENCE ON SECURITIZATION PROGRAM. The Company is dependent upon its
ability to continue to pool and sell Contracts in order to generate cash
proceeds for new purchases. Adverse changes in the market for securitized
Contract pools, or a substantial lengthening of the warehousing period, would
burden the Company's financing capabilities, could require the Company to
curtail its purchase of Contracts, and could have a material adverse effect on
the Company. In addition, as a means of reducing the percentage of cash
collateral that the Company would otherwise be required to deposit and
maintain in Spread Accounts, all of the Company's securitizations since June
1994 have utilized credit enhancement in the form of financial guaranty
insurance policies issued by FSA to achieve "AAA/Aaa" ratings for the
asset-backed securities that have been sold to investors. The Company believes
that financial guaranty insurance policies reduce the costs of securitizations
relative to alternative forms of credit enhancements available to the Company.
FSA is not required to insure Company-sponsored securitizations and there can be
no assurance that it will continue to do so or that future securitizations will
be similarly rated. Similarly, there can be no assurance that any
securitization transaction will be available on terms acceptable to the Company,
or at all. The timing of any securitization transaction is affected by a number
of factors beyond the Company's control, any of which could cause substantial
delays, including, without limitation, market conditions and the approval by all
parties of the terms of the securitization. Any delay in the sale of a pool of
Contracts beyond a quarter-end could reduce the gain on sale recognized in such
quarter and could result in decreased earnings or possible losses for such
quarter being reported by the Company.

ECONOMIC CONSIDERATIONS

RISK OF GENERAL ECONOMIC DOWNTURN. The Company's business is directly
related to sales of new and used automobiles, which are affected by employment
rates, prevailing interest rates and other domestic economic conditions.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Company's focus on Sub-Prime

<PAGE>

Borrowers, the actual rates of delinquencies, repossessions and losses on such
Contracts could be higher under adverse economic conditions than those currently
experienced in the automobile finance industry in general. Any sustained period
of economic slowdown or recession could adversely affect the Company's ability
to sell or securitize pools of Contracts. The timing of any economic changes is
uncertain, and sluggish sales of automobiles and weakness in the economy could
have an adverse effect on the Company's business and that of the Dealers from
which it purchases Contracts.

CREDITWORTHINESS OF BORROWERS. The Company specializes in the purchase,
sale and servicing of Contracts to finance automobile purchases by Sub-Prime
Borrowers, which entail a higher risk of non-performance, higher delinquencies
and higher losses than Contracts with more creditworthy borrowers. While the
Company believes that the underwriting criteria and collection methods it
employs enable it to control the higher risks inherent in Contracts with
Sub-Prime Borrowers, no assurance can be given that such criteria and methods
will afford adequate protection against such risks. Since inception, the
Company has expanded its operations significantly and has rapidly increased its
Servicing Portfolio. Because there is limited performance data available with
respect to that portion of the Company's Servicing Portfolio purchased most
recently, historical delinquency and loss statistics are not necessarily
indicative of future performance. The Company has experienced fluctuations in
the delinquency and charge-off performance of its Contracts, including an
upward trend for each. The Company believes, however, that such fluctuations
are normal and that the upward trend is the result of the seasoning of the
Servicing Portfolio. In the event that portfolios of Contracts sold and
serviced by the Company experience greater defaults, higher delinquencies or
higher losses than anticipated, the Company's earnings could be negatively
impacted. In addition, the Company bears the entire risk of loss on Contracts
it holds for sale. A larger number of defaults than anticipated could also
result in adverse changes in the structure of the Company's future
securitization transactions, such as increased interest rates on the
asset-backed securities issued in those transactions.

CONTRACTS MAY BE ONLY PARTIALLY SECURED. Although the Contracts are each
secured by a lien on the purchased vehicle, a repossession in the event of
default generally does not yield proceeds sufficient to pay all amounts owing
under a Contract. The actual cash value of the vehicle may be less than the
amount financed at inception of the Contract, and also thereafter, because the
amount financed may be as much as 115% of the wholesale book value in the case
of used vehicles or 110% of manufacturer's invoice in the case of new vehicles,
plus sales tax, licensing fees, and any service contract or credit life or
disability policy purchased by the borrower, less the borrower's down payment
and/or trade-in allowance (generally not less than 10% of the vehicle sales
price). In addition, the proceeds available upon resale are reduced by
statutory liens, such as those for repairs, storage, unpaid taxes and unpaid
parking fines, and by the costs incurred in the repossession and resale. Unless
the Contract is sufficiently seasoned that the borrower has substantial equity
in the vehicle, the proceeds of sale are generally insufficient to pay all
amounts owing. For that reason, the Company's collection policies aim to avoid
repossession to the extent possible.

<PAGE>

GEOGRAPHIC CONCENTRATION OF BUSINESS. For the year ended December 31,
1996, the Company purchased 25.8% of its Contracts from Dealers located in
California, and its prospects are dependent, in part, upon economic conditions
prevailing in this state. Such geographic concentration increases the potential
impact of collection disruptions and casualty losses on the financed vehicles
which could result from regional economic or catastrophic events. Although the
percentage of the Servicing Portfolio purchased from Dealers in California has
been declining as the Company's volume of Contract purchases has increased, at
December 31, 1996, 33.3% of the Servicing Portfolio represents obligations of
automobile purchasers in California. Accordingly, an economic slowdown in
California could result in a decline in the availability of Contracts for
purchase by the Company as well as an increase in delinquencies and
repossessions. Such conditions could have a material adverse effect on the
Company's revenue and results of operations.

POSSIBLE INCREASE IN COST OF FUNDS. The Company's profitability is
determined by, among other things, the difference between the rate of interest
charged on the Contracts purchased by the Company and the pass-through rate of
interest (the "Pass-Through Rate") payable to investors on portfolios of
Contracts sold by the Company. The Contracts purchased by the Company
generally bear the maximum finance charges permitted by applicable state law.
The fixed Pass-Through Rates payable to investors on portfolios of Contracts
sold by the Company are based on interest rates prevailing in the market at the
time of sale. Consequently, increases in market interest rates tend to reduce
the "spread" or margin between Contract finance charges and the Pass-Through
Rates required by investors and, thus, the potential operating profits to the
Company from the purchase, sale and servicing of Contracts. Operating profits
expected to be earned by the Company on portfolios of Contracts previously sold
are insulated from the adverse effects of increasing interest rates because the
Pass-Through Rates on such portfolios were fixed at the time the Contracts
were sold. Any future increases in interest rates would likely increase the
Pass-Through Rates for future portfolios sold and could have a material
adverse effect on the Company's results of operations.

PREPAYMENT AND DEFAULT RISK. Gains from the sale of Contracts in the
Company's seventeen securitization transactions have constituted a significant
portion of the net earnings of the Company and are likely to continue to
represent a significant portion of the Company's net earnings. A portion of
the gains are based in part on management's estimates of future prepayment and
default rates and other considerations in light of then-current conditions. If
actual prepayments with respect to Contracts occur more quickly than was
projected at the time such Contracts were sold, as can occur when interest
rates decline, or if default rates are greater than projected at the time such
Contracts were sold, a charge to earnings may be required and would be taken
in the period of adjustment. If actual prepayments occur more slowly or if
default rates are lower than estimated with respect to Contracts sold, total
revenue

<PAGE>

would exceed previously estimated amounts. Actual default and prepayment
performance, both in the aggregate and as to each securitization trust, has
been materially consistent with management's estimates. No material charges to
earnings have occurred as a result of default and prepayment performance.
However, there can be no assurance that charges to earnings will not occur
in the future as a result of actual default and prepayment performance
exceeding management's estimates.

COMPETITION

The automobile financing business is highly competitive. The Company
competes with a number of national, local and regional finance companies. In
addition, competitors or potential competitors include other types of
financial services companies, such as commercial banks, savings and loan
associations, leasing companies, credit unions providing retail loan financing
and lease financing for new and used vehicles and captive finance companies
affiliated with major automobile manufacturers such as General Motors Acceptance
Corporation, Ford Motor Credit Corporation, Chrysler Credit Corporation and
Nissan Motors Acceptance Corporation. Many of the Company's competitors and
potential competitors possess substantially greater financial, marketing,
technical, personnel and other resources than the Company. Moreover, the
Company's future profitability will be directly related to the availability
and cost of its capital relative to that of its competitors. The Company's
competitors and potential competitors include far larger, more established
companies that have access to capital markets for unsecured commercial paper
and investment grade rated debt instruments, and to other funding sources which
may be unavailable to the Company. Many of these companies also have
long-standing relationships with Dealers and may provide other financing to
Dealers, including floor plan financing for the Dealers' purchases of
automobiles from manufacturers, which is not offered by the Company. There can
be no assurance that the Company will be able to continue to compete
successfully.

MANAGEMENT OF RAPID GROWTH

The Company has experienced rapid growth and expansion of its business.
The Company's ability to support and manage continued growth is dependent upon,
among other things, its ability to hire, train, supervise and manage the
increased personnel. Furthermore, the Company's ability to manage portfolio
delinquency and loss rates is dependent upon the maintenance of efficient
collection procedures, adequate collection staffing, internal controls, and
automated systems. There can be no assurance that the Company's personnel,
procedures, staff, internal controls, or systems will be adequate to support
such growth.

RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS

The Warehouse Line of Credit and the indentures governing the notes
("Notes") that the Company proposes to issue in April 1997("Indenture") and
the notes ("1995 Notes") that the Company issued in December 1995("1995
Indenture") contain covenants limiting, among other things, the nature and
amount of additional indebtedness that the Company may incur. These covenants
could limit the Company's ability to withstand competitive pressures or adverse
economic conditions, make acquisitions or take advantage of business
opportunities that

<PAGE>

may arise. Failure to comply with these covenants could, as provided in the
Warehouse Line of Credit, permit the lender under the Warehouse Line of Credit
to accelerate payment of the amounts borrowed under the facility or, as
provided in the 1995 Indenture, permit the indenture trustee thereunder to
accelerate payment of the 1995 Subordinated Debt.

POTENTIAL FOR ADDITIONAL SENIOR INDEBTEDNESS

Under the Indenture and the 1995 Indenture, the Company will be permitted
to incur substantial additional senior indebtedness. Based on the Company's
consolidated stockholders' equity as of December 31, 1996, the Company would
be permitted to borrow approximately $328 million in Senior Indebtedness.
Effective January 17, 1997, an outstanding $3 million convertible subordinated
note was converted into 480,000 shares of the Company's Common Stock. The
anticipated sale of the Notes, as to which there can be no assurance, would
increase the Company's outstanding subordinated indebtedness. The interest
expense associated with the Notes and the potential interest expense associated
with the maximum permitted Senior Indebtedness could substantially increase the
Company's fixed charge obligations and could potentially limit the Company's
ability to meet its obligations under the Notes.

ABILITY TO REPAY NOTES UPON ACCELERATED REDEMPTION

Upon the occurrence of a Special Redemption Event (certain events or
transactions that result in a change in control of the Company), each holder
of the Notes or the 1995 Notes will have the right to require that the Company
purchase the holder's notes at 100% of the principal amount plus accrued
interest. If a Special Redemption Event should occur, there can be no assurance
that the Company will have available funds sufficient to pay that purchase price
for all of the notes that might be delivered by holders seeking to exercise such
rights. In the event the Company is required to purchase outstanding notes
pursuant to a Special Redemption Event, the Company expects that it would seek
third party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing, and, if obtained, the terms of any such
financing may be less favorable than the terms of the notes.

LITIGATION

Because of the consumer-oriented nature of the industry in which the
Company operates and the application of certain laws and regulations, industry
participants are regularly named as defendants in class-action litigation
involving alleged violations of federal and state laws and regulations and
consumer law torts, including fraud. Many of these actions involve alleged
violations of consumer protection laws. Although the Company is not involved
in any material litigation, a significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition and results of operations.

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DEPENDENCE ON DEALERS

The Company is dependent upon establishing and maintaining relationships
with unaffiliated Dealers to supply it with Contracts. As of December 31, 1996
the Company was a party to Dealer Agreements with 2,182 Dealers. During the
year ended December 31, 1996, no Dealer accounted for more than 2.3% of the
Contracts purchased by the Company. The Dealer Agreements do not require Dealers
to submit a minimum number of Contracts for purchase by the Company. The failure
of Dealers to submit Contracts that meet the Company's underwriting criteria
would have a material adverse effect on the Company's financial condition and
results of operations.

CONTRACTUAL RECOURSE BY PURCHASERS OF CONTRACTS

Purchasers of Contracts have recourse against the Company in the event of
the Company's breach of its representations and warranties to the purchaser
(relating to the enforceability and validity of the Contracts) or certain
defaults with respect to the Contracts. In such cases, recourse is limited to
requiring the Company to repurchase the Contracts in question. In the event
the Company is required to repurchase a Contract, the Company will generally
have similar recourse against the Dealer from which it purchased the Contract;
however, there can be no assurance that any Dealer will have the financial
resources to satisfy its repurchase obligations to the Company. Subject to any
recourse against Dealers, the Company will bear any loss on repossession and
resale of vehicles financed under Contracts repurchased by it from investors,
which could have a material adverse effect on the financial condition and
results of operations of the Company.

At December 31, 1996, the Servicing Portfolio subject to recourse was
$483.1 million. To date, the Company has never been required to repurchase a
Contract due to a breach of its representations and warranties to the trust.
However, the Company has voluntarily repurchased Contracts from the trusts when
the collateral suffers an uninsured casualty loss. In the event of a repurchase,
the Company is not obligated to replace the Contract repurchased. For the year
ended December 31, 1996, aggregate repurchases of Contracts with uninsured
casualty losses, and the amount of losses thereon, were approximately $1.7
million. The Company may or may not continue its practice of voluntarily
repurchasing Contracts from the trusts.

GOVERNMENT REGULATION

The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of its Contracts; (iv) require
the Company to provide specified disclosures; and (v) regulate certain servicing
and collection practices and define its rights to repossess and sell collateral.
An adverse change in existing laws or regulations, or in the interpretation
thereof, the promulgation of any additional laws or regulations, the failure
to comply with such laws and regulations or the expansion of the Company's
business into jurisdictions with more stringent requirements could have a
material adverse effect on the Company's financial condition and results of
operations.

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OPERATING LOSSES IN PRIOR YEARS

The Company incurred net losses for each of fiscal 1993 and 1994 of $1.5
million, and $1.8 million, respectively. Losses incurred through the end of
fiscal 1993 were attributable primarily to the Company's relatively high
degree of fixed operating costs as compared to its revenue in those years. The
net loss for fiscal 1994 was attributable entirely to a one-time, non-cash
accounting charge reflecting the release of the Escrow Shares. Although the
Company generated net income of $6.7 million for fiscal 1995, $7.6 million for
the nine-month transition period ended December 31, 1995, and $14.1 million for
the year ended December 31, 1996, there can be no assurance that the Company
will not sustain losses in the future.

DEPENDENCE ON KEY PERSONNEL

The Company's success is largely dependent on the efforts of Charles E.
Bradley, Jr., its President, Jeffrey P. Fritz, its Senior Vice President--Chief
Financial Officer, and on Nicholas P. Brockman, William J. Brummund, Jr.,
Richard P. Trotter, Curtis K. Powell, and Mark A. Creatura, each of whom is a
Senior Vice President responsible for a different aspect of the Company's
operations. The Company has not entered into employment agreements with any of
these individuals and the loss of the services of any of these individuals
could have a material adverse effect on the Company. The Company has obtained
"key man" life insurance on Messrs. Bradley and Fritz in the amount of $1.0
million each.

CONTROL OF THE COMPANY

As of December 31, 1996, Charles E. Bradley, Jr., his father, Charles
Bradley, Sr., and other members of his family beneficially owned 3,847,497
shares of outstanding Common Stock, and held options or other rights to acquire
an additional 867,640 shares. Such shares represent approximately 27.0% of the
outstanding Common Stock of the Company (or 31.2%, upon assumed exercise of all
such options). As a result of their ownership of Common Stock, they and the
other directors of the Company collectively are able, as a practical matter, to
elect a majority of the Company's Board of Directors, to cause an increase in
the authorized capital or the dissolution, merger or sale of the assets of the
Company, and generally to direct the affairs of the Company.