<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 1-11416
------------------------
CONSUMER PORTFOLIO SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 33-0459135
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER: (949) 753-6800
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT:
2 ADA, IRVINE, CALIFORNIA, 92618
------------------------
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 19, 1998, the registrant had 15,658,501 common shares
outstanding.
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<PAGE> 2
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of
September 30, 1998 and December 31, 1997......... 3
Condensed consolidated statements of income for the
three and nine month periods ended
September 30, 1998 and 1997...................... 4
Condensed consolidated statements of cash flows for
the nine month periods ended
September 30, 1998 and 1997...................... 5
Notes to condensed consolidated financial
statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 20
Signatures.................................................. 21
Exhibit Index............................................... 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Cash........................................................ $ 617 $ 1,745
Contracts held for sale (note 2)............................ 288,950 68,271
Servicing fees receivable................................... 8,296 5,425
Residual interest in securitizations (note 3)............... 205,787 124,616
Furniture and equipment, net................................ 4,753 3,128
Taxes receivable............................................ -- 1,528
Deferred financing costs.................................... 1,597 1,840
Investment in unconsolidated affiliates..................... 4,574 3,892
Related party receivables................................... 6,831 7,295
Other assets................................................ 14,372 8,155
-------- --------
$535,777 $225,895
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses......................... $ 22,119 $ 10,427
Warehouse lines of credit................................... 286,588 61,666
Taxes payable............................................... 23,345 13,143
Capital lease obligation.................................... 1,931 1,492
Notes payable............................................... 2,879 1,506
Residual financing.......................................... 33,000 --
Subordinated debt........................................... 40,000 40,000
Related party debt.......................................... 20,000 15,055
-------- --------
429,862 143,289
Shareholders' Equity
Preferred stock, $1 par value; authorized 5,000,000 shares;
none issued............................................... -- --
Series A preferred stock, $1 par value; authorized 5,000,000
shares; 3,415,000 shares issued; none outstanding......... -- --
Common stock, no par value; authorized 30,000,000 shares;
15,658,501 and 15,210,042 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively.... 47,304 42,261
Notes receivable from exercise of options................... -- (500)
Retained earnings........................................... 58,611 40,845
-------- --------
105,915 82,606
-------- --------
$535,777 $225,895
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gain on sale of contracts, net
(note 4)............................ $ 18,184 $ 10,385 $ 47,525 $ 25,660
Interest income (note 5)............... 12,060 6,632 35,655 18,305
Servicing fees......................... 6,899 3,764 17,891 9,894
Other.................................. 305 503 886 1,793
----------- ----------- ----------- -----------
37,448 21,284 101,957 55,652
----------- ----------- ----------- -----------
Expenses:
Employee costs......................... 8,333 4,388 20,684 10,921
General and administrative............. 6,335 3,312 15,911 9,493
Interest............................... 5,958 3,035 14,487 6,694
Provision for credit losses............ 2,871 1,053 12,875 2,649
Marketing.............................. 2,362 688 4,895 1,418
Occupancy.............................. 522 342 1,501 877
Depreciation and amortization.......... 304 138 906 543
Related party consulting fees.......... 19 19 56 56
----------- ----------- ----------- -----------
26,704 12,975 71,315 32,651
----------- ----------- ----------- -----------
Earnings before income taxes............. 10,744 8,309 30,642 23,001
Income taxes............................. 4,506 3,493 12,876 9,654
----------- ----------- ----------- -----------
Net income............................... $ 6,238 $ 4,816 $ 17,766 $ 13,347
=========== =========== =========== ===========
Earnings per share (note 6):
Basic.................................. $ 0.40 $ 0.34 $ 1.16 $ 0.94
Diluted................................ $ 0.38 $ 0.30 $ 1.08 $ 0.85
Number of shares used in computing
earnings per share (note 6):
Basic............................... 15,557,277 14,343,505 15,328,336 14,270,835
Diluted............................. 16,947,809 16,522,695 16,745,186 15,942,745
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 17,766 $ 13,347
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization........................... 906 543
Amortization of net interest receivables................ 19,367 9,105
Amortization of deferred financing costs................ 243 187
Provision for credit losses............................. 12,875 2,649
NIR gains recognized.................................... (36,704) (22,199)
Loss on sale of fixed asset............................. -- 13
Gain on sale of subsidiary.............................. (56) --
Gain on investment in unconsolidated affiliates......... (617) (713)
Changes in operating assets and liabilities:
Purchases of contracts held for sale.................. (895,581) (449,714)
Liquidation of contracts held for sale................ 662,027 376,369
Servicing fees receivable............................. (2,872) (1,575)
Initial deposits to spread accounts................... (36,323) (13,009)
Deposits to spread accounts and overcollateralization
accounts............................................. (44,304) (22,295)
Release of cash from spread accounts.................. 16,793 12,790
Other assets.......................................... (7,400) (410)
Accounts payable and accrued expenses................. 11,890 9,346
Warehouse lines of credit............................. 224,922 49,054
Taxes payable/receivable.............................. 11,891 5,884
--------- ---------
Net cash used in operating activities............... (45,177) (30,628)
Cash flows from investing activities:
Advances to related parties............................... (242) --
Repayment of related party receivables.................... 707 --
Investment in unconsolidated affiliate.................... (65) (686)
Purchases of furniture and equipment...................... (1,833) (1,585)
Net cash from sale of subsidiary.......................... 381 --
Purchase of subsidiary, net of cash acquired.............. -- (80)
--------- ---------
Net cash used in investing activities............... (1,052) (2,351)
Cash flows from financing activities:
Increase in residual financing............................ 33,000 --
Issuance of notes to related party........................ 5,000 54,500
Issuance of notes payable................................. 2,461 20,073
Repayment of capital lease obligations.................... (400) --
Repayment of notes payable................................ (502) (609)
Repayment of related party debt........................... -- (40,063)
Payment of financing costs................................ -- (1,165)
Issuance of common stock.................................. 5,000 --
Exercise of options and warrants.......................... 542 494
--------- ---------
Net cash provided by financing activities........... 45,101 33,230
--------- ---------
Increase (decrease) in cash................................. (1,128) 251
Cash at beginning of period................................. 1,745 154
--------- ---------
Cash at end of period....................................... $ 617 $ 405
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 13,391 $ 5,979
Income taxes............................................ $ 860 $ 3,704
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock upon conversion of debt.......... $ -- $ 3,000
Furniture and equipment acquired through capital leases... $ 839 $ 332
Purchase of CPS Leasing, Inc.
Assets acquired......................................... $ -- $ 2,718
Liabilities assumed..................................... -- (2,638)
--------- ---------
Cash paid to acquire business........................... -- 80
Less: cash acquired..................................... -- (172)
--------- ---------
Net cash received upon acquisition.................. $ -- $ (92)
========= =========
Sale of PIC Leasing, Inc.
Net assets sold......................................... $ 705 $ --
Net assets retained..................................... (155) --
Gain on sale of subsidiary.............................. 56 --
--------- ---------
Cash received from sale of subsidiary................... 606 --
Less: cash relinquished upon disposition................ (225) --
--------- ---------
Net cash received from sale of subsidiary............... $ 381 $ --
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements have been
reclassified for comparability to current period presentation. Results for the
three and nine month periods ended September 30, 1998, are not necessarily
indicative of the operating results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Alton Receivables Corp., CPS
Receivables Corp., CPS Marketing, Inc., CPS Funding Corp., and CPS Warehouse
Corp. The consolidated financial statements also include the accounts of SAMCO
Acceptance Corp., LINC Acceptance Company, LLC and CPS Leasing, Inc., all of
which are 80% owned subsidiaries of the Company. All significant intercompany
transactions and balances have been eliminated. Investments in affiliates that
are not majority owned are reported using the equity method.
Contracts Held for Sale
Contracts held for sale include automobile installment sales contracts
(generally, "Contracts") on which interest is precomputed and added to the
principal amount financed. The interest on precomputed Contracts is included in
unearned financed charges. Unearned financed charges are amortized over the
remaining period to contractual maturity, using the interest method. 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. The
Company considers a transfer of Contracts, where the Company surrenders control
over the Contracts, a sale to the extent that consideration, other than
beneficial interests in the transferred Contracts, is received in exchange for
the Contracts.
Allowance for Credit Losses
The Company provides an allowance for credit losses that management
believes provides adequately for known and inherent 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 Discounts
Upon purchase of a Contract from an automobile dealer ("Dealer"), the
Company generally charges the Dealer an acquisition fee or purchases the
Contract at a discount from its face value (some Contracts are purchased at face
value). The acquisition fees and discounts associated with Contract purchases
are deferred until the Contracts are sold. At that time the deferred acquisition
fee or discount is recognized as a component of the gain on sale.
6
<PAGE> 7
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Residual Interest in Securitizations and Gain on Sale of Contracts
The Company purchases Contracts with the primary intention of reselling
them in securitization transactions as asset-backed securities. The
securitizations are generally structured as follows: First, the Company sells a
portfolio of Contracts to a wholly owned subsidiary ("SPS"), which has been
established for the limited purpose of buying and reselling the Company's
Contracts. The SPS then transfers the same Contracts to either a grantor trust
or an owner trust (the "Trust"). The Trust in turn issues interest-bearing
asset-backed securities (the "Certificates"), generally in an amount equal to
the aggregate principal balance of the Contracts. The Company typically sells
these Contracts at face value and without recourse, except that the Company
gives representation and warranties to the Trust regarding the Contracts, which
are generally similar to the representations and warranties given to the Company
by the originating Dealers. One or more investors purchase the Certificates
issued by the Trust; the proceeds from the sale of the Certificates are then
used to purchase the Contracts from the Company. In addition, the Company
provides a credit enhancement for the benefit of the investors in the form of an
initial cash deposit to a specific account ("Spread Account") held by the Trust.
The agreements governing the securitization transactions (collectively referred
to as the "Servicing Agreements") require that the Spread Accounts be maintained
at specified levels.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the portion of the Contracts retained from the securitizations
("Residuals"). The Residuals consist of (a) the cash held in the Spread Account,
(b) the over-collateralization accounts, discussed below, and (c) the net
interest receivables ("NIRs"). NIRs represent the estimated discounted cash
flows to be received by the Trust in the future. The excess of the cash received
and the assets retained by the Company over the carrying value of the Contracts
sold, less transaction costs, equals the net gain on sale of Contracts recorded
by the Company in the securitization transaction.
The Company allocates its basis in the Contracts between the portion of the
Contracts sold (as Certificates) and the portion retained (the Residuals) based
on the relative fair values of those portions on the date of the sale. The
Company may recognize gains or losses attributable to the change in the fair
value of the Residuals, which are recorded at estimated fair value and accounted
for as "held-for-trading" securities. The Company is not aware of an active
market for the purchase or sale of such residual interests. Accordingly, the
Company determines the estimated fair value of the Residuals by discounting the
cash flows that it estimates will be released from the Spread Account (the cash
out method), using a discount rate that the Company believes is commensurate
with the risks involved. In valuing the Residuals, the Company has utilized an
effective discount rate of approximately 14% per annum.
The Company receives periodic base servicing fees for its servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay (i) the Certificate principal and interest, (ii)
the base servicing fees and (iii) certain other fees (such as trustee and
custodial fees). At the end of each collection period, the aggregate cash
collections from the Contracts are allocated first to the base servicing fees
and certain other fees (such as trustee and custodial fees) for the period, then
to the Certificateholders for interest at the pass-through rate on the
Certificates plus principal as defined in the Servicing Agreements. If the
amount of cash required for the above allocations exceeds the amount collected
during the collection period, the shortfall is drawn from the Spread Account. If
the cash collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company, or, in certain cases, transferred to other Spread
Accounts that may be below their required levels, or, pursuant to certain
Servicing Agreements, is used to make accelerated principal paydowns on certain
Certificates to create excess collateral (over-collateralization or OC account).
If the Spread Account balance is not at the required credit enhancement level,
then the excess cash collected is retained in the Spread Account until the
specified level is achieved. The cash in the Spread Accounts is restricted from
use by the Company. Cash held in the various Spread Accounts is invested in high
quality liquid investment securities, as specified in the Servicing Agreements.
Spread Account balances are held by the Trusts on behalf
7
<PAGE> 8
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Company as owner of the Residuals. Such balances are generally defined as
percentages of the principal amount remaining unpaid on the Contracts sold to
the respective Trusts.
The annual percentage rate ("APR") on the Contracts is relatively high in
comparison to the pass-through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In determining
the value of the Residuals described above, the Company must estimate the future
rates of prepayments, delinquencies, defaults and default loss severity as they
affect the amount and timing of estimated future cash flows. The Company
estimates prepayments by evaluating historical prepayment performance of
comparable Contracts and the effect of trends in the industry. The Company's
prepayment and default estimates have resulted in original estimated average
lives of its Contracts of between 22 and 26 months. The Company has used a
constant prepayment estimate of 4% per month to value the NIRs. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. The Company estimates that losses as a percentage of
the original principal balance will total approximately 14%.
In future periods, if the actual performance of the Contracts is better
than originally estimated by the Company, the Company would either recognize
additional revenue from the Residuals or increase their estimated fair value.
Alternatively, if the actual performance of the Contracts is less than
originally estimated by the Company, a reduction of the carrying value of the
Residuals may be required.
(2) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Gross receivable balance................................... $338,869 $ 81,906
Unearned finance charges................................... (26,333) (10,077)
Deferred acquisition fees and discounts.................... (9,534) (1,092)
Allowance for credit losses................................ (14,052) (2,466)
-------- --------
Net contracts held for sale................................ $288,950 $ 68,271
======== ========
</TABLE>
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash, commercial paper, US government securities and other
qualifying investments (Spread Account).................. $112,953 $ 68,513
NIRs....................................................... 62,449 45,112
OC accounts................................................ 29,477 9,621
Investments in subordinated certificates................... 444 791
Funds held by investor..................................... 464 579
-------- --------
Residual interest in securitizations....................... $205,787 $124,616
======== ========
</TABLE>
8
<PAGE> 9
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the activity of the NIRs for the nine months
ended September 30, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance, beginning of period................................ $45,112
NIR gains recognized........................................ 36,704
Amortization of NIRs........................................ (19,367)
-------
Balance, end of period...................................... $62,449
=======
</TABLE>
Included in NIR balances are estimates of credit losses totaling the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Estimated credit losses..................................... $ 131,680 $ 90,814
========== ========
Servicing subject to recourse provisions.................... $1,175,713 $830,918
========== ========
Estimated credit losses as percentage of servicing subject
to recourse provisions.................................... 11.20% 10.93%
========== ========
</TABLE>
(4) GAIN ON SALE OF CONTRACTS
The following table presents components of net gain on sale of Contracts:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
NIRs gains recognized....................... $13,820 $ 9,375 $36,704 $22,199
Deferred acquisition fees and discounts..... 5,528 2,159 13,839 6,140
Expenses related to sales................... (1,164) (1,149) (3,018) (2,679)
------- ------- ------- -------
Net gain on sale of contracts............... $18,184 $10,385 $47,525 $25,660
======= ======= ======= =======
</TABLE>
(5) INTEREST INCOME
The following table presents the components of interest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on Contracts held for sale.......... $12,236 $4,133 $30,868 $10,956
Residual interest income..................... 8,766 6,043 24,154 16,454
Amortization of NIRs......................... (8,942) (3,544) (19,367) (9,105)
------- ------ ------- -------
Net interest income.......................... $12,060 $6,632 $35,655 $18,305
======= ====== ======= =======
</TABLE>
(6) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, entitled "Earnings per Share" ("SFAS No. 128").
This statement replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any diluted effects of
options. Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts have been
restated to conform to SFAS No. 128.
9
<PAGE> 10
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share -- net earnings............ $ 6,237,513 $ 4,816,135 $17,765,601 $13,346,521
Interest on borrowings, net of tax
effect on Conversion of
convertible subordinated debt.... 149,296 117,837 381,127 195,219
----------- ----------- ----------- -----------
Numerator for diluted earnings per
share............................ $ 6,386,809 $ 4,933,972 $18,146,728 $13,541,740
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share -- weighted average number
of common shares outstanding
during the period................ 15,557,277 14,343,505 15,328,336 14,270,835
Incremental common shares
attributable to exercise of
outstanding options and
warrants......................... 239,668 1,433,628 534,703 1,242,366
Incremental common shares
attributable to Conversion of
subordinated debt................ 1,150,864 745,562 882,147 429,544
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share............................ 16,947,809 16,522,695 16,745,186 15,942,745
=========== =========== =========== ===========
Basic earnings per share............ $ 0.40 $ 0.34 $ 1.16 $ 0.94
=========== =========== =========== ===========
Diluted earnings per share.......... $ 0.38 $ 0.30 $ 1.08 $ 0.85
=========== =========== =========== ===========
</TABLE>
(7) RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, entitled "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 established Standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for the fiscal years beginning after December 15, 1997.
Comprehensive income for the three and nine month periods ended September 30,
1998 and 1997, respectively, was the same as net income, as the Company had no
components of other comprehensive income.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consumer Portfolio Services, Inc. (the "Company") and its subsidiaries
primarily engage in the business of purchasing, selling and servicing retail
automobile installment sale contracts ("Contracts") originated by automobile
dealers ("Dealers") located throughout the Unites States. Through its purchase
of Contracts, the Company provides indirect financing to Dealer customers with
limited credit histories, low incomes or past credit problems, who generally
would not be expected to qualify for financing provided by banks or by
automobile manufacturers' captive finance companies.
The major components of the Company's revenue are gains recognized on the
sale or securitization of its Contracts, servicing fees earned on Contracts
sold, and interest earned on Residuals (as defined below) and on Contracts held
for sale. Because the interest earned on the Residuals is dependent in part on
the collections received on sold Contracts, the Company's income is affected by
losses incurred on Contracts, whether such Contracts are held for sale or have
been sold in securitizations.
Residual Interest in Securitizations and Gain on Sale of Contracts
The Company purchases Contracts with the primary intention of reselling
them in securitization transactions as asset-backed securities. The
securitizations are generally structured as follows: First, the Company sells a
portfolio of Contracts to a wholly owned subsidiary ("SPS"), which has been
established for the limited purpose of buying and reselling the Company's
Contracts. The SPS then transfers the same Contracts to either a grantor trust
or an owner trust (the "Trust"). The Trust in turn issues interest-bearing
asset-backed securities (the "Certificates"), generally in an amount equal to
the aggregate principal balance of the Contracts. The Company typically sells
these Contracts at face value and without recourse, except that representations
and warranties similar to those provided by the Dealer to the Company are
provided by the Company to the Trust. One or more investors purchase the
Certificates issued by the Trust; the proceeds from the sale of the Certificates
are then used to purchase the Contracts from the Company. The Company purchases
a financial guaranty insurance policy, guaranteeing timely payment of principal
and interest on the senior Certificates, from an insurance company (the
"Certificate Insurer"). In addition, the Company provides a credit enhancement
for the benefit of the Certificate Insurer and the investors in the form of an
initial cash deposit to a specific account ("Spread Account") held by the Trust.
The agreements governing the securitization transactions (collectively referred
to as the "Servicing Agreements") require that the initial deposits to the
Spread Accounts be supplemented by a portion of collections from the Contracts
until the Spread Accounts reach specified levels, and then maintained at those
levels. The specified levels are generally computed as a percentage of the
principal amount remaining unpaid under the related Certificates. The specified
levels at which the Spread Accounts are to be maintained will vary depending on
the performance of the portfolios of Contracts held by the Trusts and on other
conditions, and may also be varied by agreement among the Company, the SPS, the
Certificate Insurer and the trustee. Such levels have increased and decreased
from time to time based on performance of the portfolios, and have also been
varied by agreement. The specified levels applicable to the Company's sold pools
have recently been increased, as is discussed under the heading "-- Liquidity
and Capital Resources."
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the portion of the Contracts retained from the securitizations
("Residuals"). The Residuals consist of (a) the cash held in the Spread Account
and (b) the net interest receivables ("NIRs"). NIRs represent the estimated
discounted cash flows to be received by the Trust in the future. The excess of
the cash received and the assets retained by the Company over the carrying value
of the Contracts sold, less transaction costs, equals the net gain on sale of
Contracts recorded by the Company in the securitization transaction.
The Company allocates its basis in the Contracts between the portion of the
Contracts sold (as Certificates) and the portion retained (the Residuals) based
on the relative fair values of those portions on the date of the sale. The
Company may recognize gains or losses attributable to the change in the fair
value of the Residuals, which are recorded at estimated fair value and accounted
for as "held-for-trading" securities. The Company is not aware of an active
market for the purchase or sale of such residual interests. Accordingly, the
Company determines the estimated fair value of the Residuals by discounting the
cash flows that it estimates
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will be released from the Spread Account (the cash out method), using a discount
rate that the Company believes is commensurate with the risks involved. In
valuing the Residuals, the Company has utilized an effective discount rate of
approximately 14% per annum. The valuation of the Residuals is dependent on
estimates of future events, and there can be no assurance that such estimates
will prove to be correct. Factors that may affect the accuracy of such estimates
include the inherent credit quality of the Contracts purchased by the Company
and sold to the Trusts, the efficacy of the Company's collection efforts, and
the state of the economy generally, all of which may affect the propensity of
the obligors to pay as agreed.
The Company receives periodic base servicing fees for its servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay (i) the Certificate principal and interest, (ii)
the base servicing fees and (iii) certain other fees (such as trustee and
custodial fees). At the end of each collection period, the aggregate cash
collections from the Contracts are allocated first to the base servicing fees
and certain other fees (such as trustee and custodial fees) for the period, then
to the Certificateholders for interest at the pass-through rate on the
Certificates, plus principal as defined in the Servicing Agreements. If the
amount of cash required for the above allocations exceeds the amount collected
during the collection period, the shortfall is drawn from the Spread Account. If
the cash collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels, or, pursuant to certain
Servicing Agreements, is used to make accelerated principal paydowns on certain
Certificates to create excess collateral (over-collateralization or OC account).
If the Spread Account balance is not at the required credit enhancement level,
then the excess cash collected is retained in the Spread Account until the
specified level is achieved. The cash in the Spread Accounts is restricted from
use by the Company. Cash held in the various Spread Accounts is invested in high
quality liquid investment securities, as specified in the Servicing Agreements.
Spread Account balances are held by the Trusts on behalf of the Company as owner
of the Residuals. Such balances are generally defined as percentages of the
principal amount remaining unpaid on the Contracts sold to the respective
Trusts.
The annual percentage rate on the Contracts is relatively high in
comparison to the pass-through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In determining
the value of the Residuals described above, the Company must estimate the future
rates of prepayments, delinquencies, defaults and default loss severity as they
affect the amount and timing of estimated future cash flows. The Company
estimates prepayments by evaluating historical prepayment performance of
comparable Contracts and the effect of trends in the industry. The Company's
prepayment and default estimates have resulted in original estimated average
lives of its Contracts of between 22 and 26 months. The Company has used a
constant prepayment estimate of 4% per month to value the NIRs. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. The Company estimates that cumulative losses as a
percentage of the original principal balance will total approximately 14%.
In future periods, if the actual performance of the Contracts is better
than originally estimated by the Company, the Company would either recognize
additional revenue from the Residuals or increase their estimated fair value.
Alternatively, if the actual performance of the Contracts is less than
originally estimated by the Company, then a reduction of the carrying value of
the Residuals may be required. The future actual performance of the Contracts
will be dependent on the factors discussed in the immediately preceding
paragraph.
RESULTS OF OPERATIONS
THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1997
Revenues. During the three months ended September 30, 1998, revenues
increased $16.2 million, or 75.9%, compared to the three month period ended
September 30, 1997. Gain on sale of Contracts increased by $7.8 million, or
75.1%, and represented 48.6% of total revenues for the three month period ended
September 30, 1998. The increase in gain on sale is largely due to the increased
volume of Contracts sold in the period. During the three month period ended
September 30, 1998, the Company sold $240.3 million in
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Contracts, compared to $150.0 million in the three month period ended September
30, 1997, a 60.2% increase. In the quarter ended September 30, 1998, certain
direct origination expenses (the recognition of which was deferred in the prior
year) were expensed as incurred.
Interest income increased by $5.4 million, or 81.8%, and represented 32.1%
of total revenues for the three month period ended September 30, 1998. The
increase is due to the increase in the volume of Contracts purchased and held
for sale, and the increase in the amount of sold Contracts and related
Residuals. During the three month period ended September 30, 1998, the Company
purchased $303.0 million in Contracts from Dealers, compared to $173.6 million
in the three month period ended September 30, 1997. The $303.0 million of
Contracts purchased in the quarter ended September 30, 1998 represents a 10.5%
decrease from the $338.4 million of Contracts purchased in the quarter ended
June 30, 1998. That decrease was primarily the result of the Company's decision
in September 1998 to eliminate its first-time buyer program and to restrict its
purchases of Contracts in order to conserve capital. The Company expects that
Contract purchases in the near future will not exceed $200 million per quarter.
Such a reduction in Contract purchases would be anticipated to cause a reduction
in revenues (both interest and gain on sale) in future periods.
Servicing fees increased by $3.1 million, or 83.3%, and represented 18.4%
of total revenues. The increase in servicing fees is due to the increase in the
Company's servicing portfolio . As of September 30, 1998, the Company was
earning servicing fees on 110,945 Contracts with aggregate outstanding principal
balances approximating $1,175.7 million, compared to 65,767 Contracts with
aggregate outstanding principal balances approximating $696.4 million as of
September 30, 1997. In addition to the $1,175.7 million in sold Contracts, on
which servicing fees were earned, the Company was holding for sale and servicing
an additional $313.7 million in Contracts, for an aggregate total servicing
portfolio of $1,489.4 million.
The growth in the Company's revenue and expenses is a result of increases
in the volume of Contract purchases and in the Company's servicing portfolio.
The Company has achieved these increases primarily by increasing market
penetration in existing geographic areas and increasing the number of marketing
representatives and Dealers relationships. At September 30, 1998, the Company
had 86 marketing representatives servicing 4,381 Dealers, compared to 65
representatives servicing 2,583 Dealers at September 30, 1997.
Expenses. During the three month period ended September 30, 1998, operating
expenses increased $13.7 million, or 105.8%, compared to the three month period
ended September 30, 1997. Employee costs increased by $3.9 million, or 89.9%,
and represented 31.2% 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. In light of the Company's decision to
reduce its level of Contract purchases, it anticipates reducing certain expenses
in the immediate future, and maintaining such expenses at levels appropriate for
the Company's level of activity in future periods. General and administrative
expenses increased by $3.0 million, or 91.3% and represented 23.7% 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.
Interest expense increased $2.9 million, or 96.3%, and represented 22.3% of
total operating expenses. During the three month period ended September 30,
1998, interest expense consisted primarily of interest on (i) borrowings under
two warehouse lines of credit ("Warehouse Lines") used to acquire Contracts and
hold them pending securitization, (ii) $20 million of outstanding Rising
Interest Subordinated Redeemable Securities due 2006 ("RISRS"), (iii) $20
million of outstanding Participating Equity Notes due 2004, (iv) $15 million of
unsecured related party debt due 2004, (v) $5 million of unsecured related party
debt due 2004 (incurred in August and September 1998), (vi) and borrowings under
a revolving line of credit (the "Revolving Line") due 2003. With respect to the
Warehouse Lines, the Company's cost of borrowed funds varies with market rates,
and the total interest payable is affected in proportion to the amount of
Contract purchases funded under the Warehouse Lines and the average time such
Contracts are held prior to securitization. With respect to the RISRS debt, the
interest paid on the debt increases each calendar year from 10.50% at present to
12.00% in 2004, and then to 12.50% until maturity at December 31, 2005. With
respect to the PENs, interest is payable at a fixed rate of 10.50% per annum.
With respect to the $15 million unsecured related party loan due 2004, interest
is payable at a fixed rate of 9.0% per annum. With respect to the $5 million
unsecured related party loans due 2004, interest was payable at a fixed rate of
15.0% per annum
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(reduced to 12.5% in November 1998). With respect to the Revolving Line due
2003, interest is payable at a variable rate of LIBOR + 4.0% of the outstanding
balance, which resulted in an effective rate of approximately 9.63% per annum in
the quarter ended September 30, 1998. The increase in interest expense as
compared to the prior year's period is due primarily to increased average
borrowings under the Warehouse Lines to finance purchases of Contracts. Also not
included in the prior year's period was interest payable with respect to the
Revolving Line. The Company on November 18, 1998 borrowed $25 million from an
affiliate of Levine Leichtman Capital Partners, Inc., as discussed in more
detail below. The funds borrowed bear interest at the rate of 13.5% per annum.
Amortization of fees and expenses of the transaction, and of the value of a
warrant issued in consideration of the loan, will result in an effective
interest rate materially greater than 13.5%. Such increased interest expense
will be recognized in future periods.
During the three month period ended September 30, 1998, the provision for
losses on Contracts held for sale increased by $1.8 million, or 172.8%, and
represented 10.8% of total operating expenses. The provision for losses on
Contracts held for sale and the related allowance for credit losses vary from
quarter to quarter based on a number of factors, including (i) the dollar amount
of Contracts held for sale at the end of the period, (ii) the relative age of
those Contracts, (iii) the estimated credit risk of those Contracts, and (iv)
the portion of Contracts that are seriously past due or are assigned for, or in,
repossession. The principal factor that caused the provision for losses on
Contracts held for sale to increase, as compared to the prior year's period, was
an increase in the amount of Contracts held for sale.
In March 1997, the Company opened a satellite collections facility in
Chesapeake, Virginia. In April 1998, the Company obtained additional contiguous
space at the Virginia facility. In addition, the Company obtained additional
leased space in the vicinity of its California headquarters in September 1997,
in which it operated a collections facility. Lease of such additional space
resulted in increased occupancy and general and administrative expenses in the
three month period ended September 30, 1998. In November 1998, the Company moved
its headquarters and consolidated its California collections facility in a new
building of approximately 115,000 square feet, which the Company has agreed to
lease for a ten-year period. The Company has subleased its former headquarters
location. Increased occupancy expenses commensurate with the increase in space
leased should be anticipated for future periods.
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998, COMPARED TO THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1997
Revenues. During the nine months ended September 30, 1998, revenues
increased $46.3 million, or 83.2%, compared to the nine month period ended
September 30, 1997. Net gain on sale of Contracts increased by $21.9 million, or
85.2%, and represented 46.6% of total revenues for the nine month period ended
September 30, 1998. The increase in gain on sale is largely due to the increased
volume of Contracts sold in the period. During the nine month period ended
September 30, 1998, the Company sold $638.3 million in Contracts, compared to
$371.1 million in the nine month period ended September 30, 1997. The Company's
plan to reduce its future Contract purchases will limit the volume of Contracts
that may be sold in future periods, and therefore can be expected to reduce the
gain on sale to be recognized in future periods. In the period ended September
30, 1998, certain direct origination expenses (the recognition of which was
deferred in the prior year) were expensed as incurred.
Interest income increased by $17.4 million, or 94.8%, and represented 35.0%
of total revenues for the nine month period ended September 30, 1998. The
increase is due to the increase in the volume of Contracts purchased and held
for sale and the increase in the amount of sold Contracts and related Residuals.
During the nine month period ended September 30, 1998, the Company purchased
$895.6 million in Contracts from Dealers, compared to $449.7 million in the nine
month period ended September 30, 1997. As discussed above, the Company expects
to reduce its purchases of Contracts in the future, which can be expected to
result in lower revenues (both interest and gain on sale) in future periods.
Servicing fees increased by $8.0 million, or 80.8%, and represented 17.5%
of total revenues. The increase in servicing fees is due to the increase in the
Company's servicing portfolio.
Expenses. During the nine month period ended September 30, 1998, operating
expenses increased $38.7 million or 118.4%, compared to the nine month period
ended September 30, 1997. Employee costs increased by $9.8 million, or 89.4%,
and represented 29.0% of total operating expenses. The increase is due to
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the addition of staff necessary to accommodate the Company's growth and certain
increases in salaries of existing staff. In light of the Company's decision to
reduce its level of Contract purchases, it anticipates reducing certain expenses
in the immediate future, and maintaining such expenses at levels appropriate for
the Company's level of activity in future periods. General and administrative
expenses increased by $6.4 million, or 67.6% and represented 22.3% 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.
Interest expense increased $7.8 million, or 116.4%, and represented 20.3%
of total operating expenses. During the nine month period ended September 30,
1998, interest expense consisted primarily of interest on (i) borrowings under
two warehouse lines of credit ("Warehouse Lines") used to acquire Contracts and
hold them pending securitization, (ii) $20 million of outstanding Rising
Interest Subordinated Redeemable Securities due 2006 ("RISRS"), (iii) $20
million of outstanding Participating Equity Notes due 2004, (iv) $15 million of
unsecured related party debt due 2004, (v) $5 million of unsecured related party
debt due 2004 (incurred in August and September 1998), and (vi) borrowings under
a revolving line of credit (the "Revolving Line") due 2003. With respect to the
Warehouse Lines, the Company's cost of borrowed funds varies with market rates,
and the total interest payable is affected in proportion to the amount of
Contract purchases funded under the Warehouse Lines and the average time such
Contracts are held prior to securitization. With respect to the RISRS debt, the
interest paid on the debt increases each calendar year from 10.50% at present to
12.00% in 2004, and then to 12.50% until maturity at December 31, 2005. With
respect to the PENs, interest is payable at a fixed rate of 10.50% per annum.
With respect to the $15 million unsecured related party loan due 2004, interest
is payable at a fixed rate of 9.0% per annum. With respect to the $5 million
unsecured related party loans due 2004, interest was payable at a fixed rate of
15.0% per annum (reduced to 12.5% in November 1998). With respect to the
Revolving Line due 2003, interest is payable at a variable rate of LIBOR + 4.0%
on the outstanding balance, resulting in an effective rate over the nine-month
period of approximately 9.64%. The increase in interest expense as compared to
the prior year's period is due primarily to increased average borrowings under
the Warehouse Lines to finance purchases of Contracts. Also not included in the
prior year's period was interest payable with respect to the Revolving Line. As
discussed above, the Company has recently borrowed an additional $25 million, on
terms that will result in a material increase in interest expense in future
periods.
During the nine month period ended September 30, 1998, the provision for
losses on Contracts held for sale increased by $10.2 million, or 386.0%, and
represented 18.1% of total operating expenses.
The satellite collections facility in Chesapeake, Virginia, and the
additional space leased for a California collections facility resulted in
increased occupancy and general and administrative expenses in the nine month
period ended September 30, 1998. In November 1998, the Company moved its
headquarters and consolidated its California collections facility in a new
building of approximately 115,000 square feet, which the Company has agreed to
lease for a ten-year period. The Company has subleased its former headquarters
location. Increased occupancy expenses commensurate with the increase in space
leased should be anticipated for future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash from operating activities are amounts
borrowed under the Warehouse Lines, servicing fees on portfolios of Contracts
previously sold, cash flows released from Spread Accounts, proceeds from sales
of Contracts, customer payments on Contracts held for sale, and interest earned
on Contracts held for sale. The Company's primary uses of cash are the purchase
of Contracts, repayment of amounts borrowed under the Warehouse Lines, operating
expenses such as employee, interest, and occupancy expenses, the establishment
of and further contributions to Spread Accounts, and income taxes.
Net cash used in operating activities was $45.2 million during the nine
month period ended September 30, 1998, compared to net cash used in operating
activities of $30.6 million during the nine month period ended September 30,
1997. Cash used for purchasing Contracts was $895.6 million, an increase of
$445.9 million, or 99.1%, over cash used for purchasing Contracts in the prior
year's period. Cash provided from the liquidation of Contracts was $662.0
million, an increase of $285.7 million, or 75.9%, over cash provided from the
liquidation of Contracts in the prior year's period.
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On a day-to-day basis, the Company funds its purchases of Contracts from
Dealers by drawing on either of two Warehouse Lines of Credit (collectively
referred to as the "Warehouse Lines"), and pledges the purchased Contracts to
one or the other warehouse lender. The amount borrowed under the Warehouse Lines
increases until the Company sells the pledged Contracts in a securitization
transaction, at which time the majority of the proceeds of the sale are used to
pay down the related balance of the Warehouse Lines. Securitization transactions
are typically completed on a quarterly basis. The amount of Contracts that the
Company can hold for sale prior to a securitization is limited by its available
cash and two Warehouse Lines, which aggregated to $300 million at September 30,
1998. In October 1998, one of the existing lenders agreed to increase
temporarily the amount available under its Warehouse Line from $200 million to
$308 million, giving the Company a total of $408 million of Warehouse Line
availability. The temporary increase will expire on November 30, 1998, at which
time the maximum availability under that warehouse line will revert to $200
million. The other warehouse line will expire on November 30, 1998. The Company
expects to replace the expiring line with a new one-year warehouse line of
credit with an affiliate of the existing lender, but there can be no assurance
that a replacement line will be available at that time, or on the terms
currently under discussion. The Company anticipates, however, that any such
replacement line will allow borrowing of no more than 88% of the principal
amount of pledged Contracts, as compared with a maximum of 97% under the
existing line, and that the interest rate payable will increase from
approximately 7.1% under the existing line (a floating rate tied to commercial
paper rates) to approximately 8.7% under the replacement line (a floating rate
tied to three-month LIBOR).
The Company's cash requirements have been and will continue to be
significant. The Servicing Agreements require the Company to make a significant
initial cash deposit, for purposes of credit enhancement, to the Spread Accounts
upon sale of Contracts in securitization transactions. Excess cash flows from
the securitized Contracts are also deposited into the Spread Accounts until such
time as the Spread Account balance reaches its requisite level, which is
computed as a specified percent of the outstanding balance of the related
asset-backed securities.
During the nine month period ended September 30, 1998, cash used for
initial deposits to Spread Accounts was $36.3 million, an increase of $23.3
million, or 179.2%, from the amount of cash used for initial deposits to Spread
Accounts in the prior year's period. The cash used increased because (i) the
Company sold more Contracts in the current period than in the prior year's
period, and (ii) in order to achieve the desired ratings for the transactions,
the required percentage initial deposit was raised from 3.5% in the prior year's
transactions to 8.0% in the transactions in the third quarter, with an
additional credit enhancement of 2.0% overcollateralization. (The Company has
since reached an agreement, discussed below, that it expects will allow a
reduced initial cash deposit of 3%.) Cash deposited to Spread Accounts for the
nine month period ended September 30, 1998, was $44.3 million, an increase of
$22.0 million, or 98.7%, over cash deposited to Spread Accounts in the prior
year's period. The cash deposited in Spread Accounts for the nine month period
ended September 30, 1998, includes $19.9 million of cash used to pay down
certain Certificates to create excess collateral in an over-collateralization
account.
Cash released from Spread Accounts for the nine month period ended
September 30, 1998, was $16.8 million, an increase of $4.0 million, or 31.3%,
over cash released from Spread Accounts in the prior year's period. Changes in
deposits to and releases from Spread Accounts are affected by the relative size,
seasoning, and performance of the various pools of sold Contracts that make up
the Company's servicing portfolio. The Spread Accounts are cross-collateralized,
so that the performance of any pool can affect the availability of cash releases
from all Spread Accounts. Due to the performance of certain pools, the Company
has not received any cash releases from Spread Accounts since June 1998, and
cannot predict with confidence when it will next receive any such releases of
cash.
The Servicing Agreements call for the requisite levels of the various
Spread Accounts to increase if the related receivables experience delinquencies,
repossessions or net losses in excess of certain predetermined levels. During
the Company's history, the predetermined levels have frequently been reached,
causing the requisite levels of certain Spread Accounts to be raised. The
requisite levels of the Spread Accounts may be returned to the original lower
levels if the delinquency, repossession and net loss performance of the related
receivables is reduced below the pre-determined levels. In addition, on two
occasions, the parties to the pertinent agreements have made modifications that
effectively raised the permissible delinquency, repossession and net loss
levels, thus resulting in Spread Accounts reverting to their original requisite
levels. As of
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September 30, 1998, the Spread Accounts for 17 of the Company's 21 securitized
pools were at higher than original requisite levels due to the delinquency,
repossession or net loss performance of 13 of the 21 securitized pools. Such
Spread Account balances therefore included approximately $15.5 million more than
would have been required at the original requisite levels.
The Company funds the increase in its servicing portfolio through off
balance sheet securitization transactions, and funds its other capital needs
(including its initial cash deposits to Spread Accounts) with cash from
operations and with the proceeds from the issuance of various securities. During
the nine month period ended September 30, 1998, the Company engaged in three
securitization transactions, established a $33.3 million revolving line of
credit (discussed below), sold common stock to an affiliated party for $5
million, and received $5 million in loans from affiliated parties. The interest
rate payable on the senior Certificates issued in the securitization
transactions ranged from 5.64% - 6.08%, as compared with 6.10% - 6.65% payable
on the similar securities issued in the prior year's period. The reduction in
the rates payable is primarily due to reductions in rates payable on U.S.
Treasuries of similar maturity.
In April 1998, the Company established a $33.3 million revolving line of
credit (the "Revolving Line") with State Street Bank and Trust Company,
Prudential Insurance and an affiliate of Prudential. Borrowings under the
Revolving Line bear interest at LIBOR + 4.0%, and are secured by the Company's
assets, including its residual interest in Securitizations. The Revolving Line
is a revolving facility for one year, after which it converts into a loan with a
maximum term of four years.
Due to the Company's continuing purchases of Contracts and the need to fund
Spread Accounts when those Contracts are sold in securitization transactions,
the Company has a continuing need for capital. The amount of capital required is
most heavily dependent on the rate of the Company's Contract purchases and on
the level of Spread Account initial deposits. To reduce its capital requirements
and to meet those requirements, the Company has begun to implement a three-part
plan: the plan includes (i) issuance of debt and equity securities, (ii) an
agreement with the Certificate Insurer to reduce the level of initial Spread
Account deposits, which reduces capital requirements, and (iii) a reduction in
the rate of Contract purchases, which also reduces capital requirements.
The Company in November 1998 issued $25 million of subordinated promissory
notes due November 30, 2003 to an affiliate of Levine Leichtman Capital
Partners, Inc. ("LLCP"), and received the proceeds thereof (net of fees and
expenses, approximately $24 million). The Company also issued a warrant to
purchase up to 3,450,000 shares of common stock at $3.00 per share, exercisable
through November 30, 2005. The debt bears interest at 13.5% per annum, and may
not be prepaid without penalty prior to November 1, 2002. Simultaneously with
the consummation of that transaction, certain affiliates of the Company, who had
lent the Company an aggregate of $5 million on a short-term basis in August and
September 1998, agreed to subordinate their indebtedness to the indebtedness in
favor of LLCP, to extend the maturity of their debt until June 2004, and to
reduce their interest rate from 15% to 12.5%. Such affiliates received in return
the option to convert such debt into an aggregate of 1,666,667 shares of common
stock at the rate of $3.00 per share through maturity at June 30, 2004. The
effective cost of this new capital is affected by the valuation of the warrant
and the conversion option, but in all events represents a material increase in
the cost of capital resources, as compared with the Company's previous issuances
of subordinated debt.
Also in November 1998, the Company reached an agreement with the
Certificate Insurer regarding initial cash deposits. In this agreement, the
Certificate Insurer commits to insure asset-backed securities issued by the
Trusts with respect to at least $560 million of Contracts, while requiring an
initial cash deposit of 3% of principal. The commitment is subject to
underwriting criteria and market conditions. The Company's agreement with the
Certificate Insurer also requires that the Company issue to the Certificate
Insurer or its designee, as of the date of the Company's next insured
securitization transaction, a warrant to purchase common stock at $3.00 per
share, exercisable through the fifth anniversary of the warrant's issuance. Such
warrant will be exercisable with respect to 10% of the Company's common shares,
computed on a fully-diluted basis on the assumption that there are approximately
23.9 million common shares issued or reserved for issuance.
As noted above, the Company has recently reduced its planned level of
Contract purchases to not more than $200 million per quarter. Such a reduction
in Contract purchases is anticipated to reduce materially the Company's capital
requirements.
17
<PAGE> 18
The Company is exploring its alternatives to raise additional required
capital of at least $15 million, which could include sale of debt or equity
instruments. Any debt issued may involve some equity participation. The sale of
any equity or convertible debt could be dilutive to existing stockholders. The
terms of any such additional issuance have not been determined as of the date of
this report, and there can be no assurance that any such transaction will occur.
In January 1997, the Company acquired a company engaged in the equipment
leasing business. Any material growth in that subsidiary's business would
require significant capital resources, to allow that subsidiary to purchase
equipment for lease. As of September 30, 1998, the leasing company had a line of
credit for $20.0 million to purchase equipment for lease. Borrowings under the
line are collateralized by the underlying equipment and bear interest at a
variable rate ranging from 1.85% to 3.0% over the five year U.S. Treasuries
rate, depending on the investment rating of the lessee to whom the equipment is
leased. The line of credit expires December 31, 2005. In order to focus the use
of its available capital on its core business, the Company plans to sell the
equipment leasing subsidiary.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. SFAS No. 131 becomes effective
for the Company's 1998 annual financial statements. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 131. Application of SFAS
No. 131 is not expected to have a material impact on the Company's consolidated
financial position, results of operations or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in foreign operation, an
unrecognized firm commitment, an available for sale security, or a
foreign-currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
YEAR 2000
The Company has performed an examination of its major software applications
to ensure that each system is prepared to accommodate the year 2000. This
examination included a review of program code that is maintained by the Company
as well as obtaining confirmation from outside software vendors that their
products are year 2000 compliant. In addition, the Company has communicated with
firms with whom it does significant business to determine their readiness for
the year 2000. The Company believes, based on its current examination, that the
year 2000 will not have a material adverse impact on the Company's operations.
However, there can be no assurance that software incompatibility with the year
2000 on the part of the Company or any of its significant suppliers does not in
fact exist or that any such incompatibility will not have a material adverse
effect on the Company.
18
<PAGE> 19
FORWARD-LOOKING STATEMENTS
The descriptions of the Company's business and activities set forth in this
Form 10-Q and in other past and future reports and announcements by the Company
contain forward-looking statements and assumptions regarding the future
activities and results of operations of the Company. In particular, statements
of the Company's expected future levels of Contract purchases are
forward-looking statements. Statements concerning uses of cash in connection
with Contracts and Spread Accounts and the levels of cash required to be
contributed to Spread Accounts for credit enhancement, are also forward-looking
statements, as are statements regarding future capital requirements and
liquidity (including, without limitation, statements that the Company plans to
reduce its Contract purchases and that such a reduction will reduce demands on
liquidity and requirements for capital), regarding planned reduction in
expenses, the availability and terms of future financing (including, without
limitation, the renewal of a Warehouse Line of Credit and a commitment as to
financial guaranty insurance), and statements regarding sale of a subsidiary.
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, or adverse changes in the market for
securitized receivables pools, either 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 for existing or future
securitizations or to be expended for other forms of credit enhancement to
support future securitizations; the reduction or unavailability of warehouse
lines of credit which the Company uses to accumulate Contracts for
securitization transactions; increased competition from other automobile finance
sources; reduction in the number and amount of acceptable Contracts submitted to
the Company by its automobile dealer network; changes in government regulations
affecting consumer credit; and other economic, financial and regulatory factors
beyond the Company's control. In particular, but without limiting the
applicability of the foregoing, the anticipated renewal of one of the Company's
Warehouse Lines is, as of the date this report is filed, within the discretion
of the lender. The renewal terns disclosed in this report, however, are the
terms most recently proposed by the lender. The commitment of the Certificate
Insurer to insure asset-backed securities to be issued by Trusts is subject to
various conditions, including that rating agencies rate the Certificates to be
insured as at least investment grade, without reference to the policy to be
issued, that the Certificate Insurer approve the transaction after a review of
the Contracts to be sold in the transaction, that reinsurance be available on
the terms assumed in the Certificate Insurer's analysis, and that the Company
demonstrate adequate working capital at the time such policy is to be issued.
Some of such conditions are outside of the Company's control.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as a part of this report:
10.1 Amendment dated July 17, 1998 to the Receivables Funding and
Servicing Agreement relating to First Union Warehouse Line.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
10.2 Subscription Agreement regarding shares issued in July 1998.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
10.3 Registration Rights Agreement regarding shares issued in July 1998.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
27 Financial Data Schedule
(b) During the three-month period ended September 30, 1998, the Company filed
two current reports on Form 8-K. The table below presents information
concerning such reports:
<TABLE>
<CAPTION>
DATE OF THE REPORT
(DATE OF EVENT
TO WHICH REPORT RELATES) TYPE OF INFORMATION INCLUDED IN REPORT
------------------------ --------------------------------------
<C> <S>
July 6, 1998 Item 5 and Item 7. The Item 5 disclosure announced that
certain exhibits were being filed. The exhibits were related
to the Company's July 1998 securitization of receivables.
July 15, 1998 Item 5 and Item 7. The Item 5 disclosure announced that
certain exhibits were being filed. The exhibits were related
to the Company's July 1998 securitization of receivables.
</TABLE>
No financial statements were filed with either of such reports.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)
<TABLE>
<S> <C>
Date: November 20, 1998 /s/ CHARLES E. BRADLEY, JR.
-------------------------------------
Director, President, Chief Executive
Officer
(Principal Executive Officer)
Date: November 20, 1998 /s/ JEFFREY P. FRITZ
--------------------------------------
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
10.1 Amendment dated July 17, 1998 to the Receivables Funding and
Servicing Agreement relating to First Union Warehouse Line.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
10.2 Subscription Agreement regarding shares issued in July 1998.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
10.3 Registration Rights Agreement regarding shares issued in July 1998.
(previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1998, and incorporated by reference)
27 Financial Data Schedule
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 617 1,745
<SECURITIES> 0 0
<RECEIVABLES> 288,950 73,696
<ALLOWANCES> 14,052 2,465
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 4,753 3,128
<DEPRECIATION> 2,317 1,734
<TOTAL-ASSETS> 535,777 225,095
<CURRENT-LIABILITIES> 308,707 72,092
<BONDS> 40,000 40,000
0 0
0 0
<COMMON> 47,307 41,761
<OTHER-SE> 58,611 40,845
<TOTAL-LIABILITY-AND-EQUITY> 535,777 225,895
<SALES> 0 0
<TOTAL-REVENUES> 37,448 21,284
<CGS> 0 0
<TOTAL-COSTS> 26,704 12,975
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2,871 1,053
<INTEREST-EXPENSE> 5,958 3,035
<INCOME-PRETAX> 10,744 8,309
<INCOME-TAX> 4,506 3,493
<INCOME-CONTINUING> 6,238 4,816
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,238 4,816
<EPS-PRIMARY> 0.40 0.34
<EPS-DILUTED> 0.38 0.30
</TABLE>
