<PAGE>
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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, 1999
[ ] 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)
CALIFORNIA 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 753-6800
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of November 12, 1999, the registrant had 20,107,501 common shares
outstanding.
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<PAGE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30,
1999 and December 31, 1998. 3
Condensed consolidated statements of operations for the three
and nine month periods ended September 30, 1999 and 1998. 4
Condensed consolidated statements of cash flows for the nine
month periods ended September 30, 1999 and 1998. 5
Notes to condensed consolidated financial statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Part II. Other Information
Item 3. Defaults Upon Senior Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
-2-
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
September 30, December 31,
------------------- ------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 516 $ 1,940
Restricted cash 1,661 1,619
Contracts held for sale (note 2) 4,564 165,582
Servicing fees receivable 9,711 11,148
Residual interest in securitizations (note 3) 205,984 217,848
Furniture and equipment, net 3,354 4,272
Deferred financing costs 2,653 2,817
Investment in unconsolidated affiliates 1,501 4,145
Related party receivables 1,032 3,268
Other assets 23,951 19,323
------------------- -------------------
$ 254,927 $ 431,962
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses $ 14,947 $ 9,267
Warehouse line of credit -- 151,857
Taxes payable 10,484 29,068
Capital lease obligation 1,669 2,132
Notes payable 3,401 2,557
Residual financing 29,563 33,000
Subordinated debt 70,000 65,000
Related party debt 21,500 20,000
------------------- -------------------
151,564 312,881
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; 20,107,501 and 15,658,501 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively 62,421 52,533
Retained earnings 40,942 66,548
------------------- -------------------
103,363 119,081
------------------- -------------------
$ 254,927 $ 431,962
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements
-3-
<PAGE>
<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Gain (loss) on sale of contracts,
net (note 4) $ (9,725) $ 15,313 $ (16,161) $ 34,650
Interest income (note 5) (5,312) 12,060 20,019 35,655
Servicing fees 6,288 6,899 22,235 17,891
Other income (loss) (455) 305 (1,066) 886
----------------- ----------------- ----------------- -----------------
(9,204) 34,577 25,027 89,082
----------------- ----------------- ----------------- -----------------
EXPENSES:
Employee costs 7,062 8,333 23,156 20,684
General and administrative 4,084 6,335 14,639 15,911
Interest 5,912 5,958 23,586 14,487
Marketing 1,175 2,362 4,162 4,895
Occupancy 683 522 2,127 1,501
Depreciation and amortization 351 304 1,245 906
Related party consulting fees 88 19 263 56
----------------- ----------------- ----------------- -----------------
19,355 23,833 69,178 58,440
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes (28,559) 10,744 (44,151) 30,642
Income taxes (11,990) 4,506 (18,545) 12,876
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (16,569) $ 6,238 $ (25,606) $ 17,766
================= ================= ================= =================
Earnings (loss) per share (note 6):
Basic $ (0.82) $ 0.40 $ (1.41) $ 1.16
Diluted $ (0.82) $ 0.38 $ (1.41) $ 1.08
Number of shares used in computing
earnings (loss) per share (note 6):
Basic 20,108 15,557 18,196 15,328
Diluted 20,108 16,948 18,196 16,745
</TABLE>
See accompanying notes to condensed consolidated financial statements
-4-
<PAGE>
<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (25,606) $ 17,766
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,245 906
Amortization of NIRs 24,222 19,367
Amortization of deferred financing costs 475 243
Provision for credit losses 4,843 12,875
NIR gains recognized -- (36,704)
Gain on sale of subsidiary -- (56)
Equity net (income) loss in unconsolidated affiliates 1,665 (617)
Net deposits into trusts (12,358) (63,834)
Changes in assets and liabilities:
Restricted cash (42) --
Purchases of contracts held for sale (306,725) (895,581)
Liquidation of contracts held for sale 462,901 662,027
Net change in warehouse lines of credit (151,857) 224,922
Other assets 6,358 (10,272)
Accrued taxes and expenses (12,904) 23,781
----------------- -----------------
Net cash used in operating activities (7,783) (45,177)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment in unconsolidated affiliate 979 --
Related party receivables (11) (242)
Repayment of related party receivables 2,248 707
Investment in unconsolidated affiliate -- (65)
Purchases of furniture and equipment (33) (1,833)
Net cash from sale of subsidiary -- 381
----------------- -----------------
Net cash provided by (used in) investing activities 3,183 (1,052)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in residual financing -- 33,000
Issuance of related party debt 1,500 5,000
Issuance of subordinated debt 5,000 --
Issuance of notes payable 1,395 2,461
Repayment of residual financing debt (3,438) --
Repayment of capital lease obligations (462) (400)
Repayment of notes payable (551) (502)
Payment of financing costs (312) --
Issuance of common stock -- 5,000
Exercise of options and warrants 44 542
----------------- -----------------
Net cash provided by financing activities 3,176 45,101
----------------- -----------------
Decrease in cash (1,424) (1,128)
Cash at beginning of period 1,940 1,745
----------------- -----------------
Cash at end of period $ 516 $ 617
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 21,712 $ 13,391
Income taxes $ 43 $ 860
Supplemental disclosure of non-cash investing and
financing activities:
Furniture and equipment acquired through capital leases $ -- $ 839
Issuance and revaluation of common stock warrants 9,844 --
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>
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, 1999, 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, 1998.
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 Corporation., and CPS
Warehouse Corp. The consolidated financial statements also include the accounts
of SAMCO Acceptance Corp. ("SAMCO"), LINC Acceptance Company, LLC ("LINC") and
CPS Leasing, Inc., each of which is 80% owned by 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.
During the nine month period ended September 30, 1999, the Company terminated
all operations of SAMCO and LINC.
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.
CONTRACTS HELD TO MATURITY
Contracts held to maturity are presented at fair market value and are
included in other assets on the September 30, 1999, condensed consolidated
balance sheet. Payments received on the $3.1 million balance of Contracts held
to maturity are restricted to certain securitized pools, and the related
Contracts cannot be resold.
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. Provision for losses are charged to gain on sale of
Contracts. Charge-offs, net of recoveries, are charged to the allowance.
Management evaluates the adequacy of the allowance by examining current
delinquencies, the characteristics of the portfolio, 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>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS
The Company historically has purchased Contracts with the primary
intention of reselling them in securitization transactions as asset-backed
securities. The Company has not sold Contracts in a securitization transaction
since December of 1998, and there can be no assurance as to when the Company
next will do so. The securitizations generally have been 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 to the Trust at face value and without recourse,
except that representations and warranties similar to those provided by the
Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Certificates issued by the Trust; the proceeds from the
sale of the Certificates are then used to purchase the Contracts from the
Company. The Company purchases a financial guaranty insurance policy,
guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. 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 increased
materially in 1998 and have recently been decreased by agreement. See note 7 -
"Liquidity" for a discussion of certain pre-conditions to the effectiveness of
such decrease.
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 ownership interest that the Company retains in Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account and (b) the net interest receivables ("NIRs"). NIRs
represent the estimated discounted cash flows to be received from the Trust in
the future, net of principal and interest payable with respect to the
Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the Certificates
and the Residuals retained based on the relative fair values of those portions
on the date of the sale. The Company recognizes gains or losses attributable to
the change in the fair value of the Residuals, which are recorded at estimated
fair value and accounted for as "held-for-trading" securities. The Company is
not aware of an active market for the purchase or sale of interests such as the
Residuals, and accordingly, the Company determines the estimated fair value of
the Residuals by discounting the amount and timing of anticipated cash flows
released from the Spread Account (the cash out method), using a discount rate
that the Company believes is appropriate for the risks involved. For that
valuation, the Company has used an effective discount rate of approximately 14%
per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the 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 the related Spread Account is at its required level, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization. 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 the owner of
the Residuals.
-7-
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The annual percentage rate payable on the Contracts is significantly
greater than the pass through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In determining
the value of the Residuals described above, the Company must estimate the future
rates of prepayments, delinquencies, defaults and default loss severity as they
affect the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effects of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. 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. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
the original estimate, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company during 1998 established a
$7.8 million allowance for losses on the Residuals, which did not change during
the nine month period ended September 30, 1999.
(2) CONTRACTS HELD FOR SALE
<TABLE>
The following table presents the components of Contracts held for sale:
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -------------------
(in thousands)
<S> <C> <C>
Gross receivable balance.................................. $ 7,248 $ 183,876
Unearned finance charges.................................. (194) (10,949)
Deferred acquisition fees and discounts................... (313) (4,594)
Allowance for credit losses............................... (2,177) (2,751)
------------------ -------------------
Net contracts held for sale............................... $ 4,564 $ 165,582
================== ===================
</TABLE>
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ ------------------
(in thousands)
<S> <C> <C>
Cash, commercial paper, US government securities and other qualifying
investments (Spread Account)............................................ $ 145,057 $ 130,394
NIRs.................................................................... 30,578 54,800
Over collateralization.................................................. 30,187 31,836
Funds held by investor.................................................. -- 480
Investment in subordinated certificates ................................ 162 338
------------------ ------------------
Residual interest in securitizations:................................... $ 205,984 $ 217,848
================== ==================
</TABLE>
-8-
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
The following table presents the activity of the NIRs:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period........... $ 40,010 $ 57,573 $ 54,800 $ 45,112
NIR gains recognized................... -- 13,819 -- 36,704
Amortization of NIRs................... (9,432) (8,943) (24,222) (19,367)
----------------- ----------------- ----------------- -----------------
Balance, end of period................. $ 30,578 $ 62,449 $ 30,578 $ 62,449
================= ================= ================= =================
</TABLE>
<TABLE>
The following table presents estimated remaining undiscounted credit
losses included in the fair value estimated of the Residuals as a percentage of
the Company's servicing portfolio subject to recourse provisions:
<CAPTION>
September 30, 1999 December 31, 1998
------------------ ------------------
(in thousands)
<S> <C> <C>
Undiscounted estimated credit losses........................... $ 95,477 $ 169,110
================== ==================
Servicing subject to recourse provisions....................... $ 947,989 $ 1,362,801
================== ==================
Undiscounted estimated credit losses as percentage of
servicing subject to recourse provisions................ 10.07% 12.41%
================== ==================
</TABLE>
<TABLE>
(4) GAIN ON SALE OF CONTRACTS
The following table presents components of net gain (loss) on sale of
Contracts:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gains (loss) recognized on sale........ $ (8,644) $ 13,820 $ (17,917) $ 36,704
Deferred acquisition fees and discounts 1,745 5,528 7,596 13,839
Expenses related to sales.............. (576) (1,164) (997) (3,018)
Provision for credit losses............ (2,250) (2,871) (4,843) (12,875)
-------------- -------------- -------------- --------------
Net gain (loss) on sale of contracts... $ (9,725) $ 15,313 $ (16,161) $ 34,650
============== ============== ============== ==============
</TABLE>
-9-
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) INTEREST INCOME
<TABLE>
The following table presents the components of interest income:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Interest on Contracts held for sale $ 3,695 $ 12,236 $ 28,213 $ 30,868
Residual interest income......... 425 8,766 16,028 24,154
Amortization of NIRs............. (9,432) (8,942) (24,222) (19,367)
-------------- -------------- -------------- --------------
Net interest income (loss)....... $ (5,312) $ 12,060 $ 20,019 $ 35,655
============== ============== ============== ==============
</TABLE>
(6) EARNINGS (LOSS) PER SHARE
Diluted loss per share for the three and nine month periods ended
September 30, 1999, was calculated using the weighted average number of shares
outstanding for the related period. Diluted earnings per share for the three and
nine month periods ending September 30, 1998, was calculated using the weighted
average number of diluted common shares outstanding including common stock
equivalents, which consist of certain outstanding dilutive stock options and
warrants and incremental shares attributable to conversion of certain
subordinated debt. The following table reconciles the number of shares used in
the computations of basic and diluted earnings (loss) per share for the three
and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding
during the period used to compute basic earnings per
share.................................................. 20,108 15,557 18,196 15,328
Incremental common shares attributable to exercise of
outstanding options and................................ -- 240 -- 535
Incremental common shares attributable to conversion of
subordinated debt......................................... -- 1,151 -- 882
-------------- -------------- -------------- --------------
Number of common shares used to compute diluted earnings
(loss) per share.......................................... 20,108 16,948 18,196 16,745
============== ============== ============== ==============
</TABLE>
If the anti-dilutive effects of common stock equivalents were not
considered, additional shares included in diluted loss per share calculation for
the three and nine month periods ended September 30, 1999, would have included
an additional 2,000 and 16,000, respectively, from outstanding stock options and
warrants and an additional 2.4 million from incremental shares attributable to
the conversion of certain subordinated debt, for an aggregate total of
approximately 22.5 million diluted shares for the three month period ending
September 30, 1999 and 20.6 million diluted shares for the nine month period
ending September 30, 1999.
(7) LIQUIDITY
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been proceeds from the sales of Contracts, amounts borrowed
under its various warehouse lines, servicing fees on portfolios of Contracts
previously sold, proceeds from the sales of Contracts, customer payments of
principal and interest on Contracts held for sale, fees for origination of
Contracts, and releases of cash from Spread Accounts. The Company's primary uses
of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts, and income taxes. As a result, the Company has been
dependent on its warehouse lines of credit to purchase Contracts, and on the
availability of capital from outside sources in order to finance its continued
operations. As of the date of this report, the Company is not party to any
warehouse line of credit, and did not receive any material releases of cash from
Spread Accounts from June 1998 through October 1999. The inability to borrow and
the lack of releases have resulted in a liquidity deficiency. The Company has
begun to remedy that deficiency, as is discussed below following a review of the
operating sources and uses of cash for the nine month period ended September 30,
1999.
-10-
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net cash used in operating activities was $7.8 million during the nine
month period ended September 30, 1999, compared to $45.2 million for the nine
month period ended September 30, 1998. Net cash deposited into trusts was $12.4
million, a decrease of $51.5 million, or 80.6%, over net cash deposited into
trusts in the nine month period ended September 30, 1998.
During the nine month period ended September 30, 1999, the Company did
not complete a securitization transaction, and therefore, did not use any cash
for initial deposits to Spread Accounts, compared to $36.3 million used during
the nine month period ended September 30, 1998. Cash used for subsequent
deposits to Spread Accounts for the nine month period ended September 30, 1999,
was $21.1 million, a decrease of $23.2 million, or 52.4%, over cash used for
subsequent deposits to Spread Accounts in the nine month period ended September
30, 1998. Cash released from Spread Accounts for the nine month period ended
September 30, 1999, was $8.7 million, a decrease of $8.0 million, or 47.9%, over
cash released from Spread Accounts in the nine month period ended September 30,
1998. 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.
As of September 30, 1999, 17 of the 21 Trusts had incurred cumulative
net losses as a percentage of the original Contract balance or average
delinquency ratios in excess of the predetermined levels specified in the
respective Servicing Agreements. Accordingly, pursuant to the Servicing
Agreements, the specified levels applicable to the Company's Spread Accounts
were increased. Due to cross collateralization provisions of the Servicing
Agreements, the increased specified levels have been applicable to 19 of the
Company's 21 Trusts. The higher requisite Spread Account levels ranged from 30%
of the outstanding principal balance of the Certificates issued by the related
Trusts up to an unlimited amount. In addition to requiring higher Spread Account
levels, the Servicing Agreements provide the Certificate Insurer with certain
other rights and remedies, some of which have been waived on a monthly basis by
the Certificate Insurer. Increased specified levels for the Spread Accounts have
been in effect from time to time in the past, including the entire period from
June 1998 to September 1999. As a result of the increased Spread Account
specified levels and cross collateralization provisions, excess cash flows that
would otherwise have been released to the Company instead were retained in the
Spread Accounts to bring the balance of those Spread Accounts up to a higher
level. Due to the increase in the Spread Account requirements, there were no
significant releases of cash from the Trusts from June 1998 through September
1999. Funding such balance increases has materially increased the Company's
capital requirements, while the absence of cash releases has materially
decreased its liquidity. As a result of the increased specified levels
applicable to the Spread Accounts, approximately $51.0 million of cash that
would otherwise have been available to the Company had been delayed and retained
in the Spread Accounts as of September 30, 1999. A portion of such cash was
subsequently released to the Company, as discussed below.
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases, discussed below) the required level of initial Spread
Account deposits, and the extent to which the Spread Accounts either release
cash to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 had materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999 and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has purchased $1.5 million
of such additional notes, on the same terms applicable to the LLCP notes, but
subordinated to the LLCP Notes and to the Company's outstanding public debt.
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CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
The Company has entered into an amendment agreement (the "Amendment"),
which fixes the amount of cash to be retained in the Spread Accounts for 19 of
the Company's 21 securitization Trusts. The amended level is 21% of the
outstanding principal balance of the Certificates issued by such Trusts,
computed on a pool by pool basis. The 21% level is subject to adjustment to
reflect overcollateralization, and with respect to older Trusts that have
amortized the Certificate balance to the extent that minimum levels are
applicable.
In the event of certain defaults by the Company, the specified level
applicable to such Spread Accounts could increase to an unlimited amount, but
such defaults are narrowly defined, and the Company does not anticipate
suffering such defaults. The Amendment by its terms is applicable from September
1999 onward, and on November 3, 1999, the necessary signatures and conditions
were satisfied to make the Amendment effective. The Company on November 4, 1999,
received its first material release of cash from the securitized portfolio
pursuant to the terms of the Amendment. The releases of cash are expected to
continue and to vary in amount from month to month. There can be no assurance
that such releases of cash will continue in the future.
As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below. During the third quarter of 1999, the Company
purchased $89.6 million of Contracts, all of which was on a flow basis, and
expects to purchase Contracts only on a flow basis in the remainder of 1999. The
reduction in the amount of Contracts purchased for the Company's own account has
materially reduced the Company's capital requirements.
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to increase the quantity of Contracts that it purchases and sells on a
flow basis, thus increasing the fees that it receives in connection with such
purchases and sales, and (2) to continue to receive releases of cash from its
Spread Accounts, pursuant to the Amendment, which became effective on November
3, 1999. There can be no assurance that this plan will be successful.
During the second and third quarters, the Company sold, on a servicing
released basis, $318.0 million of its Contracts held for sale. The remaining
Contracts held for sale represent Contracts that did not meet the criteria for
the various sales occurring in the second and third quarters. The Company's
ability to increase the quantity of Contracts that it purchases and sells on a
flow basis will be subject to general competitive conditions and other factors.
Although the Company has continued to increase the amount of Contracts purchased
and sold on a flow basis, there can be no assurance that the current level of
flow production can be maintained or increased.
Obtaining release of cash from the Spread Accounts is dependent on
collections from the related Trusts generating sufficient cash in excess of the
amended specified levels. There can be no assurance that collections from the
related trusts will generate cash in excess of the amended specified levels.
(8) COMMITMENTS AND CONTINGENCIES
On July 22, 1999, Bank of America commenced a lawsuit against the
Company in the Superior Court of California, Orange County, seeking repayment of
approximately $3 million advanced to the Company under an overdraft line of
credit, plus interest, costs and attorneys' fees. The Company and Bank of
America have entered into a settlement agreement, pursuant to which the Company
shall repay all amounts owing, in specified installments through November 1999.
The Company is in compliance with the settlement agreement as of the date of
this report.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consumer Portfolio Services, Inc. and its subsidiaries (collectively,
the "Company") primarily engage in the business of purchasing, selling and
servicing retail automobile installment sale contracts ("Contracts") originated
by automobile dealers ("Dealers") located throughout the United States. In
recent months, the Company has suspended its solicitation of Contract purchases
in 20 states, and as of the date of this report is active in 29 states. There
can be no assurance as to resumption of Contract purchasing activities in other
states. Through its purchase of Contracts, the Company provides indirect
financing to Dealer customers with limited credit histories, low incomes or past
credit problems, who generally would not be expected to qualify for financing
provided by banks or by automobile manufacturers' captive finance companies.
The major components of the Company's revenue are gains or losses
recognized on the sale or securitization of its Contracts, servicing fees earned
on Contracts sold in securitizations, interest earned on Contracts held for
sale, and fees earned upon sale of Contracts that were purchased on a flow
basis. Because the servicing fees are 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.
The Company has purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities. From
late May 1999 to the present, the Company has purchased Contracts on a flow
basis for a third party; that is, the Company purchases a Contract from a
Dealer, and sells the Contract the next day to the third party for the same
price the Company paid. The Company also receives from the third party a fee for
its services. The Company retains no interest in such Contracts, and neither
services such Contracts nor earns a servicing fee. Although the Company has been
unable to sell Contracts in a securitization transaction since December 1998, it
does plan to securitize in the future, as to which there can be no assurance.
The Company's securitization structure has been 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 a principal amount equal to the aggregate principal balance of the Contracts.
The Company typically sells these Contracts to the Trust at face value and
without recourse, except that representations and warranties similar to those
provided by the Dealer to the Company are provided by the Company to the Trust.
One or more investors purchase the Certificates issued by the Trust; the
proceeds from the sale of the Certificates are then used to purchase the
Contracts from the Company. The Company purchases a financial guaranty insurance
policy, guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. 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 increased
materially in 1998. Effective November 3, 1999, as applied to monthly
measurement dates from September 1999 onward, the specified levels have
decreased, as is discussed under the heading "Liquidity and Capital Resources."
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<PAGE>
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 ownership interest that the Company retains in the Contracts sold
in the securitization. That retained interest (the "Residual") consists 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, net of principal and interest payable with respect to
the Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the
Certificates and the Residuals retained based on the relative fair values of
those portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as "held-for-trading"
securities. The Company is not aware of an active market for the purchase or
sale of interests such as the Residuals, and accordingly, the Company determines
the estimated fair value of the Residuals by discounting the amount and timing
of anticipated cash flows released from the Spread Account (the cash out
method), using a discount rate that the Company believes is appropriate for the
risks involved. For that valuation, the Company has used an effective discount
rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the 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 specified levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization,
that is, to reduce the aggregate principal balance of outstanding Certificates
below the aggregate principal amount of the related automotive receivables. 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 the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly
greater than the rates payable 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 the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effect of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. 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. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
originally estimated, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company has established a provision
for future losses on the Residuals.
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<PAGE>
The structure described above is applicable to securitization
transactions conducted at least once quarterly from June 1994 through December
1998. The Company did not sell any Contracts in securitization transactions
during the nine month period ended September 30, 1999, and there can be no
assurance as to when it will next sell Contracts using the structure described
above.
During the nine months ended September 30, 1999, the Company has
changed its basic system of doing business. Previously, the Company would
acquire Contracts for its own account, borrowing from 88% to 97% of the
principal balance of such Contracts under "warehouse" lines of credit.
Periodically (approximately once every quarter) the Company would then sell most
or all of the recently acquired Contracts in a securitization transaction as
described above. In such a sale, the Company would retain (1) a residual
ownership interest in the Contracts sold, (2) the obligation to service the
Contracts sold, and (3) the right to receive servicing fees. At the end of March
1999, the Company learned that it would be unable to sell Contracts in
securitization transactions for an indeterminate period. Accordingly, the
Company commenced purchasing Contracts for immediate re-sale to a third party,
which third party purchases the Contracts in turn on a daily basis. In this
arrangement, the Company retains no residual interest in the Contracts, has no
servicing obligation, and receives no servicing fee. For its services in
acquiring Contracts for purchase, the Company receives a per-Contract fee from
the third party.
RESULTS OF OPERATIONS
The three month period ended September 30, 1999 compared to the three month
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period ended September 30, 1998
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REVENUES. During the three months ended September 30, 1999, revenues
decreased $43.8 million, or 126.6%, compared to the three month period ended
September 30, 1998. Gain on sale of Contracts decreased by $25.0 million, or
163.5%, from a $15.3 million gain on sale in the third quarter of 1998 to a $9.7
million loss in the third quarter of 1999. The change in gain on sale from
positive to negative is due to the Company selling Contracts only on a servicing
released basis and thus not recording any NIR gains during the period, as well
as to selling Contracts at a loss. During the three month period ended September
30, 1999, the Company sold $83.8 million of Contracts on a servicing released
basis, that is, with no residual interest retained, with no servicing
obligation, and with no right to receive a servicing fee. Those sales resulted
in a net loss of approximately $11.3 million. Expenses of approximately $576,000
were incurred related to previous securitization transactions, including the
amortization of a warrant issued to the Certificate Insurer in November 1998. In
addition, for the three month periods ended September 30, 1999 and 1998, the
Company charged against gain on sale $2.3 million and $2.9 million,
respectively, of provision for losses on Contracts held for sale.
Interest income decreased by $17.4 million, or 144.1%, from positive
interest income of $12.1 million in the third quarter of 1998 to negative
interest income of $5.3 million in the third quarter of 1999. Interest income
consists of interest earned on Contracts held for sale and residual interest
income earned on the Company's securitized portfolio, and is offset by
amortization of the NIRs. The principal factors leading to the decrease in
interest income were that the Company held fewer Contracts for sale, which
reduces interest earned on such Contracts, and that the Company did not, in the
most recent quarter, securitize any Contracts. It has been the Company's
experience that residual interest income is greatest early in the term of a
securitized pool. An increase in the amortization of NIRs in accordance with the
seasoning of the underlying securitized pools, as compared to the same period in
the prior year, also had an adverse effect on interest income. Due to the
absence of new pools of securitized Contracts that could be expected to
contribute materially to residual interest income, and a further decrease in
Contracts held for sale, interest income can be expected to decrease further in
future quarters.
Servicing fees decreased by approximately $611,000, or 8.9%, and
represented 68.3% of total revenues. The decrease in servicing fees is due to
the decrease in the servicing portfolio. As of September 30, 1999, the Company
was earning servicing fees on 101,383 sold Contracts with aggregate outstanding
principal balances approximating $948.0 million, compared to 110,945 Contracts
with aggregate outstanding principal balances approximating $1,175.7 million as
of September 30, 1998. In addition to the $948.0 million in sold Contracts, on
which servicing fees were earned, the Company was holding for sale and servicing
an additional $7.1 million in Contracts, for an aggregate total servicing
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<PAGE>
portfolio of $955.1 million. The Company is not currently acquiring Contracts
for its servicing portfolio. In addition, those Contracts that remain in the
Company's servicing portfolio are self-amortizing, and the aggregate principal
balance of the servicing portfolio therefore decreases over time. Accordingly,
the Company expects that its servicing portfolio will continue to decrease, and
that servicing fees to be earned will therefore also decrease, at least through
the remainder of 1999, and until such time as the Company is again acquiring
Contracts for its own servicing portfolio. There can be no assurance as to when
the Company may be able to do so.
EXPENSES. During the three month period ended September 30, 1999,
operating expenses decreased $4.5 million, or 18.8%, compared to the three month
period ended September 30, 1998. Employee costs decreased by $1.3 million, or
15.3%, and represented 36.5% of total operating expenses. The decrease is due to
reductions in staff in accordance with the decrease in the Company's servicing
portfolio and originations volume. General and administrative expenses decreased
by $2.3 million, or 35.5%, and represented 21.1% of total operating expenses.
Interest expense decreased approximately $46,000, or 0.8%, and
represented 30.6% of total operating expenses. See "Liquidity and Capital
Resources." The decrease is primarily due to the decrease in the Company's
warehouse lines of credit and reduction of the principal balance of senior
secured debt (the "Senior Secured Line"). The warehouse lines of credit were
paid down in their entirety as of September 30, 1999, compared to an outstanding
balance of $286.6 million at September 30, 1998. The outstanding balance of the
Senior Secured Line was $29.6 million at September 30, 1999, compared to $33.0
million at September 30, 1998.
The Company expects to hold for sale fewer Contracts in the remainder
of 1999 and the first part of 2000 than it held, on average, through the first
three quarters of 1999, which would be expected to result in a decrease in
interest earned on Contracts held for sale, and a decrease in interest expense
incurred. Beyond the first two quarters of 2000, it is not possible to estimate
the quantity of Contracts that the Company may hold for sale.
The nine month period ended September 30, 1999, compared to the nine month
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period ended September 30, 1998
- -------------------------------
REVENUES. During the nine months ended September 30, 1999, revenues
decreased $64.1 million, or 71.9%, compared to the nine month period ended
September 30, 1998. Net gain on sale of Contracts decreased by $50.8 million, or
146.6%, for the nine month period ended September 30, 1999. The change in gain
on sale from positive to negative is due to the Company selling Contracts only
on a servicing released basis and thus not recording any NIR gains during the
period, as well as to selling Contracts at a loss. During the nine month period
ended September 30, 1999, the Company sold $318.0 million of Contracts on a
servicing released basis, resulting in a loss of $17.6 million.
Interest income decreased by $15.6 million, or 43.9%, and represented
80.0% of total revenues for the nine month period ended September 30, 1999. The
decrease is primarily due to a lower average balance of Contracts held for sale,
decrease in residual interest income primarily due to the absence of any new
securitizations, and an increase in the amortization of NIRs during the nine
month period ending September 30, 1999.
Servicing fees increased by $4.3 million, or 24.3%, and represented
88.9% of total revenues. The increase in servicing fees is due to the increase
in the Company's average servicing portfolio over the prior year's period.
EXPENSES. During the nine month period ended September 30, 1999,
operating expenses increased $10.7 million, or 18.4%, compared to the nine month
period ended September 30, 1998. Employee costs increased by $2.5 million, or
12.0%, and represented 33.5% of total operating expenses. The increase is due to
the fact that on average, there were more staff on hand for the nine month
period ended September 30, 1999, than in the same period in the prior year. The
higher staff levels were necessary to accommodate the increase in the Company's
average servicing portfolio during the first two quarters of 1999. General and
administrative expenses decreased by $1.3 million, or 8.0%, and represented
21.2% of total operating expenses. The decrease in general and administrative
expenses is primarily due to decreases in telecommunications, stationery, credit
reports and other related items as a result of the decrease in the Company's
originations volume.
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<PAGE>
Interest expense increased $9.1 million, or 62.8%, and represented
34.1% of total operating expenses. See "Liquidity and Capital Resources." The
increase is primarily due to the interest paid on an additional $35.0 million in
subordinated debt securities and amounts borrowed under the Senior Secured Line.
Most of such debt was issued by the Company at various times after September 30,
1998, or had a higher outstanding balance during 1999. Interest expense has also
been increased by the Company being required to pay higher interest rates on
borrowed money in the current period, as compared with the prior year's period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been proceeds from the sales of Contracts, amounts borrowed
under its various warehouse lines, servicing fees on portfolios of Contracts
previously sold, proceeds from the sales of Contracts, customer payments of
principal and interest on Contracts held for sale, fees for origination of
Contracts, and releases of cash from Spread Accounts. The Company's primary uses
of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts, and income taxes. As a result, the Company has been
dependent on its warehouse lines of credit to purchase Contracts, and on the
availability of capital from outside sources in order to finance its continued
operations. As of the date of this report, the Company is not party to any
warehouse line of credit, and did not receive any material releases of cash from
Spread Accounts from June 1998 through October 1999. The inability to borrow and
the lack of releases have resulted in a liquidity deficiency. The Company has
begun to remedy that deficiency, as is discussed below following a review of the
operating sources and uses of cash for the nine month period ended September 30,
1999.
Net cash used in operating activities was $7.8 million during the nine
month period ended September 30, 1999, compared to $45.2 million for the nine
month period ended September 30, 1998. Net cash deposited into trusts was $12.4
million, a decrease of $51.5 million, or 80.6%, over net cash deposited into
trusts in the nine month period ended September 30, 1998.
During the nine month period ended September 30, 1999, the Company did
not complete a securitization transaction, and therefore, did not use any cash
for initial deposits to Spread Accounts, compared to $36.3 million used during
the nine month period ended September 30, 1998. Cash used for subsequent
deposits to Spread Accounts for the nine month period ended September 30, 1999,
was $21.1million, a decrease of $23.2million, or 52.4%, from cash used for
subsequent deposits to Spread Accounts in the nine month period ended September
30, 1998. Cash released from Spread Accounts for the nine month period ended
September 30, 1999, was $8.7 million, a decrease of $8.0 million, or 47.9%, from
cash released from Spread Accounts in the nine month period ended September 30,
1998. 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.
As of September 30, 1999, 17 of the 21 Trusts had incurred cumulative
net losses as a percentage of the original Contract balance or average
delinquency ratios in excess of the predetermined levels specified in the
respective Servicing Agreements. Accordingly, pursuant to the Servicing
Agreements, the specified levels applicable to the Company's Spread Accounts
were increased. Due to cross collateralization provisions of the Servicing
Agreements, the increased specified levels have been applicable to 19 of the
Company's 21 Trusts. The higher requisite Spread Account levels ranged from 30%
of the outstanding principal balance of the Certificates issued by the related
Trusts up to an unlimited amount. In addition to requiring higher Spread Account
levels, the Servicing Agreements provide the Certificate Insurer with certain
other rights and remedies, some of which have been waived on a monthly basis by
the Certificate Insurer. Increased specified levels for the Spread Accounts have
been in effect from time to time in the past, including the entire period from
-17-
<PAGE>
June 1998 to September 1999. As a result of the increased Spread Account
specified levels and cross collateralization provisions, excess cash flows that
would otherwise have been released to the Company instead were retained in the
Spread Accounts to bring the balance of those Spread Accounts up to a higher
level. Due to the increase in the Spread Account requirements, there were no
significant releases of cash from the Trusts from June 1998 through September
1999. Funding such balance increases has materially increased the Company's
capital requirements, while the absence of cash releases has materially
decreased its liquidity. As a result of the increased specified levels
applicable to the Spread Accounts, approximately $51.0 million of cash that
would otherwise have been available to the Company had been delayed and retained
in the Spread Accounts as of September 30, 1999. A portion of such cash was
subsequently released to the Company, as discussed below.
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases), the required level of initial credit enhancement in
securitizations, and the extent to which the Spread Accounts either release cash
to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 has materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999, and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has purchased $1.5 million
of such additional notes, on the same terms applicable to the LLCP Notes, but
subordinated to the LLCP Notes and to the Company's outstanding public debt.
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
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<PAGE>
The Company has entered into an amendment agreement (the "Amendment"),
which fixes the amount of cash to be retained in the Spread Accounts for 19 of
the Company's 21 securitization Trusts. The amended level is 21% of the
outstanding principal balance of the Certificates issued by such Trusts,
computed on a pool by pool basis. The 21% level is subject to adjustment to
reflect overcollateralization, and with respect to older Trusts that have
amortized the Certificate balance to the extent that minimum levels are
applicable.
In the event of certain defaults by the Company, the specified level
applicable to such Spread Accounts could increase to an unlimited amount, but
such defaults are narrowly defined, and the Company does not anticipate
suffering such defaults. The Amendment by its terms is applicable from September
1999 onward, and on November 3, 1999, the necessary signatures and conditions
were satisfied to make the Amendment effective. The Company on November 4, 1999,
received its first material release of cash from the securitized portfolio
pursuant to the terms of the Amendment. The releases of cash are expected to
continue and to vary in amount from month to month. There can be no assurance
that such releases of cash will continue in the future.
As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below. During the third quarter of 1999, the Company
purchased $89.6 million of Contracts, all of which was on a flow basis, and
expects to purchase Contracts only on a flow basis for the remainder of 1999,
and until the Company is able to identify appropriate sources of capital to
acquire and hold Contracts for the Company's own account. The reduction in the
amount of Contracts purchased for the Company's own account has materially
reduced the Company's capital requirements.
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to increase the quantity of Contracts that it purchases and sells on a
flow basis, thus increasing the fees that it receives in connection with such
purchases and sales, and (2) to continue to receive releases of cash from its
Spread Accounts, pursuant to the Amendment, which became effective on November
3, 1999. There can be no assurance that this plan will be successful.
During the second and third quarters, the Company sold, on a servicing
released basis, $318.0 million of its Contracts held for sale. The remaining
Contracts held for sale represent Contracts that did not meet the criteria for
the various sales occurring in the second and third quarters. The Company's
ability to increase the quantity of Contracts that it purchases and sells on a
flow basis will be subject to general competitive conditions and other factors.
Although the Company has continued to increase the amount of Contracts purchased
and sold on a flow basis, there can be no assurance that the current level of
flow production can be maintained or increased.
Obtaining release of cash from the Spread Accounts is dependent on
collections from the related Trusts generating sufficient cash in excess of the
amended specified levels. There can be no assurance that collections from the
related trusts will generate cash in excess of the amended specified levels.
-19-
<PAGE>
YEAR 2000
OVERVIEW. The Year 2000 issue is predicated on the concept that some
database files may contain date fields that will not support century functions
and that some programs may not support century functions even if the date fields
are present. With the change of millennium, the inability to properly process
century functions may create halts or sort/calculation errors within programs
that use century information in calculation and functions.
The Company predominantly uses accounting and installment loan
application processing software against defined relational database files. Most
financial software has long ago been forced to deal with a four byte date field
due to long term maturity dates, bond yield calculations and mortgage
amortization schedules. The Company has been cognizant of Year 2000
considerations since late 1994, when contracts with maturity dates in the year
2000 were first purchased.
PLAN. The Company's plan to assess the Year 2000 issue consists of a
three-phase process. The first phase of the process, which has been completed,
consisted of assessing all user programs of the Company's mainframe computer.
Those user programs that were not compliant were either corrected or the
necessary software patches have been identified and ordered. There were no
critical user programs identified that could not be modified to be compliant. In
addition, the Company's mainframe computer's operating system was also tested
and was deemed to be compliant as well.
The second phase of the Company's testing consisted of testing all
personal computers for compliance. An outside specialist was engaged to
administer the testing of hardware and software. This testing was completed in
April 1999. Corrective measures have been put into place for any personal
computer and its software not in compliance at that time.
The third and final phase consisted of identifying key vendors of the
Company's operations and requesting that those vendors complete a Year 2000
compliance questionnaire. The Company has collected and confirmed the Y2K
readiness of key vendors. In addition, the Company has established back-up
vendors should the primary vendors have temporary work stoppages.
COSTS. As the majority of the testing was performed internally by the
Company's information systems department, the Company estimates the costs to
complete all phases of testing, including any necessary modifications, to be
insignificant to the results of operations.
At this time, the risks associated with the Company's Year 2000 issues
internally have been identified and corrected. Through the Company's plan of
analysis and identification, it expects to identify substantially all of its
Year 2000 related risks. Although the risks have not been completely identified,
the Company believes that the most realistic worst case scenario would be that
the Company would suffer from full or intermittent power outages at some or all
of its locations. Depending upon the locations affected and estimated duration,
this would entail recovery of the main application server systems at other
locations and or move to manual processes. Manual processes have been developed
as part of the overall contingency plan. In relation to this, complete system
data dumps are scheduled to take place prior to the millennium date change to
ensure access to all Company mission critical data should any system not be
accessible for any reason.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains certain "forward-looking statements,"
including, without limitation, the statements to the effect that the Company (i)
plans to securitize Contracts in the future, and (ii) expects that forbearances
and waivers will be granted, and amendments agreed to, with respect to defaults
under existing indebtedness. Such plans and expectations are based on the
Company's assessment of the decisions likely to be made by third parties, over
which the Company has no control.
Specifically, the reader should bear in mind the following
considerations: As to future securitizations, there can be no assurance that the
Company will have the liquidity or capital resources to enable it to post the
reserves required for credit enhancement of such transactions, or that the
securitization markets will be receptive at the time that the Company seeks to
engage in such transactions.
-20-
<PAGE>
As to defaults under existing indebtedness, the Company's ability to
cure such defaults and ultimately repay such debt is dependent on the
willingness of the various lenders to agree to a number of waivers and
amendments. Although the lenders under the Senior Secured Line have agreed to
forbear from exercising their remedies with respect to such indebtedness,
provided that the Company meets the payment schedule and other conditions set
forth in such agreement, it is possible that the Company could fail to meet such
terms. Such a possibility could be realized, for example, if the Company were
forced to pay material unexpected expenses during the repayment period specified
in the agreement with the senior secured lenders. Payment of such expenses, in
turn, could leave the Company unable to repay the senior secured lenders on the
agreed schedule. A material decrease in collections on the Company's securitized
portfolio could also result in the Company being unable to meet that schedule.
With respect to the LLCP Notes, the Company, as of the date of this report, is
in negotiations with LLCP (the holder of such Notes) regarding possible waivers
and amendments that would allow the Company to comply fully with the amended
terms. There can be no assurance that such negotiations will result in an
agreement. Although LLCP may agree to grant such waivers
and execute such amendments, its decisions will be determined by LLCP's
evaluation of its own interest, and there can be no assurance that any such
waivers will be granted or amendments agreed to.
In addition to the statements identified above, 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, 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
or to be expended for other forms of credit enhancement to support future
securitizations; the unavailability of warehouse lines of credit which the
Company plans to use 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's funding strategy is largely dependent upon acquiring
interest-bearing assets (the Contracts), issuing interest bearing asset-backed
securities and incurring debt. Therefore, upward fluctuations in interest rates
may adversely affect the Company's profitability, while downward fluctuations
may improve the Company's profitability. The Company uses several strategies to
minimize the risk of interest rate fluctuations, including offering only fixed
rate contracts to obligors, regular sales of auto Contracts to the Trusts, and
pre-funding securitizations, whereby the amount of asset-backed securities
issued in a securitization exceeds the amount of Contracts initially sold to the
Trusts. The proceeds from the pre-funded portion are held in an escrow account
until the Company sells the additional Contracts to the Trust in amounts up to
the balance of the pre-funded escrow account. In pre-funded securitizations, the
Company locks in the borrowing costs with respect to the loans it subsequently
delivers to the Trust. However, the Company incurs an expense in pre-funded
securitizations equal to the difference between the money market yields earned
on the proceeds held in escrow prior to subsequent delivery of Contracts and the
interest rate paid on the asset-backed securities outstanding. As the Company
has not sold any Contracts in a securitization transaction, all strategies
related to securitizations have not been applied in the current period.
-21-
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's having incurred a loss in two consecutive quarters, and
other events, have placed it in default under its Senior Secured Line. The
Company's failure to obtain the $15.0 million of capital committed by SFSC, late
payment of monthly interest of $375,000, and certain other events, have placed
it in default under the LLCP Notes.
The Company has reached an agreement with the lenders under the Senior
Secured Line under which such lenders agree to refrain from exercising their
remedies occasioned by such default, and under which the Company and such
lenders agree to a repayment schedule with respect to all indebtedness under the
Senior Secured Line. Such repayment schedule is somewhat less rapid than the
schedule that was required in the original agreement creating the Senior Secured
Line, and the Company anticipates that it will be able to make all required
payments to the lenders under the Senior Secured Line. There can be no assurance
that the Company will be able to make all such payments as scheduled.
The Company is in discussions with LLCP regarding possible waivers of
defaults and amendments of the existing agreements concerning the LLCP Notes.
There can be no assurance that such discussions will result in waivers or in the
cure of all applicable defaults. Failure to obtain such waivers could have a
material adverse effect on the Company's ability to continue its regular
business operations.
A previously reported default with respect to approximately $69 million
of warehouse indebtedness in favor of General Electric Capital Corporation has
been cured. The Company cured that default by selling, in a series of
transactions in August 1999, substantially all of the collateral securing such
indebtedness. To the extent that such sales yielded proceeds in excess of such
indebtedness, the Company has used such excess to meet a portion of its
liquidity requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
10.41 Amendment and Forbearance Agreement.
27 Financial Data Schedule
(b) During the quarter for which this report is filed, the Company filed two
reports on Form 8-K. Such reports were dated July 15 and August 15, 1999. Each
was filed solely to include, as an exhibit thereto, Item 7, the Company's
monthly Servicer Report with respect to certain securitization trusts. The
assets of such trusts consist of automotive receivables serviced by the Company.
No financial statements were filed with any of such reports.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(REGISTRANT)
Date: November 15, 1999 /s/ Charles E. Bradley, Jr.
------------------------------------------
Charles E. Bradley, Jr., President and
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 15, 1999 /s/ James L. Stock
------------------------------------------
James L. Stock, Vice President - Finance
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
-23-
<PAGE>
EXHIBIT INDEX
10.41 Amendment and Forbearance Agreement.
27 Financial Data Schedule
LOAN AMENDMENT AND FORBEARANCE AGREEMENT
----------------------------------------
THIS AMENDMENT AND FORBEARANCE AGREEMENT (the "FORBEARANCE AGREEMENT")
is dated as of November 3, 1999, by and among Consumer Portfolio Services, Inc.,
a California corporation (the "BORROWER"), and State Street Bank and Trust
Company as agent and lender ("STATE STREET"), The Structured Finance High Yield
Fund, LLC, as lender and The Prudential Insurance Company of America, as lender.
Said lenders are sometimes herein collectively referred to as the "LENDERS" and
each individually a "LENDER". State Street in its capacity as agent for the
Lenders hereunder and under each of the Loan Documents is sometimes herein
referred to as the "AGENT".
PRELIMINARY STATEMENT
---------------------
This Forbearance Agreement (i) amends certain provisions of that
certain Residual Interest in Securitizations Revolving Credit and Term Loan
Agreement dated as of April 30, 1998 by and among the Borrower, State Street,
for itself and as Agent, and the Lenders (as amended by a certain letter
agreement dated November 2, 1998 by and between the Borrower, the Agent and the
Lenders, as further amended by the Second Amendment Agreement dated November 17,
1998 by and between the Borrower, the Agent and the Lenders, as further amended
by the Third Amendment Agreement and Confirmation of Security Documents dated
April 15, 1999 by and between the Borrower, the Agent and the Lenders, as
further amended by a certain letter agreement dated May 28, 1999 by and between
the Borrower, the Agent and the Lenders, as further amended by a certain letter
agreement dated August 25, 1999 by and between the Borrower, the Agent and the
Lenders, as further amended by a letter agreement dated September 3, 1999 by and
between the Borrower, the Agent and the Lenders, all as further amended by this
Forbearance Agreement, the "LOAN AGREEMENT") and (ii) amends certain provisions
of that certain Pledge and Security Agreement dated as of April 30, 1998 by and
among the Borrower, State Street, for itself and as Agent, and the Lenders (as
amended by and through to the date hereof, the "PLEDGE AND SECURITY AGREEMENT",
together with all other Loan Documents heretofore executed in connection with
the Loan Agreement. Certain capitalized terms relating to the transactions
contemplated by this Forbearance Agreement are defined in Section 4.16 below.
Other capitalized terms used herein and not otherwise defined shall have the
same meanings herein as in the Loan Agreement.
The Borrower is in default of its obligations to the Lenders by reason
of the occurrence of the Events of Default listed on EXHIBIT A hereto
(collectively, the "EXISTING EVENTS OF DEFAULT"). Notwithstanding the occurrence
of the Existing Events of Default, the Borrower has requested that the Lenders
forbear from exercising their rights and remedies with respect to the Existing
Events of Default and amend the Loan Documents on the terms set forth herein.
The Lenders are willing, subject to the terms and conditions set forth herein
(including without limitation the grant of various waivers set forth below), to
forbear from exercising their rights in respect of the Existing Events of
Default and to amend the Loan Agreement and the Pledge and Security Agreement as
and to the extent herein provided.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to the terms and
conditions of this Forbearance Agreement, the parties agree as follows:
SS.1. CONFIRMATION OF INDEBTEDNESS. The Borrower owes the Lenders
$28,875,000 in respect of the outstanding principal balance of the Loans as of
the date of this Forbearance Agreement, and as of November 1, 1999, accrued and
unpaid interest thereon in the amount of $141,578.04, with a PER DIEM interest
charge as of November 1, 1999 of $8,221.36 and $7,792.36 of unpaid fees and
unreimbursed expenses. The total amount of the Borrower's indebtedness and
obligations to the Lenders evidenced by and/or related to the Loan Agreement,
the Notes, the Security Documents and each agreement and instrument executed in
connection therewith (collectively with this Agreement and any agreement or
instrument executed in connection herewith, and as the same have been or may
hereafter be amended and/or restated from time to time, the "LOAN DOCUMENTS"),
including without limitation principal, interest and reasonable fees and
<PAGE>
reasonable expenses of counsel is, by the execution hereof by the Borrower,
ratified, confirmed and approved by the Borrower in all respects (the
indebtedness and obligations referred to in this sentence and all obligations of
the Borrower to the Lenders under this Agreement, in each case whether now
existing or hereafter arising and whether incurred before or after the filing of
any reorganization petition, are hereinafter referred to collectively as the
"OBLIGATIONS"). The Borrower acknowledges and agrees that (i) the Obligations
are valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their terms, and (ii) the Obligations are due and
payable in full and the Borrower is presently obligated to pay the amounts
referred to in the first sentence of this SS.1 and all of its other existing
Obligations in accordance with the terms of the Loan Documents, all without any
further demand, notice or claim by the Lenders. Without limiting the foregoing,
the Borrower acknowledges and agrees that the Lenders have no forbearance
obligation whatsoever except as expressly provided in this Forbearance
Agreement. The Borrower further acknowledges and agrees that the value of the
Collateral (as defined below) securing the Obligations is substantially in
excess of the amount of the Obligations.
SS.2. RATIFICATION AND CONFIRMATION OF SECURITY. The Borrower
acknowledges, confirms and agrees that all of the Obligations are and shall be
secured by and entitled to the benefits of each of the Security Documents and
that the liens granted to the Agent on behalf of the Lenders thereunder remain
valid, perfected liens, enforceable against the Borrower and shall extend to all
Collateral acquired or arising and Obligations incurred following the filing of
any reorganization petition. To the extent any Security Document does not
currently provide that the Obligations constitute "Obligations" and/or "Secured
Obligations" for purposes thereof, such Security Document is hereby amended to
provide for the same. The Borrower acknowledges, confirms and agrees that,
except for certain specific equipment on which vendors have existing purchase
money liens, the Lenders have and shall retain a first priority perfected
security interest in and lien on all of the Borrower's tangible and intangible
personal properties and assets, whether now existing or hereafter acquired or
arising (collectively, the "COLLATERAL"). The Borrower agrees to take, or cause
to be taken, all actions requested by the Lenders in order to create, maintain,
renew and/or perfect the Lenders' security interest in the Collateral.
SS.3. DELIBERATELY OMITTED.
SS.4. AMENDMENTS TO LOAN AGREEMENT. The Borrower wishes to amend and
supplement the Loan Agreement to (i) amend the Maturity Date and amortization
schedule for the Loans; (ii) decrease the Total Commitment from $33,333,333 to
$29,562,500; (iii) change the interest rate on the Notes; and (iv) make certain
other changes in the Loan Agreement. The Lenders are willing, subject to the
terms and conditions set forth herein, to agree to amend the Loan Agreement as
aforesaid on the terms herein provided.
4.1 AMENDMENT TO SECTION 1. Subsections 1.1 through 1.8 of the Loan
Agreement are hereby amended by deleting them in their entireties and replacing
them with the following new subsections:
"1.1 RECITALS; COMMITMENTS. The Company wishes to establish a
term loan with the Lenders in an aggregate principal amount at any one
time outstanding not in excess of Twenty-Nine Million Five Hundred
Sixty-Two Thousand Five Hundred Dollars ($29,562,500) (the "AMENDED
TERM LOAN FACILITY"), to expire September 15, 2000 or on such earlier
date as may be determined in accordance with SECTION 8.3.
Each Lender is severally willing to make such loans to the
Company, subject to the terms and conditions hereafter set forth, in
the following maximum amounts at any one time outstanding set forth
opposite each Lender's name (each of such amounts being hereinafter
called each Lender's "COMMITMENT", and collectively for all of the
Lenders, the "TOTAL COMMITMENT") and in the respective percentages set
forth opposite each Lender's name which shall be applicable to such
loans hereunder (hereinafter such Lender's "PERCENTAGE"):
<PAGE>
LENDER COMMITMENT PERCENTAGE
------ ---------- ----------
State Street Bank $14,781,250 50.0%
and Trust Company
The Structured Finance $ 4,434,375 15.0%
High Yield Fund, LLC
The Prudential Insurance $10,346,875 35.0%
----------- ------
Company of America
TOTAL $29,562,500 100.0%
=========== ======
1.2 AVAILABLE TERM LOAN COMMITMENT; BORROWING BASE; MECHANICS OF
BLOCKED ACCOUNT; BORROWING BASE Reports.
(a) The Lenders hereby establish the Amended Term Loan Facility in an
aggregate principal amount not to exceed the Total Commitment. Under the Amended
Term Loan Facility, subject to the terms and conditions hereof, the Company may
have outstanding, from time to time, an aggregate principal amount at any one
time not in excess of the Available Term Loan Commitment in effect on such date.
As used herein, the term "AVAILABLE TERM LOAN COMMITMENT" shall mean, as of any
date of determination prior to the Maturity Date, the lesser of (i) the Total
Commitment or (ii) the Borrowing Base. As used herein, the term "BORROWING BASE"
shall mean, as of any date of determination, an amount equal to the LEAST of:
(A) 80% of the Company's (and/or CPSRC's) interest in Investments in
Credit Enhancements relating to Eligible Securitization Transactions
(without duplication); or
(B) 65% of the Lenders' Value Model; or
(C) 8% of the aggregate outstanding Certificate Balance relating to
Eligible Securitization Transactions;
in each instance as reported on the most recently submitted Borrowing Base
Report. Each such loan pursuant to the Amended Term Loan Facility is herein
called an "AMENDED TERM LOAN" and such borrowings are collectively called the
"AMENDED TERM LOANS". The Company agrees that regardless of the amount of
availability hereunder, the Lenders shall not under any circumstances be
obligated to make any additional Loans hereunder.
(b) DELIBERATELY OMITTED.
(c) MECHANICS OF BLOCKED ACCOUNT. Pursuant to the Eligible
Securitization Transaction Documents (including, but not limited to, the
Irrevocable Payment Directives), and the documents governing any additional
Eligible Securitization Transaction(s) and any other notices, agreements or
documents necessary, the Company shall cause (i) the trustee, depository or
paying agent maintaining any Spread Account or other account from which Base
Servicing Fees relating to any transaction in the Company's aggregate servicing
portfolio are to be released or paid to the Company (or any Subsidiary), to
release such proceeds directly to the Blocked Account, (ii) CPSRC to make any
and all distributions and to pay any dividends or other amounts of any kind or
nature from time to time made or paid from CPSRC to the Company to be paid
directly to the Blocked Account and (iii) the Company to provide (by, among
other things, notifying each of its account debtors to remit payment of all
invoices directly to the Blocked Account) that all of its receipts, including
but not limited to, Base Servicing Fees, origination fees, proceeds from the
sale of loans or any other assets of the Company, and the release of any amount
relating to any transaction including but not limited to "holdback" purchase
price, are sent directly to the Blocked Account, PROVIDED that the Company shall
NOT be obligated to send to the Blocked Account (i) any origination fees arising
<PAGE>
from the Pass Through Sale to Fairlane, (ii) loan payments received by the
Company in the ordinary course of business relating to Automobile Contracts that
are owned by the Company, and (iii) loan payments received by the Company in the
ordinary course of business relating to Automobile Contracts that are serviced
but not owned by the Company (collectively, (i), (ii) and (iii) shall be
referred to herein as the "EXCLUDED ITEMS" and (III) shall be referred to as the
"NON-OWNED EXCLUDED ITEM"). On the 15th day of each month, prior to the
occurrence of a Forbearance Event of Default, the Agent shall apply the funds on
deposit in the Blocked Account to pay the amounts due under this Agreement in
accordance with subsections 1.3, 1.5 and 1.8 below. After the occurrence of a
Forbearance Event of Default, the Agent shall apply the funds on deposit in the
Blocked Account in accordance with subsection 1.7.
(d) DELIBERATELY OMITTED.
(e) BORROWING BASE REPORTS. On the later of (i) the 12th business day
of each month and (ii) one business day prior to the 15th day of the month, or
the next succeeding Banking Day if the 12th business day of any month is not a
Banking Day (or after and during the continuance of a Default, on such more
frequent basis as the Majority Lenders may from time to time specify by notice
to the Company), the Company shall deliver to the Lenders a Borrowing Base
Report, substantially in the form of EXHIBIT A hereto (the "BORROWING BASE
REPORT"), each such Borrowing Base Report to set forth in reasonable detail the
information specified therein as of the close of business on the immediately
preceding month-end, and shall be signed by the Chief Executive Officer,
President, any Vice-President and/or Chief Financial Officer of the Company.
Such Borrowing Base Reports may be delivered by overnight mail, courier, telex,
telecopy or other facsimile transmission. Each Borrowing Base Report will set
forth, in such detail as the Lenders may from time to time reasonably require,
the Borrowing Base calculated in accordance with SUBSECTION 1.2(a) above.
1.3 AMENDED TERM NOTES; INTEREST.
(a) FORM OF AMENDED TERM NOTE. The Amended Term Loans made by each
Lender pursuant to SECTION 1 shall not exceed such Lender's Commitment and shall
be evidenced by an amended term note of the Company in a principal amount equal
to such Lender's Commitment and in the form attached hereto as EXHIBIT B-1.
There shall be one (1) note payable to the order of each Lender (each such note
being herein called an "AMENDED TERM NOTE" and all such notes being herein
collectively called the "AMENDED TERM NOTES").
(b) INTEREST RATE. Each Amended Term Note shall bear interest (computed
on the basis of the actual number of days elapsed over a 360-day year) on the
unpaid balance thereof at a rate per annum determined as follows:
(i) the per annum rate for any portion of the
outstanding principal balance of the Amended Term
Notes which is not the subject of a LIBOR Option
shall be equal to the Prime Rate plus one and three
quarters percent (1 3/4%) (the "APPLICABLE PRIME
RATE"); and
(ii) the per annum rate for any LIBOR Portion shall be
equal to the LIBOR Rate plus five percent (5%) (the
"APPLICABLE LIBOR RATE"). It is agreed that all
Loans shall be subject to the LIBOR Option unless
the Lenders agree otherwise.
(c) INTEREST PAYMENT DATE. Interest on the Amended Term Notes shall be
payable monthly in arrears on the fifteenth day of each month (or the next
succeeding Banking Day, if such day of any month is not a Banking Day),
commencing on the first such date next succeeding the date of issuance, and at
maturity (whether by acceleration or otherwise) and subject to the additional
default rate provided for in subsection 1.10. Notwithstanding anything contained
herein or any other Loan Document to the contrary, in no event shall the amount
paid or agreed to be paid by the Company as interest on the Amended Term Notes
exceed the highest lawful rate permissible under any law applicable thereto.
<PAGE>
1.4 DELIBERATELY OMITTED.
1.5 AMORTIZATION OF AMENDED TERM LOANS; MATURITY DATE.
(a) In addition to the Company's ongoing obligation to pay accrued
interest on the Amended Term Loans pursuant to subsection 1.3, the Company shall
repay the outstanding principal balance of the Amended Term Notes in consecutive
monthly installments, due and payable on the fifteenth day of each month (or the
next succeeding Banking Day, if such day of any month is not a Banking Day) as
set forth in the table below. The Agent is hereby authorized to apply amounts in
the Blocked Account against principal and interest due on the Notes on the
fifteenth day of each month. Such monthly payments from the Blocked Account
shall commence on November 15, 1999.
<TABLE>
<CAPTION>
AMENDED TERM LOAN PRINCIPAL PAYMENT DATES PRINCIPAL PAYMENT DUE
----------------------------------------- ---------------------
<S> <C>
October 21, 1999 $ 687,500
November 15, 1999 2,000,000
December 15, 1999 2,000,000
January 15, 2000 3,000,000
February 15, 2000 3,000,000
March 15, 2000 3,000,000
April 15, 2000 3,000,000
May 15, 2000 3,000,000
June 15, 2000 3,000,000
July 15, 2000 3,000,000
August 15, 2000 3,000,000
September 15, 2000 875,000
-----------
TOTAL: $29,562,500
===========
</TABLE>
(b) Subject to acceleration pursuant to SECTION 8, the full outstanding
balance of principal and accrued but unpaid interest on the Amended Term Loans
shall be due on September 15, 2000 (the "MATURITY DATE").
1.6 DELIBERATELY OMITTED.
1.7 APPLICATION OF FUNDS DEPOSITED INTO BLOCKED ACCOUNT AFTER EVENT OF
DEFAULT. From and after the occurrence of a Default or Forbearance Event of
Default, such Default or Forbearance Event of Default not having previously been
remedied or cured in accordance with SECTION 12 below, and without prejudice to
any other rights or remedies of the Agent or the Lenders, all amounts paid into
the Blocked Account from whatever source shall be applied by the Agent as
follows:
FIRST, to the payment of the reasonable costs and expenses incurred by
the Agent and the Lenders in connection with such Default or
Forbearance Event of Default;
SECOND, to the payment in full of all accrued and unpaid interest due
and owing on the Notes;
THIRD, to the payment in full of all unpaid principal of the Notes; and
FOURTH, to the payment in full of all other amounts owed by the
Borrower to the Agent or any Lender pursuant to any Loan Document.
<PAGE>
The Agent's application of amounts paid into the Blocked Account in accordance
with this SUBSECTION 1.7 shall not affect, limit or impair in any manner the
rights and remedies of the Agent or the Lenders set forth in SUBSECTION 8.2
below.
1.8 PREPAYMENTS; REPAYMENT OF OUTSTANDING LOANS IN EXCESS OF AVAILABLE
COMMITMENT.
(a) VOLUNTARY PREPAYMENT. On at least three (3) Banking Days' prior
written notice to each Lender, the Company may, at its option, prepay the
Amended Term Notes in whole at any time or in part from time to time, without a
premium or penalty of any kind attributable to such prepayment. Any optional
prepayment of the Notes in part shall be in an aggregate principal amount of not
less than $300,000 to all of the Lenders. Any prepayment in full of the Amended
Term Notes shall be made together with accrued interest on the amount prepaid to
the date of such prepayment and all other fees and expenses due the Lenders,
including, but not limited to, the LIBOR Premium, if applicable.
(b) MANDATORY PREPAYMENTS.
(i) If at any time the aggregate outstanding principal amount
of the Amended Term Loans exceeds the Available Term Loan Commitment,
the Company will immediately repay the Amended Term Notes, without
penalty or premium, except the LIBOR Premium, if applicable, in an
amount necessary to cause the outstanding principal amount of the
Amended Term Loans not to exceed the Available Term Commitment.
Prepayments of the Amended Term Notes will be applied in inverse order
of maturity.
(ii) On or prior to the date seven (7) days after the
execution of the Forbearance Agreement and thereafter on the 15th of
each calendar month (the "ACTUAL MONTH") the Company shall make a
mandatory prepayment on the Amended Term Notes in the amount of fifty
percent (50%) of the Company's Net Free Cash Flow for that month (the
"CASH FLOW PAYMENT"). The "NET FREE CASH FLOW" for each month shall
equal (A) the sum of the Company's actual cash receipts from the
sixteenth day of the previous month through the fifteenth day of the
Actual Month, such cash receipts to include but not be limited to (1)
Base Servicing Fees; (2) origination fees paid to the Company; (3) cash
released from any Spread Account whether released to the Company or any
Subsidiary; (4) proceeds from the Company's sale of any loans or any
other sale of assets; and (5) the release of any "holdback" purchase
price or any other amounts to the Company relating to any transaction,
LESS (B) the Company's projected cash uses for the Actual Month in
accordance with the schedule set forth below.
MONTH BORROWER'S PROJECTED CASH USES
October 1999 $6,588,026
November 1999 $8,692,904
December 1999 $9,502,440
January 2000 $9,000,674
February 2000 $8,964,151
March 2000 $8,459,381
April 2000 $8,416,607
May 2000 $8,374,398
June 2000 $8,332,898
July 2000 $8,306,898
August 2000 $8,270,743
September 2000 $6,210,517
<PAGE>
It is expressly agreed that the term "Net Free Cash Flow" SHALL include
the Excluded Items other than the Non-Owned Excluded Item, PROVIDED that the
calculation of Net Free Cash Flow as of any month will include the Excluded
Items (other than the Non-Owned Excluded Item) received by the Company from the
first day of the previous month through the last day of the previous month.
(c) DELIVERY OF EXCESS CASH FLOW CERTIFICATE. On the execution date of
the Forbearance Agreement and thereafter on the 15th day of each calendar month,
the Company shall submit to the Agent an Excess Cash Flow Certificate, certified
by an appropriate officer of the Company, in the form of EXHIBIT B-2. No funds
will be released to the Company from the Blocked Account until the Agent has
received an executed Excess Cash Flow Certificate for the month."
4.2 AMENDMENT TO SUBSECTION 1.9. Subsection 1.9 of the Loan Agreement
(Security) is hereby amended by deleting the figure "$1,000,000" where it
appears in subsection (f) thereof and replacing it with the figure "$1,660,000".
4.3 AMENDMENT TO SECTION 3.19. Section 3.19 of the Loan Agreement
(Chief Executive Offices, Principal Place of Business, Real Property Owned or
Leased) is hereby amended by changing the address that appears therein to "16355
Laguna Canyon Road, Irvine, California 92618".
4.4 AMENDMENT TO SUBSECTION 5.1. (i) Subsection 5.1 of the Loan
Agreement (Financial Statements) is hereby amended by deleting clause (a)
thereof in its entirety and replacing it with the following new clause (a):
"(a) Within 90 days after the end of each fiscal year of the
Company, (i) the audited consolidated and consolidating balance sheets
of the Company and its Subsidiaries as at the end of such year; (ii)
the related audited consolidated and consolidating statements of income
and surplus and cash flows for such year, setting forth in comparative
form with respect to such consolidated financial statements figures for
the previous fiscal year, all in reasonable detail, together with (A)
the opinion thereon of independent public accountants selected by the
Company and satisfactory to the Lenders, which opinion shall be in a
form generally recognized as unqualified and shall state that such
financial statements have been prepared in accordance with GAAP applied
on a basis consistent with that of the preceding fiscal year (except
for changes, if any, which shall be specified and approved in such
opinion) and that the audit by such accountants in connection with such
financial statements has been made in accordance with generally
accepted auditing standards related to reporting; and (B) a management
letter from such independent public accountants indicating that the
Company has the appropriate accounting systems and personnel in place,
and that such accounting systems are performing adequately; and (iii) a
Compliance Certificate substantially in the form of EXHIBIT D attached
hereto (the "COMPLIANCE CERTIFICATE") signed by a principal officer of
the Borrower and certifying that no event or condition which
constitutes a Default or Forbearance Event of Default or Credit Trigger
exists, and demonstrating the calculations used to determine compliance
with the financial covenants listed in such Compliance Certificate;"
(ii) Subsection 5.1 of the Loan Agreement is further amended by
deleting clause (b) thereof and replacing it with the following new clauses (b),
(bb), (bbb) and (bbbb):
"(b) within 45 days after the end of each of the first three
quarterly accounting periods in each fiscal year of the Company, (i)
the unaudited consolidated balance sheets of the Company and its
Subsidiaries as at the end of such period, and (ii) the related
unaudited consolidated and consolidating statements of income and
surplus and cash flows for such period and for the period from the
beginning of the current fiscal year to the end of such period, all in
reasonable detail and signed by a principal officer of the Company;
(bb) no later than the seventh (7th) business day of every
month, a Pool Summary report substantially in the form attached hereto
as EXHIBIT F (the "POOL SUMMARY REPORT");
<PAGE>
(bbb) no later than the twentieth business day of every month
(1) unaudited consolidated balance sheets of the Company and its
Subsidiaries as at the end of the prior month and related unaudited
consolidated and consolidating statements of income and surplus and
cash flows for such period, prepared by the Company or its independent
public accountants, but in any event, certified by an authorized
officer of the Company, (2) a Compliance Certificate signed by a
principal officer of the Company and (3) the Company and the
Subsidiaries' accounts payable listing as of the previous month-end;
(bbbb) within 30 days after the end of each month, a copy of
the Company's monthly financial statement package for the immediately
preceding month, such monthly financial statement package to contain
statistical information on the financial performance of all
securitization transactions including, but not limited to, the Eligible
Securitization Transactions, and to be substantially in the form
currently produced by the Company, with such changes as are reasonably
satisfactory to the Lenders;"
(iii) Subsection 5.1 of the Loan Agreement is further amended by adding
a new clause (k) to the end thereof as follows:
"(k) Each Wednesday the Company shall submit to the Agent (i)
a report of the Company's actual cash receipts and disbursements as
compared to the Company's projections, for the previous week and (ii) a
weekly forecast of the Company's cash disbursements and receipts for
the next twelve weeks."
4.5 AMENDMENT TO SUBSECTION 5.7. Subsection 5.7 of the Loan Agreement
(Maintenance of Blocked Account; Eligible Securitization Transaction Documents;
Agreements to Hold in Trust) is hereby amended by deleting it in its entirety
and replacing it with the following:
"5.7 MAINTENANCE OF BLOCKED ACCOUNT; ELIGIBLE SECURITIZATION
TRANSACTION DOCUMENTS; AGREEMENT TO HOLD IN TRUST.
(i) As of the Closing Date, the Company will (a) establish a
blocked account arrangement (the "BLOCKED ACCOUNT") with the Agent and
(b) execute and cause to be executed by all necessary parties all such
agreements, instruments or notices as may be deemed necessary (1) by
the Lenders or the trustee or paying agent under each Eligible
Securitization Transaction so as to ensure that such trustee or paying
agent is directed to make payments due the Company directly to the
Blocked Account and (2) by the Lenders and any other necessary third
parties, included but not limited to account debtors, so as to ensure
that all of the Borrower's receipts, including but not limited to, Base
Servicing Fees, origination fees paid to the Company, cash released
from any Spread Account, whether released to the Company or any
Subsidiary, proceeds from the Company's sale of any loans or any other
assets and the release of "holdback" purchase price or any other amount
relating to any transaction, are sent directly by the applicable payor
to the Blocked Account, PROVIDED that the Company is not obligated to
forward the Excluded Items to the Blocked Account. The Company agrees
to contact each of its account debtors (other than account debtors
related to the Excluded Items unless such account debtors owe amounts
to the Company unrelated to the Excluded Items) in writing within
twenty (20) days of the execution of the Forbearance Agreement and
notify the account debtors to remit all payments to the Blocked
Account. All agreements, documents or instruments now or hereafter
necessary to ensure that the Collateral and all proceeds thereof will
be deposited directly into the Blocked Account, and to otherwise give
effect to the transactions contemplated by this Agreement, including
but not limited to, the Irrevocable Payment Directives, are referred to
herein collectively as the "ELIGIBLE SECURITIZATION TRANSACTION
DOCUMENTS".
<PAGE>
(b) To the extent that notwithstanding the foregoing, the
Company or CPSRC receives any amounts directly (relating to an Eligible
Securitization Transaction or otherwise), which should have been
deposited in the Blocked Account, the Company will, and will cause
CPSRC to, hold the same in trust for the Lenders immediately upon
receipt thereof, and deliver the same to the Agent in the form
received, together with the Company's or CPSRC's (as the case may be)
endorsement thereon where necessary to permit collection thereof for
deposit into the Blocked Account."
4.6 AMENDMENT TO SUBSECTION 6.1. (i) Subsection 6.1 of the Loan
Agreement (Indebtedness) is hereby amended by deleting the existing subsection
(e) thereof and replacing it with the following:
"(e) Unsecured Subordinated Debt consented to in writing by the
Lenders, PROVIDED that at the time of delivery of any such written
consent, the Lenders will decide, in their sole discretion, whether the
proceeds of such Subordinated Debt must be delivered to the Blocked
Account pursuant to subsection 1.2(c) hereof;"
(ii) Subsection 6.1 of the Loan Agreement is further amended by adding the
following subsections (n) and (o) thereto:
"(n) Contingent Indebtedness relating to the Company's obligation,
under certain limited circumstances, to repurchase certain retail
installment contracts sold by Fundco and Wareco to each of the
following entities: (i) Customized Auto Credit Services, Inc. pursuant
to an Asset Purchase Agreement dated on or about May 28, 1999 (the "GE
SALE"); (ii) NuVell Credit Corporation pursuant to a Sale and Purchase
Agreement dated on or about August 25, 1999 (the "NUVELL SALE"); (iii)
Crescent Bank and Trust pursuant to a Purchase and Sale Agreements
dated on or about August 25, 1999 and August 30, 1999 (collectively,
the "CRESCENT SALE"); and (iv) Fairlane Credit LLC pursuant to an
Agreement to Purchase Retail Installment Contracts dated on or about
September 3, 1999 (the "FAIRLANE SALE"); and
(o) Contingent Indebtedness relating to the Company's obligation, under
certain limited circumstances, to repurchase retail installment
contracts sold to Fairlane Credit LLC ("FAIRLANE") pursuant to the
Contract Sale Agreement dated May 1999 by and between the Company and
Fairlane (the "PASS THROUGH Sale")."
4.6A AMENDMENT TO SUBSECTION 6.1. Subsection 6.1(f) of the Loan
Agreement (Indebtedness) is hereby amended by deleting the figure "$5,000,000"
where it appears therein and replacing it with the figure "$5,500,000".
4.7 AMENDMENT TO SUBSECTION 6.2. Subsection 6.2 of the Loan Agreement
(Liens; etc.) is hereby amended by adding the following clause (iii) to the end
thereof:
"(iii) , PROVIDED further that the aggregate principal amount of
indebtedness secured by all such liens incurred after September 30,
1999 shall at no time exceed $500,000."
4.8 AMENDMENT TO SUBSECTION 6.5. Subsection 6.3 of the Loan Agreement
(Loans, Guarantees and Investments) is hereby amended by adding the subsection
(g) thereto:
"(g) Investments consisting of the Company's purchase of up to
$1,000,000 (face value) of RISRS for retirement on or before January 1,
2000, subject to the limitations in subsection 6.5."
4.9 AMENDMENT TO SUBSECTION 6.5. Subsection 6.5 of the Loan Agreement
(Restricted Payments) is hereby amended by deleting it in its entirely and
replacing it with the following:
"6.5 RESTRICTED PAYMENTS. The Company will not, and will not
permit any Subsidiary to, directly or indirectly declare, order, pay or
make any Restricted Payment or set aside any sum or property therefor
if at the time of such proposed action or immediately after giving
effect thereto, any Default or Event of Default exists, AND unless
expressly permitted by this subsection 6.5.
<PAGE>
As used herein, the term "RESTRICTED PAYMENTS" means (i) any
dividend or other distribution, direct or indirect, on or on account of
any shares of any class of stock of the Company now or hereafter
outstanding (including dividends payable exclusively in shares of the
Company's common or preferred stock); (ii) any redemption, purchase or
other acquisition, direct or indirect, of any shares of any class of
stock of the Company now or hereafter outstanding or of any warrants or
rights to purchase any such stock (including, without limitation, the
repurchase price thereof in connection with the exercise by the holder
thereof of any right of rescission or similar remedies with respect
thereto); (iii) any direct salary, non-salary managerial fees, fee
(consulting, management or others), fringe benefit, allowance or other
expense directly or indirectly paid or payable by the Borrower or any
Subsidiary (as compensation or otherwise) to any shareholder or
Affiliate of the Borrower (other than to an employee, to the extent of
such employee's normal compensation) and (iv) any payment in respect of
Subordinated Debt (including, without limitation, the 10.5%
Subordinated Participating Equity Notes due 2004 in the amount of
$20,000,000 (the "PENS"), the Rising Interest Subordinated Redeemable
Securities due 2006 in the amount of $20,000,000 (the "RISRS") and the
9% Subordinated Partially Convertible Note to Stanwich Financial
Services Corp. due 2004 in the amount of $15,000,000 and $5,500,000 of
other subordinated debt owed to Stanwich Financial Services Corp. and
$1,000,000 of other subordinated debt owed to John G. Poole
(collectively, the $20,500,000 of subordinated debt owed to Stanwich
Financial Services Corp. and the $1,000,000 owed to Mr. Poole, is
referred to herein as the "STANWICH SUBORDINATED DEBT"), the Levine
Subordinated Debt and the April Levine Subordinated Debt).
Subject to the foregoing, the Company may make scheduled (but
NOT accelerated) monthly payments of interest ONLY on the PENS, RISRS,
Stanwich Subordinated Debt, Levine Subordinated Debt and April Levine
Subordinated Debt and, in the Company may (i) retire up to an aggregate
of $1,000,000 in face amount of the RISRS by repurchasing such
securities at price(s) not in excess of the face amount of such
securities and/or (ii) make the minimum sinking fund payment of the
redemption price required for such securities, PROVIDED that in any
event the Company's cash outlay for the foregoing (i) and (ii) in the
aggregate shall not exceed $800,000. Notwithstanding anything to the
contrary in the documents relating to the PENS, RISRS, Stanwich
Subordinated Debt, Levine Subordinated Debt or April Levine
Subordinated Debt, the Company agrees that, except as expressly set
forth above, it will not at any time make any payment of any kind or
nature (or set aside any sums therefor), in respect any Subordinated
Debt. For the avoidance of doubt, the Company shall not make any
voluntary or involuntary principal payments at all under the
Subordinated Debt while the Amended Term Loans are outstanding other
than as expressly permitted by this paragraph.
The provisions of this subsection 6.5 are solely for the
purpose of defining the relative rights of the Agent and the Lenders on
the one hand, and the holders of Subordinated Debt on the other hand,
and none of such provisions shall impair, as between the Company and
any holder of the Subordinated Debt, the obligations of the Company,
which are unconditional and absolute, to pay to such holder all of the
Subordinated Debt in accordance with the terms thereof, subject in each
instance to the rights of the Agent and the Lenders under the
provisions of this Agreement and under the subordination provisions of
such Subordinated Debt."
4.10 AMENDMENT TO SUBSECTION 6.6. Subsection 6.6 of the Loan Agreement
(Capital Expenditures) is hereby amended by deleting it in its entirety and
replacing it with the following:
"6.6 CAPITAL EXPENDITURES. The Company will not make, or permit any
Subsidiary to make, Capital Expenditures during the period beginning
October 1, 1999 through the Maturity Date in excess of $500,000."
4.11 AMENDMENT TO SUBSECTION 6.8. Subsection 6.8 of the Loan Agreement
(Sale of Assets) is hereby amended by deleting it in its entirety and replacing
it with the following paragraph:
<PAGE>
"The Company will not, and will not permit any Subsidiary to, sell,
lease or otherwise dispose of any of its properties or assets, EXCEPT
for: (i) BONA FIDE sales of repossessed automobiles; (ii) sales or
other dispositions in the ordinary course of business of obsolete or
unusable property or assets (it being understood that Automobile
Contracts and related receivables are excluded from this clause (ii))
in each instance, with the prior written consent of the Majority
Lenders, such consent not to be unreasonably withheld, PROVIDED that
notwithstanding any of the foregoing, the GE Sale, the NuVell Sale, the
Crescent Sale, the Fairlane Sale and the Pass Through Sale, each in
accordance with the terms set out in the forms of agreement provided to
the Lenders for each such sale, are permitted sales of assets
hereunder; and (iii) any other sale of assets by the Company, consented
to in writing by the Lenders. The proceeds of any permitted sale of
assets shall be deposited into the Blocked Account unless they are
Excluded Items."
4.12 AMENDMENT TO SUBSECTION 7.2. Subsection 7.2 of the Loan Agreement
(Minimum Cash Balance) is hereby amended by deleting the figure "$500,000"
appearing therein and replacing it with the figure "$250,000."
4.13 AMENDMENT TO SUBSECTION 7.3. Subsection 7.3 of the Loan Agreement
(Minimum Net Worth) is hereby amended by deleting it in its entirety.
4.14 AMENDMENT TO SUBSECTION 7.5. Subsection 7.5 of the Loan Agreement
(Limitation on Quarterly Losses) is hereby deleted in its entirety.
4.15 AMENDMENT TO SUBSECTION 7.6. Subsection 7.6 of the Loan Agreement
(Minimum Servicing Balance) is hereby amended by deleting it in its entirety.
4.16 AMENDMENT TO SECTION 9. Section 9 of the Loan Agreement
(Definition) is hereby amended by including the following definitions in
alphabetical order:
"ACTUAL MONTH: shall have the meaning set forth in Section 1.8(b)
hereof."
"AMENDED TERM LOAN(S): shall have the meaning set forth in Section
1.2(a) hereof."
"AMENDED TERM LOAN FACILITY: shall have the meaning set forth in
Section 1.1 hereof."
"AMENDED TERM NOTE(S): shall have the meaning set forth in Section 1.3
hereof."
"AVAILABLE TERM LOAN COMMITMENT: shall have the meaning set forth in
Section 1.2(a) hereof."
"CASH FLOW PAYMENT": shall have the meaning set forth in Section 1.8
hereof."
"CRESCENT SALE: shall have the meaning set forth in Section 7.1(n)
hereof."
"EXCLUDED ITEMS: shall have the meaning set forth in Section 1.2(c)."
"GE SALE: shall have the meaning set forth in Section 6.1 hereof."
"FAIRLANE: shall have the meaning set forth in Section 6.1(o) hereof."
"FAIRLANE SALE: shall have the meaning set forth in Section 6.1(n)
hereof."
"MATURITY DATE: shall have the meaning set forth in subsection 1.5(b)
hereof."
"NET FREE CASH FLOW: shall have the meaning set forth in Section 1.8(b)
hereof."
"NON-OWNED EXCLUDED ITEM shall have the meaning set forth in subsection
1.2 hereof."
"NUVELL SALE: shall have the meaning set forth in Section 6.1(n)
hereof."
"PASS THROUGH SALE: shall have the meaning set forth in Section 6.1(o)
hereof."
"PENS: shall have the meaning set forth in Section 6.5 hereof."
"RISRS: shall have the meaning set forth in Section 6.5 hereof."
"STANWICH SUBORDINATED DEBT: shall have the meaning set forth in
Section 6.5 hereof."
SS.5. RATIFICATION AND CONFIRMATION OF LOAN AGREEMENT AND SECURITY
DOCUMENTS; UPDATED SCHEDULES AND EXHIBITS.
(a) The Borrower acknowledges and agrees with the Lenders that for all
purposes of this Forbearance Agreement, the Loan Agreement, the Notes and the
respective Security Documents, as the context permits or requires:
<PAGE>
(i) The terms "Loan Agreement" and "Agreement" shall mean the
Loan Agreement, as amended through the date of the Forbearance
Agreement, and as the same may be further amended, restated and/or
extended from time to time;
(ii) The term "Notes" shall mean the Amended Term Notes, as
amended and extended through the date of the Forbearance Agreement, and
as the same may be further amended, restated and/or extended from time
to time;
(iii) The terms "Security Documents" and "Security Document"
shall mean the several Security Documents, as amended through the date
of this Forbearance Agreement, and as each such Security Document may
hereafter be amended, restated and/or extended from time to time;
(iv) The terms "Secured Obligations" and/or "Obligations" shall
include the Amended Term Loans heretofore or hereafter made by the
Lenders pursuant to the Loan Agreement, together with interest thereon
and all fees and expenses owing under the Agreement, the Amended Term
Notes and/or under the Security Documents, together with all other
obligations of any nature of the Company to the Lenders; and
(v) All Indebtedness of the Borrower to the Lenders in respect
of the Loan Agreement and the Amended Term Notes, whether now existing
or hereafter arising, shall be secured by and entitled to the benefits
of each of the Security Documents.
(b) Except to the extent specifically amended hereby, and, with respect
to the Security Documents, as such are simultaneously being amended and
confirmed, the Loan Agreement, the Amended Term Notes and each of the Security
Documents shall be unaffected hereby and shall continue in full force and
effect. As so amended, the Loan Agreement, the Amended Term Notes, each of the
Security Documents and the rights of the Agent and the Lenders and the
obligations of the Borrower thereunder, are hereby ratified, affirmed and
approved in all respects by the Borrower.
(c) The Loan Agreement is amended by adding to the respective Schedules
attached thereto the additional information or modifications set forth on the
corresponding Schedules submitted herewith. The Borrower represents and warrants
to the Lenders that the information set forth on the respective Schedules
attached to the Loan Agreement or hereto, as the case may be, is true and
complete in all material respects.
(d) The Exhibits to the Loan Agreement are hereby amended by inserting
a new EXHIBIT B-1 (Form of Amended Term Note), attached hereto.
SS.6. FORBEARANCE; ACKNOWLEDGMENT OF EXISTING EVENTS OF DEFAULT.
(a) Subject to the Borrower's compliance with the terms and conditions
of this Forbearance Agreement, and PROVIDED that no Forbearance Event of Default
shall have occurred, the Lenders shall forbear from enforcing their rights under
the Loan Documents until September 15, 2000. The Borrower acknowledges and
agrees that the provisions of this SS.6 relate solely to the Lenders' agreement
(subject to the terms and conditions hereof) to forbear from exercising their
existing rights and remedies in respect of Existing Events of Defaults under the
Loan Documents and are not, and shall in no way be deemed or construed as, a
waiver by the Lenders of such Existing Events of Default or any other Event of
Default now existing or occurring subsequent to the date hereof.
(b) The Borrower acknowledges and confirms to the Lenders that the
Borrower is in default of its obligations under the Loan Agreement by reason of
the occurrence of the Existing Events of Default listed on EXHIBIT A hereto. The
Borrower acknowledges and agrees with the Lenders that the Lenders' forbearance
agreement hereunder relates solely to the Existing Events of Default and to NO
OTHER defaults or Events of Default, now existing or hereafter arising and now
known or unknown to the Lenders. The Borrower acknowledges and agrees with the
Lenders that by reason of the occurrence of the Existing Events of Default, the
Lenders are currently entitled to exercise the full range of their rights and
remedies against the Borrower under the Loan Documents, without defense or
counterclaim of any kind on the part of the Borrower.
<PAGE>
SS.7. FORBEARANCE FEE. The Borrower shall pay the Agent (for the
ratable benefit of the Lenders) a forbearance fee (the "FORBEARANCE FEE") of
$300,000 which Forbearance Fee shall be earned in full as of the execution of
this Forbearance Agreement. One-half of the Forbearance Fee shall be paid to the
Agent on the date the Cash Flow Payment is made for the month of October 1999
and the balance shall be paid to the Agent in three equal monthly installments
of $50,000 on the 15th of each month beginning on April 15, 2000. If the Amended
Term Loans and all other Obligations have been repaid in full prior to the due
date for any deferred portion of the Forbearance Fee, such deferred portion
shall be waived by the Lenders.
SS.8. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to
induce the Lenders to enter into this Agreement, the Borrower represents,
covenants and warrants to the Lenders as follows:
(a) AUTHORITY, ETC. The execution and delivery by the Borrower of this
Forbearance Agreement and the performance of its obligations hereunder have been
duly authorized by all necessary action and do not and will not (i) violate any
provision of any law, rule, regulation, order, judgment, injunction, decree or
determination applicable to the Borrower or of the Borrower's charter or (ii)
result in a breach of or constitute a default under any agreement, lease or
instrument to which the Borrower is a party or by which it may be bound or
affected.
(b) BINDING OBLIGATION. This Agreement, the Amended Term Notes, the
Loan Documents and each other agreement executed by the Borrower in connection
herewith or therewith constitute legal, valid and binding obligations of the
Borrower.
(c) LOAN DOCUMENTS. Except as indicated in EXHIBIT A hereto, the
Borrower is in compliance in all material respects with the covenants contained
in the Loan Documents and the representations and warranties in each of the Loan
Documents (except those that expressly relate to an earlier date) are true and
correct in all material respects on the date hereof. The Borrower's principal
place of business is as set forth in subsection 4.3 hereof and, except as
disclosed on EXHIBIT C hereto, there are no other locations at which any
Collateral is located.
(d) NO APPROVAL. No authorization, consent, approval, license,
exemption or filing or registration with, any court or governmental authorize,
agency or instrumentality is or will be necessary to the valid execution,
delivery or performance by the Borrower of this Forbearance Agreement or any
documents executed pursuant hereto.
(e) SECURITY DOCUMENTS. Each Security Document is effective to grant to
the Lenders a legal, valid, enforceable and first priority perfected security
interest in all right, title and interest of the Borrower in the Collateral
described therein; no further action or filing is required in order to perfect
the Lenders' security interest.
(f) OTHER DEBT. (i) The Borrower hereby warrants and represents that
the outstanding balance of the following debt (including principal, accrued but
unpaid interest and any fees) as of the date hereof is as follows:
<PAGE>
RISRS $20,000,000
PENS $20,000,000
Stanwich Subordinated Debt $21,500,000
Levine Subordinated Debt plus
April Levine Subordinated Debt $30,000,000
Other Debt $ -0-
(other than debt arising in
the ordinary course of the
Borrower's business)
Accrued interest on the above-
described debt $ 427,000
(ii) The Borrower hereby warrants and represents to the Lenders that the
Borrower is not in default of any of the debt referred to in paragraph (i)
above.
(g) PRELIMINARY STATEMENT. The statements contained in the Preliminary
Statement of this Forbearance Agreement are true and correct.
SS.9. COVENANTS. Until such time as the Borrower shall have paid its
Obligations to the Lenders in full, the Borrower covenants and agrees with the
Lenders that the Borrower shall comply with all of the terms and conditions
contained in the Loan Documents, as amended hereby, including but not limited to
the following covenants:
(a) RESTRICTED PAYMENTS. The Borrower shall not make any Restricted
Payment other than (i) payments of scheduled interest ONLY on the PENS, RISRS,
Stanwich Subordinated Debt, Levine Subordinated Debt and the April Levine
Subordinated Debt; and (ii) payments with respect to the repurchase or
redemption of the RISRS, subject to the limitations set forth in subsection 6.5,
as amended hereby, PROVIDED that none of the foregoing payments shall be
permitted after the occurrence of a Forbearance Event of Default;
(b) MONTHLY REPORTS. The Borrower shall provide the Agent, within
twenty (20) days of each month-end, with (i) unaudited consolidated balance
sheets of the Borrower and its Subsidiaries and related unaudited consolidated
and consolidating statements of income and surplus and cash flows, (ii) a
Compliance Certificate and (iii) an accounts payable report for the Borrower and
its Subsidiaries;
(c) WEEKLY REPORTS. The Borrower shall provide the Agent on each
Wednesday, with a report of the Borrower's cash disbursements and cash receipts
versus projections along with a forecast of the Borrower's next twelve weeks of
cash disbursements;
(d) NOTIFICATION OF ACCOUNT DEBTORS. Within twenty (20) days of the
date hereof the Borrower shall notify each of its account debtors (other than
account debtor in so far as they relate to Excluded Items) to remit all future
payment of invoices directly to the Blocked Account;
(e) OTHER LIENS. The Borrower shall not create or suffer to exist any
new lien, security interest, or other charge or encumbrance, or any type of
preferential arrangement, or grant a negative pledge to any other party, upon or
with respect to any of its real or personal property or stock, whether now owned
or hereafter acquired, PROVIDED that the Borrower shall be permitted to grant
purchase money mortgages, liens and other security interests, including Capital
Leases, created in respect of property acquired by the Company after the date
hereof or existing in respect of property so acquired prior to the date hereof,
PROVIDED that (i) each such lien shall at all times be confined solely to the
item of property so acquired, and (ii) the aggregate principal amount of
indebtedness secured by all such liens incurred after the date hereof shall at
no time exceed $500,000;
<PAGE>
(f) EXAMINATION OF BORROWER'S BOOKS. The Borrower shall permit the
Lenders to examine the Borrower's books on demand, at the Lenders' discretion.
Any such examination shall be at the Borrower's expense;
(g) FINANCIAL CRISIS MANAGEMENT. In the event of a Forbearance Event of
Default, the Borrower hereby agrees to employ a financial crisis manager chosen
by the Borrower, subject to the Lenders' approval, which approval shall not be
unreasonably withheld;
(h) FSA AGREEMENT. The Borrower shall notify the Agent in writing
immediately upon the occurrence of a default or Insurance Trigger (as defined
therein) under the FSA Agreement, as amended;
(i) REPURCHASE OBLIGATIONS. The Borrower shall notify the Agent in
writing if it incurs any liquidated repurchase obligations under the GE Sale,
Nuvell Sale, Crescent Sale, Fairlane Sale or Pass Through Sale;
(j) INDEBTEDNESS. The Borrower shall notify the Agent, in writing, of
the terms of any new Indebtedness to be incurred by the Borrower five days prior
to the Borrower's incurrence of such Indebtedness; and
(k) FORBEARANCE FEE. The Borrower shall pay the Forbearance Fee on the
schedule set forth in SS.7.
SS.10. CONDITIONS PRECEDENT. The obligations of the Lenders hereunder
are subject to the satisfaction (or written waiver) on or prior to execution
hereof by the Lenders, of the following conditions precedent, time being of the
essence hereof:
(a) The Borrower shall be in compliance with all the terms, covenants
and provisions contained herein, and all representations and warranties
contained herein shall be true in all material respects, and the Lenders shall
have received a certificate signed by an officer of the Borrower to the
foregoing effect;
(b) All corporate and legal proceedings and all instruments in
connection herewith and therewith shall be satisfactory in form and substance to
the Lenders and their counsel and the Lenders shall have received all
information and all documents and certificates (corporate and other) which the
Lenders may reasonably have requested in connection herewith, such documents
properly certified by proper corporate or governmental authorities;
(c) The Borrower shall deliver to the Agent a duly executed Landlord
Waiver relating to its principal place of business in a form acceptable to the
Lenders;
(d) The Borrower shall have entered into an amendment with its
agreement with Financial Security Assurance ("FSA") (the "FSA AGREEMENT"),
satisfactory in form to the Lenders, whereby FSA agrees to cap the amount of
cash retained in each of the Spread Accounts at no more than twenty-one percent
(21%);
(e) The Borrower shall have executed and delivered to the Lenders
Amended Term Notes in the form attached hereto as EXHIBIT B-1;
(f) The Borrower shall have delivered to the Lenders written
acknowledgment of the terms of this Forbearance Agreement by the holders of (i)
the Stanwich Subordinated Debt and (ii) the Levine Subordinated Debt and the
April Subordinated Debt;
(g) The Borrower shall have delivered to the Lenders an executed copy
of unanimous written consent of the Borrower's Board of Directors authorizing
the Borrower's execution of (A) the Forbearance Agreement, including but not
limited to the consent to the appointment of a receiver included in SS.15 hereof
and (B) the Amended Term Notes in the aggregate principal amount of $29,562,500;
<PAGE>
(h) The Borrower shall have delivered to the Agent an executed Excess
Cash Flow Certificate for the month of October 1999, PROVIDED that for purposes
of the Borrower's Excess Cash Flow calculation for the month of October, 1999
the $1,500,000 of additional Stanwich Subordinated Debt received by the Borrower
in October 1999 shall not be included in the Borrower's cash receipts;
(i) No event or circumstance shall have occurred which could have a
Material Adverse Effect; and
(j) The Lenders shall have received all such other agreements,
information and certificates as the Lenders shall have reasonably requested,
including but not limited to, the side letter executed by the Company in favor
of the Lenders.
SS.11. CASH COLLATERAL ACCOUNT. In the event the aggregate balance of
the Amended Term Loans together with all unpaid interest, fees and unreimbursed
expenses owed by the Borrower to the Lenders is less than the balance of funds
in the Cash Collateral Account, the Agent is hereby authorized to liquidate the
Cash Collateral Account and use the proceeds thereof to repay the Obligations.
The foregoing right shall not affect, limit or impair in any manner the other
rights and remedies of the Agent or the Lenders set forth in this Forbearance
Agreement.
SS.12. FURTHER ASSURANCES, ETC. The Borrower agrees to take any action
and to execute and deliver any additional documents which the Lenders may
reasonably request in order to obtain and enjoy the full rights and benefits
granted to the Lenders by the Loan Documents or this Forbearance Agreement.
SS.13. FORBEARANCE EVENTS OF DEFAULT. Each of the following events
(each a "FORBEARANCE EVENT OF DEFAULT" and collectively the "FORBEARANCE EVENTS
OF DEFAULT") shall constitute an Event of Default under this Agreement and each
of the Loan Documents (whether or not such is an event of default therein):
(a) PAYMENT. The Borrower fails to make any payment required to be made
to the Lenders or the Agent under this Forbearance Agreement or the Loan
Agreement including but not limited to the Cash Flow Payments required by
subsection 1.8(b)(ii) of the Loan Agreement; or
(b) REPRESENTATIONS. Any representation or warranty made by, or on
behalf of, the Borrower in this Forbearance Agreement or in any certificate or
other document delivered in connection herewith shall prove to have been untrue
or incorrect in any material respect; or
(c) COVENANTS. The Borrower shall fail to fully perform or comply with
any term, covenant or provisions of this Forbearance Agreement (including
without limitation those under SS.7 or SS.9 hereof); or
(d) BANKRUPTCY, ETC. The Borrower shall become insolvent or fail to pay
its debts as they mature, or the Borrower shall be adjudicated as bankrupt or
insolvent, or any case or proceeding shall be commenced by or against the
Borrower in bankruptcy or liquidation or for its reorganization or readjustment
of the indebtedness of the Borrower under any applicable bankruptcy or
insolvency laws, or any receiver, administrator, liquidator or trustee or
similar official shall be appointed for the Borrower or any of its property, or
the Borrower shall make an assignment for the benefit of creditors, or any
similar event shall take place with respect to the Borrower or the Borrower
shall sell all or a substantial part of its assets, whether in a single
transaction or a series of transactions; or
(e) MATERIAL ADVERSE EFFECT. There shall have occurred any event,
circumstance or condition that the Lenders, in their sole discretion, believe
could have a Material Adverse Effect; or
(f) DEFAULT UNDER FSA AGREEMENT. There shall have occurred a default or
Insurance Agreement Event of Default under the FSA Agreement (as defined
therein); or
<PAGE>
(g) LOAN DOCUMENTS. There shall have occurred any Event of Default
under or as defined in any of the Loan Documents (OTHER THAN the Existing Events
of Default in the amounts listed on EXHIBIT A), subject to any notice and cure
periods set forth in such Loan Documents; or
(h) SUBORDINATED DEBT. (i) The Borrower shall make any Restricted
Payment not expressly authorized in this Forbearance Agreement, including
without limitation, any principal payment in respect of Subordinated Debt other
than the payments with respect to the repurchase or redemption of the RISRS,
subject to the limitations set forth in subsection 6.5, as amended hereby; and
(ii) the Borrower shall default under any of the Subordinated Debt; or
(i) EXCESS CASH FLOW CERTIFICATE. The Borrower fails to (A) deliver an
executed Excess Cash Flow Certificate on the 15th day of each month or (B) make
any required Cash Flow Payment.
SS.14. REMEDIES. Immediately, on and after the occurrence of any
Forbearance Event of Default and in each case without any demand, presentment,
notice and/or other action of any nature by the Lenders (all of which are hereby
expressly waived by the Borrower), (a) all Obligations shall be immediately due
and payable and the Lenders shall be immediately and permanently relieved of
their forbearance obligations set forth herein; (b) all funds in the Cash
Collateral Account shall be applied against the outstanding balance of the
Obligations; (c) the Lenders may proceed to enforce their rights under and in
respect of this Forbearance Agreement and the Loan Documents including but not
limited to the rights set forth in SS.15 hereof; and (d) the Lenders shall be
free to avail themselves of all other rights and remedies available under
applicable law. The failure of the Lenders to insist upon the strict performance
of any term, condition or other provision hereof or to exercise any right or
remedy hereunder shall not constitute a waiver by the Lenders of any such term,
condition or other provision or Event of Default (including but not limited to
the Existing Events of Default) or Forbearance Event of Default in connection
therewith; and any waiver of any such term, condition or other provision of any
such Event of Default or Forbearance Event of Default shall not affect or alter
this Agreement or the other Loan Documents, and each and every term, condition
and other provision of this Forbearance Agreement and the other Loan Documents
shall, in such event, continue in full force and effect and shall be operative
with respect to any other then existing or subsequent Event of Default or
Forbearance Event of Default in connection therewith.
SS.15. CONSENT TO APPOINTMENT OF RECEIVER. WITHOUT DEROGATING FROM ANY
RIGHT, REMEDY OR OTHER PROVISION CONTAINED IN THE LOAN AGREEMENT, THE
FORBEARANCE AGREEMENT OR ANY OTHER SECURITY DOCUMENT, UPON TEN DAYS' NOTICE
AFTER THE OCCURRENCE OF A FORBEARANCE EVENT OF DEFAULT, THE LENDERS SHALL HAVE
THE RIGHT TO APPLY FOR AND HAVE A RECEIVER APPOINTED BY A COURT OF COMPETENT
JURISDICTION IN ANY ACTION TAKEN BY THE LENDERS TO ENFORCE THEIR RIGHTS AND
REMEDIES HEREUNDER IN ORDER TO MANAGE, PROTECT AND PRESERVE THE COLLATERAL AND
CONTINUE THE OPERATION OF THE BUSINESSES OF THE BORROWER, OR TO SELL OR DISPOSE
OF THE COLLATERAL, AND TO COLLECT ALL REVENUES AND PROFITS THEREOF AND APPLY THE
SAME TO THE PAYMENT OF ALL EXPENSES AND OTHER CHARGES OF SUCH RECEIVERSHIP,
INCLUDING THE COMPENSATION OF THE RECEIVER, SAID EXPENSES TO CONSTITUTE PART OF
THE SECURED OBLIGATIONS, AND TO THE PAYMENT OF THE SECURED OBLIGATIONS AS
AFORESAID. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, THE BORROWER HEREBY
IRREVOCABLY CONSENTS TO AND WAIVES ANY RIGHT TO OBJECT TO OR OTHERWISE CONTEST
THE APPOINTMENT OF RECEIVER AS PROVIDED ABOVE. THE BORROWER (I) GRANTS SUCH
WAIVER AND CONSENT KNOWINGLY AFTER HAVING DISCUSSED THE IMPLICATIONS THEREOF
WITH COUNSEL, (II) ACKNOWLEDGES THAT (A) THE UNCONTESTED RIGHT TO HAVE A
RECEIVER APPOINTED FOR THE FOREGOING PURPOSES IS CONSIDERED ESSENTIAL BY THE
LENDERS IN CONNECTION WITH THE ENFORCEMENT OF THEIR RIGHTS AND REMEDIES
HEREUNDER AND UNDER THE LOAN DOCUMENTS, AND (B) THE AVAILABILITY OF SUCH
APPOINTMENT AS A REMEDY UNDER THE FOREGOING CIRCUMSTANCES WAS A MATERIAL FACTOR
IN INDUCING THE LENDERS TO FORBEAR HEREUNDER; AND (III) TO THE EXTENT NOT
PROHIBITED BY APPLICABLE LAW, AGREES TO ENTER INTO ANY AND ALL STIPULATIONS IN
ANY LEGAL ACTIONS, OR AGREEMENTS OR OTHER INSTRUMENTS IN CONNECTION WITH THE
FOREGOING AND TO COOPERATE FULLY WITH THE LENDERS IN CONNECTION WITH THE
ASSUMPTION AND EXERCISE OF CONTROL BY THE RECEIVER OVER ALL OR ANY PORTION OF
THE COLLATERAL.
<PAGE>
SS.16. WAIVERS BY BORROWER; BANKRUPTCY MATTERS.
(a) WAIVER OF JURY TRIAL, ETC. THE BORROWER HEREBY WAIVES ANY RIGHTS
THAT IT MAY HAVE TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIMS ARISING
OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE LOAN
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE
OF SUCH RIGHTS AND OBLIGATIONS. Except as prohibited by law which cannot be
waived, the Borrower hereby waives any right that it may have to claim or
recover in any litigation referred to in the preceding sentence any special,
exemplary, punitive or consequential damages or any damages other than, or in
addition to, actual damages.
(b) BANKRUPTCY MATTERS; HEARING. IN THE CASE OF ANY FORBEARANCE EVENT
OF DEFAULT ARISING BY VIRTUE OF ANY BANKRUPTCY PROCEEDING INVOLVING THE
BORROWER, THE BORROWER COVENANTS AND AGREES THAT, UPON THE OCCURRENCE OF SUCH
FORBEARANCE EVENT OF DEFAULT, ANY OBLIGATION OF THE LENDERS TO CONTINUE TO
FORBEAR SHALL TERMINATE AS PROVIDED HEREIN, AND THE LENDERS SHALL BE ENTITLED TO
AN EMERGENCY HEARING (ON TWO (2) BUSINESS DAYS' NOTICE) ON ANY MOTION WHICH THEY
MAY FILE SEEKING A GENERAL LIFTING OF THE STAY TO ENFORCE THEIR RIGHTS AND TO
FORECLOSE ON ALL OF THEIR SECURITY INTERESTS. NOTHING HEREIN SHALL CONSTITUTE A
WAIVER BY THE BORROWER OF ANY DEFENSE TO THAT MOTION WHICH IT IS ENTITLED TO
ASSERT IN ANY BANKRUPTCY PROCEEDING.
(c) ACKNOWLEDGMENTS. The Borrower hereby (i) certifies that no
representative, agent or attorney of the Lenders has represented, expressly or
otherwise, that the Lenders would not, in the event of litigation, seek to
enforce the foregoing waivers (or any other waivers or other provisions
contained in this Agreement or in any of the Loan Documents) and (ii)
acknowledges that the Lenders have been induced to enter into this Forbearance
Agreement by, among other things, the waivers, agreements and certifications set
forth herein.
SS.17. FEES, ETC. The Borrower agrees to pay all reasonable expenses,
fees and disbursements of counsel for the Lenders which the Lenders have
incurred or may hereafter incur in connection with the Borrower's defaults under
the Loan Agreement, the preparation of this Agreement, the Loan Documents and
all other documents related hereto and thereto (including any amendment, consent
or waiver hereunder or thereunder) and the transactions contemplated hereby or
thereby or the enforcement of the rights of the Lenders hereunder or under the
Loan Documents in the event of a default hereunder or thereunder or any
"workout" of their obligations to the Lenders. All such expenses, fees and
disbursements shall constitute "Obligations" and shall be secured by the
Collateral. The Borrower shall pay all then current expenses, fees and
disbursements of the Lender's counsel upon the execution of this Forbearance
Agreement.
<PAGE>
SS.18. SETOFFS, ETC. Without limiting, affecting or impairing in any
manner the Lenders' and the Agent's rights and remedies set forth herein in any
way, if any Forbearance Event of Default occurs, any Indebtedness from the
Lenders' to the Borrower, including but not limited to amounts on deposit in the
Cash Collateral Account, may, without regard to the value or adequacy of the
Collateral, be offset and applied toward the payment of any Indebtedness from
the Borrower to the Lenders, whether or not such Indebtedness, or any part
thereof, shall then be due.
SS.19. NOTICES. All notices, consents, requests, approvals,
instructions and other communications provided for herein and/or the Loan
Documents shall be in writing and validly given or made when delivered
personally, or mailed by registered or certified mail, or sent by overnight
courier, or by facsimile transmission (when confirmation of receipt thereof is
received) to the party entitled or required to receive the same at the addresses
set forth in the Loan Agreement (PROVIDED THAT any notice to the Agent shall be
delivered to the attention of John Vaughn AND William R. Dewey, IV at the
address for the Agent set forth on the signature page), or at such other address
as any party hereto may subsequently furnish in writing to the other party.
SS.20. NO WAIVERS, ETC. Except to the extent the Lenders have agreed to
forbear pursuant to this Forbearance Agreement, the Lenders may enforce their
rights to the fullest extent permitted under this Agreement, the other Loan
Documents and/or applicable law. Neither this Forbearance Agreement nor the
compliance of the Lenders herewith shall be deemed or construed to be a waiver
of any right or remedy to which the Lenders may now or hereafter be entitled
against the Borrower, except to the extent herein otherwise explicitly provided.
Except to the extent herein otherwise explicitly provided, the provisions of the
Loan Documents and all related agreements shall continue in full force and
effect. The failure of the Lenders to insist upon the strict performance of any
term, condition or other provision hereof or to exercise any right or remedy
hereunder shall not constitute a waiver by the Lenders of any such term,
condition or other provision or Event of Default (including but not limited to
the Existing Events of Default) or Forbearance Event of Default in connection
therewith; and any waiver of any such term, condition or other provision of any
such Event of Default or Forbearance Event of Default shall not affect or alter
this Agreement or the other Loan Documents, and each and every term, condition
and other provision of this Agreement and the other Loan Documents shall, in
such event, continue in full force and effect and shall be operative with
respect to any other then existing or subsequent Event of Default or Forbearance
Event of Default in connection therewith.
SS.21. MISCELLANEOUS. (a) COUNTERPARTS, SUCCESSORS, GOVERNING LAW, ETC.
This Forbearance Agreement may be executed in multiple counterparts, each of
which shall be considered an original but all of which shall constitute one and
the same agreement. One or more counterparts may be delivered via telecopier;
any such telecopied counterpart shall have the same force and effect as an
original counterpart hereof. The Forbearance Agreement shall be binding and
inure to the benefit of each of the parties hereto, and their respective
successors, heirs, legal representatives and assigns, PROVIDED THAT the Borrower
may not assign its rights and obligations without the Lenders' prior written
consent. This Forbearance Agreement is solely for the purpose, and shall have
the sole effect, of defining the relative rights and obligations of the parties
hereto and may not be relied upon or enforced by any person not a party hereto;
no Person shall have third-party beneficiary rights hereunder.
This Forbearance Agreement shall be construed in accordance with and
governed by the internal laws of Massachusetts (without giving effect to
conflicts of laws principles) and is being executed as a sealed instrument under
Massachusetts law. In addition to the extent that it may lawfully do so, the
Borrower hereby consents to service of process, and to be sued, in Massachusetts
and consents to the jurisdiction of the courts of Massachusetts and the U.S.
District Court for the District of Massachusetts, as well as to the jurisdiction
of all courts to which an appeal may be taken from such courts, for the purpose
of any suit, action or other proceeding arising out of any of its obligations
<PAGE>
hereunder or under the Loan Documents or with respect to the transactions
contemplated hereby or thereby, and expressly waives any and all objections it
may have as to venue in any such courts. The Borrower further agrees that a
summons and complaint commencing an action or proceeding in any of such courts
shall be properly served and shall confer personal jurisdiction if served
personally or by certified mail to it at its address provided on the signature
page or as otherwise provided under the laws of Massachusetts or the
jurisdiction in which suit is brought.
(b) AMENDMENTS AND WAIVERS. Any term of this Forbearance Agreement or
of the Loan Documents may be amended and the observance of any term of this
Forbearance Agreement may be waived only with the written consent of each party
hereto.
(c) CONSTRUCTION. The parties acknowledge and agree that this
Forbearance Agreement shall not be construed in favor of one party more than the
other(s) based upon which party drafted (or caused to be drafted) the same.
Headings contained herein are included for convenience of reference only and
shall not constitute a part or to affect the meaning or interpretation of this
Forbearance Agreement. This Forbearance Agreement sets forth the entire
understanding of the parties with respect to its subject matter and supersedes
all other negotiations, understandings and representations made by and among
such parties. No course of dealing, course of performance, trade usage or parole
evidence of any nature shall be used to supplement or modify any terms of this
Forbearance Agreement.
(d) SURVIVAL OF REPRESENTATIONS. All representations and warranties
made herein and/or in certificates delivered pursuant hereto by the Borrower
shall survive the execution and delivery hereof, and shall continue in full
force and effect with respect to the date as of which made so long as any
Obligation is outstanding.
(e) STATUTE OF LIMITATIONS; TIME OF ESSENCE. Any statute of limitations
applicable to any remedy of the Lenders under the Loan Documents or any
applicable law shall be suspended and tolled until such time as the Lenders'
forbearance obligation terminates. Time shall be of the essence with respect to
each and every undertaking and obligation of the Borrower set forth herein.
(f) SPECIFIC PERFORMANCE, ETC. The Borrower stipulates that the
Lenders' remedies at law, in the event of any default or threatened default by
the Borrower in the performance of or compliance with any of the terms and
provisions of this Forbearance Agreement on its part to be observed or
performed, are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or therein or by an injunction against a violation of any of
the terms or provisions hereof, thereof or otherwise.
(g) SEVERABILITY. The unenforceability of any provision of this
Forbearance Agreement shall not affect the validity, binding effect and
enforceability of any other provision or provisions of this Forbearance
Agreement; PROVIDED, HOWEVER, that if any provision of this Forbearance
Agreement is declared unenforceable against the Borrower for any reason by any
court or governmental body having jurisdiction, all agreements, consents and
waivers of the Lenders set forth herein shall, at the option of the Lenders, be
deemed null and void AB INITIO, and the Lenders shall, at their election, be
restored to the position they would have occupied, with all rights available to
them as though such agreements, consents and waivers had never been made.
(h) INDEMNIFICATION. In addition to any indemnification obligations
contained in any of the Loan Documents, the Borrower agrees to indemnify the
Lenders and hold the Lenders and each of the Released Parties harmless from and
against any and all claims, damages, losses, liabilities, judgments and expenses
(including without limitation all reasonable counsel fees and expenses and
litigation expenses) which the Lenders may incur or which may be asserted
against it in connection with or arising out of any investigation, litigation or
proceeding which arises out of the transactions contemplated hereby or by the
Loan Documents (or any action or inaction by the Lenders hereunder or
thereunder) or which otherwise involves the Borrower or any shareholder or any
affiliate of the Borrower, whether or not the Lenders are party thereto, other
than claims, damages, losses, liabilities or judgments with respect to any
matter as to which the Lenders shall have been finally adjudicated (a) not to
have acted in good faith or (b) to have acted in a grossly negligent manner. The
<PAGE>
provisions of this paragraph shall survive payment of all Obligations to the
Lenders. Promptly upon receipt by any party hereunder of notice of the
commencement against such party of any action, such indemnified party shall, if
a claim in respect thereof is to be made against the Borrower hereunder, notify
the Borrower in writing of the commencement thereof, PROVIDED THAT the failure
to provide such notice shall not limit any party's right to indemnification
unless and to the extent such failure shall have adversely affected the
Borrower.
(i) ARMS'-LENGTH TRANSACTION. The Borrower recognizes, stipulates and
agrees that Lenders' actions and relationships with the parties hereto
including, but not limited to, those relationships created or referenced by or
in this Forbearance Agreement, have been and constitute arms-length commercial
transactions, that such actions and relationships shall at all times in the
future continue to constitute arms'-length commercial transactions and that the
Lenders shall not at any time act, be obligated to act, or otherwise be
construed or interpreted as acting as or being the agent, employee or fiduciary
of the Borrower.
(j) NEGOTIATIONS/COUNSEL. The Borrower stipulates and agrees that this
Forbearance Agreement is the product of and results from lengthy arms-length
negotiations among the parties and that neither the Lenders nor any other party
have exerted or attempted to exert improper or unlawful pressure or has in any
way attempted to induce, through threats or otherwise, the execution or delivery
of this Forbearance Agreement. Without in any way limiting the foregoing, each
of the parties hereto stipulates and agrees that at all times during the course
of the negotiations surrounding the execution and delivery of this Forbearance
Agreement, they have, to the extent deemed necessary or advisable in their sole
discretion, been advised and assisted by competent counsel of their own
choosing, that such counsel has been present and participated in the
negotiations surrounding this Agreement and that they have been fully advised by
such counsel of the effect of each term, condition, provision and stipulation
contained herein.
(k) PARTIAL INVALIDITY. The invalidity or unenforceability of any one
or more phrases, clauses or sections of this Forbearance Agreement shall not
affect the validity or enforceability of the remaining portions of it.
(l) ENTIRE AGREEMENT. This Forbearance Agreement, the Amended Term
Notes, the other Loan Documents, the other Security Documents and the other
documents and agreements executed in connection herewith constitute the final
agreement of the parties hereto and supersede any prior agreement or
understanding, written or oral, with respect to the matters contained herein and
therein.
<PAGE>
This Forbearance Agreement is a "LOAN DOCUMENT" as such term is defined
in the Loan Agreement.
EXECUTED as a sealed instrument as of the date first above written.
CONSUMER PORTFOLIO SERVICES, INC.
By:_______________________________
(Title)
Address:___________________
___________________
___________________
STATE STREET BANK AND TRUST COMPANY, INDIVIDUALLY AND AS AGENT
By: ________________________________________
(Title)
Address: 225 Franklin Street
Boston, MA 02110-2804
THE STRUCTURED FINANCE HIGH YIELD FUND, LLC
By: ________________________________________
(Title)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: ________________________________________
(Title)
ACKNOWLEDGED
- ------------
STANWICH FINANCIAL SERVICES CORP.
By: ________________________________________
(Title)
LEVINE LEICHTMAN CAPITAL PARTNERS
II, L.P.
By: ________________________________________
(Title)
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,177
<SECURITIES> 0
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<PP&E> 6,931
<DEPRECIATION> 3,578
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<BONDS> 40,000
0
0
<COMMON> 62,421
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