<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, 2000
[ ] 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 9, 2000, the registrant had 20,127,101 common shares outstanding.
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30, 2000 and December 31, 1999 3
Condensed consolidated statements of operations for the three and nine month periods
Ended September 30, 2000 and 1999. 4
Condensed consolidated statements of cash flows for the nine month periods ended
September 30, 2000 and 1999. 5
Notes to condensed consolidated financial statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
</TABLE>
2
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, December 31,
-------------- --------------
2000 1999
-------------- --------------
(Unaudited)
ASSETS
Cash $ 28,746 $ 1,640
Restricted cash 500 1,684
Contracts held for sale (note 2) 5,418 2,421
Servicing fees receivable 5,957 9,919
Residual interest in securitizations (note 3) 117,285 172,530
Furniture and equipment, net 2,431 3,040
Taxes receivable (note 9) 3,275 4,914
Deferred financing costs 2,315 2,488
Investment in unconsolidated affiliates -- 755
Related party receivables 948 901
Deferred interest expense (note 7) 8,801 10,720
Other assets 9,977 12,553
-------------- --------------
$ 185,653 $ 223,565
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses $ 10,019 $ 13,637
Deferred tax liability (note 9) -- 6,318
Capital lease obligation 1,043 1,506
Notes payable 2,646 4,006
Senior secured debt 42,000 23,161
Subordinated debt 38,350 69,000
Related party debt 21,500 21,500
-------------- --------------
115,558 139,128
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; 20,222,951 and 20,107,501
shares issued and outstanding at September
30, 2000 and December 31, 1999,
respectively (note 8) 64,850 62,421
Retained earnings 6,555 22,016
Deferred compensation (note 8) (1,085) --
Treasury stock, 130,100 shares and none at
September 30, 2000 and December 31, 1999,
respectively, at cost (225) --
-------------- --------------
70,095 84,437
-------------- --------------
$ 185,653 $ 223,565
============== ==============
See accompanying notes to condensed consolidated financial statements
3
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Gain (loss) on sale of contracts, net (note 4) $ 4,787 $ (9,725) $ 12,628 $ (16,161)
Interest income (note 5) 5,648 (5,312) 2,483 20,019
Servicing fees 3,585 6,288 12,969 22,235
Other income (loss) 236 (455) 100 (1,066)
-------------- -------------- -------------- --------------
14,256 (9,204) 28,180 25,027
-------------- -------------- -------------- --------------
EXPENSES:
Employee costs 6,339 7,062 18,716 23,156
General and administrative 2,684 4,084 10,697 14,639
Interest 4,241 5,912 13,011 23,586
Marketing 1,569 1,175 4,506 4,162
Occupancy 631 683 2,557 2,127
Depreciation and amortization 283 351 875 1,245
Related party consulting fees -- 88 12 263
-------------- -------------- -------------- --------------
15,747 19,355 50,374 69,178
-------------- -------------- -------------- --------------
Loss before income taxes (1,491) (28,559) (22,194) (44,151)
Income tax benefit (note 9) (313) (11,990) (6,733) (18,545)
-------------- -------------- -------------- --------------
Net loss $ (1,178) $ (16,569) $ (15,461) $ (25,606)
============== ============== ============== ==============
Loss per share (note 6):
Basic $ (0.06) $ (0.82) $ (0.76) $ (1.41)
Diluted $ (0.06) $ (0.82) $ (0.76) $ (1.41)
Number of shares used in computing
loss per share (note 6):
Basic 20,311 20,108 20,258 18,196
Diluted 20,311 20,108 20,258 18,196
See accompanying notes to condensed consolidated financial statements
4
</TABLE>
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,461) $ (25,606)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 875 1,245
Amortization of deferred financing costs 712 475
Provision for credit losses 800 4,843
Loss on sale of fixed asset 14 --
Deferred compensation 1,010 --
Equity net loss in unconsolidated affiliates 755 1,665
Releases of cash from Trusts to Company 60,427 8,750
Net deposits to spread accounts (12,072) (22,921)
Decrease in receivables from Trusts and investment in
subordinated certificates 6,890 26,035
Changes in assets and liabilities:
Restricted cash 1,184 (42)
Purchases of contracts held for sale (457,802) (306,725)
Liquidation of contracts held for sale 454,005 462,901
Other assets 8,720 6,358
Accounts payable and accrued expenses (3,618) 5,680
Warehouse lines of credit -- (151,857)
Deferred tax liability (6,318) --
Taxes payable/receivable 1,639 (18,584)
-------------- --------------
Net cash provided by (used in) operating activities 41,760 (7,783)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment in unconsolidated affiliate -- 979
Net related party receivables (47) 2,237
Purchases of furniture and equipment (232) (33)
-------------- --------------
Net cash (used in) provided by investing activities (279) 3,183
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in senior secured debt 16,000 5,000
Issuance of related party debt -- 1,500
Issuance of notes payable -- 1,395
Repayment of senior secured debt (27,161) (3,438)
Repayment of subordinated debt (650) --
Repayment of capital lease obligations (463) (462)
Repayment of notes payable (1,360) (551)
Payment of financing costs (539) (312)
Repurchase of common stock (225) --
Issuance of common stock -- 44
Exercise of options and warrants 23 --
-------------- --------------
Net cash (used in) provided by financing activities (14,375) 3,176
-------------- --------------
Increase (decrease) in cash 27,106 (1,424)
Cash at beginning of period 1,640 1,940
-------------- -------------
Cash at end of period $ 28,746 $ 516
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 10,249 $ 21,712
Income taxes $ 1,026 $ 43
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock upon restructuring of debt $ 311 $ --
Revaluation of common stock warrants $ -- $ 9,844
Reclassification of subordinated debt $ 30,000 $ --
Valuation of deferred compensation $ 1,085 $ --
See accompanying notes to condensed consolidated financial statements
5
</TABLE>
<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, 2000, 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, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Consumer
Portfolio Services, Inc. and its wholly-owned subsidiaries CPS Marketing, Inc.,
Alton Receivables Corp. ("Alton"), CPS Receivables Corp. ("CPSRC"), CPS Funding
Corporation ("CPSFC") and CPS Warehouse Corp. ("CPSWC"). Alton, CPSRC, CPSFC and
CPSWC are limited purpose corporations formed to accommodate the structures
under which the Company has purchased and sold its Contracts. CPS Marketing,
Inc. employs marketing representatives who solicit business from motor vehicle
dealers ("Dealers"). The consolidated financial statements also include the
accounts of SAMCO Acceptance Corp., LINC Acceptance Company, LLC, and CPS
Leasing, Inc., which are 80% owned subsidiaries. Of these three subsidiaries,
only CPS Leasing, Inc. has any current operations. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
unconsolidated affiliates that are not majority owned are reported using the
equity method. The excess of the purchase price of such subsidiaries over the
Company's share of the net assets at the acquisition date ("goodwill") is being
amortized over a period of up to fifteen years. Goodwill is reviewed for
possible impairment when events or changed circumstances may affect the
underlying basis of the asset. Impairment is measured by discounting operating
income at an appropriate discount rate.
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 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 cost and are included in
other assets. Payments received on Contracts held to maturity are restricted to
certain securitized pools, and the related Contracts cannot be resold.
ALLOWANCE FOR CREDIT LOSSES
The Company estimates an allowance for credit losses, which management
believes provides adequately for known and inherent losses that may develop in
the Contracts held for sale and Contracts held to maturity. Provision for loss
is 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 and the
value of the underlying collateral.
6
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONTRACT ACQUISITION FEES
Upon purchase of a Contract from a Dealer, the Company generally
charges the Dealer an acquisition fee. The acquisition fees associated with
Contract purchases are deferred until the Contracts are sold, at which time the
deferred acquisition fees are recognized as a component of the gain on sale. The
Company also charges an origination fee for those Contracts that are sold on a
flow basis. Those fees are recognized at the time the Contracts are sold,
typically one day after they are purchased by the Company, and are also a
component of the gain on sale.
FLOW PURCHASE PROGRAM
From May 1999 through the date of this report, the Company has
purchased Contracts primarily for immediate and outright resale to
non-affiliated third parties. Such sales are made 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. The Company sells such Contracts for a
mark-up above what the Company pays the Dealer. In such sales, the Company makes
certain representations and warranties to the purchasers, normal in the
industry, which relate primarily to the legality of the sale of the underlying
motor vehicle and to the validity of the security interest that is being
conveyed to the purchaser. These representations and warranties are generally
similar to the representations and warranties given by the originating Dealer to
the Company. In the event of a breach of such representations or warranties, the
Company may incur liabilities in favor of the purchaser(s) of the Contracts, and
there can be no assurance that the Company would be able to recover, in turn,
against the originating Dealer(s).
RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS
The Company has purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities.
Although the Company has not been able 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 "Securitization
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
significantly in 1998. Effective November 3, 1999, as applied to monthly
measurement dates from September 1999 onward, the specified levels have
decreased. See note 7 - "Liquidity".
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. NIRs are included in receivable from Trusts
as a component of the residual interest in securitizations in the accompanying
balance sheet. 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.
7
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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; 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 Securitization Agreements. If the amount of
cash required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain
Securitization Agreements, excess cash collected during the period is used to
make accelerated principal paydowns on certain Certificates to create excess
collateral (over-collateralization or OC account). The over-collateralization is
included in receivable from Trusts as a component of the residual interest in
securitizations in the accompanying balance sheet. 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 Securitization 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 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. 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 range from 14% to 16.5% cumulatively over the lives of
the related Contracts.
The primary components of receivable from Trusts are NIRs and
over-collateralization, each net of estimated credit losses and the present
value discount. Interest income is accreted over the estimated remaining lives
of the underlying Contracts at the present value discount rate used in valuing
the Residuals, on a level yield basis.
In future periods, the Company would recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
the original estimate, or the Company would 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
provision for losses on the Residuals.
The Certificateholders and the related securitization trusts have no
recourse to the Company for failure of the Contract obligors to make payments on
a timely basis. The Company's Residuals are subordinate to the Certificates
until the Certificateholders are fully paid.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
8
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interpretation clarifies the definition of an employee for purposes of applying
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, " Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement for FASB Statement No. 125" ("FAS 140"). The new statement, FAS 140,
revises the standards for accounting for securitizations and for other transfers
of financial assets and collateral. FAS 140 also requires certain disclosures
that were not required under FASB Statement No. 125. The accounting provisions
of FAS 140 will apply to the Company for transactions entered into after March
31, 2001, and the reclassification and disclosure provisions will apply to the
Company beginning with the year 2000. Because most of the provisions of FASB
Statement No. 125 are carried over into FAS 140 without change, the Company does
not expect that the adoption and implementation of FAS 140 will have a material
effect on its results of operations or financial condition.
(2) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
September 30, December 31,
2000 1999
-------------- -------------
(in thousands)
Gross receivable balance $ 6,389 $ 3,857
Unearned finance charges (46) (136)
Deferred acquisition fees and discount (52) (437)
Allowance for credit losses (873) (863)
-------------- -------------
Net contracts held for sale $ 5,418 $ 2,421
============== =============
During the nine month period ended September 30, 2000, the Company
repurchased the assets of certain Trusts that had amortized to a level making
such assets available for repurchase. The Trusts in turn used the proceeds
received from the repurchase of such assets to repay in full the remaining
balance of the certificates that such Trusts had issued. The assets repurchased
consisted primarily of principal and interest remaining on Contracts. The
principal amount related to the Contracts of such repurchases was $5.1 million,
which is included in Contracts held for sale.
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
September 30, December 31,
2000 1999
-------------- -------------
(in thousands)
Cash, commercial paper, US government
securities and other qualifying
investments (Spread Account) $ 77,771 126,126
Receivable from Trusts 39,506 46,288
Investment in subordinated certificates 8 116
-------------- -------------
Residual interest in securitizations $ 117,285 $ 172,530
============== =============
Cash released from the Trusts to the Company for the three month
periods ended September 30, 2000 and 1999, was $22.2 million and $8.1 million,
respectively. Cash released from the Trusts to the Company for the nine month
periods ended September 30, 2000 and 1999, was $60.4 million and $8.8 million,
respectively.
9
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents estimated remaining undiscounted credit
losses included in the fair value estimate of the Residuals as a percentage of
the Company's servicing portfolio subject to recourse provisions:
September 30, December 31,
2000 1999
-------------- -------------
(in thousands)
Undiscounted estimated credit losses $ 30,932 $ 77,480
============== =============
Servicing subject to recourse provisions $ 481,904 $ 813,061
============== =============
Undiscounted estimated credit losses as percentage
of servicing subject to recourse provisions 6.42% 9.53%
============== =============
(4) GAIN (LOSS) ON SALE OF CONTRACTS
The following table presents components of net gain (loss) on sale of
Contracts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gains (loss) recognized on sale $ 4,866 $ (8,644) $ 13,649 $ (17,917)
Deferred acquisition fees and discounts 31 1,745 110 7,596
Expenses related to sales (110) (576) (331) (997)
Provision for credit losses -- (2,250) (800) (4,843)
-------------- ------------- -------------- -------------
Net gain (loss) on sale of contracts $ 4,787 $ (9,725) $ 12,628 $ (16,161)
============== ============= ============== =============
</TABLE>
(5) INTEREST INCOME
The following table presents the components of interest income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Interest on Contracts held for sale $ 941 $ 3,695 $ 1,755 $ 28,213
Residual interest income, net 4,707 (9,007) 728 (8,194)
-------------- ------------- -------------- -------------
Net interest income $ 5,648 $ (5,312) $ 2,483 $ 20,019
============== ============= ============== =============
</TABLE>
10
<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LOSS PER SHARE
Diluted loss per share for the three and nine months ended September
30, 2000 and 1999, was calculated using the weighted average number of shares
outstanding for the related period. The following table reconciles the number of
shares used in the computations of basic and diluted loss per share for the
three and nine month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding
during the period used to compute basic loss per share 20,311 20,108 20,258 18,196
Incremental common shares attributable to exercise of
outstanding options and warrants -- -- -- --
Incremental common shares attributable to conversion of
subordinated debt -- -- -- --
-------------- ------------- -------------- -------------
Number of common shares used to compute diluted Loss per
share 20,311 20,108 20,258 18,196
============== ============= ============== =============
</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, 2000, would have included
an additional 1.5 million 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 24.3 million
diluted shares for the three month period ending September 30, 2000, and 24.2
million diluted shares for the nine month period ending September 30, 2000.
(7) LIQUIDITY
The Company's business requires substantial cash to support its
purchases of Contracts and other operating activities. The Company's primary
sources of cash from operating activities have been proceeds from sales of
Contracts, amounts borrowed under warehouse lines of credit, servicing fees on
portfolios of Contracts previously sold, 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 warehouse
lines and otherwise, operating expenses such as employee, interest, and
occupancy expenses, the establishment of and further contributions to Spread
Accounts, and income taxes. Internally generated cash may or may not be
sufficient to meet the Company's cash demands, depending on the performance of
securitized pools (which determines the level of releases from Spread Accounts),
on the rate of growth or decline in the Company's servicing portfolio, and on
the terms on which the Company is able to buy, borrow against and sell
Contracts.
Contracts are purchased for a cash price close to their principal
amount, and return cash over a period of years. As a result, the Company has
been dependent on warehouse lines of credit to purchase Contracts, and on the
availability of cash from outside sources in order to finance its continued
operations, and to fund the portion of Contract purchase prices not borrowed
under warehouse lines of credit. The Company is not presently 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 cash releases resulted in a liquidity deficiency, which has been
progressively alleviated since the November 1999 re-commencement of releases of
cash from Spread Accounts.
The Company has maintained its Contract purchasing program in the
absence of any warehouse line of credit by entering into flow purchase
arrangements. Flow purchases allow the Company to purchase Contracts while
maintaining only an immaterial level of Contracts held for sale. The Company's
revenues from flow purchase of Contracts, however, are materially less than may
be received by holding Contracts to maturity or by selling Contracts in
securitization transactions. For the nine month period ended September 30, 2000,
the Company purchased $452.7 million of Contracts on a flow basis, compared to
$306.7 million of Contracts purchased, $123.6 million of which was purchased on
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CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
a flow basis, for the same period in the prior year. The Company expects to
purchase Contracts only on a flow basis in the future until the Company is able
to identify appropriate sources of capital to acquire and hold Contracts for the
Company's own account.
Net cash provided by operating activities was $41.8 million for the
nine month period ended September 30, 2000, compared to net cash used in
operating activities of $7.8 million for the same period in the prior year.
During the nine month periods ended September 30, 2000 and 1999, the Company did
not complete a securitization transaction, and therefore, did not use any cash
for initial deposits to Spread Accounts. Cash used for subsequent deposits to
Spread Accounts for the nine month period ended September 30, 2000, was $12.1
million, a decrease of $10.8 million, or 47.3%, from cash used for subsequent
deposits to Spread Accounts for the same period in the prior year. Cash released
from Spread Accounts to the Company for the nine month period ended September
30, 2000, was $60.4 million, as compared with $8.8 million for the same period
in the prior year. 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. In particular, in
the prior year's period the cash generated by Contracts held by the Trusts was
directed, pursuant to the Securitization Agreements, to building Spread Accounts
to their respective specified levels. Those levels having been reached in
November 1999, cash subsequently generated has been available for release to the
Company.
Beginning in June 1998, the Company's liquidity was adversely affected
by the absence of releases from Spread Accounts. Such releases did not occur
because a number of the 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 Securitization
Agreements. Accordingly, pursuant to the Securitization Agreements, the
specified levels applicable to the Company's Spread Accounts were increased, in
most cases to an unlimited amount. Due to cross collateralization provisions of
the Securitization Agreements, the specified levels were increased on all but
the two most recent of the Company's Trusts. In addition to requiring higher
Spread Account levels, the Securitization Agreements provide the Certificate
Insurer with certain other rights and remedies, some of which have been waived
on a recurring basis by the Certificate Insurer with respect to all of the
Trusts. Until the November 1999 effectiveness of an amendment to the
Securitization Agreements, described below, no material releases from any of the
Spread Accounts were available to the Company. Upon effectiveness of that
amendment, the requisite Spread Account levels in general have been set at 21%
of the outstanding principal balance of the Certificates issued by the related
Trusts. (Higher percentages are applicable to those Trusts that have amortized
to the point that "floor" or minimum levels of credit enhancement are
applicable.)
The amendment agreement mentioned above (the "Amendment") fixes the
amount of credit enhancement to be maintained for all but the two most recent of
the Company's 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 over
collateralization. Older Trusts may require more than 21% of credit enhancement
if the Certificate balance has amortized to such a level that "floor" or minimum
levels of credit enhancement are applicable.
In the event of certain defaults by the Company, the specified level
applicable to such credit enhancement 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.
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 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. There can be no assurance that this plan will be
successful.
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<PAGE>
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
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. There can be no assurance that the current level
of flow production can be maintained or increased. Obtaining releases 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) COMMON STOCK
Included in common stock is additional paid in capital related to the
valuation of certain stock options as required by FIN 44. Based on the adoption
of FIN 44, common stock increased by approximately $2.1 million, of which $1.1
million relates to the expense of valuing currently vested options and $1.0
million relates to deferred compensation related to unvested options.
(9) INCOME TAXES
During the three and nine month periods ended September 30, 2000, the
Company recorded income tax benefit of approximately $313,000 and $6.7 million,
respectively, arising from operating losses. In order to realize the net
deferred tax asset of $3.3 million, the Company will need to generate future
taxable income of approximately $8.0 million. Management believes that it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax asset. In reaching
this conclusion, management anticipates that the Company will resume its
securitization programs, which would be a key component to improved earnings in
the future. As to such resumption there can be no assurance.
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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. 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, residual interest
earned from its securitized pools of Contracts, servicing fees earned on
Contracts sold in securitizations and interest earned on Contracts held for
sale. 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 such Contracts.
The Company has purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities.
Although the Company has not been able 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 "Securitization
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
significantly in 1998. Effective November 3, 1999, as applied to monthly
measurement dates from September 1999 onward, the specified levels have
decreased. See note 7 - "Liquidity".
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. NIRs are included in receivable from Trusts
as a component of the residual interest in securitizations in the accompanying
balance sheet. 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; accordingly, the Company determines the
14
<PAGE>
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 Securitization Agreements. If the amount of
cash required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain
Securitization Agreements, excess cash collected during the period is used to
make accelerated principal paydowns on certain Certificates to create excess
collateral (over-collateralization or OC account). The over-collateralization is
included in receivable from Trusts as a component of the residual interest in
securitizations in the accompanying balance sheet. 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 Securitization 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 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. 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 range from 14% to 16.5% cumulatively over the lives of
the related Contracts.
The primary components of receivable from Trusts are NIRs and
over-collateralization, each net of estimated credit losses and the present
value discount. Interest income is accreted over the estimated remaining lives
of the underlying Contracts at the present value discount rate used in valuing
the Residuals, on a level yield basis.
In future periods, the Company would recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
the original estimate, or the Company would 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
provision for losses on the Residuals.
The Certificateholders and the related securitization trusts have no
recourse to the Company for failure of the Contract obligors to make payments on
a timely basis. The Company's Residuals are subordinate to the Certificates
until the Certificateholders are fully paid.
The structure described above is applicable to securitization
transactions conducted at least once quarterly from June 1994 through December
1998. The Company has not sold any Contracts in securitization transactions
since December 1998, and there can be no assurance as to when it will next sell
Contracts using the structure described above.
Since March 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
15
<PAGE>
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. A second purchaser has since begun to purchase Contracts from the Company
on similar terms. In these arrangements, 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. Such fees represent
substantially all of the gain on sale of Contracts recognized in the current
year.
RESULTS OF OPERATIONS
THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1999
REVENUES. During the three months ended September 30, 2000, revenues
increased by $23.5 million, from a loss of $9.2 million for the three months
ended September 30, 1999 to revenues of $14.3 million. Gain on sale of Contracts
increased by $14.5 million, from a loss of $9.7 million to a gain of $4.8
million. The primary reason for the increase is that the prior year's period
included sales of some $83.8 million of Contracts for less than their
acquisition cost, resulting in a loss on sale of $11.3 million. Gain on sale in
the current period is the result of the Company's flow purchase program. During
the three months ended September 30, 2000, the Company sold $156.4 million of
Contracts on a flow basis, compared to $89.6 million for the same period in the
prior year. Those sales resulted in fees earned of $4.9 million and $2.5
million, for the three months ended September 30, 2000 and 1999, respectively.
In addition to the increase in the number of Contracts sold, the Company also
received a higher average fee per Contract in the current year. Gain on sale of
Contracts is reduced for the three month periods ended September 30, 2000 and
1999, by approximately $110,000 and $576,000, respectively, of expenses 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 period ended September 30, 2000 the Company did not charge against gain on
sale any additional provision for losses on Contracts held for sale compared to
a $2.3 million charge recorded for the three month period ended September 30,
1999.
Interest income increased by $11.0 million, and represented 39.6% of
total revenue. During the three month period ended September 30, 2000, residual
interest income increased by $13.7 million, from negative interest income of
$9.0 million for the three months ended September 30, 1999, to residual interest
income of $4.7 million for the current year's period. Prior to the three month
period ended June 30, 2000, the Company recognized residual interest income as
the excess cash flows generated by the Trusts over the related obligations of
the Trusts, the result of which was further offset by the amortization of the
NIRs. In the prior year's period, interest income included $9.4 million of such
amortization. This method of residual interest income recognition approximated a
level yield rate of residual interest income, primarily due to the continued
addition of new securitizations. As a result of the Company's not having
securitized any Contracts since December 1998, the Company's existing method of
amortizing the Residuals would not reflect the appropriate level yield.
Therefore, the Company refined its methodology to accrete residual interest
income on a level yield basis, using an accretion rate that approximates the
discount rate used to value the residual interest in securitizations. That rate
is 14% per annum.
Servicing fees decreased by approximately $2.7 million, or 43.0%. The
decrease in servicing fees is due to the decrease in the servicing portfolio. As
of September 30, 2000, the Company was earning servicing fees on 64,333 sold
Contracts with aggregate outstanding principal balances approximating $481.9
million, compared to 101,383 Contracts with aggregate outstanding principal
balances approximating $948.0 million as of September 30, 1999. In addition to
the $481.9 million in sold Contracts, on which servicing fees were earned, the
Company was holding for sale and servicing an additional $8.1 million in
Contracts, for an aggregate total servicing portfolio at September 30, 2000, of
$490.0 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 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 2000, 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, 2000,
operating expenses decreased $3.6 million, or 18.6%, compared to the three month
period ended September 30, 1999. Employee costs decreased by $723,000 or 10.2%,
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<PAGE>
and represented 40.3% 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. The decrease was offset by an increase in
employee costs of $1.0 million related to the valuation of certain stock options
in accordance with recently issued and adopted accounting principles. General
and administrative expenses decreased by $1.4 million or 34.3%, and represented
17.0% of total operating expenses.
Interest expense decreased $1.7 million, or 28.3%, and represented
26.9% of total operating expenses. The decrease is primarily due to the decrease
in the Company's warehouse lines of credit and reduction of the principal
balance of other debt. The warehouse lines of credit were paid in full and
terminated in the second and third quarters of 1999. Accordingly, there was no
warehouse interest expense in the quarter ended September 30, 2000, compared to
warehouse interest expense of $1.3 million in the quarter ended September 30,
1999. Although senior secured debt increased from $29.6 million at September 30,
1999, to $42.0 million at September 30, 2000, $30.0 million of the balance at
September 30, 2000, represents former subordinated debt that was exchanged for
senior secured debt in a debt restructuring completed in March 2000. Overall,
outstanding non-warehouse indebtedness of the Company for borrowed money
decreased from $126.1 million at September 30, 1999, to $105.6 million at
September 30, 2000.
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000, COMPARED TO THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1999
REVENUES. During the nine months ended September 30, 2000, revenues
increased by $3.2 million, or 12.6%, compared to the nine month period ended
September 30, 1999. Net gain on sale of Contracts increased by $28.8 million,
from a negative $16.2 million for the nine months ended September 30, 1999, to a
gain on sale of $12.6 million for the nine month period ended September 30,
2000. The primary reason for the increase is that the prior year's period
included sales of some $318.0 million of Contracts for less than their
acquisition cost, resulting in a loss on sale of $17.6 million. Net gain on sale
also increased due to an increase in the number of Contracts sold on a flow
basis, and an increase in the average fee paid to the Company per Contract sold.
During the nine months ended September 30, 2000, the Company sold $452.7 million
of Contracts on a flow basis compared to $123.6 million of Contracts for the
same period in the prior year.
Interest income decreased by $17.5 million or 87.6%. The primary reason
for the decrease is that fewer Contracts are being held for sale. During the
nine month period ended September 30, 2000, the Company earned interest on an
average balance of Contracts held for sale of $6.5 million compared to an
average of $162.6 million for the previous year period. Such a reduction in
interest earned on Contracts held for sale was partially offset by the increase
in residual interest income. Although residual interest income was $728,000 for
the nine month period ended September 30, 2000, for the three month period ended
September 30, 2000, residual interest income was $4.7 million. Prior to the
second quarter, the Company recognized residual interest income as the excess
cash flows generated by the Trusts over the related obligations of the Trusts.
This method of residual interest income recognition approximated a level yield
rate of residual interest income, net of the amortization of the NIRs, primarily
due to the continued addition of new securitizations. As a result of the
Company's not having securitized any Contracts since December 1998, the
Company's existing method of amortizing the Residuals would not reflect the
appropriate level yield. Therefore, the Company refined its methodology to
accrete residual interest income on a level yield basis, using an accretion rate
that approximates the discount rate used to value the residual interest in
securitizations. That rate is 14% per annum.
Servicing fees decreased by $9.3 million, or 41.7%. The decrease in
servicing fees is due to the decrease in the Company's servicing portfolio
compared to the prior year's period.
EXPENSES. During the nine month period ended September 30, 2000,
operating expenses decreased $18.8 million, or 27.2%, compared to the nine month
period ended September 30, 1999. Employee costs decreased by $4.4 million, or
19.2%, and represented 37.2% of total operating expenses. The decrease is due to
the reduction of staff in accordance with the decrease in the Company's
servicing portfolio. The decrease was offset by an increase in employee costs of
$1.0 million related to the valuation of certain stock options in accordance
with recently issued and adopted accounting principles. General and
administrative expenses decreased by $3.9 million, or 26.9%, and represented
21.2% of total operating expenses. Decreases in general and administrative
expenses included decreases in telecommunications, stationery, credit reports
and other related items as a result of the decrease in the Company's servicing
portfolio.
Interest expense decreased $10.6 million, or 44.8%, and represented
25.8% of total operating expenses. The decrease is primarily due to the
reductions in warehouse and non-warehouse indebtedness from the prior year's
period.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
purchases of Contracts and other operating activities. The Company's primary
sources of cash from operating activities have been proceeds from sales of
Contracts, amounts borrowed under warehouse lines of credit, servicing fees on
portfolios of Contracts previously sold, 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 warehouse
lines and otherwise, operating expenses such as employee, interest, and
occupancy expenses, the establishment of and further contributions to Spread
Accounts, and income taxes. Internally generated cash may or may not be
sufficient to meet the Company's cash demands, depending on the performance of
securitized pools (which determines the level of releases from Spread Accounts),
on the rate of growth or decline in the Company's servicing portfolio, and on
the terms on which the Company is able to buy, borrow against and sell
Contracts.
Contracts are purchased from Dealers for a cash price close to their
principal amount, and return cash over a period of years. As a result, the
Company has been dependent on warehouse lines of credit to purchase Contracts,
and on the availability of cash from outside sources in order to finance its
continued operations, and to fund the portion of Contract purchase prices not
borrowed under warehouse lines of credit. The Company is not presently 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 cash releases resulted in a liquidity deficiency, which
has been progressively alleviated since the November 1999 re-commencement of
releases of cash from Spread Accounts.
The Company has maintained its Contract purchasing program in the
absence of any warehouse line of credit by entering into flow purchase
arrangements. Flow purchases allow the Company to purchase Contracts while
maintaining only an immaterial level of Contracts held for sale. The Company's
revenues from flow purchase of Contracts, however, are materially less than may
be received by holding Contracts to maturity or by selling Contracts in
securitization transactions. For the nine month period ended September 30, 2000,
the Company purchased $452.7 million of Contracts on a flow basis, compared to
$306.7 million of Contracts purchased, $123.6 million of which was purchased on
a flow basis, for the same period in the prior year. The Company expects to
purchase Contracts only on a flow basis in the future until the Company is able
to identify appropriate sources of capital to acquire and hold Contracts for the
Company's own account.
Net cash provided by operating activities was $41.8 million for the
nine month period ended September 30, 2000, compared to net cash used in
operating activities of $7.8 million for the same period in the prior year.
During the nine month periods ended September 30, 2000, and 1999, the Company
did not complete a securitization transaction, and therefore, did not use any
cash for initial deposits to Spread Accounts. Cash used for subsequent deposits
to Spread Accounts for the nine month period ended September 30, 2000, was $12.1
million, a decrease of $10.8 million, or 47.3%, from cash used for subsequent
deposits to Spread Accounts for the same period in the prior year. Cash released
from Spread Accounts to the Company for the nine month period ended September
30, 2000, was $60.4 million, as compared with $8.8 million for the same period
in the prior year. 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. In particular, in
the prior year's period the cash generated by Contracts held by the Trusts was
directed, pursuant to the Securitization Agreements, to building Spread Accounts
to their respective specified levels. Those levels having been reached in
November 1999, cash subsequently generated has been available for release to the
Company.
Beginning in June 1998, the Company's liquidity was adversely affected
by the absence of releases from Spread Accounts. Such releases did not occur
because a number of the 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 Securitization
Agreements. Accordingly, pursuant to the Securitization Agreements, the
specified levels applicable to the Company's Spread Accounts were increased, in
most cases to an unlimited amount. Due to cross collateralization provisions of
the Securitization Agreements, the specified levels were increased on all but
the two most recent of the Company's Trusts. In addition to requiring higher
Spread Account levels, the Securitization Agreements provide the Certificate
Insurer with certain other rights and remedies, some of which have been waived
on a recurring basis by the Certificate Insurer with respect to all of the
Trusts. Until the November 1999 effectiveness of an amendment to the
Securitization Agreements, described below, no material releases from any of the
Spread Accounts were available to the Company. Upon effectiveness of that
amendment, the requisite Spread Account levels in general have been set at 21%
of the outstanding principal balance of the Certificates issued by the related
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Trusts. (Higher percentages are applicable to those Trusts that have amortized
to the point that "floor" or minimum levels of credit enhancement are
applicable.)
The amendment agreement mentioned above (the "Amendment") fixes the
amount of credit enhancement to be maintained for all but the two most recent of
the Company's 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 over
collateralization. Older Trusts may require more than 21% of credit enhancement
if the Certificate balance has amortized to such a level that "floor" or minimum
levels of credit enhancement are applicable.
In the event of certain defaults by the Company, the specified level
applicable to such credit enhancement 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.
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 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. There can be no assurance that this plan will be
successful.
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. There can be no assurance that the current level
of flow production can be maintained or increased. Obtaining releases 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.
CREDIT EXPERIENCE
The Company's financial results are dependent on the performance of the
Contracts in which it retains an ownership interest. The following is a summary
of the Company's gross servicing portfolio, including Contracts held for sale,
broken down by Contracts that are (i) more than 30 days delinquent, but not in
repossession, and (ii) in repossession (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
----------------------------- -----------------------------
Amount Percent Amount Percent
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Delinquent Contracts:
31 to 60 days $ 15,495 3.0% $ 25,987 2.5%
Greater than 60 days 10,792 2.1% 28,664 2.8%
-------------- ------------- -------------- -------------
26,287 5.1% 54,651 5.3%
In repossession 9,969 2.0% 31,122 3.1%
-------------- ------------- -------------- -------------
$ 36,256 7.1% $ 85,773 8.4%
============== ============= ============== =============
</TABLE>
The following table presents charge-off data with respect to the
Company's servicing portfolio, including Contracts held for sale, (dollars in
thousands):
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net charge-offs (1) $ 12,601 $ 25,145 $ 53,090 $ 79,646
============== ============= ============== =============
Net charge-offs as an annualized percentage of
average servicing portfolio outstanding 9.7% 9.8% 11.3% 7.9%
============== ============= ============== =============
</TABLE>
---------------
(1) Charge-off amounts are net of recoveries which are recorded when received.
Delinquency and charge-off ratios typically fluctuate over time as a
portfolio matures. There can be no assurance that future delinquency and credit
losses will be comparable to data presented above.
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 hold Contracts pledged to a warehouse line of credit, and (ii) plans to
securitize Contracts in the future. Such plans are dependent on the Company's
ability to conclude transactions with third parties, over which third parties
the Company has no control.
Specifically, the reader should bear in mind the following
considerations: As to entering into a warehouse line of credit, the Company's
ability to open such a line of credit and use proceeds thereunder to acquire
Contracts is dependent on the willingness of prospective lenders to reach
agreement with the Company on the terms and conditions of such a line of credit.
Although the Company is in negotiations with respect to a proposed warehouse
line of credit, there can be no assurance that mutually acceptable agreements
will be reached.
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. Financial guaranty insurance, if required in order
to sell securities backed by receivables to be securitized by the Company, may
or may not be available on acceptable terms at the time of any such transaction,
and the credit performance or terms of the receivables that the Company would
seek to securitize could cause securitization transactions to be difficult,
unduly expensive or even impracticable.
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, adverse changes
in the market for securitized receivables pools, which could restrict the
Company's ability to obtain cash for new Contract originations and purchases;
increases in the amounts required to be set aside in Spread Accounts or to be
expended for other forms of credit enhancement to support future
securitizations; the reduction or unavailability 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
There have been no significant changes in interest rate risk since
December 31, 1999. The Company is not currently issuing interest bearing
asset-backed securities nor is it holding any material amount of Contracts for
sale. All Contracts purchased are primarily sold on a flow basis, for which the
Company receives a fee. Therefore, any strategies the Company has used in the
past to minimize interest rate risk do not apply currently. Described below are
strategies the Company has used in the past to minimize interest rate risk.
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The strategies the Company has used in the past to minimize interest
rate risk include offering only fixed rate contracts to obligors, regular sales
of Contracts to the Trusts, and pre-funding securitizations, whereby the amount
of asset-backed securities issued exceeds the amount of Contracts initially sold
to the Trusts. In pre-funding, the proceeds from the pre-funded portion are held
in an escrow account until the Company sells the additional Contracts to the
Trust in amounts up to the balance of the pre-funded escrow account. In
pre-funded securitizations, the Company locks in the borrowing costs with
respect to the Contracts it subsequently delivers to the Trust. However, the
Company incurs an expense in pre-funded securitizations equal to the difference
between the money market yields earned on the proceeds held in escrow prior to
subsequent delivery of Contracts and the interest rate paid on the asset-backed
securities outstanding.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 15, 2000, Linda McGee filed a lawsuit in the New Jersey
Circuit Court, Gloucester County, alleging that she, and a purported 48-state
class, were defrauded by a "conspiracy" among the Company and unspecified
automobile dealers. The alleged object of the conspiracy was to conceal from
plaintiff the minimum interest rate at which the Company would be willing to
finance a vehicle purchase, and thus to gain for the dealer the additional
amount that the Company is willing to pay for higher-rate Contracts. The
complaint seeks damages in an unspecified amount. The 48-state class alleged by
plaintiff is defined to exclude the states of Alabama and Tennessee, where
similar lawsuits against other auto finance companies have failed. The Company
has filed a motion to dismiss the complaint for failure to state a cognizable
claim, which motion has not yet been set for a hearing. The Company plans to
defend this matter vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as a part of this report.
27 Financial Data Schedule
During the quarter for which this report is filed, the Company filed no
reports on Form 8-K.
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 14, 2000 /s/ Charles E. Bradley, Jr.
------------------------------------------------
Charles E. Bradley, Jr. President and
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 14, 2000 /s/ James L. Stock
------------------------------------------------
James L. Stock, Sr. Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
21
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EXHIBIT INDEX
27 Financial Data Schedule
22
