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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 MARCH 31, 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 May 11, 2000, the registrant had 20,314,501 common shares outstanding.
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
<CAPTION>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 31, 2000 and December 31, 1999. 3
Condensed consolidated statements of operations for the three month periods
ended March 31, 2000 and 1999. 4
Condensed consolidated statements of cash flows for the three month periods
ended March 31, 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 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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PART I - FINANCIAL INFORMATION
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, December 31,
------------ ------------
2000 1999
---- ----
ASSETS
Cash $ 4,699 $ 1,640
Restricted cash -- 1,684
Contracts held for sale (note 2) 3,482 2,421
Servicing fees receivable 8,444 9,919
Residual interest in securitizations (note 3) 146,335 172,530
Furniture and equipment, net 2,751 3,040
Taxes receivable 11,976 4,914
Deferred financing costs 2,862 2,488
Investment in unconsolidated affiliates 271 755
Related party receivables 912 901
Deferred interest expense (note 7) 10,362 10,720
Other assets 11,801 12,553
------------ ------------
$ 203,895 $ 223,565
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses $ 12,453 $ 13,637
Deferred tax liability 6,318 6,318
Capital lease obligations 1,338 1,506
Notes payable 3,635 4,006
Senior secured debt 46,000 23,161
Subordinated debt 39,000 69,000
Related party debt 21,500 21,500
------------ ------------
130,244 139,128
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; 20,314,501 and 20,107,501 shares
issued and outstanding at March 31, 2000
and December 31, 1999, respectively 62,732 62,421
Retained earnings 10,919 22,016
------------ ------------
73,651 84,437
------------ ------------
$ 203,895 $ 223,565
============ ============
See accompanying notes to condensed consolidated financial statements
3
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Consumer Portfolio Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
March 31,
------------ ------------
2000 1999
---- ----
REVENUES:
Gain (loss) on sale of contracts, net (note 4) $ 4,346 $ (1,560)
Interest income (note 5) (8,957) 14,601
Servicing fees 5,095 7,918
Other loss (110) (135)
------------ ------------
374 20,824
------------ ------------
EXPENSES:
Employee costs 6,793 8,244
General and administrative 3,528 5,756
Interest 4,779 7,268
Marketing 1,520 1,882
Occupancy 958 710
Depreciation and amortization 301 533
Related party consulting fees 12 98
------------ ------------
17,891 24,491
------------ ------------
Loss before income taxes (17,517) (3,667)
Income tax benefit (6,420) (1,540)
------------ ------------
Net loss $ (11,097) $ (2,127)
============ ============
Loss per share (note 6):
Basic $ (0.55) $ (0.14)
Diluted $ (0.55) $ (0.14)
Number of shares used in computing
loss per share (note 6):
Basic 20,144 15,659
Diluted 20,144 15,659
See accompanying notes to condensed consolidated financial statements
4
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<TABLE>
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Three Months Ended
March 31,
------------ ------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,097) $ (2,127)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 301 533
Amortization of NIRs 5,256 10,270
Amortization of deferred financing costs 165 148
Provision for credit losses 400 1,378
Equity in net loss of investment in unconsolidated affiliates 484 319
Net releases from (deposits into) trusts 17,992 (14,567)
Amortization of over-collateralization 2,947 2,600
Changes in assets and liabilities:
Restricted cash 1,684 --
Purchases of contracts held for sale (157,620) (158,186)
Liquidation of contracts held for sale 156,159 14,498
Other assets 2,884 (1,129)
Accounts payable and accrued expenses (1,184) 17,828
Warehouse lines of credit -- 125,775
Taxes payable/receivable (7,062) (1,570)
------------ ------------
Net cash provided by (used in) operating activities 11,309 (4,230)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net related party receivables (11) 1,545
Purchases of furniture and equipment -- (17)
------------ ------------
Net cash provided by (used in) investing activities (11) 1,528
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in senior secured debt 16,000 --
Issuance of notes payable -- 1,395
Repayment of senior secured debt (23,161) --
Repayment of capital lease obligations (168) (145)
Repayment of notes payable (371) (106)
Payment of financing costs (539) --
------------ ------------
Net cash provided by (used in) financing activities (8,239) 1,144
------------ ------------
Increase (decrease) in cash 3,059 (1,558)
Cash at beginning of period 1,640 1,940
------------ ------------
Cash at end of period $ 4,699 $ 382
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,957 $ 6,969
Income taxes $ 642 $ 32
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock upon restructuring of debt $ 311 $ --
Reclassification of subordinated debt $ 30,000 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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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 month period ended March 31, 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 purchases and sells 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. 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 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 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. 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.
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 and are
also a component of the gain on sale.
6
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FLOW PURCHASE PROGRAM
From May 1999 through the date of this report, the Company has
purchased Contracts only 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. 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
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.
7
<PAGE>
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). 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.
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.
(2) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
March 31, December 31,
2000 1999
------------ ------------
(in thousands)
Gross receivable balance.......................... $ 4,309 $ 3,857
Unearned finance charges.......................... (57) (136)
Deferred acquisition fees and discounts (497) (437)
Allowance for credit losses....................... (273) (863)
------------ ------------
Net contracts held for sale....................... $ 3,482 $ 2,421
============ ============
8
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(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
March 31, December 31,
2000 1999
------------ ------------
(in thousands)
Cash, commercial paper, US government
securities and other qualifying
investments (Spread Account)...................... $ 108,167 $ 126,126
NIRs.............................................. 13,934 19,190
Over collateralization............................ 24,151 27,098
Investment in subordinated certificates .......... 83 116
------------ ------------
Residual interest in securitizations:............. $ 146,335 $ 172,530
============ ============
The following table presents the activity of the NIRs:
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
(in thousands)
Balance, beginning of period...................... $ 19,190 $ 54,800
Amortization of NIRs.............................. (5,256) (10,270)
------------ ------------
Balance, end of period............................ $ 13,934 $ 44,530
============ ============
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:
March 31, December 31,
2000 1999
------------ ------------
(in thousands)
Undiscounted estimated credit losses.............. $ 60,051 $ 77,480
============ ============
Servicing subject to recourse provisions.......... $ 685,768 $ 813,061
============ ============
Undiscounted estimated credit losses as
percentage of servicing subject to
recourse provisions............................. 8.76% 9.53%
============ ============
9
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(4) GAIN ON SALE OF CONTRACTS
The following table presents components of net gain (loss) on sale of
Contracts:
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
(in thousands)
Gains (loss) recognized on sale................... $ 4,847 $ --
Deferred acquisition fees and discounts........... 9 --
Expenses related to sales......................... (110) (182)
Provision for credit losses....................... (400) (1,378)
------------ ------------
Net gain (loss) on sale of contracts.............. $ 4,346 $ (1,560)
============ ============
(5) INTEREST INCOME
The following table presents the components of interest income:
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
(in thousands)
Interest on Contracts held for sale............... $ 323 $ 12,659
Residual interest income net of amortization
of OC accounts and Spread Accounts.............. (4,024) 12,212
Amortization of NIRs.............................. (5,256) (10,270)
------------ ------------
Net interest income (loss)........................ $ (8,957) $ 14,601
============ ============
(6) LOSS PER SHARE
Diluted loss per share for the three month periods ended March 31, 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 month
periods ended March 31, 2000 and 1999:
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
(in thousands)
Weighted average number of common shares
outstanding during the period used to compute
basic loss per share............................ 20,144 15,659
Number of common shares used to compute diluted
loss per share.................................. 20,144 15,659
============ ============
If the anti-dilutive effects of common stock equivalents were not
considered, additional shares included in diluted loss per share calculation for
the three month periods ended March 31, 2000 and 1999, would have included an
additional 1.7 million and 2.2 million shares, 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 24.2 million and 20.2 million diluted shares for the
three month periods ending March 31, 2000 and 1999, respectively.
10
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(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 of credit, 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 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. 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, 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.
Net cash provided by operating activities was $11.3 million for the
three month period ended March 31, 2000, compared to net cash used in operating
activities of $4.2 million for the same period in the prior year. Net cash
released from Trusts was $18.0 million for the three month period ended March
31, 2000, as compared to net cash deposited into Trusts of $14.6 million for the
same period in the prior year.
During the three month periods ended March 31, 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 three month period ended March 31, 2000, was
$1.0 million, a decrease of $11.5 million, or 92%, from cash used for subsequent
deposits to Spread Accounts for the same period in the prior year. Cash released
from Spread Accounts for the three month period ended March 31, 2000, was $19.0
million, as compared with $577,000 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.
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 have been increased on 16 of
the Company's 18 remaining 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.)
11
<PAGE>
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. Increased specified
levels for the Spread Accounts have been in effect from time to time in the
past. 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 higher levels. As a result of the
increased specified levels applicable to the Spread Accounts, approximately
$30.4 million of cash that would otherwise have been available to the Company
had been delayed and retained in the Spread Accounts as of March 31, 2000.
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 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 capital represented 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 these transactions were subsequently modified in March
2000, as discussed below.
In March 2000, the Company and LLCP restructured the outstanding
indebtedness of the Company in favor of LLCP, which had been in default. In the
restructuring (i) all existing defaults were waived or cured, (ii) LLCP lent an
additional $16 million ("Tranche A") to the Company, (iii) the proceeds of that
loan (net of fees and expenses) were used to repay all of the Company's
outstanding senior secured indebtedness, (iv) the outstanding $30 million of
subordinated indebtedness in favor of LLCP was exchanged for senior indebtedness
("Tranche B"), (v) the Company granted a blanket security interest in favor of
LLCP, to secure both Tranche A and Tranche B, and (vi) LLCP released SFSC and
its affiliates (including Mr. Bradley, Sr., Mr. Bradley, Jr., and Mr. Poole,
directors of the Company) of any liability for failure to invest $15 million in
the Company. Tranche A is due July 2001, and bears interest at 12.50% per annum;
Tranche B is due November 2003, and bears interest at 14.50% per annum. In each
case the interest rate is subject to increase by 2.0% in the event of a default
by the Company. In the restructuring, the Company paid a fee of $325,000, paid
accrued default interest of $300,000, issued 103,500 shares of common stock to
LLCP, and paid out-of-pocket expenses of approximately $214,000. The shares of
common stock issued were valued at approximately $155,000, which is included in
deferred interest expense to be amortized over the remaining life of the related
debt. The terms of the transaction were determined by negotiation between the
Company and LLCP. Also in March 2000, the Company's board of directors
authorized the issuance of 103,500 shares of the Company's common stock to SFSC
in connection with a $1.5 million promissory note issued by the Company to SFSC
in August 1999. The shares of common stock issued were valued at approximately
$155,000, which is included in deferred interest expense to be amortized over
the remaining life of the related debt.
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. 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
exercise price of the warrants is subject to certain anti-dilution adjustments.
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The amendment agreement mentioned above (the "Amendment") fixes the
amount of cash to be retained in the Spread Accounts for 16 of the Company's 18
remaining 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 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, and subsequently to purchasing Contracts only on a flow
basis. Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in "flow purchase" arrangements with
third parties. Under the flow purchase arrangements, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party. For
the three month period ending March 31, 2000, the Company purchased $157.6
million of Contracts on a flow basis, compared to $158.0 million of Contracts
that were purchased and held for sale during 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.
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, which became effective on November 3, 1999. 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.
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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.
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, as discussed under the heading "Liquidity and Capital Resources."
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the 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; 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.
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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). 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.
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 Certificate holders 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
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.
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RESULTS OF OPERATIONS
The three month period ended March 31, 2000 compared to the three month period
- ------------------------------------------------------------------------------
ended March 31, 1999
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REVENUES. During the three months ended March 31, 2000, revenues
decreased $20.5 million, or 98.2%, compared to the three month period ended
March 31, 1999. Gain on sale of Contracts increased by $5.9 million, from a loss
of $1.6 million to a gain of $4.3 million. The primary reason for the increase
is the fees received from selling Contracts on a flow basis. During the three
months ended March 31, 2000, the Company sold $154.5 million of Contracts on a
flow basis, compared to not selling any Contracts for the same period in the
prior year. Those sales resulted in $4.8 million of fees earned. Gain on sale of
Contracts is reduced by approximately $110,000 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
periods ended March 31, 2000 and 1999, the Company charged against gain on sale
$400,000 and $1.4 million, respectively, of provision for losses on Contracts
held for sale.
Interest income decreased by $23.6 million, from a $14.6 million of
interest income to $9.0 million of negative interest income. The primary reason
for the decrease is that fewer Contracts are being held for sale. During the
three months ended March 31, 1999, the Company held for sale an average of
$253.6 million compared to an average of $3.1 million for the three months ended
March 31, 2000. In addition to the reduction in interest income earned on
Contracts held for sale, residual interest income also decreased from a positive
$12.2 million for the three month period ended March 31, 1999, to a negative
$4.0 million for the three month period ended March 31, 2000. The reduction in
residual interest income is due to the Company not completing a securitization
transaction during 1999, or during the three month period ended March 31, 2000.
It has been the Company's experience that residual interest income is highest in
the early months of a new securitization. Additionally, several of the Trusts
are experiencing their peak loss periods or have amortized to such an extent
that there is minimal interest spread remaining, the result of which is
insufficient interest spread to pay all the obligations of such Trusts and have
any residual cash remaining (residual interest income).
Servicing fees decreased by approximately $2.8 million, or 35.7%. The
decrease in servicing fees is due to the decrease in the servicing portfolio. As
of March 31, 2000, the Company was earning servicing fees on 82,317 sold
Contracts with aggregate outstanding principal balances approximating $685.8
million, compared to 119,699 Contracts with aggregate outstanding principal
balances approximating $1,219.2 million as of March 31, 1999. In addition to the
$685.8 million in sold Contracts, on which servicing fees were earned, the
Company was holding for sale and servicing an additional $6.7 million in
Contracts, for an aggregate total servicing portfolio at March 31, 2000, of
$692.5 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 March 31, 2000, operating
expenses decreased $6.6 million, or 26.9%, compared to the three month period
ended March 31, 1999. Employee costs decreased by $1.5 million, or 17.6%, and
represented 38.0% 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 $2.2
million, or 38.7%, and represented 19.7% of total operating expenses. Occupancy
expenses increased $248,000, or 34.9%, and represented 5.4% of total operating
expenses. The primary reason for the increase is due to additional property
taxes paid on the Company's headquarters building that were not paid in the
prior year's period.
Interest expense decreased $2.5 million, or 34.2%, and represented
26.7% 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 certain senior secured debt.
The warehouse lines of credit were paid in full and terminated in the second and
third quarters of 1999. Accordingly, there was no outstanding warehouse
indebtedness in the quarter ended March 31, 2000, compared to an outstanding
balance of $277.6 million at March 31, 1999. Although senior secured debt
increased from $33.0 million at March 31, 1999, to $46.0 million at March 31,
2000, $30.0 million of the balance at March 31, 2000, represents former
subordinated debt that was exchanged for senior secured debt in a debt
restructuring completed in March 2000, as discussed below in "Liquidity and
Capital Resources." Therefore, the comparative decrease in senior secured debt
from March 31, 1999, to March 31, 2000, was $17.0 million.
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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 of credit, 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 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. 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, 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.
Net cash provided by operating activities was $11.3 million for the
three month period ended March 31, 2000, compared to net cash used in operating
activities of $4.2 million for the same period in the prior year. Net cash
released from Trusts was $18.0 million for the three month period ended March
31, 2000, as compared to net cash deposited into Trusts of $14.6 million for the
same period in the prior year.
During the three month periods ended March 31, 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 three month period ended March 31, 2000, was
$1.0 million, a decrease of $11.5 million, or 92%, from cash used for subsequent
deposits to Spread Accounts for the same period in the prior year. Cash released
from Spread Accounts for the three month period ended March 31, 2000, was $19.0
million, as compared with $577,000 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.
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 Servicing
Agreements. Accordingly, pursuant to the Servicing 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
Servicing Agreements, the specified levels have been increased on 16 of the
Company's 18 remaining Trusts. Until the November 1999 effectiveness of an
amendment to the Servicing Agreement, 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.)
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 recurring basis by the Certificate
Insurer with respect to all of the Trusts. Increased specified levels for the
Spread Accounts have been in effect from time to time in the past. 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 higher levels. As a result of the increased
specified levels applicable to the Spread Accounts, approximately $30.4 million
of cash that would otherwise have been available to the Company had been delayed
and retained in the Spread Accounts as of March 31, 2000. A portion of such cash
was subsequently released to the Company as discussed below.
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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 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 capital represented 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 these transactions were subsequently modified in March
2000, as discussed below.
In March 2000, the Company and LLCP restructured the outstanding
indebtedness of the Company in favor of LLCP, which had been in default. In the
restructuring(i) all existing defaults were waived or cured, (ii) LLCP lent an
additional $16 million ("Tranche A") to the Company, (iii) the proceeds of that
loan (net of fees and expenses) were used to repay all of the Company's
outstanding senior secured indebtedness, (iv) the outstanding $30 million of
subordinated indebtedness in favor of LLCP was exchanged for senior indebtedness
("Tranche B"), (v) the Company granted a blanket security interest in favor of
LLCP, to secure both Tranche A and Tranche B, and (vi) LLCP released SFSC and
its affiliates (including Mr. Bradley, Sr., Mr. Bradley, Jr., and Mr. Poole,
directors of the Company) of any liability for failure to invest $15 million in
the Company. Tranche A is due July 2001, and bears interest at 12.50% per annum;
Tranche B is due November 2003, and bears interest at 14.50% per annum. In each
case the interest rate is subject to increase by 2.0% in the event of a default
by the Company. In the restructuring, the Company paid a fee of $325,000, paid
accrued default interest of $300,000, issued 103,500 shares of common stock to
LLCP, and paid out-of-pocket expenses of approximately $214,000. The shares of
common stock issued were valued at approximately $155,000, which is included in
deferred interest expense to be amortized over the remaining life of the related
debt. The terms of the transaction were determined by negotiation between the
Company and LLCP. Also in March 2000, the Company's board of directors
authorized the issuance of 103,500 shares of the Company's common stock to SFSC
in conjunction with a $1.5 million promissory note issued by the Company to SFSC
in August 1999. The shares of common stock issued were valued at approximately
$155,000, which is included in deferred interest expense to be amortized over
the remaining life of the related debt.
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. 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
exercise price of the warrants is subject to certain anti-dilution adjustments.
The amendment agreement mentioned above (the "Amendment") fixes the
amount of cash to be retained in the Spread Accounts for 16 of the Company's 18
remaining 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.
18
<PAGE>
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, and subsequently to purchasing Contracts only on a flow
basis. Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in "flow purchase" arrangements with
third parties. Under the flow purchase arrangements, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party. For
the three month period ending March 31, 2000, the Company purchased $157.6
million of Contracts on a flow basis, compared to $158.0 million of Contracts
that were purchased and held for sale during 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.
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, which became effective on November 3, 1999. 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.
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 has identified potential lenders, which have expressed some
degree of interest in such transactions, 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.
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, or a substantial lengthening of
the Company's warehousing period, each of which could restrict the Company's
ability to obtain cash for new Contract originations and purchases; increases in
the amounts required to be set aside in Spread Accounts or to be expended for
19
<PAGE>
other forms of credit enhancement to support future securitizations; the
reduction or unavailability of warehouse lines of credit which the Company uses
to accumulate Contracts for securitization transactions; increased competition
from other automobile finance sources; reduction in the number and amount of
acceptable Contracts submitted to the Company by its automobile Dealer network;
changes in government regulations affecting consumer credit; and other economic,
financial and regulatory factors beyond the Company's control.
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 Contracts for sale. All Contracts
purchased are 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as a part of this report:
27 Financial Data Schedule
(b) During the quarter for which this report is filed, the Company filed no
reports on Form 8-K.
20
<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: May 15, 2000 /S/ Charles E. Bradley, Jr.
---------------------------------------------
Charles E. Bradley, Jr., President and
Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 15, 2000 /S/ James L. Stock
---------------------------------------------
James L. Stock, Senior Vice President -
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
21
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