SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-20608
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CONSUMER PORTFOLIO SERVICES, INC.
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(Name of small business issuer in its charter)
California 33-0459135
- --------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2 Ada, Irvine, California 92718
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (714) 753-6800
Former name, former address and former fiscal year, if changed since last
report: N/A
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 8, 1996, the registrant
had 13,541,842 common shares outstanding.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB JUNE 30, 1996
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of June 30, 1996 and
December 31, 1995.
Condensed consolidated statements of operations for the three
and six month periods ended June 30, 1996 and 1995.
Condensed consolidated statements of cash flows for the six
month period ended June 30, 1996 and 1995.
Notes to condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Signatures
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
----------- ------------
1996 1995
---- ----
ASSETS
Cash $ 71,064 $10,895,157
Contracts held for sale (note 3) 17,769,377 19,548,842
Servicing fees receivable 2,711,327 1,454,707
Investment in subordinated certificates (note 2) -- 2,174,666
Investments in credit enhancements (note 2) 40,904,265 30,477,793
Investment in NAB Asset Corporation 3,995,318 --
Excess servicing receivables 16,222,104 11,108,251
Furniture and equipment, net 687,966 548,535
Deferred financing costs 1,021,826 1,100,430
Other assets 972,690 569,944
----------- -----------
$84,355,937 $77,878,325
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 3,323,680 $ 1,341,905
Warehouse line of credit 6,840,812 7,500,000
Taxes payable 1,099,084 2,912,084
Deferred tax liability 1,643,254 1,643,254
Notes payable 20,000,000 20,000,000
Convertible subordinated debt 3,000,000 3,000,000
----------- -----------
35,906,830 36,397,243
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; 13,541,842 and 13,298,642
shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively 33,910,739 33,265,239
Retained earnings 14,538,368 8,215,843
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48,449,107 41,481,082
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$84,355,937 $77,878,325
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net gain on sale of contracts $ 5,582,236 $ 4,321,517 $10,080,067 $ 6,379,678
Servicing fees (note 4) 4,235,296 2,227,168 7,648,185 4,263,285
Interest 2,667,653 1,540,619 4,664,514 3,687,194
----------- ----------- ----------- -----------
12,485,185 8,089,304 22,392,766 14,330,157
----------- ----------- ----------- -----------
Expenses:
Interest 1,523,541 910,090 2,712,646 2,027,201
Employee costs 2,288,395 1,347,664 3,757,377 1,926,662
General and administrative 1,873,072 1,094,950 3,175,658 1,802,529
Marketing 293,992 48,701 616,668 111,813
Occupancy 176,688 105,953 403,333 201,784
Related party consulting fees 18,750 87,500 37,500 175,000
Depreciation 70,982 48,810 140,055 83,508
Provision for credit losses 722,516 370,350 930,984 549,681
----------- ----------- ----------- -----------
6,967,936 4,014,018 11,774,221 6,878,178
----------- ----------- ----------- -----------
Income before income taxes $ 5,517,249 $ 4,075,286 $10,618,545 $ 7,451,979
Income taxes 2,246,020 1,733,079 4,296,020 3,090,524
----------- ----------- ----------- -----------
Net income $ 3,271,229 $ 2,342,207 $ 6,322,525 $ 4,361,455
=========== =========== =========== ===========
Net income per common and common
equivalent share $ 0.22 $ 0.17 $ 0.43 $ 0.34
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares 14,767,623 13,520,738 14,714,687 12,332,003
=========== =========== =========== ===========
Fully diluted net income per common
and common equivalent share $ 0.22 $ 0.17 $ 0.42 $ 0.33
=========== =========== =========== ===========
Fully diluted weighted average number of
common and common equivalent share 15,247,623 14,707,510 15,194,687 13,622,931
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements
4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-----------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 6,322,525 $ 4,361,455
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 140,055 83,508
Amortization of excess servicing 2,594,863 972,755
Amortization of financing costs 78,604 --
Provision for credit losses 930,984 549,681
Gain on sale of contracts from excess
servicing receivables (7,708,716) (3,909,849)
Changes in operating assets and liabilities:
Purchases of contracts held for sale (160,327,070) (83,774,105)
Liquidation of contracts held for sale 161,175,551 97,132,983
Servicing fees receivable (1,256,620) (373,788)
Prepaid related party expenses -- (15,333)
Initial deposits to credit enhancement accounts (5,795,619) (8,198,473)
Excess servicing deposited to credit enhancement accounts (8,318,873) (3,818,843)
Release of cash from credit enhancement accounts 3,688,020 4,014,842
Deferred taxes -- (381,616)
Other assets (402,746) 382,298
Accounts payable and accrued expenses 1,981,775 2,368,733
Warehouse line of credit (659,188) (20,719,555)
Taxes payable (1,813,000) (1,279,368)
Deferred rent -- (17,123)
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Net cash used in operating activities: (9,369,455) (12,604,675)
Cash flows from investing activities:
Proceeds from sale of subordinated certificates 2,022,220 --
Investment in NAB Asset Corporation (3,995,318) --
Purchases of furniture and equipment (279,486) (269,245)
Payments received on subordinated certificates 152,446 --
------------- ------------
Net cash used in investing activities (2,100,138) (269,245)
Cash flows from financing activities:
Repayment of notes payable -- (5,000,000)
Issuance of common stock -- 13,304,550
Exercise of options and warrants 645,500 151,348
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Net cash provided by financing activities 645,500 8,455,898
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Decrease in cash (10,824,093) (4,418,022)
Cash at beginning of period 10,895,157 6,686,844
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Cash at end of period $ 71,064 $ 2,268,822
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ 2,366,470 $ 1,900,297
Income taxes $ 5,054,000 $ 4,840,050
See accompanying notes to condensed consolidated financial statements
5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The Company is engaged in the business of purchasing, selling and servicing
retail installment sales contracts ("Contracts") originated by automobile
dealers ("Dealers") that sell both new and used automobiles, light trucks and
passenger vans.
The unaudited condensed consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include all
adjustments which 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.
Results for the three and six month periods ended June 30, 1996 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. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's 10-KSB filing for the nine month period
ended December 31, 1995.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Alton Receivables Corp. ("Alton"),
CPS Receivables Corp. ("CPSRC") and CPS Funding Corp. ("CPSFC"). The
consolidated financial statements also include the accounts of SAMCO acceptance
Corp. ("SAMCO") an 80% owned subsidiary of the Company. All significant
intercompany transactions and balances have been eliminated.
On June 5, 1996, the Company purchased 38% of the outstanding common stock of
NAB Asset Corporation ("NAB") for approximately $4 million. The Company accounts
for its investment in NAB under the equity method. All significant intercompany
transactions and balances have been eliminated.
Note 2: Investments in Credit Enhancements
The Company is a party to various agreements with institutional investors and
investment banks for the sale of the Company's Contracts. The agreements call
for the Company to sell Contracts to one of its special purpose corporation
subsidiaries, either Alton or CPSRC (the "SPCs"), which subsequently transfer
the Contracts to various grantor trusts (the "Trusts") which then issue interest
bearing certificates which are purchased by institutional investors. The terms
of the agreements provide that simultaneous with each purchase of certificates
by the investor, the Company is required to provide a credit enhancement in the
form of a cash capital contribution to the SPC equal to a specified percentage
of the amount of the certificates purchased by the investor. The SPC then
deposits the initial cash deposit, and subsequent excess servicing cash flows as
required by the terms of the various agreements, to an account held by a trustee
(the "Spread Account") and pledges the cash to the Trust, which in turn invests
the cash in high quality liquid investment securities as defined by the various
agreements. In the securitizations since June 1995, the Company altered the
credit enhancement mechanism to create a subordinated class of asset-backed
securities ("B Piece") in order to reduce the size of the required initial
deposit to the Spread Account. The Company has sold four of five B Pieces
created in conjunction with the sale of the related senior certificates. Unsold
B Pieces are accounted for as available for sale and, when originated, are
treated as non-cash investing activities in the Company's consolidated statement
of cash flows. In the event that the cash flows generated by the Contracts
transferred to the Trust are insufficient to pay obligations of the Trust,
including principal or interest due to certificateholders or expenses of the
Trust, the trustee will draw an amount necessary from the Spread Accounts to pay
the obligations of the Trust. The agreements provide that the Spread Accounts
shall be maintained at a specified percent of the principal balance of the
certificates, which can be increased in the event delinquencies and/or losses
exceed certain specified levels. In the event delinquencies and/or losses on the
Contracts serviced exceed specified levels defined in certain of the Company's
securitization agreements, the terms of those securitizations may require the
transfer of servicing to another servicer. As principal payments are made to the
certificateholders, and if the Spread Accounts are in excess of the specified
percent of the principal balance of the certificates, the trustee shall release
to the SPC the portion of the pledged cash that is in excess of the specified
6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
percent of the principal balance of the certificates. Except for releases in
this manner, the cash in the Spread Accounts is restricted from use by the SPC
or the Company.
Note 3: Contracts Held for Sale
The Contracts which the Company purchases from dealers provide for finance
charges of approximately 20%, in most cases. Each Contract provides for full
amortization, equal monthly payments and can be fully prepaid by the borrower at
any time without penalty. The Company generally purchases the Contracts from
dealers at a discount, ranging from zero to ten percent, from the amount
financed under the Contract. Contracts are generally sold by the Company within
three months of their purchase, although they may be held longer. Contracts held
for sale are stated at the lower of aggregate cost or market value, net of
related reserves. At June 30, 1996 and 1995, the balance of Contracts held for
sale was made up of the following components:
June 30, December 31,
1996 1995
-------- ------------
Gross receivable balance $23,672,573 $24,694,964
Unearned finance charges (4,625,873) (3,820,267)
Dealer discounts (933,621) (1,054,776)
Deferred contract acquisition net costs 59,963 59,077
Reserves for losses (403,665) (330,156)
----------- -----------
Net contracts held for sale $17,769,377 $19,548,842
=========== ===========
Note 4: Servicing Fees
Servicing fees are reported as income when earned, net of related amortization
of excess servicing. Servicing costs are charged to expense as incurred.
Servicing fees for the three and six month periods ended June 30, 1996 and 1995,
included the following components:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
Gross contract servicing fees $ 5,683,083 $2,767,221 $10,243,048 $5,236,040
Amortization of excess servicing (1,447,787) (540,053) (2,594,863) (972,755)
----------- ---------- ----------- ----------
Net servicing fees $ 4,235,296 $2,227,168 $ 7,648,185 $4,263,285
=========== ========== =========== ==========
7
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Consumer Portfolio Services, Inc. (the "Company") and its subsidiaries engage
primarily in the business of purchasing, selling and servicing retail automobile
installment sale contracts ("Contracts") originated by Dealers located
throughout the U.S. and predominantly in California. The Company specializes in
Contracts with borrowers who generally would not be expected to qualify for
traditional financing such as that provided by commercial banks or automobile
manufacturers' captive finance companies.
The Company generates revenue, earnings and cash flow primarily through the
purchase and subsequent securitization of Contracts. In each securitization, the
Company sells a distinct portfolio of Contracts to a trust, which, in turn,
sells interest bearing certificates backed by the Contracts to institutional
investors. The terms of the securitization transactions generally provide for
the Company to earn a base servicing fee computed as a percentage of the
outstanding balance of the Contracts as compensation for its duties as servicer.
In addition, the Company is entitled to certain excess servicing fees which
represent collections on the Contracts in excess of the amounts necessary to pay
certificate purchasers' principal and interest and the expenses of the trust,
including, primarily, base servicing fees.
The Company also recognizes gains on its sales of Contracts. Gains are
determined based upon the difference between the sale proceeds for the portion
of Contracts sold and the Company's recorded investment in Contracts sold. The
Company allocates the recorded investment in the Contracts between the portion
of the Contracts sold and the portion retained based on the relative fair value
of those portions on the date of sale. In addition, the Company recognizes gains
attributable to its estimates of excess servicing receivables ("ESR") for each
pool of Contracts it securitizes. ESRs are determined by computing the
difference between the weighted average yield of the Contracts sold and the
yield to the purchaser, adjusted for the base servicing fee based on the
agreements between the Company and the purchaser. The resulting differential is
recorded as a gain in the period of the sale equal to the present value of the
estimated cash flows, net of any portion of the excess that may be due to the
purchaser and adjusted for anticipated prepayments, repossessions, liquidations
and other losses. To the extent that the actual future performance of the
Contracts results in less excess cash flows than the Company estimated, the
Company's ESRs will be adjusted at least quarterly, with corresponding charges
recorded against income in the period in which the adjustment is made. To the
extent that the actual cash flows exceed the Company's estimates the Company
will record additional servicing fees in the periods in which the excess cash
was collected.
Results of Operations
The three month period ended June 30, 1996, compared to the three month period
- ------------------------------------------------------------------------------
ended June 30, 1995
- -------------------
Revenues. During the three months ended June 30, 1996, revenues increased $4.4
million, or 54.3%, compared to the three month period ended June 30, 1995.
Servicing fees increased by $2.0 million, or 90.2%, and represented 33.9% of
total revenues. Servicing fees consist primarily of base and excess monthly
servicing fees earned on Contracts sold and serviced by the Company. The
increase in servicing fees is due to the Company's continued expansion of its
Contract purchase, sale and servicing activities. As of June 30, 1996, the
Company was earning servicing fees on 34,764 Contracts approximating $367.8
million compared to 19,495 Contracts approximating $205.0 million as of June 30,
1995. In addition to the $367.8 million in sold Contracts on which servicing
fees were earned, the Company was holding for sale and servicing an additional
$18.7 million in Contracts for an aggregate total servicing portfolio of $386.5
million.
Net gain on sale of Contracts, which includes (i) the excess of the amount
realized on the sale of Contracts over the Company's net cost, (ii) the net
present value of estimated excess servicing fees on sold Contracts, and (iii)
the recognition of deferred acquisition fees paid by Dealers net of related
acquisition costs, increased by $1.3 million, or 29.2%, and represented 44.7% of
total revenues for the three month period ended June 30, 1996. The increase in
gain on sale is largely due to the volume of Contracts which were sold in
8
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
the period. During the three month period ended June 30, 1996, the Company sold
$88.9 million in Contracts, compared to $49.3 million in the three month period
ended June 30, 1995.
Interest income on Contracts warehoused for sale increased by $1.1 million, or
73.2%, representing 21.4% of total revenues for the three month period ended
June 30, 1996. The increase is due to the increase in the volume of contracts
purchased. During the three month period ended June 30, 1996, the Company
purchased $88.0 million in Contracts from Dealers, compared to $42.2 million in
the three month period ended June 30, 1995.
Expenses. During the three month period ended June 30, 1996, operating expenses
increased $3.0 million, or 73.6%, compared to the three month period ended June
30, 1995. Employee costs increased by $940,731, or 69.8%, and represented 32.8%
of total operating expenses. The increase is due to the addition of staff
necessary to accommodate the Company's growth and certain increases in salaries
of existing staff. General and administrative expenses increased by $778,122, or
71.1% and represented 26.9% of total operating expenses. Increases in general
and administrative expenses included increases in telecommunications,
stationery, credit reports and other related items as a result of increases in
the volume of purchasing and servicing of Contracts.
Marketing expenses increased by $245,291, or 503.7%, and represented 4.2% of
total expenses. The Company uses a combination of independent contractor and
employee marketing representatives all of whom are compensated directly in
proportion to the number of Contracts the Company purchases from Dealers
serviced by the marketing representative. The fees paid to the marketing
representatives for Contracts purchased are combined with other direct costs
related to contract originations and are offset against acquisition fees paid by
Dealers. Any direct costs in excess of the acquisition fees paid by Dealers are
deferred and amortized, in the case of Contracts held for sale, or are offset
against any gain on sale in the case of Contracts sold. Additional increases in
marketing expense relate to other marketing expenses such as travel, promotion
and convention expenses.
Interest expense increased $613,451, or 67.4%, and represented 21.9% of total
operating expenses. During the three month period ended June 30, 1996, interest
expense consisted of interest accrued and/or paid on a $3.0 million convertible
note issued November 16, 1993, $20.0 million in subordinated debt securities
issued December 20, 1995, and a warehouse line of credit. Interest expense is
also impacted by the volume of Contracts held for sale as well as the Company's
cost of borrowed funds.
The six month period ended June 30, 1996, compared to the six month period ended
- --------------------------------------------------------------------------------
June 30, 1995
- -------------
Revenues. During the six months ended June 30, 1996, revenues increased $8.1
million, or 56.3%, compared to the six month period ended June 30, 1995.
Servicing fees increased by $3.4 million, or 79.4%, and represented 34.2% of
total revenues. Servicing fees consist primarily of base and excess monthly
servicing fees earned on Contracts sold and serviced by the Company. The
increase in servicing fees is due to the Company's continued expansion of its
Contract purchase, sale and servicing activities.
Net gain on sale of Contracts, which includes (i) the excess of the amount
realized on the sale of Contracts over the Company's net cost, (ii) the net
present value of estimated excess servicing fees on sold Contracts, and (iii)
the recognition of acquisition fees paid by Dealers and deferred by the Company,
increased by $3.7 million, or 58.0%, and represented 45.0% of total revenues for
the six month period ended June 30, 1996. The increase in gain on sale is
largely due to the volume of Contracts which were sold in the period. During the
six month period ended June 30, 1996, the Company sold $156.0 million in
Contracts, compared to $97.0 million in the six month period ended June 30,
1995.
Interest income on Contracts warehoused for sale increased by $1.0 million, or
26.5%, representing 20.8% of total revenues for the six month period ended June
30, 1996. The increase is due to the increase in the volume of contracts
purchased. During the six month period ended June 30, 1996, the Company
purchased $160.3 million in Contracts from Dealers, compared to $83.8 million in
the six month period ended June 30, 1995.
9
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Expenses. During the six month period ended June 30, 1996, operating expenses
increased $4.9 million, or 71.2%, compared to the six month period ended June
30, 1995. Employee costs increased by $1.8 million, or 95.0%, and represented
31.9% of total operating expenses. The increase is due to the addition of staff
necessary to accommodate the Company's growth and certain increases in salaries
of existing staff. General and administrative expenses increased by $1.4
million, or 76.2% and represented 27.0% of total operating expenses. Increases
in general and administrative expenses included increases in telecommunications,
stationery, credit reports and other related items as a result of increases in
the volume of purchasing and servicing of Contracts.
Marketing expenses increased by $504,855, or 451.5%, and represented 5.2% of
total expenses. The Company uses a combination of independent contractor and
employee marketing representatives all of whom are compensated directly in
proportion to the number of Contracts the Company purchases from Dealers
serviced by the marketing representative. The fees paid to the marketing
representatives for Contracts purchased are combined with other direct costs
related to contract originations and are offset against acquisition fees paid by
Dealers. Any direct costs in excess of the acquisition fees paid by Dealers are
deferred and amortized, in the case of Contracts held for sale, or are offset
against any gain on sale in the case of Contracts sold. Additional increases in
marketing expense relate to other marketing expenses such as travel, promotion
and convention expenses.
Interest expense increased $685,445, or 33.8%, and represented 23.0% of total
operating expenses. During the six month period ended June 30, 1996, interest
expense consisted of interest accrued and/or paid to Sun Life on a $3.0 million
convertible note issued November 16, 1993, $20.0 million in subordinated debt
securities issued December 20, 1995, and a warehouse line of credit. Interest
expense is also impacted by the volume of Contracts held for sale as well as the
Company's cost of borrowed funds.
Liquidity and Capital Resources
The Company's primary sources of cash include base and excess servicing fees it
earns on portfolios of Contracts it has previously sold, proceeds from sales of
Contracts in excess of its recorded investment in the Contracts, amortization
and release of investments in credit enhancement balances pledged in conjunction
with the securitization of its Contracts and borrower payments on Contracts held
for sale. The Company's primary uses of cash include its normal operating
expenses and the establishment and build up of Spread Accounts, used for credit
enhancements, to their maintenance levels.
Net cash used in operating activities was $9.4 million during the six month
period ended June 30, 1996, compared to net cash used of $12.6 during the six
month period ended June 30, 1995. Cash used for purchasing Contracts was $160.3
million, an increase of $76.6 million, or 91.4%, over cash used for purchasing
Contracts in the prior year's period. Cash provided from the liquidation of
Contracts was $161.2 million, an increase of $64.0 million, or 65.9%, over cash
provided from the liquidation of Contracts in the prior year's period.
The Company's cash requirements have been and will continue to be significant.
Each agreement under which the Company has securitized and sold its Contracts
required the Company to make a significant initial cash deposit, for purposes of
credit enhancement, to a Spread Account which is pledged to support the related
Asset Backed Securities ("ABS"), and is invested in high quality liquid
securities. Excess cash flows from the securitized Contracts are deposited into
the Spread Accounts until such time as the Spread Account balance reaches a
specific percent of the outstanding balance of the related ABS. In its most
recent securitizations, the Company established a subordinated B Piece in order
to reduce the size of the required initial deposit to the Spread Accounts. The
Company has sold four of five B Pieces created in conjunction with the sale of
the related senior certificates.
During the six month period ended June 30, 1996, cash used for initial deposits
to Spread Accounts was $5.8 million, a decrease of $2.4 million, or 29.3%, from
the amount of cash used for initial deposits to Spread Accounts in the prior
year's period. The decrease is due to the fact that the structure of the current
period Contract sales, including establishment of the B Piece, results in less
cash required for initial deposits to Spread Accounts compared to the prior
period. Cash from excess servicing deposited to Spread
10
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Accounts for the six month period ended June 30, 1996, was $8.3 million, an
increase of $4.5 million, or 117.8%, over cash from excess servicing deposited
to Spread Accounts in the prior year's period. Cash released from Spread
Accounts for the six month period ended June 30, 1996, was $3.7 million, a
decrease of $326,822, or 8.1%, over cash released from Spread Accounts in the
prior year's period. Changes in deposits to and releases from Spread Accounts
are impacted by the relative size and seasoning of the various pools of sold
Contracts that make up the Company's servicing portfolio.
Cash flows are impacted by the use of the credit line (the "Line") which is in
turn is impacted by the amount of Contracts the Company holds for sale. At June
30, 1996, the Line had an outstanding balance of $6.8 million compared to $10.2
million at June 30, 1995. In June 1995, the Company entered into two new
agreements which restructured the Line and increased the maximum available
amount to $100.0 million. The primary agreement provides for contractss by
Redwood Receivables Corporation ("Redwood") to the Company, to be funded by
commercial paper issued by Redwood and secured by Contracts pledged periodically
by the Company. The Redwood facility provides for a maximum of $100.0 million of
advances to the Company, with interest at a variable rate tied to prevailing
commercial paper rates. When the Company wishes to securitize these Contracts, a
substantial part of the proceeds received from investors is paid to Redwood,
which simultaneously releases the pledged Contracts for transfer to a pass-
through securitization trust. The second agreement is a standby line of credit
with GECC, also with a $100.0 million maximum, which the Company may use only if
and to the extent that Redwood does not provide funding as described above. The
GECC line of credit is secured by Contracts and substantially all other assets
of the Company. Both agreements extend through November 30, 1998. The two
agreements are viewed as a single short-term warehouse line of credit, with
advances varying according to the amount of pledged Contracts.
The Company anticipates the funds available under the Line, proceeds from the
sale of Contracts and cash from operations will be sufficient to satisfy the
Company's estimated cash requirements for the next 12 months, assuming that the
Company continues to have a means by which to sell its warehoused Contracts. If
for any reason the Company is unable to sell its Contracts, or if the Company's
available cash otherwise proves to be insufficient to fund operations (because
of future changes in the industry, general economic conditions, unanticipated
increases in expenses, or other factors), the Company may be required to seek
additional funding.
The Company's existing facility and data processing and management information
systems currently have some excess capacity. The Company anticipates that it
will incur certain limited capital expenditures during the next twelve months as
its business continues to grow. In addition, the terms of the Company's lease
agreement allows for the acquisition of an additional 7,000 square feet of
contiguous space on November 1, 1996.
The descriptions of the Company's business and activities set forth in this Form
10-QSB and in other past and future reports and announcements by the Company may
contain forward-looking statements and assumptions regarding the future
activities and results of operations of the Company. Actual results may be
adversely affected by various factors including the following: increases in
unemployment or other changes in domestic economic conditions which adversely
affect the sales of new and used automobiles and may result in increased
delinquencies, foreclosures and losses on Contracts; adverse economic conditions
in geographic areas in which the Company's business is concentrated; changes in
interest rates, adverse changes in the market for securitized receivables pools,
or a substantial lengthening of the Company's warehousing period, each of which
could restrict the Company's ability to obtain cash for new Contract
originations and purchases; increases in the amounts required to be set aside in
Spread Accounts or to be expended for other forms of credit enhancement to
support future securitizations; the reduction or unavailability or warehouse
lines of credit which the Company uses to accumulate Contracts for
securitization transactions; increased competition from other automobile finance
sources; reduction in the number and amount of acceptable Contracts submitted to
the Company by its automobile dealer network; changes in government regulations
affecting consumer credit; and other economic, financial and regulatory factors
beyond the Company's control.
11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB JUNE 30,1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this Filing, the Company was not involved in any material
litigation in which it is the defendant. The Company regularly initiates legal
proceedings as a plaintiff in connection with its routine collection activities.
12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB JUNE 30, 1996
SIGNATURES
- ----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Consumer Portfolio Services, Inc.
(Registrant)
Date: August 8, 1996 /s/ Charles E. Bradley, Jr.
----------------------------------------
Charles E. Bradley, Jr.
Director, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 1996 /s/ Jeffrey P. Fritz
----------------------------------------
Jeffrey P. Fritz
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
13
5
3-MOS
DEC-31-1996
APR-01-1996
JUN-30-1996
71,064
0
20,480,704
0
0
20,551,768
687,966
0
84,355,937
11,263,576
20,000,000
0
0
33,910,739
14,538,368
84,355,937
0
12,485,185
0
6,967,936
0
722,516
1,523,541
5,517,249
2,246,020
3,271,229
0
0
0
3,271,229
.22
.22
