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 September 30, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Ada, Irvine, California 92618
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(Address of principal (Zip Code)
executive offices)
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
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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
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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 November 13, 1996, the
registrant had 13,647,842 common shares outstanding.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB SEPTEMBER 30, 1996
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30, 1996
and December 31, 1995.
Condensed consolidated statements of operations for the three
and nine month periods ended September 30, 1996 and 1995.
Condensed consolidated statements of cash flows for the nine
month periods ended September 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 4. Submission of Matters to a Vote of Security Holders
Signatures
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
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1996 1995
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ASSETS
Cash $ 145,109 $ 10,895,157
Contracts held for sale (note 3) 17,772,503 19,548,842
Servicing fees receivable 2,732,971 1,454,707
Investment in subordinated certificates (note 2) -- 2,174,666
Investments in credit enhancements (note 2) 46,525,564 30,477,793
Excess servicing receivables 19,110,958 11,108,251
Furniture and equipment, net 630,520 548,535
Deferred financing costs 982,524 1,100,430
Other assets 5,528,007 569,944
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$ 93,428,156 $ 77,878,325
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 4,526,558 $ 1,341,905
Warehouse line of credit 9,838,856 7,500,000
Taxes payable 2,091,084 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
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41,099,752 36,397,243
Shareholders' Equity
Preferred stock, $1 par value; authorized
5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares; 3,415,000
shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 13,556,842 and
13,298,642 shares issued and outstanding
at September 30, 1996 and December 31,
1995, respectively 33,955,739 33,265,239
Retained earnings 18,372,665 8,215,843
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52,328,404 41,481,082
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$ 93,428,156 $ 77,878,325
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See accompanying notes to condensed financial statements
3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
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1996 1995 1996 1995
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Revenues:
Net gain on sale of contracts $ 5,784,375 $ 3,311,996 $ 15,864,442 $ 9,941,674
Servicing fees (note 4) 5,290,961 2,842,399 12,939,146 7,105,684
Interest 2,683,190 1,697,796 7,347,704 5,384,990
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13,758,526 7,852,191 36,151,292 22,432,348
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Expenses:
Interest 1,597,213 808,036 4,309,859 2,835,237
Employee costs 2,363,903 1,160,601 6,121,280 3,087,263
General and administrative 1,772,486 805,140 4,948,144 2,607,669
Marketing 500,383 346,284 1,117,051 708,097
Occupancy 138,676 69,627 542,009 271,411
Related party consulting fees 18,750 87,500 56,250 262,500
Depreciation and amortization 67,472 60,390 207,527 143,898
Provision for credit losses 848,346 338,950 1,779,330 888,631
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7,307,229 3,676,950 19,081,450 10,804,706
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Income before income taxes 6,451,297 4,175,663 17,069,842 11,627,642
Income taxes 2,617,000 1,643,018 6,913,020 4,733,542
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Net income $ 3,834,297 $ 2,532,645 $ 10,156,822 $ 6,894,100
============ ============ ============ ============
Net income per common and common
equivalent share $ 0.26 $ 0.18 $ 0.69 $ 0.54
============ ============ ============ ============
Weighted average number of common
and common equivalent shares 14,828,719 13,915,172 14,746,930 12,837,934
============ ============ ============ ============
Fully diluted net income per common
and common equivalent share $ 0.25 $ 0.17 $ 0.67 $ 0.49
============ ============ ============ ============
Fully diluted weighted average number
of common and common equivalent shares 15,520,106 14,917,746 15,452,640 14,001,510
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
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1996 1995
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Cash flows from operating activities:
Net income $ 10,156,822 $ 6,894,100
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 207,527 143,898
Amortization of excess servicing receivables 4,401,858 1,617,628
Amortization of deferred financing costs 117,906 --
Provision for credit losses 1,779,330 888,631
Gain on sale of contracts from excess
servicing receivables (12,404,565) (6,198,271)
Loss on investment in NAB Asset Corporation 124,000 --
Changes in operating assets and liabilities:
Purchases of contracts held for sale (254,322,070) (114,803,980)
Liquidation of contracts held for sale 254,319,079 117,891,066
Servicing fees receivable (1,278,264) (1,099,273)
Prepaid related party expenses -- (30,834)
Initial deposits to credit enhancement accounts (9,020,145) (7,262,503)
Excess servicing deposited to credit
enhancement accounts (13,274,535) (6,721,998)
Release of cash from credit enhancement
accounts 6,246,909 8,087,419
Deferred taxes -- (381,616)
Other assets (1,082,063) 304,931
Accounts payable and accrued expenses 3,184,653 288,795
Warehouse line of credit 2,338,856 (15,416,779)
Taxes payable (821,000) 329,681
Deferred rent -- (33,677)
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Net cash used in operating activities: (9,325,702) (15,502,782)
Cash flows from investing activities:
Proceeds from sale of subordinated certificates 2,022,220 --
Investment in NAB Asset Corporation (4,000,000) --
Purchases of furniture and equipment (289,512) (381,616)
Payments received on subordinated certificates 152,446 118,764
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Net cash used in investing activities (2,114,846) (262,852)
Cash flows from financing activities:
Issuance of note to related party -- 2,000,000
Repayment of notes payable -- (5,000,000)
Issuance of common stock -- 13,304,550
Exercise of options and warrants 690,500 227,764
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Net cash provided by financing activities 690,500 10,532,314
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Decrease in cash (10,750,048) (5,233,320)
Cash at beginning of period 10,895,157 6,686,844
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Cash at end of period $ 145,109 $ 1,453,524
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Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ 3,766,359 $ 2,568,007
Income taxes $ 6,679,000 $ 4,844,050
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock upon conversion
of debt $ -- $ 2,000,000
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 nine month periods ended September 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 condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 10-KSB report
for the nine month transition 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") and LINC Acceptance Company, LLC ("LINC") both of which are 80%
owned subsidiaries 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 investment in
NAB is included in other assets and is accounted for by the Company under the
equity method. All significant intercompany transactions and balances have been
eliminated.
Included in other assets is a loan to a subsidiary of NAB. At September 30,
1996, the balance of the loan was approximately $600,000.
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 five of six 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 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 certificate
holders or expenses of the Trust, the trustee will draw an amount necessary from
the Spread Accounts to pay the
6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 are increased in cases where delinquencies, repossessions or
losses exceed certain specified levels. In the event delinquencies,
repossessions or losses on the Contracts serviced exceed specified higher levels
defined in certain of the Company's securitization agreements, the terms of
those securitizations may allow for the transfer of servicing to another
servicer. As principal payments are made to the certificate holders, 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 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% per annum, 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. In addition, the Company generally charges
the Dealer a fee of $200 per Contract purchased. 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 September 30, 1996 and December 31,
1995, the balance of Contracts held for sale was made up of the following
components:
September 30, December 31,
1996 1995
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Gross receivable balance $ 23,351,660 $ 24,694,964
Unearned finance charges (4,327,496) (3,820,267)
Dealer discounts (956,968) (1,054,776)
Deferred contract acquisition net costs 61,127 59,077
Reserves for losses (355,820) (330,156)
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Net contracts held for sale $ 17,772,503 $ 19,548,842
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7
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine month periods ended September 30, 1996 and
1995, included the following components:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------------
1996 1995 1996 1995
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Gross contract servicing fees $ 7,097,956 $ 3,487,272 $ 17,341,004 $ 8,723,312
Amortization of excess servicing (1,806,995) (644,873) (4,401,858) (1,617,628)
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Net servicing fees $ 5,290,961 $ 2,842,399 $ 12,939,146 $ 7,105,684
============= ============ ============= =============
8
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. 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 September 30, 1996 compared to the three month
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period ended September 30, 1995
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Revenues. During the three months ended September 30, 1996, revenues increased
$5.9 million, or 75.2%, compared to the three month period ended September 30,
1995. Servicing fees increased by $2.4 million, or 86.1%, and represented 38.5%
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 September 30, 1996, the
Company was earning servicing fees on 40,216 Contracts approximating $426.4
million compared to 22,062 Contracts approximating $233.2 million as of
September 30, 1995. In addition to the $426.4 million in sold Contracts on
which servicing fees were earned, the Company was holding for sale and servicing
an additional $18.9 million in Contracts for an aggregate total servicing
portfolio of $445.3 million.
Net gain on sale of Contracts 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. Net
gain on sale of Contracts increased by $2.5 million, or
9
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
74.6 %, and represented 42.0% of total revenues for the three month period ended
September 30, 1996. The increase in gain on sale is largely due to the volume of
Contracts which were sold in the period. During the three month period ended
September 30, 1996, the Company sold $92.1 million in Contracts, compared to
$45.0 million in the three month period ended September 30, 1995.
Interest income on Contracts held for sale increased by $1.0 million, or 58.0%,
representing 19.5% of total revenues for the three month period ended September
30, 1996. The increase is due to the increase in the volume of contracts
purchased and held for sale. During the three month period ended September 30,
1996, the Company purchased $94.0 million in Contracts from Dealers, compared to
$48.3 million in the three month period ended September 30, 1995.
Expenses. During the three month period ended September 30, 1996, operating
expenses increased $3.6 million, or 98.8%, compared to the three month period
ended September 30, 1995. Employee costs increased by $1.2 million, or 103.7%,
and represented 32.4% 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 $1.0 million, or 120.1% and represented 24.3% of total operating
expenses. Increases in general and administrative expenses included increases
in telecommunications, stationery, credit reports and other related items as a
result of increases in the volume of purchasing and servicing of Contracts.
Marketing expenses increased by $154,099, or 44.5%, and represented 6.8% 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 $789,177, or 97.7%, and represented 21.9% of total
operating expenses. During the three month period ended September 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 by
the Company's cost of borrowed funds.
During the three month period ended September 30, 1996, the provision for losses
on Contracts held for sale increased by $509,396, or 150.3%, and represented
11.6% of total operating expenses. The increase in the provision reflects a
larger volume of Contracts held prior to sale when compared to the same period
in the prior year.
The nine month period ended September 30, 1996 compared to the nine month period
- --------------------------------------------------------------------------------
ended September 30, 1995
- ------------------------
Revenues. During the nine months ended September 30, 1996, revenues increased
$13.7 million, or 61.2%, compared to the nine month period ended September 30,
1995. Servicing fees increased by $5.8 million, or 82.1%, and represented 35.8%
of total revenues. 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 increased by $5.9 million, or 59.6%, and
represented 43.9% of total revenues for the nine month period ended September
30, 1996. The increase in gain on sale is largely due to the volume of
Contracts which
10
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
were sold in the period. During the nine month period ended September 30, 1996,
the Company sold $248.1 million in Contracts, compared to $144.3 million in the
nine month period ended September 30, 1995.
Interest income on Contracts held for sale increased by $2.0 million, or 36.4%,
representing 20.3% of total revenues for the nine month period ended September
30, 1996. The increase is due to the increase in the volume of contracts
purchased and held for sale. During the nine month period ended September 30,
1996, the Company purchased $254.3 million in Contracts from Dealers, compared
to $132.1 million in the nine month period ended September 30, 1995.
Expenses. During the nine month period ended September 30, 1996, operating
expenses increased $8.3 million, or 76.6%, compared to the nine month period
ended September 30, 1995. Employee costs increased by $3.0 million, or 98.3%,
and represented 32.1% 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 $2.3 million, or 89.8% and represented 25.9% 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 $408,954, or 57.8%, and represented 5.9% of
total expenses. The increase is primarily due to the increase in the volume of
contracts purchased as marketing representatives are compensated directly in
proportion to the number of Contracts the Company purchases from Dealers
serviced by the marketing representative. Additional increases in marketing
expense relate to other marketing expenses such as travel, promotion and
convention expenses.
Interest expense increased $1.5 million, or 52.0%, and represented 22.6% of
total operating expenses. The increase is primarily due to the interest paid on
the $20.0 million in subordinated debt securities issued December 20, 1995.
Interest expense is also impacted by the volume of Contracts held for sale as
well as by the Company's cost of borrowed funds.
During the nine month period ended September 30, 1996, the provision for losses
on Contracts held for sale increased by $890,699, or 100.2%, and represented
9.3% of total operating expenses. The increase in the provision reflects a
larger volume of Contracts held prior to sale when compared to the same period
in the prior year.
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, 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 $9.3 million during the nine month
period ended September 30, 1996, compared to net cash used of $15.5 million
during the nine month period ended September 30, 1995. Cash used for purchasing
Contracts was $254.3 million, an increase of $139.5 million, or 121.5%, over
cash used for purchasing Contracts in the prior year's period. Cash provided
from the liquidation of Contracts was $254.3 million, an increase of $136.4
million, or 115.7%, 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
11
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 five of six B Pieces created in conjunction with the sale
of the related senior certificates.
During the nine month period ended September 30, 1996, cash used for initial
deposits to Spread Accounts was $9.0 million, an increase of $1.8 million, or
24.2%, from the amount of cash used for initial deposits to Spread Accounts in
the prior year's period. Cash from excess servicing deposited to Spread
Accounts for the nine month period ended September 30, 1996, was $13.3 million,
an increase of $6.6 million, or 97.5%, over cash from excess servicing deposited
to Spread Accounts in the prior year's period. Cash released from Spread
Accounts for the nine month period ended September 30, 1996, was $6.2 million, a
decrease of $1.8 million, or 22.8%, 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. In the nine
month period ended September 30, 1996, certain securitized pools exceeded
predetermined delinquency levels which resulted in increased Spread Account
levels, and consequently, less releases in cash from Spread Accounts. The
Company believes that increases in delinquency are due to changes in its
strategy regarding the timing of repossessions of vehicles under its Contracts.
The Company is currently in discussions with parties to the various
securitization agreements and believes those discussions will result in
modifications to the agreements that will provide for delinquency levels which
are more reflective of the Company's experience. As a result, the Company would
anticipate greater releases of cash from Spread Accounts in the future.
During the nine month period ended September 30, 1996, the Company purchased 38%
of the outstanding common stock of NAB Asset Corporation for approximately $4
million.
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
September 30, 1996, the Line had an outstanding balance of $9.8 million,
compared to $15.5 million at September 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
loans 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 General Electric Capital Corporation ("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.
12
CONSUMER PORTFOLIO SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On November 1, 1996, the Company began to rent an additional 7,000 square feet
of contiguous office space in accordance with the Company's lease agreement. In
addition, the Company recently acquired an additional, and significantly
upgraded, IBM AS/400 computer. This hardware represents the primary platform on
which the Company processes its Contracts. The Company anticipates that it will
incur certain limited capital expenditures during the next twelve months as its
business continues to grow.
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.
13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB SEPTEMBER 30, 1996
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 31, 1996, at which
the following action was taken:
1. The following persons were elected directors of the Company by the votes of
shares indicated to hold office until the next annual meeting.
Name Votes For Votes Withheld Abstain Total
---- ---------- -------------- ------- ----------
Charles E. Bradley, Sr. 10,642,985 103,117 0 10,746,102
Charles E. Bradley, Jr. 10,642,985 103,117 0 10,746,102
William B. Roberts 10,642,985 103,117 0 10,746,102
John G. Poole 10,642,985 103,117 0 10,746,102
Robert A. Simms 10,642,985 103,117 0 10,746,102
Thomas L. Chrystie 10,642,985 103,117 0 10,746,102
2. A proposal to ratify the appointment of KPMG Peat Marwick as the Company's
independent auditors for the year ending December 31, 1996, was approved by
the holders of the Company's common stock. The vote of common shareholders
on this proposal was a follows: 10,577,885 shares in favor, 20,270 shares
against and 147,947 shares abstaining.
There were zero shares of broker no-votes on all above matters.
14
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB SEPTEMBER 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: November 13, 1996 /s/ Charles E. Bradley, Jr.
------------------------------
Charles E. Bradley, Jr.
Director, President, Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 /s/ Jeffrey P. Fritz
------------------------------
Jeffrey P. Fritz
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
15
5
3-MOS
DEC-31-1996
JUL-01-1996
SEP-30-1996
145,109
0
20,505,474
0
0
20,650,583
630,520
0
93,428,156
16,456,498
20,000,000
0
0
33,955,739
18,372,665
93,428,156
0
13,758,526
0
7,307,229
0
848,346
1,597,213
6,451,297
2,617,000
3,834,297
0
0
0
3,834,297
.26
.25
