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, 1997
[_] 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 (IRS Employer
of incorporation or organization) Identification No.)
2 Ada, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (714) 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 9, 1997, the registrant had 14,299,442 common shares outstanding.
Consumer Portfolio Services, Inc. and Subsidiaries
Form 10-Q March 31, 1997
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 31, 1997 and
December 31, 1996.
Condensed consolidated statements of operations for the three
month periods ended March 31, 1997 and 1996.
Condensed consolidated statements of cash flows for the three
month periods ended March 31, 1997 and 1996.
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 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consumer Portfolio Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
------------------------ ------------------------
1997 1996
---- ----
Assets
Cash $ 396,309 $ 153,958
Contracts held for sale (note 2) 34,252,726 21,656,773
Servicing fees receivable 5,751,523 3,086,194
Residual interest in securitizations (note 3) 76,215,949 67,251,933
Furniture and equipment, net 1,232,379 629,774
Taxes receivable -- 610,913
Deferred financing costs 903,920 943,222
Investment and receivables from affiliate 2,786,242 3,040,158
Other assets 7,415,453 4,573,495
------------------------ ------------------------
$ 128,954,501 $ 101,946,420
======================== ========================
Liabilities and Shareholders' Equity
Liabilities
Accounts payable & accrued expenses $ 7,655,683 $ 1,697,051
Warehouse line of credit 25,843,602 13,264,585
Taxes payable 2,330,438 --
Deferred tax liability 7,027,251 7,027,251
Notes payable 21,155,643 20,000,000
Convertible subordinated debt -- 3,000,000
Related party debt 787,922 --
------------------------ ------------------------
64,800,539 44,988,887
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; 14,279,242 and 13,779,242
shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively 37,695,989 34,644,314
Retained earnings 26,457,973 22,313,219
------------------------ ------------------------
64,153,962 56,957,533
------------------------ ------------------------
$ 128,954,501 $ 101,946,420
======================== ========================
See accompanying notes to condensed consolidated financial statements
3
Consumer Portfolio Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended
March 31,
----------------------------------------------
1997 1996
---- ----
Revenues:
Net gain on sale of contracts $ 7,333,250 $ 4,497,831
Servicing fees (note 4) 5,270,502 3,002,782
Interest 3,265,120 2,406,968
Other 388,792 --
------------------- --------------------
16,257,664 9,907,581
------------------- --------------------
Expenses:
Interest 1,438,109 1,189,105
Employee costs 3,221,830 1,468,982
General and administrative 2,500,560 1,321,336
Marketing 320,325 322,676
Occupancy 244,366 226,645
Depreciation and amortization 361,687 69,073
Provision for credit losses 1,027,426 208,468
------------------- --------------------
9,114,303 4,806,285
------------------- --------------------
Income before income taxes 7,143,361 5,101,296
Income taxes 2,998,607 2,050,000
------------------- --------------------
Net income $ 4,144,754 $ 3,051,296
=================== ====================
Net income per common and common
equivalent share $ 0.27 $ 0.21
=================== ====================
Weighted average number of common
and common equivalent share 15,347,875 14,670,349
=================== ====================
Fully diluted net income per common
and common equivalent share $ 0.27 $ 0.20
=================== ====================
Fully diluted weighted average number of
common and common equivalent shares 15,438,542 15,207,411
=================== ====================
See accompanying notes to condensed consolidated financial statements
4
Consumer Portfolio Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-----------------------------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 4,144,754 $ 3,051,296
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 361,687 69,073
Amortization of net interest receivables 2,586,939 1,147,076
Amortization of deferred financing costs 39,302 39,302
Provision for credit losses 1,027,426 208,468
Gain on sale of contracts (6,100,696) (3,452,714)
Loss on investment in unconsolidiated affiliate 80,636 --
Changes in operating assets and liabilities:
Purchases of contracts held for sale (114,103,226) (72,278,677)
Liquidation of contracts held for sale 99,821,888 69,884,456
Servicing fees receivable (2,665,329) (713,359)
Initial deposits to spread accounts (3,581,445) (2,684,093)
Deposits to spread accounts (6,331,340) (3,236,976)
Release of cash from spread accounts 4,462,526 736,530
Other assets (183,990) (1,062,387)
Accounts payable and accrued expenses 5,559,000 (606,647)
Warehouse line of credit 12,579,017 350,656
Taxes payable 2,941,351 (1,350,000)
------------------------- -----------------------
Net cash provided by (used in) operating activities 638,500 (9,897,996)
Cash flows from investing activities:
Purchases of furniture and equipment (350,786) (215,703)
Payments received on receivables from affiliate 173,280 --
Payments received on subordinated certificates -- 152,446
Investment in subsidiary (80,000) --
------------------------- -----------------------
Net cash used in investing activities (257,506) (63,257)
Cash flows from financing activities:
Repayment of notes payable (190,318) --
Exercise of options and warrants 51,675 35,000
------------------------- -----------------------
Net cash (used in) provided by financing activities (138,643) 35,000
------------------------- -----------------------
Increase (decrease) in cash 242,351 (9,926,253)
Cash at beginning of period 153,958 10,895,157
------------------------- -----------------------
Cash at end of period $ 396,309 $ 968,904
========================= =======================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,304,094 $ 881,047
Income taxes $ 44,842 $ 3,400,000
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock upon conversion of debt $ 3,000,000 $ --
Purchase of CPS Leasing, Inc.
Assets acquired $ 2,495,084 $ --
Liabilities assumed (2,415,084) --
------------------------- -----------------------
Net cash used to acquire business $ 80,000 $ --
========================= =======================
See accompanying notes to condensed consolidated financial statements
5
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
Note 1: Summary of Significant Accounting Policies
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.
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.
Results for the three month period ended March 31, 1997 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 report on Form
10-K for the year ended December 31, 1996.
Principles of Consolidation
- ---------------------------
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Alton Receivables Corp., CPS
Receivables Corp. and CPS Funding Corp. The consolidated financial statements
also include the accounts of SAMCO Acceptance Corp., LINC Acceptance Company,
LLC and CPS Leasing, Inc., all of which are 80% owned subsidiaries of the
Company. All significant intercompany transactions and balances have been
eliminated. Investments in affiliates that are not majority owned are reported
using the equity method.
Recent Accounting Developments
- ------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements and other transactions involving the transfer of financial assets.
SFAS No. 125 is effective for transfers and servicing of assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. The adoption of SFAS No.
125 on January 1, 1997 by the Company did not have a material impact on its
consolidated financial position or results of operations.
6
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per common share
amounts must be restated based on the provisions of the new standard. Pro forma
basic and diluted earnings per share calculated in accordance with SFAS No. 128
is provided below:
Three months ended March 31,
----------------------------
1997 1996
Basic earnings per share $ 0.29 $ 0.23
============================
Diluted earnings per share $ 0.27 $ 0.20
============================
Residual Interest in Securitizations
- ------------------------------------
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 the Company's special purpose
subsidiaries, (the "SPS"), which subsequently transfers the Contracts to various
grantor trusts (the "Trusts"), which then issue interest bearing, asset-backed
securities ("certificates") , which are purchased by institutional investors.
The terms of the agreements provide that with each purchase of certificates by
the investors, the Company is required to provide a credit enhancement in the
form of (i) a cash capital contribution to the SPS, held in a credit enhancement
account ("Spread Account") and (ii) a certificate guarantor insurance policy.
Cash deposited in the various Spread Accounts is pledged to the related Trust,
which in turn invests the cash in high quality liquid investment securities as
defined by the various agreements.
At the closing of each securitization, the Company removes from its balance
sheet the Contracts held for sale and adds to its balance sheet (i) the cash
received and (ii) the estimated fair value of the portion of the Contracts
retained from the securitizations ("residuals"), which consist of (a) the cash
deposited by the Company into the Spread Account and (b) the net interest
receivables. The excess of the cash received and 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 portion of the
Contracts sold through asset-backed securities (the "certificates") and the
residuals, based on the relative fair values of those portions on the date of
the sale. The Company may recognize 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 in accordance with SFAS No.
115. The Company is not aware of an active market for the purchase or sale of
the residuals; accordingly, the Company estimates fair value of the residuals by
calculating the present value of the estimated expected future cash flows using
a discount rate commensurate with the risks involved.
The Spread Account consists of an initial cash deposit, made simultaneously with
the purchase of the certificates by the investors, and subsequent cash flows
required by the terms of the various securitization agreements. In the event
that the cash flows generated by the Contracts transferred to the Trust were
insufficient to pay the obligations of the Trust, including principal or
interest due to certificate holders or expenses of the Trust, the trustee would
draw from the Spread Account an amount necessary to pay the obligations of the
trust. The securitization agreements provide that the Spread Accounts shall be
maintained at a specified percent of the principal balance of the certificates,
which can be increased significantly 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. Consequently, 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 releases to the SPS the portion of the pledged cash
that is in excess of the
7
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
principal balance of the certificates, the trustee releases to the SPS the
portion of the pledged cash that is in excess of the amount necessary to meet
the specified percent of the principal balance of the certificates. To the
extent cash in excess of the predetermined level is generated, such cash is
either transferred to cover deficiencies, if any, in Spread Accounts for other
pools, or is released to the Company. Except for releases in this manner, the
cash in the Spread Accounts is restricted from use by the SPS or the Company.
Net interest receivables ("NIRs") are determined by using the amount of the
excess of the weighted-average coupon on the Contracts sold over the sum of (i)
the coupon on the certificates, (ii) a base servicing fee paid to the servicer
of the Contracts (currently, the Company), (iii) expected losses to be incurred
on the portfolio of Contracts sold over their estimated lives and (iv) other
expenses and revenues. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit losses.
The Company estimates prepayments by evaluating historical prepayment
performance of comparable Contracts and the effect of trends in the industry.
The Company estimates credit losses using available historical loss data for
comparable Contracts and the specific characteristics of the Contracts included
in the Company's securitizations.
Note 2: Contracts held for sale
The Contracts that 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 may be fully prepaid by the
customer at any time without penalty. The Company has historically purchased
Contracts from Dealers at discounts ranging from 0% to 10% of the total amount
financed under the Contracts, depending on the perceived credit risk of the
Contract, plus a flat acquisition fee, generally $200, for each Contract
purchased. The Company believes that the level of discounts and fees are a
significant factor in the Dealer's decision to submit a Contract to the Company
for purchase, and will continue to play such a role in the future. Effective
January 10, 1997, the Company began purchasing all Contracts without a
percentage discount, charging Dealers only an acquisition fee ranging from zero
to $1,195 for each Contract purchased. The fees vary based on the perceived
credit risk and, in some cases, the interest rate on the Contract. The
acquisition fees instituted in January 1997 are larger, on average, than the
acquisition fees previously charged in conjunction with percentage discounts, so
as to result in a similar net purchase price on a typical Contract. Contracts
held for sale are stated at the lower of aggregate cost or market value, net of
related reserves. At March 31, 1997 and December 31, 1996, the balance of
Contracts held for sale comprised the following components:
March 31, December 31,
1997 1996
--------------- -------------
Gross receivable balance $ 43,467,360 $ 28,095,461
Unearned finance charges (7,494,744) (5,268,107)
Dealer discounts (116,532) (509,266)
Deferred fees and costs (377,161) 61,774
Allowance for credit losses (1,226,197) (723,089)
-------------- -------------
Net contracts held for sale $ 34,252,726 $ 21,656,773
============= =============
Note 3: Residual interest in securitizations
Residual interest in securitizations comprised the following components at
March 31, 1997 and December 31, 1996:
March 31, December 31,
1997 1996
------------- -------------
Spread accounts $ 49,047,731 $ 43,597,472
Net interest receivables 27,168,218 23,654,461
------------- -------------
$ 76,215,949 $ 67,251,933
============= =============
8
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
The following table summarizes NIR activity for the three months ended March 31,
1997:
Beginning balance, December 31, 1996 $ 23,654,461
NIR portion of gains recognized 6,100,696
Amortization of NIR (2,586,939)
--------------
Ending balance, March 31, 1997 $ 27,168,218
==============
Included in NIR balances are estimates of losses totaling the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Estimated credit losses $ 56,748,663 $ 50,098,119
============== ============
Servicing subject to recourse provisions $ 541,453,310 $483,106,256
============== ============
Estimated credit losses as percentage
of servicing subject to recourse
provisions 10.48% 10.37%
============== ============
Spread Account comprised the following components at March 31, 1997 and
December 31, 1996:
March 31, December 31,
1997 1996
----------- ------------
Funds held by investors $ 1,056,922 $ 1,263,660
Investment in subordinated certificates 1,242,752 1,530,950
US government securities 46,748,057 40,802,862
----------- -----------
$49,047,731 $43,597,472
=========== ===========
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 month periods ended March 31, 1997 and 1996
comprised the following components:
Three Months Ended March 31,
-----------------------------------
1997 1996
--------------- -----------------
Base servicing fees $ 2,829,306 $ 1,549,355
Residual interest income 5,028,135 2,600,503
------------- -------------
Amortization of excess servicing (2,586,939) (1,147,076)
------------- -------------
Net servicing fees $ 5,270,502 $ 3,002,782
============= =============
9
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
Note 5: Net gain on sale of contracts
Net gain on sale of contracts for the three months ended March 31, 1997 and 1996
comprised the following components:
Three Months Ended March 31,
----------------------------------
1997 1996
------------ -----------
Dealer discounts and acquisition fees $ 1,904,689 $ 1,590,090
(net of acquisition costs)
NIR portion of gains recognized 6,100,696 3,452,714
Expenses related to sales (672,135) (544,973)
------------ -----------
$ 7,333,250 $ 4,497,831
============ ===========
10
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
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 automobile dealers
("Dealers") located throughout the Unites 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 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 recognized on the sale
or securitization of its Contracts, servicing fees earned on Contracts sold, and
interest earned on Contracts held for sale. Because the servicing fees are
dependent in part on the collections received on sold Contracts, the Company's
income is affected by losses incurred on Contracts, whether such Contracts are
held for sale or have been sold in securitizations.
In each securitization, the Company sells Contracts to a trust (the "Trusts"),
which then issue interest bearing, asset-backed securities ("certificates"),
which are purchased by institutional investors. The terms of the agreements
provide that with each purchase of certificates by the investors, the Company is
required to provide a credit enhancement in the form of (i) a cash capital
contribution, held in a credit enhancement account ("Spread Account") and (ii) a
certificate guarantor insurance policy provided by a monoline insurance company.
Cash deposited in the various Spread Accounts is pledged to the related Trust,
which in turn invests the cash in high quality liquid investment securities as
defined by the various agreements.
At the closing of each securitization, the Company removes from its balance
sheet the Contracts held for sale and adds to its balance sheet (i) the cash
received and (ii) the estimated fair value of the portion of the Contracts
retained from the securitizations ("residuals"), which consist of (a) the cash
deposited by the Company into the Spread Account and (b) the net interest
receivables ("NIRs"). The excess of the cash received and 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 portion of the
Contracts sold through asset-backed securities (the "certificates") and the
residuals, based on the relative fair values of those portions on the date of
the sale. The Company may recognize 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 the residuals; accordingly, the
Company estimates fair value of the residuals by calculating the present value
of the estimated expected future cash flows using a discount rate commensurate
with the risks involved.
The Spread Account consists of an initial cash deposit, made simultaneously with
the purchase of the certificates by the investors, and subsequent cash flows
required by the terms of the various agreements. In the event that the cash
flows generated by the Contracts transferred to the Trust were insufficient to
pay the obligations of the Trust, including principal or interest due to
certificate holders or expenses of the Trust, the trustee would draw from the
Spread Account an amount necessary to pay the obligations of the trust. The
securitization agreements provide that the Spread Accounts shall be maintained
at a specified percent of the principal balance of the certificates, which can
be increased significantly 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. Consequently, 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 SPS the portion of the pledged cash that is in excess of
the amount necessary to meet the specified percent of the principal balance of
the certificates. To the extent cash in excess of the predetermined level is
generated, such cash is either transferred to cover deficiencies, if any, in
Spread Accounts for other pools, or is released to the Company. Except for
releases in this manner, the cash in the Spread Accounts is restricted from use
by the SPS or the Company.
11
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
Net interest receivables ("NIRs") are determined by using the amount of the
excess of the weighted-average coupon on the Contracts sold over the sum of (i)
the coupon on the certificates, (ii) a base servicing fee paid to the servicer
of the Contracts (currently, the Company), (iii) expected losses to be incurred
on the portfolio of Contracts sold over their estimated lives and (iv) other
expenses and revenues. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit losses.
The Company estimates prepayments by evaluating historical prepayment
performance of comparable Contracts and the effect of trends in the industry.
The Company estimates credit losses using available historical loss data for
comparable Contracts and the specific characteristics of the Contracts included
in the Company's securitizations.
There are no assurances that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates and
assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residual interests may increase or decrease, which could have a
material impact on the Company's results of operations, financial condition and
liquidity.
Results of Operations
Revenues. During the three months ended March 31, 1997, revenues increased $6.4
million, or 64.1%, compared to the three month period ended March 31, 1996.
Servicing fees increased by $2.3 million, or 75.5%, and represented 32.4% of
total revenues. Servicing fees consist primarily of base monthly servicing fees
earned on Contracts sold and serviced by the Company and net interest earned on
residual interest in securitizations held 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 March 31, 1997, the Company was
earning servicing fees on 51,205 Contracts with aggregate outstanding principal
balances approximating $541.5 million, compared to 29,228 Contracts with
aggregate outstanding principal balances approximating $308.6 million as of
March 31, 1996. In addition to the $541.5 million in sold Contracts on which
servicing fees were earned, the Company was holding for sale and servicing an
additional $36.0 million in Contracts for an aggregate total servicing portfolio
of $578.7 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 fair value of the
residual interest in each securitization of 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 $2.8 million, or
63.0%, and represented 45.1% of total revenues for the three month period ended
March 31, 1997. The increase in gain on sale is largely due to the increased
volume of Contracts sold in the period. During the three month period ended
March 31, 1997, the Company sold $102.3 million in Contracts, compared to $67.1
million in the three month period ended March 31, 1996.
Interest income on Contracts held for sale increased by $858,152, or 35.7%, and
represented 20.1% of total revenues for the three month period ended March 31,
1997. The increase is due to the increase in the volume of Contracts purchased
and held for sale. During the three month period ended March 31, 1997, the
Company purchased $114.1 million in Contracts from Dealers, compared to $72.3
million in the three month period ended March 31, 1996.
The growth in the Company's revenue and expenses is a result of increases in the
volume of Contract purchases and the Company's servicing portfolio. The Company
has achieved these increases primarily by expanding into new geographic areas
and increasing the number of marketing representatives and Dealers. At March
31, 1997 the Company had 56 marketing representatives and 2,464 Dealers,
compared to 46 representatives and 1,244 Dealers at March 31, 1996.
Expenses. During the three month period ended March 31, 1997, operating
expenses increased $4.3 million, or 89.6%, compared to the three month period
ended March 31, 1996. Employee costs increased by $1.8 million, or 119.3%, and
represented 35.3% 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 $1.2 million, or 89.2% and represented 27.4% 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.
12
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
Interest expense increased $249,004, or 20.9%, and represented 15.8% of total
operating expenses. During the three month period ended March 31, 1997,
interest expense consisted of interest on (i) borrowings under a warehouse line
of credit ("Warehouse Line") used to acquire Contracts and hold them pending
securitization, (ii) $20 million of outstanding Rising Interest Subordinated
Redeemable Securities due 2006 ("RISRS"), and (iii) a $3 million convertible
subordinated note, which was converted into common stock in accordance with its
terms on January 17, 1997. With respect to the Warehouse Line, the Company's
cost of borrowed funds varies with market rates, and the total interest payable
is affected in proportion to the amount of Contract purchases funded under the
Warehouse Line and the average time such Contracts are held prior to
securitization. With respect to the RISRS debt, the interest paid on the debt
increases each calendar year from 10.25% at present to 12.00% in 2004, and then
to 12.50% until maturity at December 31, 2005. The April 1997 issuance of $20
million of Participating Equity Notes due 2004 (discussed below), on which
interest is payable at a fixed rate of 10.50% per annum, can be expected to
increase the Company's interest expense in future periods.
During the three month period ended March 31, 1997, the provision for losses on
Contracts held for sale increased by $818,958, or 392.8%, and represented 11.3%
of total operating expenses. The increase in the provision reflects a larger
volume of Contracts purchased and held prior to sale when compared to the same
period in the prior year and the Company's strategy to increase its allowance
for losses on Contracts held for sale.
The Company in March 1997 opened a satellite collections facility in Chesapeake,
Virginia, and plans to lease additional space in the vicinity of its California
headquarters at some point in the second or third quarter of 1997. Lease of
such additional space should be expected to result in increased occupancy and
general and administrative expenses in future periods.
The Company continues to expand its staff to accommodate increases in its
purchases of Contracts and in its servicing portfolio. The Company therefore
expects to incur commensurate additional employee costs in future periods.
Financial Condition
Contracts held for sale increased $12.6 million, or 58.2%, from December 31,
1996 to March 31, 1997. The number of Contracts held for sale at any specific
date is dependent both on the volume of the Company's Contract origination
activities, and on the length of time since its most recent securitization
transaction, since the Company has made a practice of selling, in any
securitization transaction, substantially all of its Contracts then held for
sale.
Residual interest in securitizations increased $9.0 million, or 13.3%, from
December 31, 1996 to March 31, 1997. This increase results from (i) additions
to net interest receivable resulting from gains recognized in conjunction with
the securitization of Contracts, net of amortization, and (ii) increases in
Spread Account balances resulting from initial deposits relating to new
securitizations and deposits relating to prior securitizations, net of releases
from Spread Accounts which have reached their required target levels.
The amount outstanding under the Warehouse Line increased from $13.3 million at
December 31, 1996 to $25.8 million at March 31, 1997. This increase reflects a
greater number of Contracts held for sale at the end of the quarter than at the
end of the preceding fiscal year.
Liquidity and Capital Resources
The Company's primary sources of cash from operations include base servicing
fees it earns on portfolios of Contracts it has previously sold, proceeds from
sales of Contracts, release of investments in Spread Accounts, and customer
payments on Contracts held for sale. The Company's primary uses of cash are its
normal operating expenses, the purchase of Contracts, the establishment of
Spread Accounts and the further contribution of cash to the Spread Accounts
until they reach their maintenance levels, and payment of income taxes.
Net cash provided by operating activities was $638,500 during the three month
period ended March 31, 1997, compared to net cash used of $9.9 million during
the three month period ended March 31, 1996. Cash used for purchasing Contracts
was $114.1 million, an increase of $41.8 million, or 57.9%, over cash used for
purchasing Contracts in the prior year's period. Cash provided from the
liquidation of Contracts was $99.8 million, an increase of $29.9 million, or
42.8%, over cash provided from the liquidation of Contracts in the prior year's
period.
13
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
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 to a Spread
Account, which is pledged to enhance the credit of the related ABS and is
invested in high quality liquid securities.
During the three month period ended March 31, 1997, cash used for initial
deposits to Spread Accounts was $3.6 million, an increase of $897,352, or 33.4%,
from the amount of cash used for initial deposits to Spread Accounts in the
prior year's period. Cash deposited to Spread Accounts for the three month
period ended March 31, 1997, was $6.3 million, an increase of $3.1 million, or
95.6%, over cash deposited to Spread Accounts in the prior year's period. Cash
released from Spread Accounts for the three month period ended March 31, 1997,
was $4.5 million, an increase of $3.7 million, or 505.9%, over cash released
from Spread Accounts in the prior year's period. Changes in deposits to and
releases from Spread Accounts are affected by the relative size and seasoning of
the various pools of sold Contracts that make up the Company's servicing
portfolio. In the prior year's period, certain securitized pools exceeded
predetermined delinquency levels, which resulted in increases in the required
levels for certain Spread Accounts and consequently, in less releases of cash
from Spread Accounts. In November 1996, the Company restructured certain aspects
of its financial guarantee insurance agreements with Financial Security
Assurance, Inc. Under the restructured agreements, the levels of delinquency
that trigger increased Spread Account requirements were raised, so that the
delinquency levels currently experienced by the Company do not result in
increased Spread Account requirements. As a result, the Company experienced
greater releases of cash from Spread Accounts for the three month period ended
March 31, 1997 than in the prior year's period.
On a day-to-day basis, the Company funds its purchases of Contracts from Dealers
by drawing on the Warehouse Line, and pledges the purchased Contracts to the
warehouse lender. The amount borrowed under the Warehouse Line increases until
the Company sells the pledged Contracts in a securitization transaction, at
which time the proceeds of the sale are used to pay down the balance of the
Warehouse Line. Since June 1995, such securitization transactions have taken
place on a quarterly basis. The Company has experienced continued growth in the
levels of Contracts purchased and securitized and expects that such growth may
continue. The amount of Contracts that the Company can hold for sale prior to a
securitization is limited by its available cash and the $100 million Warehouse
Line. If the volume of Contract purchases continues to increase, the Company
will be required to seek additional or alternative warehouse financing.
The Company funds the increase in its servicing portfolio through off balance
sheet securitization transactions, and funds its other capital needs with cash
from operations and with the proceeds from the issuance of long-term debt.
Since December 31, 1996, the Company has engaged in one securitization
transaction, and has issued $20 million of Participating Equity Notes due 2004
("PENs").
The PENs were issued in a registered public offering in April 1997. After
deduction of underwriting commissions, the proceeds of that offering were $19.2
million. The PENs have a fixed coupon rate of interest of 10.5% per annum,
payable monthly beginning May 15, 1997. The fixed interest rate payable on the
PENs may be considered comparable to the rising interest rate payable on the
RISRS that the Company issued in 1995: The RISRS interest rate is 10.25% per
annum throughout 1997 and will rise by .25% per annum in each calendar year
through 2004, and then by an additional .50% per annum for the final year prior
to the RISRS maturity on December 31, 2005. The RISRS may be redeemed without
premium at any time after January 1, 2000, and the PENs may be redeemed without
premium at any time after April 15, 2000. The PENs are also partially
convertible into equity. At maturity or earlier redemption of the PENs, the
holders thereof will have the option to convert 25% of the principal amount into
common stock of the Company, at a conversion rate of $10.15 per share.
As to the cost of off balance sheet financing, the interest rate payable on the
senior ABS issued in the Company's March 1997 securitization was 6.55%, as
compared with 6.4% payable on the similar securities issued in the Company's
March 1996 securitization transaction. The increase in the rate is due to
increases in rates payable on Treasuries of similar maturities, with such
increase partially offset as a result of the March 1997 securitization being a
registered public offering in contrast to the March 1996 private placement.
14
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
There can be no assurance that such financing will continue to be available to
the Company, nor that the cost of any such financing will not increase
materially in the future.
The Company anticipates that the proceeds from the PENs, funds available under
the Warehouse 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 twelve 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 in January 1997 acquired a company engaged in the equipment leasing
business. Any material growth in that subsidiary's business will require
significant capital resources, to allow that subsidiary to purchase equipment
for lease. The Company is examining possible sources of capital for that
subsidiary, but has made no commitments as of the date of this report.
The descriptions of the Company's business and activities set forth in this Form
10-Q 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.
15
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On April 18, 1997 the Company issued $20 million of PENs in a registered
public offering. The PENs bear interest at 10.50%, mature in April 2004, and
are convertible into common stock (as to 25% only of their principal amount)
at maturity or upon earlier redemption at a conversion rate of $10.15 per
share. In connection with the issuance of the PENs, the Company has agreed
to certain limitations on dividends on its common stock, and on other
payments with a similar effect. In particular the indenture under which the
PENs were issued (the "Indenture") provides that the Company shall not (i)
declare or pay any dividend, either in cash or property, on any shares of its
capital stock (except dividends or other distributions payable solely in
shares of capital stock of the Company or warrants, options or other rights
solely to acquire capital stock of the Company) or (ii) purchase, redeem or
retire any shares of its capital stock or any warrants, rights or options to
purchase or acquire any shares of its capital stock (except from employees in
connection with the termination of their employment) or (iii) make any other
payment or distribution, either directly or indirectly through any
subsidiary, in respect of its capital stock (such dividends, purchases,
redemptions, retirements, payments and distributions being herein
collectively called "Restricted Payments") if, after giving effect thereto,
(1) an Event of Default would have occurred; or
(2) (A) the sum of (i) such Restricted Payment plus (ii) the
aggregate amount of all Restricted Payments made during the period after
December 31, 1996 would exceed (B) the sum of (i) $7.5 million plus (ii) 50%
of Consolidated Net Income for the period commencing December 31, 1996 and
ending on the date of payment of such Restricted Payment, treated as one
accounting period plus (iii) 100% of the cumulative cash and non-cash
proceeds received by the Company from contributions to capital or the
issuance or sale after December 31, 1996 of capital stock of the Company or
of any warrants, rights or other options to purchase or acquire its capital
stock.
"Event of Default," as defined in the Indenture, includes any failure to pay
principal or interest when due, failure to comply with financial covenants
(including a maximum debt to net worth ratio of six, with indebtedness under
the Warehouse Line excluded from both the computation of debt and the
computation of the Company's net worth), and certain other events. For a
complete definition of Events of Default, and a further discussion of the
terms of the PENs, reference is made to the Indenture, which is filed as an
exhibit to this report and incorporated herein by this reference.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of the Company, as amended on
December 13, 1993, and March 7, 1996. (Previously filed as an exhibit to the
Company's Form 10-KSB for the transition period ended December 31, 1995, and
incorporated herein by reference)
3.2 Amended and Restated Bylaws of the Company, adopted November 30,
1993. (Previously filed as an exhibit to the Company's Form 10-KSB for the
fiscal year ended March 31, 1994, and incorporated herein by reference)
4.1 Form of Indenture between the Company and Banker's Trust Company.
(Previously filed as an exhibit to the Company's registration statement on
Form S-3, file No. 333-21289, and incorporated herein by reference)
4.2 Form of First Supplemental Indenture between the Company and
Banker's Trust Company, relating to issuance of the Participating Equity
Notes. (Previously filed as an exhibit to the Company's registration
statement on Form S-3, file number 333-21289, and incorporated herein by
reference)
10.1 Purchase Agreement relating to sale of Participating Equity Notes
to underwriters. (Previously filed as an exhibit to the Company's
registration statement on Form S-3, file number 333-21289, and incorporated
herein by reference)
11 Statement re computation of per share earnings.
16
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
27 Financial Data Schedule.
(b) During the quarter for which this report is filed, the Company filed two
reports on Form 8-K. The first such report was dated March 14, 1997, and
reported, under Item 5 thereof, information regarding the Company's March
1997 securitization transaction. The second such report was dated March 17,
1997, and reported, also under Item 5 thereof, additional information
regarding the Company's March 1997 securitization transaction.
17
Consumer Portfolio Services, Inc.
Form 10-Q March 31, 1997
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 14, 1997 /s/ Charles E. Bradley, Jr.
-----------------------------------
Charles E. Bradley, Jr.
Director, President, Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ Jeffrey P. Fritz
-----------------------------------
Jeffrey P. Fritz
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
18
Exhibit 11
Consumer Portfolio Services, Inc.
Statement Regarding Computation of Per Share Earnings
Three months ended
March 31, March 31,
-------------- --------------
1997 1996
Primary Earnings Per Share
--------------------------
Computation for Statement of Operations:
Net earnings per statement of
operations used in primary
earnings per share computation
Net earnings $ 4,144,754 $ 3,051,296
=========== ===========
Weighted average number
of shares outstanding 14,169,620 13,302,180
Net shares issuable form assumed exercise
of warrants and options, as determined by
the application of the Treasury
Stock Method 1,178,255 1,368,169
Weighted average number of ----------- -----------
shares outstanding 15,347,875 14,670,349
=========== ===========
Primary earnings per ----------- -----------
share, as adjusted $ 0.27 $ 0.21
=========== ===========
Fully Diluted Earnings Per Share
--------------------------------
Computation for Statement of Operations:
Net earnings per statement of
operations used in primary
earnings per share computation
Net earnings $ 4,144,754 $ 3,051,296
Interest on borrowings, net of tax
effect on conversion of convertible
subordinated debt 2,602 42,608
----------- -----------
Net earnings as adjusted $ 4,147,356 $ 3,093,904
=========== ===========
Weighted average number of shares
outstanding 14,169,620 13,302,180
Net shares issuable form assumed exercise
of warrants and options, as determined by
the application of the Treasury Stock
Method 1,178,255 1,425,231
Shares issuable form assumed conversion
of subordinated debt 90,667 480,000
Weighted average number of shares ----------- -----------
outstanding 15,438,542 15,207,411
=========== ===========
Fully diluted earnings per share, as ----------- -----------
adjusted $ 0.27 $ 0.20
=========== ===========
5
3-MOS 3-MOS
DEC-31-1996 DEC-31-1995
JAN-01-1997 JAN-01-1996
MAR-31-1997 MAR-31-1996
396,309 153,958
0 0
5,751,523 3,086,194
1,226,197 723,089
0 0
0 0
1,232,379 629,774
1,378,385 1,097,579
128,954,501 101,946,420
0 0
21,155,643 23,000,000
0 0
0 0
37,695,989 34,644,314
26,457,973 22,313,219
128,954,501 101,946,420
0 0
16,257,664 9,907,581
0 0
9,114,303 4,806,285
0 0
1,027,426 208,468
1,438,109 1,189,105
7,143,361 5,101,296
2,998,607 2,050,000
0 0
0 0
0 0
0 0
4,144,754 3,051,296
0.27 0.21
0.27 0.20
