CPSS

Business Context and Reporting Period

Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: CPS purchases, sells, and services retail automobile installment sale contracts ("Contracts") originated by dealers across 37 states. The company targets customers with limited credit histories who typically do not qualify for traditional bank financing. Revenue is generated through gains on the sale of contracts (via flow purchases or securitizations), interest income on held contracts, and servicing fees.

Key Financial Metrics

Note: Debt figures exclude capital lease obligations and notes payable unless specified in the summary text.

Material Changes vs. Prior Period

• Revenue Growth: For the nine months ended September 30, 2001, total revenues increased 70.0% to $47.9 million from $28.2 million in the prior year period. This was driven primarily by a 105.4% increase in "Gain on sale of contracts, net" ($25.9 million vs. $12.6 million) and a significant increase in interest income ($13.2 million vs. $2.5 million).
• Profitability Turnaround: The company reported a net loss of $15.5 million for the nine months ended September 30, 2000, compared to a net earnings of $0.7 million for the same period in 2001. The third quarter of 2001 showed a net earnings of $0.3 million compared to a loss of $1.2 million in the prior year quarter.
• Portfolio Contraction: Despite revenue growth, the servicing portfolio (contracts held for own account) contracted. The outstanding principal balance of the servicing portfolio decreased from approximately $490.0 million in September 2000 to $318.1 million in September 2001. Consequently, servicing fees decreased 25.4% in the quarter and 40.0% in the nine-month period.
• Debt Reduction: Aggregate senior secured and subordinated debt outstanding decreased to $80.5 million at September 30, 2001, from $101.8 million at September 30, 2000. This reduction contributed to a 23.2% decrease in interest expense for the quarter.
• Securitization Activity: Unlike the prior year, CPS executed securitization transactions in 2001, selling approximately $119.2 million of contracts in the nine-month period. A $68.5 million term securitization was completed in September 2001, with proceeds used to reduce revolving debt.

Guidance, Outlook, and Risks

• Liquidity Strategy: The company plans to manage liquidity by adjusting the mix of "flow" purchases (immediate resale) versus purchases for its own account. It is negotiating a second $100 million revolving credit facility, expected to be finalized in the fourth quarter of 2001, though no assurance is given.
• Portfolio Stabilization: Management expects the servicing portfolio to level off in late 2001 or early 2002, which should stabilize interest income and servicing fees. However, there is no assurance that sufficient contracts can be purchased to achieve this.
• Legal Contingencies:
  • Stanwich Litigation: CPS is a defendant in a class action involving an affiliate of the former chairman. A "Standstill Agreement" is currently in place, but plaintiffs have filed amended complaints alleging breach of fiduciary duty and interference with contract. Management intends to contest vigorously but acknowledges the possibility of material damages.
  • LINC Acceptance Settlement: An agreement in principle exists to settle bankruptcy adversary claims for $425,000, subject to court approval.
• Market Risks: The company faces risks related to interest rate fluctuations (variable rate debt vs. fixed rate assets), unemployment rates affecting auto sales and delinquencies, and the availability of warehouse lines of credit.
• Accounting Changes: The company adopted SFAS 133 (Derivatives) and SFAS 140 (Transfers of Financial Assets) with no material effect. SFAS 141 and 142 (Goodwill) are to be adopted in 2002.

Investor Verification Checklist

• Debt Covenants and Renewals: Verify the status of the $75 million revolving note purchase facility and the progress of the proposed $100 million second facility, as liquidity is heavily dependent on these.
• Spread Account Releases: Monitor the performance of securitized pools to ensure cash continues to be released from Spread Accounts, which is a primary source of operating cash flow.
• Legal Exposure: Track the status of the Stanwich litigation and the LINC Acceptance settlement, as adverse outcomes could result in material liabilities.
• Portfolio Performance: Review delinquency and default rates on the remaining $318 million servicing portfolio to assess the stability of residual interest income.
• Valuation Allowance: Note the $3.7 million valuation allowance against deferred tax assets; verify if future taxable income projections are sufficient to realize the remaining deferred tax assets.