CPSS

Business Context and Reporting Period

Company: Consumer Portfolio Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: The Company purchases, sells, and services retail automobile installment sale contracts ("Contracts") originated by dealers. Historically, the Company securitized these contracts; however, no securitizations have occurred since December 1998. Currently, the Company operates primarily on a "flow purchase" basis, buying contracts for immediate resale to third parties for a fee, rather than holding them for securitization or maturity.

Key Financial Metrics (Nine Months Ended Sept 30, 2000)

Material Changes vs. Prior Period

• Revenue Improvement: Total revenues increased by $3.2 million (12.6%) compared to the nine months ended September 30, 1999. This was driven by a significant turnaround in "Gain on sale of contracts," which swung from a loss of $16.2 million in the prior year to a gain of $12.6 million in the current period due to the flow purchase program.
• Interest Income Decline: Interest income decreased by $17.5 million (87.6%) to $2.5 million. This reflects the shift away from holding contracts for sale (average balance dropped from $162.6 million to $6.5 million) to the flow purchase model.
• Expense Reduction: Total operating expenses decreased by $18.8 million (27.2%) to $50.4 million. Interest expense dropped $10.6 million due to the elimination of warehouse lines of credit and debt restructuring.
• Cash Flow Turnaround: Net cash provided by operating activities improved from a use of $7.8 million in the prior year to a provision of $41.8 million in the current period, largely due to $60.4 million in cash releases from Spread Accounts.

Outlook, Risks, and Management Commentary

• Liquidity Strategy: The Company has no warehouse lines of credit. Liquidity is currently supported by flow purchase fees and cash releases from Spread Accounts following a November 1999 amendment to Securitization Agreements that fixed credit enhancement levels at 21%.
• Future Securitization: Management plans to resume securitization transactions but explicitly states there is "no assurance" this will occur. Success depends on market conditions and the ability to post required reserves.
• Portfolio Performance: The servicing portfolio is shrinking as contracts amortize and no new contracts are being acquired for the portfolio. Delinquency rates (31+ days) were 5.1% as of September 30, 2000, compared to 5.3% in the prior year.
• Legal Proceedings: A class-action lawsuit was filed in August 2000 alleging a conspiracy to conceal minimum interest rates. The Company intends to defend vigorously; the motion to dismiss has not yet been heard.
• Accounting Changes: The Company adopted FIN 44 regarding stock compensation, resulting in a $1.0 million increase in employee costs related to deferred compensation.

Investor Verification Checklist

• Spread Account Releases: Verify the sustainability of the $60.4 million cash release from Spread Accounts, as future releases depend on contract performance exceeding the 21% credit enhancement threshold.
• Debt Structure: Review the terms of the $104.5 million in outstanding debt, specifically the $30 million of subordinated debt reclassified as senior secured debt in March 2000.
• Flow Purchase Margins: Assess the stability of the "flow purchase" fee model, which now constitutes the primary revenue source, given the cessation of securitization gains.
• Legal Exposure: Monitor the status of the New Jersey class-action lawsuit regarding alleged interest rate conspiracies.
• Residual Valuation: Scrutinize the $117.3 million "Residual interest in securitizations" asset, which is valued using a 14% discount rate and assumptions regarding future prepayments and default losses (estimated at 14-16.5%).