Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: The Company purchases, sells, and services retail automobile installment sale contracts. Historically, it purchased contracts for securitization; however, due to liquidity constraints and market conditions, it has suspended securitization transactions since December 1998. As of late May 1999, the Company shifted to a "flow purchase" model, buying contracts from dealers and immediately reselling them to a third party for a fee, retaining no residual interest or servicing obligation.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 1999 |
Three Months Ended June 30, 1998 |
Six Months Ended June 30, 1999 |
Six Months Ended June 30, 1998 |
|---|---|---|---|---|
| Total Revenues | $13,406 | $29,724 | $34,231 | $54,506 |
| Net Income (Loss) | $(6,910) | $5,925 | $(9,037) | $11,528 |
| Earnings (Loss) Per Share (Basic) | $(0.37) | $0.39 | $(0.52) | $0.76 |
| Cash and Restricted Cash | $2,518 | N/A | N/A | N/A |
| Net Cash Used in Operating Activities | N/A | N/A | $(8,382) | $(16,371) |
| Total Debt (Warehouse, Notes, Subordinated, etc.) | $198,000 | N/A | N/A | N/A |
Note: Total Debt calculated as sum of Warehouse line of credit ($72,801), Notes payable ($3,644), Residual financing ($31,625), Subordinated debt ($70,000), and Related party debt ($20,000) as of June 30, 1999.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 54.9% for the quarter and 37.2% for the six-month period compared to the prior year. This was driven primarily by a shift from a $9.1 million gain on sale of contracts in Q2 1998 to a $4.9 million loss in Q2 1999.
- Loss on Sale of Contracts: The Company sold $234.4 million of contracts on a "servicing released" basis in Q2 1999, resulting in a net loss of approximately $9.3 million. No Net Interest Receivables (NIR) gains were recognized, unlike the prior year.
- Interest Expense Surge: Interest expense increased 125.6% for the quarter and 107.2% for the six-month period. This increase is attributed to higher interest rates and the issuance of $35.0 million in subordinated debt and $33.0 million in senior secured debt since mid-1998.
- Liquidity Strain: Cash and restricted cash decreased from $1,940,000 at year-end 1998 to $899,000 at June 30, 1999. The Company has been unable to borrow under its warehouse lines of credit since late 1998 and has received no material cash releases from Spread Accounts since June 1998.
Guidance, Outlook, Risks, and Contingencies
Liquidity and Capital Resources
The Company faces a severe liquidity deficiency. It is unable to borrow under its warehouse lines of credit due to defaults. Approximately $47.7 million of cash is trapped in Spread Accounts due to increased credit enhancement requirements triggered by portfolio performance issues. The Company's plan to remedy this includes liquidating its remaining portfolio of contracts held for sale, increasing flow purchase volume, and awaiting cash releases from Spread Accounts contingent on an amendment with the Certificate Insurer.
Defaults and Legal Proceedings
- Debt Defaults: The Company is in default under its Senior Secured Line due to consecutive quarterly losses. It is also in default under the LLCP Notes due to failure to secure committed capital from an affiliate (SFSC). On August 4, 1999, General Electric Capital Corporation (GECC) declared a default on the warehouse line of credit ($69 million outstanding), triggering cross-defaults on other senior and subordinated debt.
- Litigation: A lawsuit was filed by Kevin Gilmore regarding repossession notices in California (potential material liability). A separate lawsuit by Bank of America regarding a $3 million overdraft was settled with a repayment plan through November 1999.
Outlook
The Company expects to sell its remaining contracts held for sale in the third quarter of 1999 on a servicing-released basis, anticipating a loss on these sales. It plans to purchase contracts only on a flow basis for the remainder of 1999. There is no assurance that the Company will successfully cure its defaults, obtain necessary lender consents for asset sales, or resume securitization activities.
Investor Verification Checklist
- Debt Default Status: Verify the current status of the defaults declared by GECC, the Senior Secured Line lenders, and LLCP, and whether waivers or forbearance agreements have been secured.
- Asset Sale Execution: Confirm if the Company has successfully sold its remaining portfolio of contracts held for sale and whether the proceeds were sufficient to repay the warehouse indebtedness.
- Spread Account Amendment: Determine if the amendment capping Spread Account balances at 21% has become effective and if cash releases have commenced.
- Liquidity Runway: Assess the Company's ability to meet operating expenses and debt service obligations given the inability to access warehouse lines and the lack of cash releases from trusts.
- Legal Exposure: Monitor the outcome of the Kevin Gilmore lawsuit regarding potential restitution liabilities.