Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: The Company purchases, sells, and services retail automobile installment sale contracts ("Contracts") originated by dealers, primarily targeting customers with limited credit histories. Revenue is generated through gains on the sale or securitization of Contracts, servicing fees, and interest income on residual interests and Contracts held for sale.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1997 |
|---|---|---|---|
| Total Revenues | $37,448 | $101,957 | $55,652 |
| Net Income | $6,238 | $17,766 | $13,347 |
| Earnings Per Share (Diluted) | $0.38 | $1.08 | $0.85 |
| Cash and Cash Equivalents | $617 (Sep 30, 1998) | -- | |
| Net Cash Used in Operating Activities | -- | $(45,177) (9 months 1998) | |
| Total Assets | $535,777 (Sep 30, 1998) | -- | |
| Total Liabilities | $429,862 (Sep 30, 1998) | -- | |
| Warehouse Lines of Credit | $286,588 (Sep 30, 1998) | -- |
Revenue Composition (9 Months 1998):
- Gain on sale of contracts: $47,525 (46.6% of total revenue)
- Interest income: $35,655 (35.0% of total revenue)
- Servicing fees: $17,891 (17.5% of total revenue)
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 83.2% for the nine months ended September 30, 1998, compared to the prior year period. This was driven by a 85.2% increase in gains on the sale of contracts and a 94.8% increase in interest income.
- Volume Expansion: The Company sold $638.3 million in contracts during the nine-month period (up from $371.1 million in 1997) and purchased $895.6 million in contracts (up from $449.7 million in 1997).
- Expense Increases: Operating expenses rose 118.4% year-over-year. Employee costs increased 89.4% due to staff additions, and interest expense increased 116.4% due to higher borrowings under warehouse lines to fund contract purchases.
- Provision for Credit Losses: The provision for losses on contracts held for sale increased 386.0% to $12.875 million, primarily due to the larger volume of contracts held for sale.
- Liquidity Position: Cash on hand decreased from $1.745 million at year-end 1997 to $0.617 million at September 30, 1998. Net cash used in operating activities was $45.2 million for the nine-month period.
Guidance, Outlook, and Risks
Strategic Shift and Guidance:
- The Company has decided to reduce its rate of contract purchases to conserve capital, expecting future purchases not to exceed $200 million per quarter (down from $303 million in Q3 1998).
- Management anticipates this reduction will lower future revenues (both interest and gain on sale) and operating expenses.
- The Company is implementing a three-part capital plan: issuing debt/equity, negotiating reduced initial cash deposits for Spread Accounts, and reducing contract purchase rates.
Recent Financing Activities (Post-Period):
- In November 1998, the Company issued $25 million in subordinated notes at 13.5% interest to an affiliate of Levine Leichtman Capital Partners, Inc.
- Related party debt terms were modified, extending maturity and reducing interest rates from 15% to 12.5%.
- An agreement was reached with the Certificate Insurer to reduce initial Spread Account deposits from 8.0% to 3.0% for future transactions.
Risks and Contingencies:
- Liquidity: The Company requires significant capital for Spread Account deposits and contract purchases. One warehouse line of credit expires November 30, 1998, and renewal terms are uncertain (potential increase in interest rates and reduction in borrowing capacity).
- Credit Performance: Valuation of residual interests depends on estimates of prepayments, delinquencies, and defaults. If actual performance is worse than estimated, the carrying value of residuals may need to be reduced.
- Spread Accounts: Due to delinquency performance in certain pools, the Company has not received cash releases from Spread Accounts since June 1998.
- Year 2000: The Company believes its systems are compliant, but there is no assurance that supplier incompatibilities will not have a material adverse effect.
Key Facts for Investor Verification
- Capital Constraints: Verify the status of the warehouse line of credit expiring November 30, 1998, and the terms of the replacement facility.
- Revenue Sustainability: Assess the impact of the planned reduction in contract purchases (to ~$200M/quarter) on future revenue growth and profitability.
- Credit Quality: Monitor the delinquency and loss rates of the securitized pools, as these directly impact the value of residual interests and cash releases from Spread Accounts.
- Cost of Capital: Note the significant increase in the cost of new debt (13.5% on recent notes) compared to historical rates, which will pressure future margins.
- Cash Flow: Review the continued negative operating cash flow and the Company's ability to fund operations without further dilution or high-cost debt.