Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The Company purchases, sells, and services retail automobile installment sale contracts. Historically, it securitized these contracts, but no securitizations occurred during the nine months ended September 30, 1999. The Company has shifted to a "flow purchase" model, buying contracts from dealers and immediately selling them to a third party without retaining residual interest or servicing obligations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1998 |
|---|---|---|---|
| Total Revenues | $(9,204) | $25,027 | $89,082 |
| Net Income (Loss) | $(16,569) | $(25,606) | $17,766 |
| Earnings Per Share (Basic) | $(0.82) | $(1.41) | $1.16 |
| Cash and Restricted Cash | $2,177 | $2,177 | N/A |
| Total Debt (Notes, Subordinated, Related Party) | $94,901 | $94,901 | N/A |
| Warehouse Line of Credit | $0 | $0 | $151,857 (Dec 31, 1998) |
Note: Total Revenues for the three months ended Sep 30, 1999, were negative due to significant losses on the sale of contracts.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues for the nine months ended September 30, 1999, decreased by $64.1 million (71.9%) compared to the same period in 1998. This was driven by a $50.8 million decrease in net gain on the sale of contracts, which turned from a $34.7 million gain in 1998 to a $16.2 million loss in 1999.
- Net Loss: The Company reported a net loss of $25.6 million for the nine months ended September 30, 1999, compared to a net income of $17.8 million in the prior year period.
- Asset Reduction: "Contracts held for sale" dropped from $165.6 million at December 31, 1998, to $4.6 million at September 30, 1999, reflecting the cessation of holding contracts for securitization.
- Debt Structure: The Company paid down its warehouse lines of credit entirely ($151.9 million balance at year-end 1998 reduced to $0). However, subordinated debt increased to $70.0 million, and related party debt increased to $21.5 million.
- Cash Flow: Net cash used in operating activities was $7.8 million for the nine months ended September 30, 1999, a significant improvement from the $45.2 million used in the prior year period.
Guidance, Outlook, and Risks
Liquidity and Capital Plan
The Company faces a liquidity deficiency due to the inability to borrow under warehouse lines and a lack of cash releases from Spread Accounts (credit enhancement reserves) since June 1998. Approximately $51.0 million of cash was trapped in Spread Accounts as of September 30, 1999, due to increased reserve requirements triggered by portfolio performance.
Remediation Plan:
- Debt/Equity Issuance: Issued $30 million in subordinated notes (LLCP Notes) and related warrants.
- Spread Account Amendment: An agreement with the Certificate Insurer to reduce Spread Account levels to 21% became effective November 3, 1999. The Company received its first material cash release on November 4, 1999.
- Flow Purchases: Reduced contract purchases for its own account and shifted to "flow purchases" (buying and immediately selling to a third party) to reduce capital requirements.
Risks and Contingencies
- Defaults: The Company is in default under its Senior Secured Line and LLCP Notes due to consecutive losses and failure to secure committed capital from an affiliate (SFSC). Forbearance agreements are in place, but future waivers are not guaranteed.
- Legal Action: A lawsuit by Bank of America regarding a $3 million overdraft was settled with a repayment plan through November 1999.
- Future Securitization: There is no assurance the Company will be able to resume securitization transactions or that the market will be receptive.
- Year 2000: The Company believes its systems are compliant, but risks of power outages or vendor failures remain.
Investor Verification Checklist
- Cash Release Status: Verify the actual amount of cash released from Spread Accounts following the November 3, 1999, amendment and whether subsequent releases are continuing as expected.
- Debt Compliance: Confirm the Company's adherence to the repayment schedules under the Senior Secured Line and the status of negotiations for waivers regarding the LLCP Notes.
- Flow Purchase Viability: Assess the sustainability of the "flow purchase" model and whether the fee income generated is sufficient to cover operating expenses without securitization gains.
- Portfolio Performance: Monitor delinquency and loss rates on the existing servicing portfolio, as poor performance could trigger further increases in Spread Account requirements.
- Capital Commitments: Verify if the affiliate (SFSC) has fulfilled its commitment to purchase additional notes, as failure to do so contributed to the current default status.