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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-11416
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 753-6800
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /x / No / /
As of August 20, 1999, the registrant had 20,107,501 common shares outstanding.
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of June 30, 1999 and
December 31, 1998.
Condensed consolidated statements of operations for the three
and six month periods ended June 30, 1999 and 1998.
Condensed consolidated statements of cash flows for the six
month periods ended June 30, 1999 and 1998.
Notes to condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
-2-
PART I - FINANCIAL INFORMATION
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
-------------------- --------------------
1999 1998
---- ----
ASSETS
Cash $ 899 $ 1,940
Restricted cash 1,619 1,619
Contracts held for sale (note 2) 90,851 165,582
Servicing fees receivable 5,830 11,148
Residual interest in securitizations (note 3) 220,378 217,848
Furniture and equipment, net 3,663 4,272
Deferred financing costs 2,819 2,817
Investment in unconsolidated affiliates 2,154 4,145
Related party receivables 1,031 3,268
Other assets 31,433 19,323
-------------------- --------------------
$ 360,677 $ 431,962
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable & accrued expenses $ 18,365 $ 9,267
Warehouse line of credit 72,801 151,857
Taxes payable 22,471 29,068
Capital lease obligation 1,839 2,132
Notes payable 3,644 2,557
Residual financing 31,625 33,000
Subordinated debt 70,000 65,000
Related party debt 20,000 20,000
-------------------- --------------------
240,745 312,881
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 20,107,501 and 15,658,501
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 62,421 52,533
Retained earnings 57,511 66,548
-------------------- --------------------
119,932 119,081
-------------------- --------------------
$ 360,677 $ 431,962
==================== ====================
See accompanying notes to condensed consolidated financial statements
-3-
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Gain (loss) on sale of contracts, net (note 4) $ (4,877) $ 9,093 $ (6,436) $ 19,337
Interest income (note 5) 10,730 14,524 25,331 23,596
Servicing fees 8,029 5,896 15,947 10,992
Other income (loss) (476) 211 (611) 581
------------------ ----------------- ------------------ -----------------
13,406 29,724 34,231 54,506
------------------ ----------------- ------------------ -----------------
EXPENSES:
Employee costs 7,850 6,954 16,094 12,350
General and administrative 4,799 5,044 10,555 9,576
Interest 10,407 4,614 17,674 8,529
Marketing 1,103 2,085 2,986 2,533
Occupancy 734 498 1,444 979
Depreciation and amortization 361 270 894 603
Related party consulting fees 77 19 175 38
------------------ ----------------- ------------------ -----------------
25,331 19,484 49,822 34,608
------------------ ----------------- ------------------ -----------------
Income (loss) before income taxes (11,925) 10,240 (15,591) 19,898
Income taxes (5,015) 4,315 (6,554) 8,370
------------------ ----------------- ------------------ -----------------
Net income (loss) $ (6,910) $ 5,925 $ (9,037) $ 11,528
================== ================= ================== =================
Earnings (loss) per share (note 6):
Basic $ (0.37) $ 0.39 $ (0.52) $ 0.76
Diluted $ (0.37) $ 0.36 $ (0.52) $ 0.70
Number of shares used in computing
earnings (loss)per share (note 6):
Basic 18,773 15,215 17,224 15,215
Diluted 18,773 16,762 17,224 16,683
See accompanying notes to condensed consolidated financial statements
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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
--------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,037) $ 11,528
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 894 603
Amortization of NIRs 14,790 10,424
Amortization of deferred financing costs 310 162
Provision for credit losses 2,593 10,004
NIR gains recognized -- (22,885)
Gain on sale of subsidiary -- (56)
Equity net (income) loss in unconsolidated affiliates 1,012 (322)
Net deposits into trusts (17,321) (26,979)
Changes in assets and liabilities:
Purchases of contracts held for sale (217,454) (592,624)
Liquidation of contracts held for sale 289,592 413,982
Net change in warehouse lines of credit (79,056) 171,559
Other assets 2,795 (6,161)
Accrued taxes and expenses 2,500 14,394
------------------ ------------------
Net cash used in operating activities (8,382) (16,371)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment in unconsolidated affiliate 979 --
Related party receivables (11) (1,113)
Repayment of related party receivables 2,248 165
Investment in unconsolidated affiliate -- (65)
Purchases of furniture and equipment (27) (1,157)
Net cash from sale of subsidiary -- 381
------------------ ------------------
Net cash provided by (used in) investing activities 3,189 (1,789)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in residual financing -- 16,000
Issuance of subordinated debt 5,000 --
Issuance of notes payable 1,395 1,453
Repayment of residual financing debt (1,375) --
Repayment of capital lease obligations (292) (267)
Repayment of notes payable (308) (332)
Payment of financing costs (312) --
Issuance of common stock 44 --
Exercise of options and warrants -- 543
------------------ ------------------
Net cash provided by financing activities 4,152 17,397
------------------ ------------------
Decrease in cash (1,041) (763)
Cash at beginning of period 1,940 1,745
------------------ ------------------
Cash at end of period $ 899 $ 982
================== ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 16,634 $ 7,842
Income taxes $ 43 $ 860
Supplemental disclosure of non-cash investing and
financing activities:
Furniture and equipment acquired through capital leases $ -- $ 482
Issuance and revaluation of common stock warrants 9,844 --
Sale of PIC Leasing, Inc.
Net assets sold $ -- $ 705
Net assets retained -- (155)
Gain on sale of subsidiary -- 56
------------------ ------------------
Cash received from sale of subsidiary -- 606
Less: cash relinquished upon disposition -- (225)
------------------ ------------------
Net cash received from sale of subsidiary $ -- $ 381
================== ==================
See accompanying notes to condensed consolidated financial statements
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(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements have been
reclassified for comparability to current period presentation. Results for the
three and six month periods ended June 30, 1999, are not necessarily indicative
of the operating results to be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Alton Receivables Corp., CPS
Receivables Corp., CPS Marketing, Inc., CPS Funding Corp., and CPS Warehouse
Corp. The consolidated financial statements also include the accounts of SAMCO
Acceptance Corp. ("SAMCO"), LINC Acceptance Company, LLC ("LINC") and CPS
Leasing, Inc., each of which is 80% owned by the Company. All significant
intercompany transactions and balances have been eliminated. Investments in
affiliates that are not majority owned are reported using the equity method.
During the six month period ended June 30, 1999, the Company terminated all
operations of SAMCO and LINC.
CONTRACTS HELD FOR SALE
Contracts held for sale include automobile installment sales contracts
(generally, "Contracts") on which interest is precomputed and added to the
principal amount financed. The interest on precomputed Contracts is included in
unearned financed charges. Unearned financed charges are amortized over the
remaining period to contractual maturity, using the interest method. Contracts
held for sale are stated at the lower of cost or market value. Market value is
determined by purchase commitments from investors and prevailing market prices.
Gains and losses are recorded as appropriate when Contracts are sold. The
Company considers a transfer of Contracts, where the Company surrenders control
over the Contracts, a sale to the extent that consideration, other than
beneficial interests in the transferred Contracts, is received in exchange for
the Contracts.
ALLOWANCE FOR CREDIT LOSSES
The Company provides an allowance for credit losses that management
believes provides adequately for known and inherent losses that may develop in
the Contracts held for sale. Provision for losses are charged to gain on sale of
Contracts. Charge-offs, net of recoveries, are charged to the allowance.
Management evaluates the adequacy of the allowance by examining current
delinquencies, the characteristics of the portfolio, the value of underlying
collateral, and general economic conditions and trends.
CONTRACT ACQUISITION FEES AND DISCOUNTS
Upon purchase of a Contract from an automobile dealer ("Dealer"), the
Company generally charges the Dealer an acquisition fee or purchases the
Contract at a discount from its face value (some Contracts are purchased at face
value). The acquisition fees and discounts associated with Contract purchases
are deferred until the Contracts are sold. At that time the deferred acquisition
fee or discount is recognized as a component of the gain on sale.
-6-
RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS
The Company historically has purchased Contracts with the primary
intention of reselling them in securitization transactions as asset-backed
securities. The securitizations generally have been structured as follows:
First, the Company sells a portfolio of Contracts to a wholly owned subsidiary
("SPS"), which has been established for the limited purpose of buying and
reselling the Company's Contracts. The SPS then transfers the same Contracts to
either a grantor trust or an owner trust (the "Trust"). The Trust in turn issues
interest-bearing asset-backed securities (the "Certificates"), generally in an
amount equal to the aggregate principal balance of the Contracts. The Company
typically sells these Contracts to the Trust at face value and without recourse,
except that representations and warranties similar to those provided by the
Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Certificates issued by the Trust; the proceeds from the
sale of the Certificates are then used to purchase the Contracts from the
Company. The Company purchases a financial guaranty insurance policy,
guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. The agreements governing the
securitization transactions (collectively referred to as the "Servicing
Agreements") require that the initial deposits to the Spread Accounts be
supplemented by a portion of collections from the Contracts until the Spread
Accounts reach specified levels, and then maintained at those levels. The
specified levels are generally computed as a percentage of the principal amount
remaining unpaid under the related Certificates. The specified levels at which
the Spread Accounts are to be maintained will vary depending on the performance
of the portfolios of Contracts held by the Trusts and on other conditions, and
may also be varied by agreement among the Company, the SPS, the Certificate
Insurer and the trustee. Such levels have increased and decreased from time to
time based on performance of the portfolios, and have also been varied by
agreement. The specified levels applicable to the Company's sold pools increased
materially in 1998 and have recently been decreased. See note 7 - "Liquidity"
for a discussion of certain pre-conditions to the effectiveness of such
decrease.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the ownership interest that the Company retains in Contracts sold in
securitization. That retained interest (the "Residual") consists of (a) the cash
held in the Spread Account and (b) the net interest receivables ("NIRs"). NIRs
represent the estimated discounted cash flows to be received from the Trust in
the future, net of principal and interest payable with respect to the
Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the
Certificates and the Residuals retained based on the relative fair values of
those portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as "held-for-trading"
securities. The Company is not aware of an active market for the purchase or
sale of interests such as the Residuals, and accordingly, the Company determines
the estimated fair value of the Residuals by discounting the amount and timing
of anticipated cash flows released from the Spread Account (the cash out
method), using a discount rate that the Company believes is appropriate for the
risks involved. For that valuation, the Company has used an effective discount
rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
-7-
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the Servicing Agreements. If the amount of cash
required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and the related Spread Account is at its required level, the excess
is released to the Company or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization. If
the Spread Account balance is not at the required credit enhancement level, then
the excess cash collected is retained in the Spread Account until the specified
level is achieved. The cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Servicing Agreements. Spread
Account balances are held by the Trusts on behalf of the Company as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly
greater than the pass through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In determining
the value of the Residuals described above, the Company must estimate the future
rates of prepayments, delinquencies, defaults and default loss severity as they
affect the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effects of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
the original estimate, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company during 1998 established a
$7.8 million allowance for losses on the Residuals, which did not change during
the six month period ended June 30, 1999.
(2) CONTRACTS HELD FOR SALE
The following table presents the components of Contracts held for sale:
June 30, December 31,
1999 1998
-------------------- --------------------
(in thousands)
Gross receivable balance................................................ $ 98,158 $ 183,876
Unearned finance charges................................................ (3,814) (10,949)
Deferred acquisition fees and discounts................................. (2,108) (4,594)
Allowance for credit losses............................................. (1,385) (2,751)
-------------------- --------------------
Net contracts held for sale............................................. $ 90,851 $ 165,582
==================== ====================
-8-
(3) RESIDUAL INTEREST IN SECURITIZATIONS
The following table presents the components of the residual interest in
securitizations:
June 30, December 31,
1999 1998
--------------------- ---------------------
(in thousands)
Cash, commercial paper, US government securities and other qualifying
investments (Spread Account)............................................ $ 146,574 $ 130,394
NIRs.................................................................... 40,010 54,800
Over collateralization.................................................. 33,080 31,836
Funds held by investor.................................................. 511 480
Investment in subordinated certificates ................................ 203 338
--------------------- ---------------------
Residual interest in securitizations:................................... $ 220,378 $ 217,848
===================== =====================
The following table presents the activity of the NIRs:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(in thousands) (in thousands)
Balance, beginning of period........... $ 44,530 $ 50,910 $ 54,800 $ 45,112
NIR gains recognized................... -- 12,135 -- 22,885
Amortization of NIRs................... (4,520) (5,472) (14,790) (10,424)
------------------ ------------------ ------------------ ------------------
Balance, end of period................. $ 40,010 $ 57,573 $ 40,010 $ 57,573
================== ================== ================== ==================
The following table presents estimated remaining undiscounted credit
losses included in the fair value estimated of the Residuals as a percentage of
the Company's servicing portfolio subject to recourse provisions:
June 30, December 31,
1999 1998
----------------- -----------------
(in thousands)
Undiscounted estimated credit losses.............................................. $ 119,369 $ 169,110
================= =================
Servicing subject to recourse provisions.......................................... $ 1,077,069 $ 1,362,801
================= =================
Undiscounted estimated credit loses as percentage of servicing subject to recourse
Provisions................................................................. 11.08% 12.41%
================= =================
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(4) GAIN ON SALE OF CONTRACTS
The following table presents components of net gain (loss) on sale of
Contracts:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
Gains (loss) recognized on sale........ $ (9,273) $ 12,135 $ (9,273) $ 22,885
Deferred acquisition fees and discounts 5,851 5,386 5,851 8,311
Expenses related to sales.............. (240) (961) (421) (1,855)
Provision for credit losses............ (1,215) (7,467) (2,593) (10,004)
----------------- ----------------- ----------------- -----------------
Net gain (loss) on sale of contracts... $ (4,877) $ 9,093 $ (6,436) $ 19,337
================= ================= ================= =================
(5) INTEREST INCOME
The following table presents the components of interest income:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
Interest on Contracts held for sale $ 11,859 $ 10,793 $ 24,518 $ 18,632
Residual interest income......... 3,391 9,203 15,603 15,388
Amortization of NIRs............. (4,520) (5,472) (14,790) (10,424)
----------------- ----------------- ----------------- -----------------
Net interest income.............. $ 10,730 $ 14,524 $ 25,331 $ 23,596
================= ================= ================= =================
(6) EARNINGS (LOSS) PER SHARE
Diluted loss per share for the three and six month periods ended June
30, 1999, was calculated using the weighted average number of shares outstanding
for the related period. Diluted earnings per share for the three and six month
periods ending June 30, 1998, was calculated using the weighted average number
of diluted common shares outstanding including common stock equivalents which
consist of certain outstanding dilutive stock options and warrants and
incremental shares attributable to conversion of certain subordinated debt. The
following table reconciles the number of shares used in the computations of
basic and diluted earnings (loss) per share for the three and six month periods
ended June 30, 1999 and 1998:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(in thousands) (in thousands)
Weighted average number of common shares outstanding
during the period used to compute basic earnings per share 18,773 15,215 17,224 15,215
Incremental common shares attributable to exercise of
outstanding options and................................ - - 801 - - 722
Incremental common shares attributable to conversion
of subordinated debt...................................... - - 746 - - 746
--------------- --------------- --------------- ---------------
Number of common shares used to compute diluted
earnings (loss) per share................................. 18,773 16,762 17,224 16,683
=============== =============== =============== ===============
-10-
If the anti-dilutive effects of common stock equivalents were not
considered, additional shares included in diluted loss per share calculation for
the three and six month periods ended June 30, 1999, would have included an
additional 1.0 million and 378,000, respectively, from outstanding stock options
and warrants and an additional 2.4 million from incremental shares attributable
to the conversion of certain subordinated debt, for an aggregate total of
approximately 22.2 million diluted shares for the three month period ending June
30, 1999 and 20.0 million diluted shares for the six month period ending June
30, 1999.
(7) LIQUIDITY
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been amounts borrowed under its various warehouse lines,
servicing fees on portfolios of Contracts previously sold, proceeds from the
sales of Contracts, customer payments of principal and interest on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary
uses of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts and income taxes. As a result, the Company has been dependent
on its warehouse lines of credit to purchase Contracts, and on the availability
of capital from outside sources in order to finance its continued operations. As
of the date of this report, the Company is unable to borrow under any warehouse
line of credit (due to certain defaults discussed below), and has not received
any material releases of cash from Spread Accounts since June 1998. The
inability to borrow and lack of releases have resulted in a liquidity
deficiency. The Company's plans for remedying that deficiency are discussed
below, after a review of the operating sources and uses of cash for the six
month period ended June 30, 1999.
Net cash used in operating activities was $8.4 million during the six
month period ended June 30, 1999, compared to $16.4 million for the six month
period ended June 30, 1998. Net cash deposited into trusts was $17.3 million, a
decrease of $9.7 million, or 35.8%, over net cash deposited into trusts in the
six month period ended June 30, 1998.
During the six month period ended June 30, 1999, the Company did not
complete a securitization transaction, and therefore, did not use any cash for
initial deposits to Spread Accounts, compared to $17.1 million used during the
six month period ended June 30, 1998. Cash used for subsequent deposits to
Spread Accounts for the six month period ended June 30, 1999, was $18.0 million,
a decrease of $7.7 million, or 30.0%, over cash used for subsequent deposits to
Spread Accounts in the six month period ended June 30, 1998. Such subsequent
deposits into Spread Accounts in the six month period ended June 30, 1999,
include $1.2 million of cash used to pay down certain senior series of
Certificates to create over-collateralization. "Over-collateralization," as used
herein, means that the principal amount payable on the underlying automobile
purchase contracts is greater than the total principal amount payable on the
Certificates issued by the Trust. Cash released from Spread Accounts for the six
month period ended June 30, 1999, was $665,000, a decrease of $15.2 million, or
95.8%, over cash released from Spread Accounts in the six month period ended
June 30, 1998. Changes in deposits to and releases from Spread Accounts are
affected by the relative size, seasoning and performance of the various pools of
sold Contracts that make up the Company's Servicing Portfolio.
As of June 30, 1999, 15 of the 21 Trusts had incurred cumulative net
losses as a percentage of the original Contract balance or average delinquency
ratios in excess of the predetermined levels specified in the respective
Servicing Agreements. Accordingly, pursuant to the Servicing Agreements, the
specified levels applicable to the Company's Spread Accounts were increased. Due
to cross collateralization provisions of the Servicing Agreements, the increased
specified levels are applicable to 19 of the Company's 21 Trusts. The higher
requisite Spread Account levels range from 30% to 100% of the outstanding
principal balance of the Certificates issued by the related Trusts. In addition
to requiring higher Spread Account levels, the Servicing Agreements provide the
Certificate Insurer with certain other rights and remedies, some of which have
been waived on a monthly basis by the Certificate Insurer. Increased specified
levels for the Spread Accounts have been in effect from time to time in the
past, including the entire period from June 1998 to the present. As a result of
the increased Spread Account specified levels and cross collateralization
provisions, excess cash flows that would otherwise have been released to the
Company instead have been retained in the Spread Accounts to bring the balance
-11-
of those Spread Accounts up to a higher level. Due to the increase in the Spread
Account requirements, there have been no significant releases of cash from the
Trusts since June 1998. Funding such balance increases has materially increased
the Company's capital requirements, while the absence of cash releases has
materially decreased its liquidity. As a result of the increased specified
levels applicable to the Spread Accounts, approximately $47.7 million of cash
that would otherwise have been available to the Company has been delayed and
retained in the Spread Accounts as of June 30, 1999.
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases discussed below), the required level of initial Spread
Account deposits, and the extent to which the Spread Accounts either release
cash to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 has materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999 and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has not purchased any of
such additional notes.
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
In April 1999 the Company entered into an amendment agreement (the
"Amendment") with the Certificate Insurer of the Company's asset-backed
securities to cap the amount of cash retained in the Spread Accounts at 21% of
the outstanding securities balance for 19 of the Company's 21 securitized pools,
computed on a pool by pool basis. The Amendment is subject to certain
performance measures that may result in an increase in the maximum level to 25%
of the outstanding principal balance of such Certificates. The effectiveness of
-12-
the Amendment is contingent upon approval by the holders of the subordinated
Certificates issued by the related Trusts, and certain other conditions. As of
July 31, 1999, the aggregate Spread Account balance of the related 19 Trusts was
19.2% of the outstanding principal balance of the securities. That percentage
should increase as additional collections are deposited into the Spread
Accounts, and as the principal of the related asset-backed securities is paid
down. The Company is in discussions with the Certificate Insurer regarding
proposed revisions to the Amendment, which would clarify its effect, and provide
assurances requested by certain holders of the subordinated Certificates. There
can be no assurance that such revisions will be agreed to.
As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below, and expects to purchase Contracts only on a flow
basis in the remainder of 1999. The reduction in the amount of Contracts
purchased for the Company's own account has materially reduced the Company's
capital requirements.
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to liquidate its existing portfolio of Contracts held for sale, (2) to
increase the quantity of Contracts that it purchases and sells on a flow basis,
thus increasing the fees that it receives in connection with such purchases and
sales, and (3) to await releases of cash from its Spread Accounts, pursuant to
the Amendment. There can be no assurance that this plan will be successful.
During the second quarter, the Company sold, on a servicing released
basis, $234.4 million of its Contracts held for sale. As of the date of this
report, the Company is engaged in negotiations regarding the sale of all or
substantially all of its remaining Contracts held for sale. Such sales are
expected to be on a servicing released basis, and the Company will recognize a
loss upon such sales. The Company expects to effect such sales at an aggregate
cash price in excess of the indebtedness outstanding under its warehouse line of
credit. To the extent that it is successful in doing so, the sales would release
cash to the Company, which would be applied to meet in part the Company's
liquidity and capital requirements identified herein. Substantially all of the
Contracts that the Company proposes to sell are pledged to the lender under the
Company's warehouse line of credit. That lender on August 4, 1999, declared the
line to be in default, and has taken the position that it is not obligated to
release its interest in any of the pledged Contracts unless it receives adequate
assurances that it will be repaid all of the indebtedness outstanding under the
warehouse line. Under the terms of the agreements related to the LLCP Notes and
certain outstanding senior secured indebtedness of the Company (the "Senior
Secured Line"), the consent of those respective lenders is also required to a
sale by the Company of any material assets outside the ordinary course of
business. Such lenders' consents to the proposed sales of Contracts may or may
not be granted, depending on such lenders' evaluation of the proposed sale.
Although the Company believes that the lenders will consent to the sales as
proposed by the Company, there can be no assurance that such consents will be
forthcoming.
The Company's ability to increase the quantity of Contracts that it
purchases and sells on a flow basis will be subject to general competitive
conditions and other factors.
Obtaining release of cash from the Spread Accounts is dependent on the
Amendment's becoming effective, and on collections from the related Trusts
generating sufficient cash to bring the Spread Accounts to the amended specified
levels. Effectiveness of the Amendment, in turn, is dependent on the Company's
obtaining consents from holders of the subordinated Certificates issued by the
related Trusts, and on certain other conditions. The existing terms of the
Senior Secured Line require that any such releases be used to repay principal
outstanding under that line. The Company has commenced discussions with the
holders of the subordinated Certificates and with the senior secured lenders
regarding the consents and amendments that would be necessary to allow the
Company to receive cash released from the Spread Accounts, but there can be no
assurance that the necessary consents and amendments will be obtained and agreed
to.
-13-
The Company is also exploring additional financing possibilities,
focussing on issuance of additional secured debt. Although such explorations
have involved discussions with, and expressions of interest from, various
investment banks, there can be no assurance that any such transactions will take
place.
(8) SUBSEQUENT EVENTS
On July 22, 1999, Bank of America commenced a lawsuit against the
Company in the Superior Court of California, Orange County, seeking repayment of
approximately $3 million advanced to the Company under an overdraft line of
credit, plus interest, costs and attorneys' fees. The Company and Bank of
America have entered into a settlement agreement, pursuant to which the Company
shall repay all amounts owing, in specified installments through November 1999.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consumer Portfolio Services, Inc. and its subsidiaries (collectively,
the "Company") primarily engage in the business of purchasing, selling and
servicing retail automobile installment sale contracts ("Contracts") originated
by automobile dealers ("Dealers") located throughout the United States. In
recent months, the Company has suspended its solicitation of Contract purchases
in 20 states, and as of the date of this report is active in 29 states. There
can be no assurance as to resumption of Contract purchasing activities in other
states. Through its purchase of Contracts, the Company provides indirect
financing to Dealer customers with limited credit histories, low incomes or past
credit problems, who generally would not be expected to qualify for financing
provided by banks or by automobile manufacturers' captive finance companies.
The major components of the Company's revenue are gains recognized on
the sale or securitization of its Contracts, servicing fees earned on Contracts
sold in securitizations, interest earned on Contracts held for sale, and fees
earned upon sale of Contracts that were purchased on a flow basis. Because the
servicing fees are dependent in part on the collections received on sold
Contracts, the Company's income is affected by losses incurred on Contracts,
whether such Contracts are held for sale or have been sold in securitizations.
The Company has purchased Contracts with the primary intention of
reselling them in securitization transactions as asset-backed securities. From
late May 1999 to the present, the Company has purchased Contracts on a flow
basis for a third party; that is, the Company purchases a Contract from a
Dealer, and sells the Contract the next day to the third party for the same
price the Company paid. The Company also receives from the third party a fee for
its services. The Company retains no interest in such Contracts, and neither
services such Contracts nor earns a servicing fee.
Although the Company has been unable to sell Contracts in a
securitization transaction since December 1998, it does plan to securitize in
the future, as to which there can be no assurance. The Company's securitization
structure has been as follows:
First, the Company sells a portfolio of Contracts to a wholly owned
subsidiary ("SPS"), which has been established for the limited purpose of buying
and reselling the Company's Contracts. The SPS then transfers the same Contracts
to either a grantor trust or an owner trust (the "Trust"). The Trust in turn
issues interest-bearing asset-backed securities (the "Certificates"), generally
in a principal amount equal to the aggregate principal balance of the Contracts.
The Company typically sells these Contracts to the Trust at face value and
without recourse, except that representations and warranties similar to those
provided by the Dealer to the Company are provided by the Company to the Trust.
One or more investors purchase the Certificates issued by the Trust; the
proceeds from the sale of the Certificates are then used to purchase the
Contracts from the Company. The Company purchases a financial guaranty insurance
policy, guaranteeing timely payment of principal and interest on the senior
Certificates, from an insurance company (the "Certificate Insurer"). In
addition, the Company provides a credit enhancement for the benefit of the
Certificate Insurer and the investors in the form of an initial cash deposit to
an account ("Spread Account") held by the Trust. The agreements governing the
securitization transactions (collectively referred to as the "Servicing
Agreements") require that the initial deposits to the Spread Accounts be
supplemented by a portion of collections from the Contracts until the Spread
Accounts reach specified levels, and then maintained at those levels. The
specified levels are generally computed as a percentage of the principal amount
remaining unpaid under the related Certificates. The specified levels at which
the Spread Accounts are to be maintained will vary depending on the performance
of the portfolios of Contracts held by the Trusts and on other conditions, and
may also be varied by agreement among the Company, the SPS, the Certificate
Insurer and the trustee. Such levels have increased and decreased from time to
time based on performance of the portfolios, and have also been varied by
agreement. The specified levels applicable to the Company's sold pools increased
materially in 1998. The Company and the Certificate Insurer have entered into an
agreement to decrease such levels, as is discussed under the heading "Liquidity
and Capital Resources." There can be no assurance that such agreement will take
effect.
-15-
At the closing of each securitization, the Company removes from its
consolidated balance sheet the Contracts held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the ownership interest that the Company retains in the Contracts sold
in the securitization. That retained interest (the "Residual") consists of (a)
the cash held in the Spread Account and (b) the net interest receivables
("NIRs"). NIRs represent the estimated discounted cash flows to be received by
the Trust in the future, net of principal and interest payable with respect to
the Certificates, and certain expenses. The excess of the cash received and the
assets retained by the Company over the carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company.
The Company allocates its basis in the Contracts between the
Certificates and the Residuals retained based on the relative fair values of
those portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as "held-for-trading"
securities. The Company is not aware of an active market for the purchase or
sale of interests such as the Residuals, and accordingly, the Company determines
the estimated fair value of the Residuals by discounting the amount and timing
of anticipated cash flows released from the Spread Account (the cash out
method), using a discount rate that the Company believes is appropriate for the
risks involved. For that valuation, the Company has used an effective discount
rate of approximately 14% per annum.
The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Residuals that represent collections on the Contracts in excess
of the amounts required to pay principal and interest on the Certificates, the
base servicing fees, and certain other fees (such as trustee and custodial
fees). At the end of each collection period, the aggregate cash collections from
the Contracts are allocated first to the base servicing fees and certain other
fees such as trustee and custodial fees for the period, then to the
Certificateholders for interest at the pass-through rate on the Certificates
plus principal as defined in the Servicing Agreements. If the amount of cash
required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Spread Account, the excess
is released to the Company, or in certain cases is transferred to other Spread
Accounts that may be below their required levels. Pursuant to certain Servicing
Agreements, excess cash collected during the period is used to make accelerated
principal paydowns on certain Certificates to create over-collateralization,
that is, to reduce the aggregate principal balance of outstanding Certificates
below the aggregate principal amount of the related automotive receivables. If
the Spread Account balance is not at the required credit enhancement level, then
the excess cash collected is retained in the Spread Account until the specified
level is achieved. The cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Servicing Agreements. Spread
Account balances are held by the Trusts on behalf of the Company as the owner of
the Residuals.
The annual percentage rate payable on the Contracts is significantly
greater than the rates payable on the Certificates. Accordingly, the Residuals
described above are a significant asset of the Company. In determining the value
of the Residuals described above, the Company must estimate the future rates of
prepayments, delinquencies, defaults and default loss severity as they affect
the amount and timing of the estimated cash flows. The Company estimates
prepayments by evaluating historical prepayment performance of comparable
Contracts and the effect of trends in the industry. The Company has used a
constant prepayment estimate of approximately 4% per annum. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. In valuing the Residuals, the Company estimates that
losses as a percentage of the original principal balance will total
approximately 14% cumulatively over the lives of the related Contracts.
In future periods, the Company could recognize additional revenue from
the Residuals if the actual performance of the Contracts were to be better than
originally estimated, or the Company could increase the estimated fair value of
the Residuals. If the actual performance of the Contracts were to be worse than
the original estimate, then a downward adjustment to the carrying value of the
Residuals would be required. Due to the inherent uncertainty of the future
performance of the underlying Contracts, the Company has established a provision
for future losses on the Residuals.
-16-
The structure described above is applicable to securitization
transactions conducted at least once quarterly from June 1994 through December
1998. The Company did not sell any Contracts in securitization transactions
during the six month period ended June 30, 1999, and there can be no assurance
as to when it will next sell Contracts using the structure described above.
During the quarter ended June 30, 1999, the Company has changed its
basic system of doing business. Previously, the Company would acquire Contracts
for its own account, borrowing from 88% to 97% of the principal balance of such
Contracts under "warehouse" lines of credit. Periodically (approximately once
every quarter) the Company would then sell most or all of the recently acquired
Contracts in a securitization transaction as described above. In such a sale,
the Company would retain (1) a residual ownership interest in the Contracts
sold, (2) the obligation to service the Contracts sold, and (3) the right to
receive servicing fees. At the end of March 1999, the Company learned that it
would be unable to sell Contracts in securitization transactions for an
indeterminate period. Accordingly, the Company commenced purchasing Contracts
for immediate re-sale to a third party, which third party purchases the
Contracts in turn on a daily basis. In this arrangement, the Company retains no
residual interest in the Contracts, has no servicing obligation, and receives no
servicing fee. For its services in acquiring Contracts for purchase, the Company
receives a per-Contract fee from the third party.
RESULTS OF OPERATIONS
The three month period ended June 30, 1999 compared to the three month period
- -----------------------------------------------------------------------------
ended June 30, 1998
- -------------------
REVENUES. During the three months ended June 30, 1999, revenues
decreased $16.3 million, or 54.9%, compared to the three month period ended June
30, 1998. Gain on sale of Contracts decreased by $14.0 million, or 153.6%, from
a $9.1 million gain on sale in the second quarter of 1998 to a $4.9 million loss
in the second quarter of 1999. The decrease in gain on sale is due to the
Company selling Contracts only on a servicing released basis and thus not
recording any NIR gains during the period. During the three month period ended
June 30, 1999, the Company sold $234.4 million of Contracts on a servicing
released basis, that is, with no residual interest retained, with no servicing
obligation, and with no right to receive a servicing fee. That sale resulted in
a net loss of approximately $9.3 million. Expenses of approximately $240,000
were incurred related to previous securitization transactions, including the
amortization of a warrant issued to the Certificate Insurer in November 1998. In
addition, for the three month periods ended June 30, 1999 and 1998, the Company
charged against gain on sale $1.2 million and $7.5 million, respectively, of
provision for losses on Contracts held for sale. The Company plans to sell,
within the third quarter of 1999 and on a servicing released basis,
substantially all of the remainder of its portfolio of Contracts held for sale.
Although there can be no assurance as to whether such sales will take place or
the exact terms thereof, the Company anticipates that it will incur a loss on
such sales. Interest income decreased by $3.8 million, or 26.1%, and
represented 79.9% of total revenues for the three month period ended June 30,
1999. The decrease is primarily due to the Company not selling any Contracts in
securitization structures and an increase in the amortization of NIRs in
accordance with the seasoning of the underlying securitized pools, as compared
to the same period in the prior year. That decrease in average aggregate
balance, in turn, was due primarily to the Company selling the majority of its
Contracts held for sale during the second quarter. As that sale took place in
the latter part of the quarter, and as the Company anticipates selling most or
all of its remaining Contracts held for sale in the third quarter, interest
income can be expected to decrease further in future quarters.
Servicing fees increased by $2.1 million, or 36.2%, and represented
59.9% of total revenues. The increase in servicing fees is due to the increase
in the servicing portfolio. As of June 30, 1999, the Company was earning
servicing fees on 128,150 sold Contracts with aggregate outstanding principal
balances approximating $1,307.9 million, compared to 98,772 Contracts with
aggregate outstanding principal balances approximating $1,048.6 million as of
June 30, 1998. In addition to the $1,307.9 million in sold Contracts, on which
servicing fees were earned, the Company was holding for sale and servicing an
additional $98.8 million in Contracts, for an aggregate total servicing
portfolio of $1.4 billion. The Company is not currently acquiring Contracts for
its servicing portfolio, and is actively seeking to sell those Contracts in its
servicing portfolio that it holds for its own account. In addition, those
Contracts that remain in the Company's servicing portfolio are self-amortizing,
and the aggregate principal balance of the servicing portfolio therefore
decreases over time. Accordingly, the Company expects that its servicing
portfolio will continue to decrease throughout 1999, and that servicing fees to
be earned in the remainder of 1999 will therefore also decrease.
-17-
EXPENSES. During the three month period ended June 30, 1999, operating
expenses increased $5.8 million, or 30.0%, compared to the three month period
ended June 30, 1998. Employee costs increased by $896,000, or 12.9%, and
represented 31.0% of total operating expenses. The increase is due to the
addition of staff necessary to accommodate the increase in the Company's
servicing portfolio, to increases in the cost of fringe benefits provided to
employees, and to increases in salaries of existing staff. General and
administrative expenses decreased by $245,000, or 4.9% and represented 18.9% of
total operating expenses.
Interest expense increased $5.8 million, or 125.6%, and represented
41.1% of total operating expenses. See "Liquidity and Capital Resources." The
increase is primarily due to the interest paid on an additional $35.0 million in
subordinated debt securities and $33.0 million of senior secured debt (the
"Senior Secured Line"), most of which was issued by the Company at various times
after June 30, 1998, or had a higher outstanding balance during 1999, and was
outstanding throughout most of the second quarter of 1999. Interest expense has
also been increased by the Company's being required to pay higher interest rates
on money borrowed in the current period, as compared with the prior year's
period.
The Company expects to purchase and hold for sale fewer Contracts in
1999 than it did in 1998, which would be expected to result in a decrease in
interest earned on Contracts held for sale, and a decrease in interest expense
incurred.
The six month period ended June 30, 1999, compared to the six month period ended
- --------------------------------------------------------------------------------
June 30, 1998
- -------------
REVENUES. During the six months ended June 30, 1999, revenues decreased
$20.3 million, or 37.2%, compared to the six month period ended June 30, 1998.
Net gain on sale of Contracts decreased by $25.8 million, or 133.3%, for the six
month period ended June 30, 1999.
Interest income increased by $1.7 million, or 7.4%, and represented 74%
of total revenues for the six month period ended June 30, 1999. The increase is
primarily due to a higher average balance of Contracts held for sale during the
six month period ending June 30, 1999.
Servicing fees increased by $5.0 million, or 45.1%, and represented
46.6% of total revenues. The increase in servicing fees is due to the increase
in the Company's servicing portfolio over the prior year's period.
EXPENSES. During the six month period ended June 30, 1999, operating
expenses increased $15.2 million, or 44.0%, compared to the six month period
ended June 30, 1998. Employee costs increased by $3.7 million, or 30.3%, and
represented 32.3% of total operating expenses. The increase is due to the
addition of staff necessary to accommodate the increase in the Company's
servicing portfolio and increases in salaries of existing staff. General and
administrative expenses increased by $979,000, or 10.2%, and represented 21.2%
of total operating expenses. Increases in general and administrative expenses
included increases in telecommunications, stationery, credit reports and other
related items as a result of the increase in the Company's servicing portfolio.
Interest expense increased $9.1 million, or 107.2%, and represented
35.5% of total operating expenses. See "Liquidity and Capital Resources." The
increase is primarily due to the interest paid on an additional $35.0 million in
subordinated debt securities and $33.0 million borrowed under the Senior Secured
Line. Most of such debt was issued by the Company at various times after June
30, 1998, or had a higher outstanding balance during 1999, and was outstanding
throughout most of the second quarter of 1999. Interest expense has also been
increased by the Company being required to pay higher interest rates on money
borrowed in the current period, as compared with the prior year's period.
-18-
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to support its
operating activities. The Company's primary sources of cash from operating
activities have been amounts borrowed under its various warehouse lines,
servicing fees on portfolios of Contracts previously sold, proceeds from the
sales of Contracts, customer payments of principal and interest on Contracts
held for sale, and releases of cash from Spread Accounts. The Company's primary
uses of cash have been the purchases of Contracts, repayment of amounts borrowed
under its various warehouse lines, operating expenses such as employee,
interest, and occupancy expenses, the establishment of and further contributions
to Spread Accounts and income taxes. As a result, the Company has been dependent
on its warehouse lines of credit to purchase Contracts, and on the availability
of capital from outside sources in order to finance its continued operations. As
of the date of this report, the Company is unable to borrow under any warehouse
line of credit (due to certain defaults discussed below), and has not received
any material releases of cash from Spread Accounts since June 1998. The
inability to borrow and lack of releases has resulted in a liquidity deficiency.
The Company's plans for remedying that deficiency are discussed below, after a
review of the operating sources and uses of cash for the six month period ended
June 30, 1999.
Net cash used in operating activities was $8.4 million during the six
month period ended June 30, 1999, compared to $16.4 million for the six month
period ended June 30, 1998. Net cash deposited into trusts was $17.3 million, a
decrease of $27.0 million, or 35.8%, over net cash deposited into trusts in the
six month period ended June 30, 1998.
During the six month period ended June 30, 1999, the Company did not
complete a securitization transaction, and therefore, did not use any cash for
initial deposits to Spread Accounts, compared to $17.1 million used during the
six month period ended June 30, 1998. Cash used for subsequent deposits to
Spread Accounts for the six month period ended June 30, 1999, was $18.0 million,
a decrease of $7.7 million, or 30.0%, from cash used for subsequent deposits to
Spread Accounts in the six month period ended June 30, 1998. Such subsequent
deposits into Spread Accounts in the six month period ended June 30, 1999,
include $1.2 million of cash used to pay down certain senior series of
Certificates to create over-collateralization. "Over-collateralization," as used
herein, means that the principal amount payable on the underlying automobile
purchase contracts is greater than the total principal amount payable on the
Certificates issued by the Trust. Cash released from Spread Accounts for the six
month period ended June 30, 1999, was $665,000, a decrease of $15.2 million, or
95.8%, from cash released from Spread Accounts in the six month period ended
June 30, 1998. Changes in deposits to and releases from Spread Accounts are
affected by the relative size, seasoning and performance of the various pools of
sold Contracts that make up the Company's Servicing Portfolio.
As of June 30, 1999, 15 of the 21 Trusts had incurred cumulative net
losses as a percentage of the original Contract balance or average delinquency
ratios in excess of the predetermined levels specified in the respective
Servicing Agreements. Accordingly, pursuant to the Servicing Agreements, the
specified levels applicable to the Company's Spread Accounts were increased. Due
to cross collateralization provisions of the Servicing Agreements, the increased
specified levels are applicable to 19 of the Company's 21 Trusts. The higher
requisite Spread Account levels range from 30% to 100% of the outstanding
principal balance of the Certificates issued by the related Trusts. In addition
to requiring higher Spread Account levels, the Servicing Agreements provide the
Certificate Insurer with certain other rights and remedies, some of which have
been waived on a monthly basis by the Certificate Insurer. Increased specified
levels for the Spread Accounts have been in effect from time to time in the
past, including the entire period from June 1998 to the present. As a result of
the increased Spread Account specified levels and cross collateralization
provisions, excess cash flows that would otherwise have been released to the
Company instead have been retained in the Spread Accounts to bring the balance
of those Spread Accounts up to a higher level. Due to the increase in the Spread
Account requirements, there have been no significant releases of cash from the
Trusts since June 1998. Funding such balance increases has materially increased
the Company's capital requirements, while the absence of cash releases has
materially decreased its liquidity. As a result of the increased specified
levels applicable to the Spread Accounts, approximately $47.7 million of cash
that would otherwise have been available to the Company has been delayed and
retained in the Spread Accounts as of June 30, 1999.
-19-
The acquisition of Contracts for subsequent sale in securitization
transactions, and the need to fund Spread Accounts when those transactions take
place, results in a continuing need for capital. The amount of capital required
is most heavily dependent on the rate of the Company's Contract purchases (other
than flow purchases), the required level of initial credit enhancement in
securitizations, and the extent to which the Spread Accounts either release cash
to the Company or capture cash from collections on sold Contracts. As noted
above, the absence of any significant releases of cash from Spread Accounts
since June 1998 has materially impaired the Company's ability to meet such
capital requirements. To reduce its capital requirements and to meet those
requirements, the Company in November 1998 began to implement a three-part plan:
the plan includes (i) issuance of debt and equity securities, (ii) agreements
with the Certificate Insurer to reduce the level of initial Spread Account
deposits, and to reduce the maximum levels of the Spread Accounts, and (iii) a
reduction in the rate of Contract purchases.
As the first step in the plan, the Company in November 1998 and April
1999 issued $25.0 million and $5.0 million, respectively, of subordinated
promissory notes (collectively, the "LLCP Notes"), to Levine Leichtman Capital
Partners, L.P. ("LLCP"). The LLCP Notes are due in 2004, and bear interest at
the rate of 14.5% per annum. Net proceeds received from the issuances were
approximately $28.5 million. In conjunction with the LLCP Notes, the Company
issued warrants to purchase up to 4,450,000 shares of common stock at $0.01 per
share, 3,115,000 and 1,334,000 of which were exercised in April 1999 and May
1999, respectively. The effective cost of this new capital represents a material
increase in the cost of capital to the Company. As part of the agreements for
issuance of the LLCP Notes, Stanwich Financial Services Corp. ("SFSC") agreed to
purchase an additional $15.0 million of notes (at least $7.5 million by July 31,
1999, and the remainder by August 31, 1999), and the Company agreed to sell such
notes. The chairman and the president of the Company are the principal
shareholders of SFSC, and the Company's chairman is the chief executive officer
of SFSC. The terms of such additional notes are to be not less favorable to the
Company than (i) those that would be available in a transaction with a
non-affiliate, and (ii) those applicable to the LLCP Notes. Sale of such
additional notes would likely therefore involve some degree of equity
participation, which could be dilutive to other holders of the Company's common
stock. SFSC's commitment in turn has been collateralized by certain assets
pledged by the chairman of the Company's board of directors and the president of
the Company. Additionally, $5.0 million of the LLCP Notes have been personally
guaranteed by the chairman of the Company's board of directors and the president
of the Company. As of the date of this report, SFSC has not purchased any of
such additional notes.
Also in November 1998, as the second step in its plan, the Company
reached an agreement with the Certificate Insurer regarding initial cash
deposits. In this agreement, the Certificate Insurer committed to insure
asset-backed securities issued by the Trusts with respect to at least $560.0
million of Contracts, while requiring an initial cash deposit of 3% of
principal. The commitment is subject to underwriting criteria and market
conditions. Of the $560.0 million committed, $310.0 million was used in the
Company's December 1998 securitization transaction. The Company's agreement with
the Certificate Insurer also required that the Company issue to the Certificate
Insurer or its designee warrants to purchase 2,525,114 shares of the Company's
common stock at $3.00 per share, exercisable through the fifth anniversary of
the warrants' issuance. The number of shares issuable is subject to standard
anti-dilution adjustments.
In April 1999, the Company entered into an amendment agreement (the
"Amendment") with the Certificate Insurer of the Company's asset-backed
securities. The Amendment by its terms would cap the amount of cash retained in
the Spread Accounts for 19 of the Company's 21 securitization Trusts. The
amended maximum would be 21% of the outstanding principal balance of the
Certificates issued by such Trusts, computed on a pool by pool basis. The
Amendment is subject to certain performance measures that may result in an
increase in the maximum level to 25% of the outstanding principal balance of
such Certificates. The effectiveness of the Amendment is contingent upon
approval by the holders of the subordinated Certificates issued by the related
Trusts, and certain other conditions. As of July 31, 1999, the aggregate Spread
Account balance of the related 19 Trusts was 19.2% of the outstanding principal
balance of the related Certificates. That percentage should increase as
additional collections are deposited into the Spread Accounts, and as the
principal of the related Certificates is paid down. The Company is in
discussions with the Certificate Insurer regarding proposed revisions to the
Amendment, which would clarify its effect, and provide assurances requested by
certain holders of the subordinated Certificates. There can be no assurance that
such revisions will be agreed to.
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As a third part of its plan, the Company reduced its planned level of
Contract purchases initially to not more than $200.0 million per quarter
beginning November 1998. In the first quarter of 1999, the Company purchased
$158.0 million of Contracts. During the second quarter of 1999, the Company
purchased $59.1 million of Contracts, of which $20.3 million was on a flow
basis, as discussed below. The Company expects to purchase Contracts only on a
flow basis in the remainder of 1999. The reduction in the amount of Contracts
purchased for the Company's own account has materially reduced the Company's
capital requirements
Since late May 1999, the Company has purchased Contracts from Dealers
without use of warehouse lines of credit, in a "flow purchase" arrangement with
a third party. Under the flow purchase arrangement, the Company purchases
Contracts from Dealers and sells such Contracts outright to the third party.
Purchase of Contracts on a flow basis, as compared with purchase of
Contracts for the Company's own account, has materially reduced the Company's
cash requirements. The Company's plan for meeting its immediate liquidity needs
is (1) to liquidate its existing portfolio of Contracts held for sale, (2) to
increase the quantity of Contracts that it purchases and sells on a flow basis,
thus increasing the fees that it receives in connection with such purchases and
sales, and (3) to await releases of cash from its Spread Accounts, pursuant to
the Amendment. There can be no assurance that this plan will be successful.
During the second quarter, the Company sold, on a servicing released
basis, $234.4 million of its Contracts held for sale. As of the date of this
report, the Company is engaged in negotiations regarding the sale of all or
substantially all of its remaining Contracts held for sale. Such sales are
expected to be on a servicing released basis, and the Company will recognize a
loss upon such sales. The Company expects to effect such sales at an aggregate
cash price in excess of the indebtedness outstanding under its warehouse line of
credit. To the extent that it is successful in doing so, the sales would release
cash to the Company, which would be applied to meet in part the Company's
liquidity and capital requirements identified herein. Substantially all of the
Contracts that the Company proposes to sell are pledged to the lender under the
Company's warehouse line of credit. That lender on August 4, 1999, declared the
line to be in default, and has taken the position that it is not obligated to
release its interest in any of the pledged Contracts unless it receives adequate
assurances that it will be repaid all of the indebtedness outstanding under the
warehouse line. Under the terms of the agreements related to the LLCP Notes and
the Senior Secured Line, the consent of those respective lenders is also
required to a sale by the Company of any material assets outside the ordinary
course of business. Such lenders' consents to the proposed sales of Contracts
may or may not be granted, depending on such lenders' evaluation of the proposed
sale. Although the Company believes that the lenders will consent to the sales
as proposed by the Company, there can be no assurance that such consents will be
forthcoming.
The Company's ability to increase the quantity of Contracts that it
purchases and sells on a flow basis will be subject to general competitive
conditions and other factors.
Obtaining releases of cash from the Spread Accounts is dependent on the
Amendment's becoming effective, and on collections from the related Trusts
generating sufficient cash to bring the Spread Accounts to the amended specified
levels. Effectiveness of the Amendment, in turn, is dependent on the Company's
obtaining consents from holders of the subordinated Certificates issued by the
related Trusts, and on certain other conditions. The existing terms of the
Senior Secured Line require that any such releases be used to repay principal
outstanding under that line. The Company has commenced discussions with the
holders of the subordinated Certificates and with the senior secured lenders
regarding the consents and amendments that would be necessary to allow the
Company to receive cash released from the Spread Accounts, but there can be no
assurance that the necessary consents and amendments will be obtained and agreed
to.
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The Company is also exploring additional financing possibilities,
focussing on issuance of additional secured debt. Although such explorations
have involved discussions with, and expressions of interest from, various
investment banks, there can be no assurance that any such transactions will take
place.
YEAR 2000
OVERVIEW. The Year 2000 issue is predicated on the concept that some
database files may contain date fields that will not support century functions
and that some programs may not support century functions even if the date fields
are present. With the change of millennium, the inability to properly process
century functions may create halts or sort/calculation errors within programs
that use century information in calculation and functions.
The Company predominantly uses accounting and installment loan
application processing software against defined relational database files. Most
financial software has long ago been forced to deal with a four byte date field
due to long term maturity dates, bond yield calculations and mortgage
amortization schedules. The Company has been cognizant of Year 2000
considerations since late 1994, when contracts with maturity dates in the year
2000 were first purchased.
PLAN. The Company's plan to assess the Year 2000 issue consists of a
three-phase process. The first phase of the process, which has been completed,
consisted of assessing all user programs of the Company's mainframe computer.
Those user programs that were not compliant were either corrected or the
necessary software patches have been identified and ordered. There were no
critical user programs identified that could not be modified to be compliant. In
addition, the Company's mainframe computer's operating system was also tested
and was deemed to be compliant as well.
The second phase of the Company's testing consisted of testing all
personal computers for compliance. An outside specialist was engaged to
administer the testing of hardware and software. This testing was completed in
April, 1999. Corrective measures have been put into place for any personal
computer and its software not in compliance at that time.
The third and final stage of testing consists of identifying key
vendors of the Company's operations and requesting that those vendors complete a
Year 2000 compliance questionnaire. Any vendors found to be non-compliant will
be continuously monitored for progress towards compliance. The Company estimates
this phase of testing will also be completed by September 30, 1999.
COSTS. As the majority of the testing was performed internally by the
Company's information systems department, the Company estimates the costs to
complete all phases of testing, including any necessary modifications, to be
insignificant to the results of operations.
At this time, the risks associated with the Company's Year 2000 issues,
both internally and as related to third party business partners and suppliers
are not completely known. Through the Company's plan of analysis and
identification, it expects to identify substantially all of its Year 2000
related risks. Although the risks have not been completely identified, the
Company believes that the most realistic worst case scenario would be that the
Company would suffer from full or intermittent power outages at some or all of
-22-
its locations. Depending upon the locations affected and estimated duration,
this would entail recovery of the main application server systems at other
locations and or move to manual processes. Manual processes have been developed
as part of the overall contingency plan. In relation to this, complete system
data dumps are scheduled to take place prior to the millennium date change to
ensure access to all Company mission critical data should any system not be
accessible for any reason.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains certain "forward-looking statements,"
including, without limitation, the statements to the effect that the Company
expects that (i) the Amendment will take effect, the Spread Account Balances
will reach the amended specified levels, and that the lenders under the Senior
Secured Line will agree to such modifications as will permit the Company to
receive material cash releases prior to such lenders being repaid in full, (ii)
it plans to securitize Contracts in the future, (iii) it will sell Contracts on
a servicing-released basis in the third quarter in transactions that would yield
cash to the Company, over and above the warehouse indebtedness secured by such
Contracts, and (iv) forbearances and waivers will be granted, and amendments
agreed to, with respect to defaults under existing indebtedness. All of these
expectations are based on the Company's assessment of the decisions likely to be
made by third parties, over which the Company has no control.
Specifically, the reader should bear in mind the following
considerations: As to the Amendment, and release of cash from Spread Accounts,
the effectiveness of the Amendment is dependent on the consent of certain
holders of subordinated interest in the related securitization trusts, on the
performance of the receivables included in such trusts, and on certain other
conditions. Such holders may give or withhold such consent in their discretion,
and may or may not agree that it is in their best interest to do so. The
performance of the receivables in the trusts is dependent on various factors,
including their inherent credit quality and the effectiveness of the Company's
collection efforts. The Company's liquidity shortage identified herein could
impair the effectiveness of its collection efforts. Should the Amendment take
effect, the existing terms of the Senior Secured Line require that all
outstanding indebtedness thereunder (approximately $31.6 million) be repaid
prior to the Company's receiving any portion of such cash; accordingly, an
amendment of such terms would be required for the Company to receive any such
cash in the current year. The lenders under the Senior Secured Line will
determine whether to agree to such an amendment based on their independent
evaluation of their best interest, which in turn may depend on the Company's
short-term liquidity and on the availability of consents and waivers from other
lenders to the Company. The liquidity shortage identified in this report could
adversely influence the willingness of all such lenders (under the Senior
Secured Line and others) to grant such waivers or agree to such amendments.
As to future securitization, there can be no assurance that the Company
will have the liquidity or capital resources to enable it to post the reserves
required for credit enhancement of such a transaction, or that the
securitization markets will be receptive at the time that the Company seeks to
engage in such a transaction.
-23-
As to the intended sale of Contracts in the third quarter, although the
Company plans to sell the remainder of its portfolio of Contracts held for sale,
servicing-released, in the third quarter in transactions that would release cash
to the Company, definitive agreements relating to such transactions have been
executed only with respect to a portion of such Contracts. The lender to which
such Contracts are pledged has declared a default under, and accelerated the
indebtedness outstanding under, the related warehouse line of credit. The
intended sales will not take place unless that lender receives assurances that
it deems adequate that it will be repaid in full from the proceeds of such
sales. The prospective purchasers might decline to purchase sufficient Contracts
to repay such indebtedness, or the prices on which the Company and such
purchasers may agree may be inadequate to provide for repayment in full of such
indebtedness, or some combination of those factors may apply. As to the
Contracts for which no definitive agreement has been reached, the prospective
purchasers may decline to proceed with such transactions in their discretion, or
the Company and the purchasers might be unable to reach mutually acceptable
terms. Furthermore, the terms of the Company's Senior Secured Line and of the
LLCP Notes require that such lenders consent to the Company's sale of such
Contracts. The Company is in default with respect to its indebtedness to such
lenders, which may adversely affect their willingness to grant such consents.
As to defaults under existing indebtedness, the Company's ability to
cure such defaults and ultimately repay such debt is dependent on the
willingness of the various lenders and the Certificate Insurer to agree to a
number of waivers and amendments. Although the lenders under the Company's
Senior Secured Line, its warehouse line of credit, the LLCP Notes and certain
other indebtedness may agree to grant such waivers and execute such amendments,
their decisions will be determined by their evaluation of their own interest,
and there can be no assurance that any such waivers will be granted. Certain of
such lenders have indicated that their willingness to grant waivers or to agree
to amendments (such as a re-scheduling of principal repayment) may be dependent
on other lenders' or the Certificate Insurer's also agreeing to waive certain
rights. There can be no assurance that such mutually acceptable agreements will
be reached.
In addition to the statements identified above, descriptions of the
Company's business and activities set forth in this report and in other past and
future reports and announcements by the Company may contain forward-looking
statements and assumptions regarding the future activities and results of
operations of the Company. Actual results may be adversely affected by various
factors including the following: increases in unemployment or other changes in
domestic economic conditions which adversely affect the sales of new and used
automobiles and may result in increased delinquencies, foreclosures and losses
on Contracts; adverse economic conditions in geographic areas in which the
Company's business is concentrated; changes in interest rates, adverse changes
in the market for securitized receivables pools, or a substantial lengthening of
the Company's warehousing period, each of which could restrict the Company's
ability to obtain cash for new Contract originations and purchases; increases in
the amounts required to be set aside in Spread Accounts or to be expended for
other forms of credit enhancement to support future securitizations; the
reduction or unavailability of warehouse lines of credit which the Company uses
to accumulate Contracts for securitization transactions; increased competition
from other automobile finance sources; reduction in the number and amount of
acceptable Contracts submitted to the Company by its automobile Dealer network;
changes in government regulations affecting consumer credit; and other economic,
financial and regulatory factors beyond the Company's control.
-24-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's funding strategy is largely dependent upon acquiring
interest-bearing assets (the Contracts), issuing interest bearing asset-backed
securities and incurring debt. Therefore, upward fluctuations in interest rates
may adversely affect the Company's profitability, while downward fluctuations
may improve the Company's profitability. The Company uses several strategies to
minimize the risk of interest rate fluctuations, including offering only fixed
rate contracts to obligors, regular sales of auto Contracts to the Trusts, and
pre-funding securitizations, whereby the amount of asset-backed securities
issued in a securitization exceeds the amount of Contracts initially sold to the
Trusts. The proceeds from the pre-funded portion are held in an escrow account
until the Company sells the additional Contracts to the Trust in amounts up to
the balance of the pre-funded escrow account. In pre-funded securitizations, the
Company locks in the borrowing costs with respect to the loans it subsequently
delivers to the Trust. However, the Company incurs an expense in pre-funded
securitizations equal to the difference between the money market yields earned
on the proceeds held in escrow prior to subsequent delivery of Contracts and the
interest rate paid on the asset-backed securities outstanding. As the Company
has not sold any Contracts in a securitization transaction, all strategies
related to securitizations have not been applied in the current period.
-25-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 18, 1999, Kevin Gilmore commenced a lawsuit against the Company
in the Superior Court of California, San Francisco County. The lawsuit alleges
certain defects in repossession notices used by the Company in the State of
California, and seeks injunctive relief, including "restitution" of an
unspecified amount. The Company has not been required to respond to this lawsuit
as of the date of this report, and has not yet evaluated the amount of
"restitution" that it could be required to pay, should the plaintiff be
successful. It is possible that such liability could be material. The Company
plans to contests vigorously this litigation.
On July 22, 1999, Bank of America commenced a lawsuit against the
Company in the Superior Court of California, Orange County, seeking repayment of
approximately $3 million advanced to the Company under an overdraft line of
credit, plus interest, costs and attorneys' fees. The Company and Bank of
America have entered into a settlement agreement, pursuant to which the Company
shall repay all amounts owing, in specified installments through November 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's having incurred a loss in two consecutive quarters has
placed it in default under its Senior Secured Line. The Company's failure to
obtain at least $7.5 million of the $15.0 million of capital committed by SFSC
has placed it in default under the LLCP Notes.
On August 4, 1999, General Electric Capital Corporation ("GECC")
notified the Company that GECC was declaring a default under the Company's
warehouse line of credit, and that the approximately $69 million of indebtedness
then outstanding was immediately due and payable. GECC declared there to be
multiple defaults under the warehouse line, including (i) failure of SFSC to
provide capital to the Company, (ii) outstanding indebtedness under the
warehouse line in excess of borrowing base formula, and (iii) failure to deliver
a covenant compliance certificate for the month of June 1999. The Company, as of
the date of this report, has not been able to repay the warehouse indebtedness
in favor of GECC; accordingly, the cross-default provisions of other outstanding
indebtedness of the Company have been triggered. The Company is therefore also
in default with respect to (i) $31.6 million of outstanding indebtedness in
favor of a group of lenders represented by State Street Bank and Trust, and (ii)
$30 million in total of indebtedness to Levine Leichtman Capital Partners, L.P.
Furthermore, should such defaults not be cured within 30 days, the Company would
also be in default with respect to (i) its $20 million of Rising Interest
Subordinated Redeemable Securities due 2006, and (ii) its Participating Equity
Notes (subordinated partially convertible debt securities) due 2004. There can
be no assurance that the Company will be successful in curing its existing
defaults or averting any such further defaults.
The Company is seeking waivers and/or forbearance agreements from the
lenders of all such defaulted indebtedness, but there can be no assurance that
its efforts to obtain such waivers and/or forbearance agreements will be
successful. Failure to obtain such waivers and/or forbearance agreements could
have a material adverse effect on the Company's ability to continue its regular
business operations.
-26-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on May 26,
1999. At the meeting, each of the six nominees to the Board of Directors was
elected for a one-year term by the shareholders. The directors elected were the
incumbent members of the board, Charles E. Bradley, Sr., Charles E. Bradley,
Jr., Thomas L. Chrystie, John G. Poole, William B. Roberts, and Robert A. Simms.
The shareholders also approved each other proposal placed before the annual
meeting. Such proposals were (i) approval of the issuance of a warrant initially
exercisable to purchase 1,335,000 shares of common stock, granted as a condition
of the issuance of $5 million of debt, and (ii) ratification of the appointment
of KPMG LLP as independent auditors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
10.40 Agreement dated May 20, 1999 for Sale of Contracts on a Flow
Basis
27 Financial Data Schedule
During the quarter for which this report is filed, the Company filed
three reports on Form 8-K. Such reports were dated April 15, May 15 and
June 15, 1999. Each was filed solely to include as an exhibit thereto,
Item 7, the Company's monthly Servicer Report with respect to certain
securitization trusts. The assets of such trusts consist of automotive
receivables serviced by the Company. No financial statements were filed
with any of such reports.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CONSUMER PORTFOLIO SERVICES, INC.
(Registrant)
Date: August 23, 1999 /s/ Charles E. Bradley, Jr.
------------------------------------------
Charles E. Bradley, Jr., Director,
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 23, 1999 /s/ James L. Stock
------------------------------------------
James L. Stock, Acting Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
-27-
EXHIBIT INDEX
10.40 Agreement dated May 20, 1999 for Sale of Contracts on a Flow Basis
27 Financial Data Schedule
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