<PAGE>
UNITED STATES
U. S. 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, 1998
[ ] 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 333-50103
CREDITRUST CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1754916
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
7000 SECURITY BLVD, BALTIMORE, MD 21244-2543
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 410-594-7000
Indicate by check mark whether the registrant (1) has 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 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 [ ] No [X]
The number of shares outstanding of the registrant's common stock as of
September 10, 1998 was 8,000,000.
<PAGE>
CREDITRUST CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Page
a) Statements of Earnings
For the Three and Six Months Ended June 30, 1997 and 1998 ... 1
b) Balance Sheets
As of December 31, 1997 and June 30, 1998 ................... 2
c) Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1998 ............. 3
d) Notes to Financial Statements ............................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..................... 18
Item 4. Submission of Matters to a Vote of Security Holders ........... 19
Item 5. Other Information ............................................. 19
Item 6. Exhibits and Reports on Form 8-K .............................. 19
SIGNATURE .................................................................. 20
<PAGE>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CREDITRUST CORPORATION
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Three Months Ended Six Months Ended
June 30 June 30
------------------------------------- -------------------------------------
1997 1998 1997 1998
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue:
Income on finance receivables $ 1,953 $ 1,951 $ 3,893 $ 3,454
Servicing fees - 491 - 1,733
Gain on sale - 5,959 - 6,617
---------- --------- --------- ----------
Total Revenue 1,953 8,401 3,893 11,804
Expenses from Operations
Personnel 1,202 2,218 2,140 3,930
Contingency legal and court costs 79 173 181 277
Communications 189 426 332 704
Rent and other occupancy 209 277 332 579
Professional Fees 43 89 147 281
General and administrative 53 102 185 187
--------- --------- --------- ----------
Total Expenses from Operations 1,775 3,285 3,317 5,958
Earnings from Operations 178 5,116 576 5,846
Other Income (Expense)
Interest and other income 4 86 4 97
Interest expense (114) (206) (227) (282)
--------- --------- --------- ----------
(110) (120) (223) (185)
Earnings Before Income Taxes 68 4,996 353 5,661
Provision for Income Taxes 26 1,958 137 2,208
--------- --------- --------- ----------
Net Earnings $ 42 $ 3,038 $ 216 $ 3,453
Basic Earnings per Common Share $ 0.01 $ 0.51 $ 0.04 $ 0.58
--------- --------- --------- ----------
Diluted Earnings per Common Share $ 0.01 $ 0.51 $ 0.04 $ 0.58
--------- --------- --------- ----------
Weighted Average Shares Outstanding
Basic and Diluted 6,000,000 6,000,000 6,000,000 6,000,000
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
1
<PAGE>
CREDITRUST CORPORATION
CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31 June 30
--------------------------- ------------------------
1997 1998
--------------------------- ------------------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Cash and equivalents $ 770 $ 5,068
Finance receivables 5,050 3,503
Residual investment in securitization - 4,618
Property and equipment 1,434 1,475
Deferred costs 535 1,270
Other assets 415 754
-------------------------- -----------------------
$ 8,204 $ 16,688
-------------------------- -----------------------
Liabilities
Accounts payable and accrued expenses $ 653 $ 1,579
Notes payable 2,106 -
Capitalized lease obligations 972 955
Deferred income 895 -
Other liabilities 420 354
Deferred income taxes 1,094 3,301
Subordinated notes - 4,572
-------------------------- -----------------------
6,140 10,761
Stockholder's Equity
Preferred stock $ - $ -
Common stock 60 60
Paid-in-capital 53 462
Retained earnings 1,951 5,405
-------------------------- -----------------------
2,064 5,927
-------------------------- -----------------------
$ 8,204 $ 16,688
-------------------------- -----------------------
-------------------------- -----------------------
</TABLE>
2
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Six Months Ended June 30
------------------------------
1997 1998
------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 216 $ 3,453
Adjustments to reconcile net earnings to net cash and equivalents
Provided by operating activities
Depreciation and amortization 67 165
Deferred tax expense 131 2,208
Gain on sale -- (6,617)
Changes in assets and liabilities
Increase in other assets (144) (338)
Increase in accounts payable and
accrued expenses 363 926
Decrease in other liabilities (6) (69)
-------- --------
Net Cash Provided by (Used in) Operating Activities 627 (272)
-------- --------
Cash Flows from Investing Activities
Collections applied to principal on finance receivables 1,115 131
Purchases of property and equipment (113) (94)
Acquisitions of finance receivables (460) (9,900)
Proceeds of securitization -- 12,656
Net cost of portfolios sold -- (238)
-------- --------
Net Cash Provided by Investing Activities 542 2,555
-------- --------
Cash Flows from Financing Activities:
Accrued interest on borrowings from participants, net -- 4
Payments on capital lease, net (28) (129)
Payments on notes payable, net (591) (2,106)
Proceeds from subordinated debt, net -- 4,572
Proceeds on issuance of warrants -- 410
Deferred costs (355) (736)
-------- --------
Net Cash (Used in) Provided by Financing Activities (974) 2,015
-------- --------
Net Increase in Cash and Equivalents 195 4,298
-------- --------
Cash at Beginning of Period 476 770
-------- --------
Cash and Equivalents at End of Period
$ 671 $ 5,068
-------- --------
-------- --------
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Equipment and Furniture Acquired Under Capitalized Leases $ 824 $ 112
Residual Investment in Securitization $ - $ 4,183
-------- --------
</TABLE>
3
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying financial statements
include all adjustments (consisting only of normal recurring items) necessary
for their fair presentation in conformity with generally accepted accounting
principles. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Creditrust Corporation final prospectus dated July 29, 1998.
NOTE A-ORGANIZATION AND BUSINESS
Creditrust Corporation (the Company) was incorporated in Maryland on
October 17, 1991. The Company acquires and liquidates consumer finance
receivables originated and charged off by national financial and retail
institutions. The Company's customers are located throughout the United States.
The Company does not currently extend credit or originate loans. Acquisitions
are financed by operations, capital raised through stock offerings and through
loans from third parties.
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates have been made by management with respect to the
collectibility of future cash flows of portfolios. Actual results could differ
from these estimates making it reasonably possible that a change in these
estimates could occur within one year. On a quarterly basis, management reviews
the estimate of future collections, and it is reasonably possible that its
assessment of collectibility may change based on actual results and other
factors.
Finance Receivables/Interest Income
The Company accounts for its investment in finance receivables on an
accrual basis under the guidance of Practice Bulletin 6 "Amortization of
Discounts on Certain Acquired Loans" using unique and exclusive static pools.
Static pools are established with accounts having similar attributes, usually
based on acquisition timing and/or by seller. Once a static pool is established
the receivables in the pool are not changed. The difference between the
contractual receivable balance of the accounts in the static pools and the cost
of each static pool (the discount) is not recorded since the Company expects to
collect a relatively small percentage of each static pool's contractual
receivable balance. Each static pool is initially recorded at cost.
Accrual accounting for each static pool is measured as a unit for the
economic life of the static pool (similar to one loan) for recognition of income
on finance receivables, or collections applied to principal on finance
receivables, and for provision for loss or impairment. The effective interest
rate for each static pool is estimated based on the estimated monthly
collections over the estimated economic life of each pool, currently five years
based on the Company's collection experience. Income on finance receivables is
accrued monthly based on each static pool's effective interest rate applied to
each static pool's monthly opening carrying value. Monthly collections received
for each static pool reduce each static pool's carrying value. To the extent
collections exceed the interest accrual, the
4
<PAGE>
carrying value is reduced and the reduction is recorded as collections applied
to principal. If the accrual is greater than collections, then the carrying
value accretes. Accretion arises as a result of collection rates lower in the
early months of ownership than the estimated effective yield which reflects
collections for the entire economic life of the static pool. Measurement of
impairment and any provision for loss is based on each static pool. To the
extent the estimated future cash flow, discounted at the estimated yield
increases or decreases, the Company adjusts the yield accordingly. To the extent
that the carrying amount of a particular static pool exceeds its fair value, a
valuation allowance would be recognized in the amount of such impairment. The
estimated yield for each static pool is based on estimates of future cash flows
from collections, and actual cash flows may vary from current estimates.
Securitization
The Company completed its first securitization in June 1998 and
expects to pursue additional securitizations in the future. The Company
accounts for securitizations as sales in accordance with SFAS No. 125. In
summary, a securitization will qualify as a sale because it meets the
following provisions of SFAS No. 125: (i) the sold receivables are put beyond
the reach of the Company creditors through a number of means, including
completion of the securitization in a two-step structure; (ii) the buyer of
the receivables is a qualifying special-purpose entity; and (iii) there does
not exist an agreement between the Company and the qualifying special purpose
entity that maintains the Company's control over the sold receivables. The
residual investment in securitization is treated as a debt security
classified as available-for-sale in accordance with SFAS 115. To the extent
that the Company determines in the future that collections will be less than
the carrying value of the residual, the Company would be required to record
an impairment charge.
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires all items required
to be recognized under accounting standards as components of comprehensive
income to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. The statement requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will comply with the
disclosure requirements of SFAS No. 130 in fiscal year 1998. For the quarters
ended June 30, 1997 and 1998 and the six months ended June 30, 1997 and 1998,
the Company had no sources of other comprehensive income. In the future,
comprehensive income or losses might arise from any valuation provision in
connection with the residual investment in securitization as a security held
available for sale.
Stock Split/Authorization
On February 19, 1998, the Company effected a 60,000-for-1 stock split
of its common stock in the form of a stock dividend. Pursuant to the split, the
Company increased the number of shares of common stock authorized for issuance
from 1,000 to 20,000,000. The stated par value of each common share was changed
from no par to $0.01. In addition, the Company authorized 5,000,000 shares of
preferred stock, with a par value of $0.01.
The accompanying financial statements, including stockholder's equity
and per share amounts, give retroactive effect to the stock split.
5
<PAGE>
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" (EPS). The statement replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS calculation. For the three and six month periods ended June 30,
1997 the Company had no common stock equivalents. The Company issued 450,000
warrants for common stock on April 2, 1998 as described in Note I-Subordinated
Notes. Market value of the warrants under the treasury stock method is the same
as the exercise price. Therefore, there is no dilutive effect for the quarter
ended June 30, 1998.
NOTE C-FINANCE RECEIVABLES
The Company acquires charged off consumer receivables at a discount
from the actual contractual receivable balance. The following summarizes the
change in finance receivables as of:
<TABLE>
<CAPTION>
December 31 June 30
(In thousands) 1997 1998
------------ --------
(Audited) (Unaudited)
<S> <C> <C>
Balance, at beginning of period....................... $ 6,604 $ 5,050
Acquisitions of finance receivables................ 557 9,900
Collections applied to principal on finance (2,111) (131)
receivables.....................................
Securitization of finance receivables - (11,316)
------------------- -------------
Balance, at end of period............................. $ 5,050 $ 3,503
------------------- -------------
(Unaudited) (Unaudited)
Unrecorded discount................................... $ 403,308 $ 108,963
------------------- -------------
</TABLE>
To the extent that the carrying amount of a static pool exceeds its
fair value, a valuation allowance would be recognized in the amount of such
impairment. As of December 31, 1997 and June 30, 1997 and 1998, no provision for
loss has been recorded.
NOTE D-PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
(In thousands) December 31 June 30
1997 1998
------------ --------
(Audited) (Unaudited)
<S> <C> <C>
Computer equipment.................................. $ 845 $ 1044
Furniture and fixtures.............................. 856 863
Leasehold improvements.............................. 95 95
--------- ----------
1,796 2,002
Less accumulated depreciation and amortization...... (362) (527)
--------- ----------
$ 1,434 $ 1,475
--------- ----------
</TABLE>
6
<PAGE>
NOTE E-DEFERRED COSTS
The Company has deferred certain costs related to ongoing
securitization, initial public offering and senior subordinated notes placement
efforts. Deferred costs consist of the following at:
<TABLE>
<CAPTION>
(In thousands) December 31 June 30
1997 1998
------------ -----------
(Audited) (Unaudited)
<S> <C> <C>
Securitization..................................................... $ 332 $ -
Initial public offering............................................ 203 737
Senior subordinated notes.......................................... - 533
-------- --------
$ 535 $ 1,270
-------- --------
</TABLE>
Upon closing of the Company's initial public offering, the deferred initial
public offering costs were charged against additional paid in capital from
the offering proceeds and the subordinated note costs were charged to
extraordinary loss on early retirement of debt.
NOTE F-ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
<TABLE>
<CAPTION>
(In thousands) December 31 June 30
1997 1998
------------ -----------
(Audited) (Unaudited)
<S> <C> <C>
Accounts payable........................................................... $ 239 $ 609
Accrued other liabilities.................................................. 105 686
Accrued salaries, taxes and fringe benefits................................ 309 284
------------ ------------
$ 653 $ 1,579
------------ ------------
</TABLE>
NOTE G-NOTES PAYABLE
On September 23, 1996, the Company entered into a credit facility with
a commercial bank to provide acquisition financing for finance receivables. As
of December 31, 1997 the Company had borrowed $2.1 million net of principal
payments made, pursuant to this facility. The facility was retired in June 1998
upon the closing of the securitization (see Note L). Interest was payable
monthly at 1% over the bank's prime rate, which was 9.5% at December 31, 1997
and June 30, 1998. The Company has received a commitment for a $30 million
warehouse facility, but to date the facility has not yet closed.
NOTE H-INCOME TAXES
Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities, following the guidance of SFAS
No. 109, "Accounting for Income Taxes." These differences are primarily the
result from the use of the cost recovery method of accounting for finance
receivables for income tax purposes versus the effective interest rate method
for financial reporting purposes and the treatment of securitizations as
financing for tax purposes.
7
<PAGE>
NOTE I-SUBORDINATED NOTES
In April 1998, the Company sold $5.0 million aggregate principal amount
of subordinated notes, together with common stock purchase warrants exercisable
for an aggregate of 450,000 shares of the Company's Common Stock. Each of the 50
units was sold for $100,000 principal amount for the note and a warrant
exercisable for 9,000 shares. The exercise price is $12.00 per share for 396,000
of the warrants and $15.50 for 54,000 of the warrants. Upon the closing of the
initial public offering in August 1998, the notes plus accrued interest at 10%
per annum were repaid.
The Company recorded the fair value of the subordinated notes at $4.5
million and recorded as additional paid-in capital the remaining consideration
of $410,000 net of offering expenses attributable to the fair value of the
warrants. The effective interest rate on the subordinated notes based on this
allocation is 12.8%. The Company repaid the subordinated notes at $5.0 million
plus accrued interest. This resulted in the Company recording an extraordinary
charge for the early repayment of indebtedness which, including debt issuance
costs, resulted in an extraordinary charge in August 1998 of approximately
$659,000 after-tax, before amortization of financing costs and original issue
discount expensed between April 2, 1998 and the date of pay-off.
NOTE J-COMMITMENTS AND CONTINGENCIES
Litigation
The Company is routinely involved in various litigation incurred in the
ordinary course of business. Management believes these items, individually or in
aggregate, will not have a material, adverse impact on the Company.
NOTE K-SERVICING REVENUE
In June 1997, the Company arranged for a commercial bank to acquire,
under an exclusive purchasing agent agreement, a portfolio of approximately $737
million of charged-off balances of Visa and Mastercard accounts originated by a
major money center bank. In August 1997, the Company closed the acquisition for
the bank and acquired the exclusive rights to the servicing, re-marketing and
securitization of, and a majority interest in the underlying recoverable value
of the portfolio. Under the contract, the Company receives servicing income of
85% of net collections through February 1998, 60% of collections until the bank
receives a required amount under the contract which reduces over time by
collections remitted to the bank estimated to be for 18 to 24 months, and 90% of
net collections thereafter in perpetuity. The Company securitized the portfolio
in June 1998 and will not receive servicing income on the same terms (see
Note L).
NOTE L-GAIN ON SALE AND SECURITIZATION
In June 1998, a special-purpose finance company formed by the Company
issued, through a trust created under an indenture and servicing agreement with
an independent trustee, $14.5 million principal amount of 6.43% Creditrust
Receivables-Backed Notes, Series 1998-1. The securitization notes are secured by
a trust estate, consisting of, among other things, consumer receivables owned by
the Company with a carrying value as of June 1998 of approximately $4.8 million
and all of the serviced receivables. The Company purchased the serviced
receivables included in the securitization for $6.5 million. After payment of
the purchase price of the serviced receivables, retirement of the Company's
credit facility (see Note G), and payment of transaction costs, the Company
received cash of $5.8 million and recognized gain on sale of $6.0 million and
recorded a residual investment in securitization of $4.6 million. The Company
will receive a servicing fee of 20% of the collections of the receivables in the
securitization, and will be entitled to all future recoveries on these
receivables above the debt service on the securitization notes and trustee and
other fees. To the extent that the Company determines in the future that
collections will be less than the
8
<PAGE>
carrying value of the residual, the Company would be required to record an
impairment charge. Payment of principal and interest on the securitization notes
is insured by a financial guaranty and has a "AA" rating from Standard &
Poor's Corporation.
NOTE M-RELATED PARTY TRANSACTIONS
The Company remitted payments on loans due participants (including
interest) of approximately $31,000, $0, $5,000, and $0 to related parties during
the quarters ended June 30, 1997 and 1998 and the six months ended June 30, 1997
and 1998, respectively.
Additionally, included in accounts receivable are amounts due from
non-stockholder employees of $55,766, and $17,750 as of December 31, 1997 and
June 30, 1998, respectively.
Revision to Employment Agreements
In conjunction with the initial public offering, the Company revised
employment agreements with two executive officers in April 1998. The employment
agreements entitle each officer to incentive compensation up to $100,000 at the
discretion of the Board of Directors, in addition to annual base compensation.
Each agreement contains non-compete and confidentiality clauses.
NOTE N-SUBSEQUENT EVENTS
Initial Public Offering
On July 29, 1998, the Company commenced an initial public offering of
2.0 million shares of Common Stock at an initial public offering price of $15.50
per share. The Company's sole shareholder also sold 500,000 shares of Common
Stock in the offering, which closed on August 3, 1998, and an additional 308,711
shares pursuant to an underwriters' over-allotment option which was subsequently
exercised and which closed on September 2, 1998. After payment of underwriting
discounts and commissions and estimated other offering expenses, the Company
received estimated net proceeds of $27.7 million. A portion of these proceeds
was used to repay the subordinated notes; of the remaining proceeds, a portion
has been used to make additional portfolio purchases and the balance has been
added to working capital.
Employee Stock Purchase Plan
In conjunction with the initial public offering, the Company has
reserved a total of 100,000 shares of common stock for issuance pursuant to the
1998 Creditrust Employee Stock Purchase Plan. The plan is administered by the
Board of Directors and is open to all eligible employees, who will be able to
purchase shares at a 15% discount to the fair market value subject to certain
annual limitations. As permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company will
account for stock-based compensation on the intrinsic value-based method of
Accounting Principles Board Opinion No. 25 (APB 25). As the plan is
non-compensatory in nature, no compensation expense will be recorded for stock
purchased pursuant to the plan.
Stock Incentive Plan
In conjunction with the initial public offering, the Company has
reserved a total of 800,000 shares of common stock for issuance pursuant to
the Creditrust 1998 Stock Incentive Plan. The Stock Incentive Plan is
administered by the Board of Directors and provides for the grant of stock
options and other stock grants to directors and to all eligible employees of
the Company, including executive officers and directors. Options granted
under the plan are granted on such terms and at such prices as determined by
the Board of Directors, except the per share exercise price may not be less
than the fair market value of the common stock on the date of the grant. The
Board of Directors has the authority to amend or terminate the plan, provided
no such amendment or termination adversely affects the rights of any holder
of any outstanding option without the written consent of such holder. Options
to purchase 338,710 shares of Common Stock at an exercise price of $15.50 per
share were issued upon the closing of the initial public offering in August
1998.
9
<PAGE>
In connection with the initial public offering, the Board of Directors
granted nonqualified options to key executives and employees.
SMILE Program
In connection with the initial public offering, the Board of Directors
approved the Creditrust Corporation Shareholders Make Involved Loyal Employees
(SMILE) stock purchase plan. Effective every six months, the Board will direct
the purchase of Creditrust Corporation shares in the open market, presently 40
shares for each employee as of the date of purchase. The shares will be held for
the benefit of the employees, and 10 shares per employee will be sold every six
months after purchase and the proceeds distributed to participants then employed
at the end of each six-month period. In August 1998 the trustee for the plan
purchased 15,520 shares at an average price of $17 5/16 per share for a total
payment of $269,000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contain, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from the results discussed in the forward-looking
statements. The following discussion and analysis should be read in conjunction
with the audited financial statements of the Company, including the notes
thereto, included in the Company's Prospectus dated July 29, 1998 and in
conjunction with the information under "Risk Factors and Forward-Looking
Statements" contained in Part II hereof.
Overview
The Company acquires, services and liquidates portfolios of distressed
receivables and believes that it is one of the largest distressed consumer
receivables purchasers anywhere in the United States. The Company uses
proprietary technology to acquire and recover on receivables primarily
consisting of charged-off Visa, MasterCard, and private label credit card
accounts issued by major banks and merchants, the originating institutions.
The Company accounts for its investment in consumer or finance
receivables on an accrual basis using unique and exclusive static pools. Static
pools are established using similar accounts with similar attributes, usually
based on acquisition timing and/or by seller. Once a static pool is established
the receivables in the pool are not changed. The difference between the
contractual receivable balance of the accounts in the static pools and the cost
of each static pool (the discount) is not recorded since the Company expects to
collect a relatively small percentage of each static pool's contractual
receivable balance. Each static pool is initially recorded at cost. See Note B
of Notes to Financial Statements.
In the quarter ended September 30, 1997, the Company began recognizing
servicing income in connection with its agreement to liquidate certain serviced
receivables. Under the terms of the servicing agreement, the financial
institution had agreed to accept any third-party offer to purchase or allow the
Company to securitize the serviced receivables provided the proceeds to the
financial institution exceeded a minimum amount. See "Liquidity and Capital
Resources." The serviced receivables were included in the securitization
described below.
In June 1998, the Company completed its first securitization of
finance receivables. In the securitization, the Company transferred
receivables owned by the Company with a charge-off balance of $412 million
and a carrying value of $4.8 million and also purchased for $6.5 million and
simultaneously transferred the serviced receivables with a charge-off balance
of $692 million, at a transaction price negotiated at the time that the
servicing arrangement was initiated, to Creditnist SPV2, LLC (SPV2), a
limited purpose finance subsidiary. SPV2 issued $14.5 million of 6.43%
Creditnist Receivables-Backed Notes, Series 1998-1, secured by the
receivables and a financial guaranty insurance policy. As of June 30, 1998,
the Company also owned receivables not contributed to the securitization with
a charge-off balance of $112 million and a carrying value of $3.5 million.
The notes are not obligations of the Company and SPV2 is not consolidated for
financial reporting purposes.
The projected recovery value of the transferred receivables exceeded
the principal balance of the securitization notes. The Company retains a
residual interest in SPV2 representing this interest. The Company acts as
servicer with respect to the receivables included in the securitization, and
receives a servicing fee equal to 20% of collections. As servicer, the Company
continues its collection activities with its customers as it otherwise would
with owned receivables. Accordingly, customer relationships are not affected by
the securitization.
The securitization qualified as a sale under generally accepted
accounting principles. For securitized pools of finance receivables, future
income is reduced due to the elimination of income on finance receivables and
partially offset by the receipt of servicing income and interest income on the
residual investment in securitization. After payment of all principal and
interest on the notes, the Company will receive all collections, subject to an
obligation to pay the seller of the serviced receivables 10% of collections with
respect to the serviced receivables after aggregate collections on those
receivables exceed a specified amount.
11
<PAGE>
The proceeds from the securitization were used by the Company to pay
the purchase price of the serviced receivables, to retire debt associated with
the owned receivables, and to pay transaction costs. The Company recognized gain
on the sale of both the owned and serviced receivables in the securitization of
$6.0 million and received cash of $5.8 million. The Company also recorded a
residual investment in securitization of $4.6 million. The investment in
securitization is accounted for under the provisions of SFAS 115 as debt
securities available-for-sale and is estimated to accrue income at the rate of
12% per annum. Once the notes are retired, recoveries will be applied to reduce
the carrying amount of the investment in securitization and accrued income. The
Company expects to pursue similar securitization transactions in the future. See
Note B in the Notes to Financial Statements for additional discussion concerning
the financial statement effects of the securitization.
In April 1998, the Company issued, for $5.0 million in total
consideration, $5.0 million principal amount of subordinated notes and
warrants to purchase 396,000 shares of common stock at an exercise price of
$12.00 per share and warrants to purchase 54,000 shares of Common Stock at an
exercise price equal to the initial public offering price or $15.50. The
Company recorded the fair value of the subordinated notes at $4.5 million and
recorded as additional paid-in capital the remaining consideration of
$410,000 net of offering costs attributable to the fair value of the
warrants. The Company repaid the subordinated notes at $5.0 million plus
accrued interest of $47,000 at the closing of the initial public offering on
August 3, 1998. This resulted in the Company recording an extraordinary
charge for the early repayment of indebtedness which, including debt issuance
costs, resulted in an extraordinary charge of approximately $659,000
after-tax. Accordingly, quarter-to-quarter comparisons of results for the
quarter in which the initial public offering is concluded will be adversely
affected.
Results of Operations
Revenues. Total revenues for the quarter ended June 30, 1998 were
$8.4 million compared to total revenues of $2.0 million for the quarter ended
June 30, 1997, an increase of 320%. On a year to date basis, total revenues
through June 30, 1998 were $11.8 million compared to total revenues through
June 30, 1997 of $3.9 million, a 203% increase. Year to date and second
quarter results were increased significantly due to a $6.0 million gain on
sale from the Company's securitization of most of its receivables in the
second quarter as discussed above. Revenues year to date were further
benefited by a $658,000 gain on sale in the first quarter of 1998 resulting
from the resale of a portfolio repurchased under a settlement agreement.
Previously deferred income of $895,000 was recognized against a $237,000 cost
of the resale. See "Financial Condition-Deferred Income."
Income on finance receivables was level at $2.0 million in the
second quarter of 1998 and 1997. Year to date income on finance receivables
decreased by $439,000 in 1998 over 1997 due primarily to the higher
investment level of receivables owned in the first quarter of 1997 over 1998.
The Company made greater levels of receivable acquisitions in late 1996 and
early 1997 than it did in late 1997 and early 1998, when the Company was
pursuing alternative funding sources to bank financing. As a result, the
weighted average investment in receivables declined to $4.8 million in the
first quarter of 1998 from $6.6 million in the first quarter of 1997. Income
on finance receivables was approximately equal in the second quarter of 1998
over 1997 due to the purchases of receivables in the second quarter of 1998
with proceeds from the subordinated debt offering discussed above.
Collections increased $1.3 million or 26% from $5.0 million to $6.3 million
in the six months ended 1997 and 1998. The weighted average charged-off
balances owned or serviced by the Company increased from $444 million in the
first half of 1997 to $1.1 billion in the first half of 1998, an increase of
148%.
Total Expenses from Operations. Total expenses from operations
increased by $1.5 million to $3.3 million in the quarter ended June 30, 1998
from $1.8 million in the quarter ended June 30, 1997. Year to date total
expenses increased $2.7 million to $6.0 million $3.3 million over last year.
Operating expenses for the quarter ended June 30, 1998 increased over the
quarter ended June 30, 1997 by 85.2% due to (a) a 84.5% increase in personnel
costs as a result of growing total staff from 172 to 333 as of June 30, 1997
and 1998, respectively; (b) a 32.5% increase in rent and occupancy due to the
start up of the approximately 36,000 square foot operations center in March
1997 and full occupancy in June 1997 compared to the full quarter of
occupancy for the quarter ended June 30, 1998; (c) an increase in
communication expense of 125.4% due to increased levels of credit reporting
and long distance usage from a higher volume of accounts; (d) a 119.0%
increase in contingency legal and court costs due to higher volumes of
accounts under management; and (e) 107.0% increase in professional fees
primarily due to auditing expense increases.
12
<PAGE>
Operating expenses as a percentage of revenues experienced a very significant
decline due to the gain on sale in the second quarter of 1998.
Expenses increased in the quarter ended June 30, 1998 primarily as a
result of costs associated with recovery efforts on the serviced receivables,
and in anticipation of additional acquisitions in the 1998 fiscal year.
Management believes that many of the expense categories discussed above can
support the servicing and the liquidation of substantially larger volumes of
receivables without proportional expense increases.
Personnel expenses were $1.2 million or 61.5% of revenue in the quarter
ended June 30, 1997 and $2.2 million or 26.4% of revenue for the quarter ended
June 30, 1998. Personnel expenses were $2.1 million or 55.0% of revenue in the
six months ended June 30, 1997 and $3.9 million or 33.3% of revenue for the
quarter ended June 30, 1998. Major categories of personnel expense increases
included: (a) additional compensation costs for development, installation and
training associated with the expanded information technology systems; (b)
significant investment in senior management infrastructure, including senior
management staff in the information technology and legal departments; and (c)
increase in the number of account officers to service a larger volume of
receivables.
Rent and other occupancy costs were $209,000 or 10.7% of revenue and
$277,000 or 3.3% of revenue in the quarters ended June 30, 1997 and 1998,
respectively. Rent and other occupancy costs were $332,000 or 8.5% of revenue
and $579,000 or 4.9% of revenue in the six months ended June 30, 1997 and 1998,
respectively. This increase is attributable primarily to utilities and
depreciation expense increases in connection with the addition of approximately
36,000 square feet of space and related equipment for the new operations center
started up in March 1997 and occupied in June 1997 compared to a full quarter
and six months of occupancy in 1998.
Professional fees were $43,000 or 2.2% of revenue and $89,000 or 1.1%
of revenue in the quarters ended June 30, 1997 and 1998, respectively.
Professional fees were $147,000 or 3.8% of revenue and $281,000 or 2.4% of
revenue in the six months ended June 30, 1997 and 1998, respectively. The
increases were attributable to increased annual audit fee and various legal
expenses.
Earnings From Operations. Earnings from operations were $178,000 or
9.1% of revenues in the quarter ended June 30, 1997 and $5.1 million or 60.9% of
revenues in the quarter ended June 30,1998. Earnings from operations were
$576,000 or 14.8% of revenues in the six months ended June 30, 1997 and $5.8
million or 49.5% of revenues in the six months ended June 30, 1998. This
increase resulted from several factors, particularly the positive effect on
revenues from servicing income and gain on sale, which largely offset the
substantial growth in corporate infrastructure to support a substantially larger
base of operations.
Other Income (Expense). Interest expense increased from $114,000 in the
quarter ended June 30, 1997 to $206,000 in the quarter ended June 30, 1998.
Interest expense increased from $226,000 in the six months ended June 30, 1997
to $282,000 in the six months ended June 30, 1998. Interest on the Company's
bank debt decreased during both periods as a result of pay-downs on the credit
facility. Offsetting these decreases, interest expense on the subordinated notes
issued in April 1998 increased interest expense in the second quarter and year
to date.
Earnings Before Income Taxes. As the result of the foregoing, earnings
before income taxes were $68,000 in the quarter ended June 30, 1997 and $5.0
million in the quarter ended June 30, 1998. Year to date, earnings before income
taxes were $353,000 and $5.7 million for 1997 and 1998, respectively.
Provision For Income Taxes. Income taxes for the quarters ended June
30, 1997 and 1998 were at effective tax rates of 38% and 39%, respectively. Year
to date, tax rates were 39% in both 1997 and 1998. The effective tax rate
fluctuates as a result of changes in pre-tax income and nondeductible expenses.
Deferred tax liabilities increased from $1.1 million at December 31, 1997 to
$3.3 million at June 30, 1998, principally due to the deferred taxes of
approximately $2.3 million provided for on the gain on sale related to the
securitization which is treated as a financing transaction for tax purposes, and
the reversal of a deferred tax benefit of $345,000 on the first quarter
portfolio resale and recognition of previously deferred income which was
previously taxed.
13
<PAGE>
Net Earnings. Net earnings for the quarter ended June 30, 1997 were
$42,000 versus $3.0 million for the quarter ended June 30, 1998. This
increase was principally attributable to higher revenues as a result of the
gain on sale from securitization and servicing income in the quarter ended
June 30, 1998 over the quarter ended June 30, 1997 of $6.4 million offset by
higher costs of $1.5 million and further decreased by a $1.9 million increase
in tax expenses. Year to date, net earnings were $216,000 for 1997 and $3.5
million for 1998, an increase of $3.2 million. The increase year to date was
similarly attributable to higher revenues as a result of the gain on sale
from securitization and servicing income in 1998 over 1997 of $7.9 million
offset by higher costs of $2.6 million and further decreased by a $2.1
million increase in tax expenses.
EBITDA. EBITDA increased $4.9 million from $134,000 to $5.0 million
at June 30, 1997 to June 30, 1998, respectively. Year to date, EBITDA
increased $5.2 million to $5.7 million in 1998 over 1997. EBITDA increased
parallel to net earnings as a result of the gain on sale in June 1998.
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents increased 558.2%
from $770,000 as of December 31, 1997 to $5.1 million as of June 30, 1998,
primarily as a result of an increase in net cash from investing activities,
principally, proceeds of securitization, and net cash from financing activities,
principally the issuance of the subordinated notes, offset by net cash used in
operating activities.
Finance Receivables. Finance receivables decreased 30.6% to $3.5
million, as of June 30, 1998 from $5.0 million as of December 31, 1997. All
of the receivables owned as of December 31, 1997 were securitized in the
second quarter and removed from the balance sheet. The carrying value of the
receivables, along with the purchase price of the serviced receivables of
$6.5 million was allocated to cost of the sales on the residual investment in
securitization. Purchases of $9.9 million all occurred in the second quarter
and included $6.5 million for the serviced receivables and $3.4 million for
additional receivables that are not yet securitized and are reflected on the
balance sheet as of June 30, 1998. The Company purchased the $3.4 million of
finance receivables as of June 30, 1998 with a portion of the net proceeds
from the issuance of the subordinated notes.
Residual Investment in Securitization. Residual investment in
securitization increased from none in 1997 to $4.6 million as of June 30, 1998.
The residual investment represents the allocated cost of the Company's
subordinated retained interest in the excess recoveries projected from the
receivables securitized in June 1998. Once the securitization notes are fully
satisfied, along with related interest expense, servicing costs, trustee fees
and insurance premiums and the receivables are returned to SPV2, thereafter the
Company will reacquire control of the receivables and continue its recovery
activity in realization of the residual carrying value. The carrying value was
established by allocating the total cost of the receivables sold of $11.3
million among the fair value of the receivables sold in the amount of the
securitization notes of $14.5 million and the fair value of the retained
interest estimated at $8.1 million, plus the cash reserve established from
selling proceeds of $435,000. The fair value of the retained interest was
estimated by management based on future projected recoveries employing the
Company's proprietary projection software, the Portfolio Analysis Tool (PAT).
PAT projected recoveries were reduced by 20% for unforeseen reduced collection
trends, further reduced for the estimated costs to service in the future at 20%
and discounted at 12% per annum as a reasonable expected return on a
subordinated retained interest. Interest income is accrued on the residual at
12% per annum for the estimated remaining life of the receivables of
approximately four years. Once the securitization notes are retired in an
expected 18 months, any collections will be applied to amortize the investment
in residual including accrued interest income. The investment will be accounted
for under the provisions of SFAS 115 as a security available for sale and marked
to market through a valuation reserve in the equity accounts of the Company. As
of June 30, 1998, no valuation adjustment was incurred. In the future, should
recoveries fall short of management's projections, a valuation reserve might be
required.
Property and Equipment. Property and equipment, net, increased 2.9% to
$1.48 million as of June 30, 1998 from $1.43 million as of December 31, 1997 due
to $206,000 in purchases (principally through capital leases) of computer
equipment net of $165,000 of depreciation.
Deferred Costs. Deferred costs increased 137% to $1.3 million as of
June 30, 1998 from $535,000 as of December 31, 1997, principally as a result of
$534,000 in additional capitalized initial public offering development
14
<PAGE>
costs. Previously capitalized securitization costs of $511,000 ($332,000 at
December 31, 1997) were expensed in connection with the completion of the
securitization. Initial public offering costs consist principally of legal and
accounting fees incurred in 1997 and 1998 that management believes have a future
benefit to the Company in its efforts to raise additional equity capital. These
costs will be netted against the additional paid in capital of the initial
public offering proceeds, which became effective, July 28, 1998. The Company
also capitalized $533,000 net of amortization in the first and second quarters
of 1998 in debt issuance costs related to the issuance of the subordinated notes
which were sold April 2, 1998; the Company was required to write off these
costs at the time of the consummation of the initial public offering and the
mandatory repayment of the subordinated notes.
Accounts payable and accrued expenses. Accounts payable and accrued
expenses increased 142% from $653,000 at December 31, 1997 to $1.6 million at
June 30, 1998. The increase was principally due to increased accrued legal,
accounting, and printing costs incurred in connection with the initial public
offering of $581,000.
Notes Payable and Capitalized Lease Obligations. Notes payable
decreased from $2.1 million as of December 31, 1997 to none as of June 30, 1998.
Capitalized lease obligations decreased from $972,000 to $955,000 for the same
period. The decrease in notes payable was attributable to repayments on the
Company's bank credit facility and complete repayment in June 1998 at the
time of the securitization. No further borrowings are available under this bank
credit facility. The Company expects to obtain a $30 million warehouse facility
for which it has received a lending commitment but which has not yet closed.
Deferred Income. As of December 31,1997 the Company had deferred income
of $895,000. As of March 31, 1998, the deferred income was recognized.
Historically, the Company purchased receivables from time to time with
commitments from a third party to purchase a portion of the newly acquired
receivables. The Company entered into three such transactions during 1996
resulting in gains totaling $996,000. In 1997, a complaint was filed against the
Company by one such purchaser. In June 1997, the Company settled, resulting in a
dismissal of the complaint. Under the terms of the settlement, the Company
agreed to repurchase the receivables for approximately $1.3 million, as adjusted
for collections until consummation of the repurchase, resulting in deferred
income of $895,000. The repurchase occurred in February 1998 for approximately
$1.0 million. The portfolio was resold in February 1998 to a financial
institution for $800,000. The Company recognized a gain on sale of approximately
$658,000 in the first quarter of 1998, approximately $401,000 after tax.
Deferred Tax Liability. Deferred tax liability at June 30, 1998 is $3.3
million compared to $1.1 million as of December 31, 1997. This increase of $2.2
million was primarily attributable to an increase in deferred income for tax
purposes since the gain from securitization is not income and the securitization
notes are treated as a financing transaction and was further attributable to a
decrease in deferred tax benefit on previously deferred gain on sale reported in
the first quarter of 1998 for book purposes.
Subordinated Notes. The Company issued subordinated notes of $5 million
on April 2, 1998 with 450,000 of warrants to purchase common stock. The notes
were unsecured and subordinate to the general liabilities of the Company. The
notes were recorded at their fair value less the value attributable to the
warrants. The notes were repaid with proceeds from the initial public offering
on August 3, 1998.
Total Stockholder's Equity. Total stockholder's equity increased $3.9
million or 187% to $5.9 million at June 30, 1998 from $2.1 million at December
31, 1997 as a result of net income of $3.4 million during the six months ended
June 30, 1998 and $409,000 of additional paid in capital resulting from the fair
value of the warrants issued in connection with the subordinated notes.
Liquidity And Capital Resources
The Company has derived substantially all of its cash flow from
collections on finance receivables and servicing income. In addition, the
Company receives cash upon the sale of receivables in connection with
securitizations. In the past, the primary sources of funds to acquire
receivables were cash flow, the sale of participations to third parties, and
borrowings under a bank credit facility. In September 1996, the Company entered
into a credit facility with a commercial bank providing up to $4.0 million in
advances to finance the acquisition of finance receivables. In 1997, the Company
was notified that the bank providing the Company's bank credit facility was
being
15
<PAGE>
acquired. At the time of the securitization, the Company's existing bank debt
was repaid and no further borrowings are permitted under that facility. At
December 31, 1997, and June 30, 1998, there was no availability under the
Company's bank credit facility. The Company has received a commitment for a $30
million warehouse facility, but to date the facility has not closed.
In April 1998, the Company issued $5.0 million of subordinated
notes in a private placement transaction. These notes were repaid upon
consummation of the initial public offering. In connection with the private
placement, the Company issued warrants to purchase 396,000 shares of common
stock exercisable at $12.00 per share and warrants to purchase 54,000 shares of
common stock exercisable at the initial public offering price or $15.50.
On June 19, 1998, the Company completed a securitization of most of the
receivables owned as of March 31, 1998 and the serviced receivables. Gross
proceeds of the securitization were $14.5 million. After securitization expenses
and the purchase of the serviced receivables, the Company retired its notes
payable to its existing senior lender of $1 million resulting in net cash
proceeds available for working capital (including receivables purchases) of $5.8
million.
As of June 30, 1998, the Company had cash of $5.1 million. Capital
expenditures from operations were $94,000 for the six months ended June 30,
1998. Capital additions made pursuant to capital leases were $112,000 in the
first six months of 1998. Receivables purchases were $9.9 million for the six
months ended June 30, 1998.
As an additional means of increasing the amount of receivables under
management, in August 1997, the Company entered into an exclusive servicing
agreement with a financial institution pursuant to which the Company serviced
approximately 400,000 additional accounts representing approximately $737
million of charged-off balances of serviced receivables. The serviced
receivables were included in the securitization.
The debt service requirements associated with borrowings under any new
credit facility would significantly increase liquidity requirements. The Company
anticipates that its operating cash flow and proceeds from its initial public
offering and subordinated note offering will be sufficient to meet its
anticipated future operating expenses and to service its debt requirements as
they become due. In order to continue its growth, the Company will have to make
future purchases of receivables that may require significant additional
investment in excess of the capital raised in the initial public offering, the
subordinated debt offering and its initial securitization. The Company
anticipates financing such purchases with additional borrowings under a $30
million warehouse facility for which the Company has received a lending
commitment but which facility has not yet closed. It is expected that such a
facility would enable the Company to purchase additional portfolios of
receivables to be held under the warehouse subject to a securitization or other
permanent financing within 12 months. In addition, the Company expects to secure
additional funding through additional securitizations similar to its initial
securitization.
16
<PAGE>
Year 2000
The Year 2000 issue arises out of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording mechanism, including date sensitive software, which uses only
two digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations and cause a disruption of operations, including, among other
things, a temporary inability to process transactions, send letters and
statements or engage in similar activities.
The Company believes it has replaced or modified all of its material
computer systems and business applications software so that its computer systems
would properly utilize dates beyond December 31, 1999 and does not believe that
any further material expenditures will be necessary to make these systems Year
2000 compliant. Most of the Company's major customers are the largest
originating institutions in the country, which the Company expects will become
Year 2000 compliant due to the nature of their businesses and the financial
strength of these businesses. Additionally, the Company does not generally
communicate on-line with originating institutions on a continuing basis, but
rather receives discrete date files for analysis and to support recovery
activities. The Company has to date been able to convert data received from
originating institutions and other third parties to be Year 2000 compliant and
expects that it will continue to be able to do so in the future. The Company is
in the process of seeking Year 2000 certifications from key vendors.
Inflation
The Company believes that inflation has not had a material impact on
its results of operations for the three and six months ended June 30, 1997 and
1998.
Forward-Looking Statements
The "Year 2000" and "Risk Factors and Forward-Looking Statements"
sections contained herein discuss factors that could cause actual results to
differ materially from the forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained herein.
17
<PAGE>
Part II. Other Information
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.
(d) The Company filed its first registration statement under the
Securities Act on April 15, 1998 and the registration was declared effective
July 28, 1998, File No. 333-50103. The offering commenced July 29, 1998, and
closed on August 3, 1998. The underwriters exercised the over-allotment
option and the option closing occurred on September 2, 1998. 66,289 shares
covered by the over-allotment option registered in the offering were not
sold. The offering has terminated. The managing underwriters were Ferris,
Baker Watts Incorporated and Boenning & Scattergood, Inc. The security
registered is Common Stock, par value $0.01 per share. The amount registered,
the aggregate price of the offering amount registered, the amount sold and
the aggregate offering price of the amount sold to date, as to the Company
and the sole selling stockholder, respectively, are as follows:
FOR THE ACCOUNT OF THE COMPANY
<TABLE>
<CAPTION>
<S> <C>
Amount registered 2,000,000
Aggregate price of offering amount registered $31,000,000
Amount sold 2,000,000
Aggregate offering price of amount sold $31,000,000
FOR THE ACCOUNT OF THE SELLING STOCKHOLDER
Amount registered 875,000
Aggregate price of offering amount registered $13,562,500
Amount sold 808,711
Aggregate offering price of amount sold $12,535,020.50
</TABLE>
Through the date hereof, in connection with the issuance and
distribution of the Company's Common Stock the expenses incurred were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting Discounts and Commissions $2,160,000
Finders Fees -
Underwriters Expenses 310,000
Other Expenses* 800,000
--------------
Total Expenses $3,270,000
</TABLE>
* Estimated
The above-listed expenses were paid directly to underwriters and others
incurring those expenses. The net offering proceeds to the Company after
deducting total expenses described above are estimated at $27,730,000.
The Company used a portion of the net offering proceeds to redeem
subordinated notes in the amount of $5.0 million plus accrued interest of
$47,000 and to purchase additional portfolios of consumer receivables in amounts
to be detailed in future filings.
18
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consents each dated July 27, 1998, in lieu of a special
meeting, the sole stockholder of the Company ratified and approved the following
matters:
a) The adoption of an amendment to the Articles of Amendment and
Restatement, as and for the charter of the Company, exempting any "business
combination" between the Company and Joseph K. Rensin, or any existing or future
associates or affiliates of Joseph K. Rensin, from the provisions of Subsection
6 of Title 3 of the Corporations and Associations Article of the Annotated Code
of Maryland.
b) The adoption of the 1998 Incentive Stock Plan, the 1998 Employee
Stock Purchase Plan and the SMILE Program.
ITEM 5. OTHER INFORMATION
Risk Factors and Forward-Looking Statements
The Company's business prospects are highly dependant on a variety of
factors within and beyond the Company's control which may affect the timing and
amount of collections on the Company's portfolios of consumer receivables, most
of which have been in default. Future internal growth will depend on numerous
factors, including the initiation and development of relationships with
originating institutions, the availability of adequate financing to purchase
additional receivables, the ability to securitize receivables, the ability to
maintain the quality of services the Company provides to its customers and to
originating institutions, and the recruitment, motivation and retention of
qualified personnel. There can be no assurance that the Company will be able to
manage its expanding operations effectively or to maintain its historical
collection rates, or that it will be able to maintain or accelerate its growth,
and any failure to do so could have a material adverse effect on the Company's
business, results of operations, and financial condition.
The Company's quarterly operating results have fluctuated in the
past and may fluctuate in the future as a result of a variety of factors
which can affect revenues, cost of collections and other expenses. These
factors include costs relating to personnel, communications, and legal
collections, as well as variations in the value of portfolios of receivables
based on the accuracy of the Company's pricing models, pricing pressures in
connection with future acquisitions of receivables, and capital expenditures
and other costs relating to the expansion of its operations. No assurance can
be given that unanticipated future events, including further refinements to
the Company's collection models, will not result in changes in estimates in
future periods which could adversely affect quarter-to-quarter comparisons.
Period-to-period comparisons will also be affected by the timing of
securitization transactions. The Company's initial securitization, completed in
June 1998, resulted in gain on sale of $6.0 million and the recognition of a
residual investment in securitization of $4.6 million (accounted for as an
available-for-sale security). A decline in the value of an available-for-sale
security below cost that is deemed other than temporary is charged to earnings
and results in the establishment of a new cost basis for the security and,
therefore, could have an adverse effect on the Company's financial position
and/or results of operations. Any downward adjustment in the carrying amount of
any residual interests could also have an adverse effect on the market price of
the Company's Common Stock. Additionally, the timing of future securitizations
which the Company may pursue, if any, could affect period-to-period comparisons.
Statements made herein and in other written and oral statements of
the Company may include the plans and objectives of management for future
operations, including plans and objectives relating to future growth in the
number of receivables and availability of adequate third-party financing. Any
forward-looking statements are based on current expectations which involve
numerous risks and uncertainties. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive, and market conditions and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that any of the forward-looking statements will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or by any other person that the
objectives and plans of the Company will be achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27. Financial Data Schedule
(B) Reports on Form 8-K
Creditrust Corporation filed no reports on Form 8-K during the quarter
ended June 30, 1998.
Items 1 and 3 are not applicable and have been omitted.
19
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Creditrust Corporation
Date: September 10, 1998
By: /s/ Richard J. Palmer
------------------------------------
Richard J. Palmer
Vice President
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001043497
<NAME> CREDITRUST CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,068
<SECURITIES> 4,618
<RECEIVABLES> 3,503
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,068
<PP&E> 2,002
<DEPRECIATION> 527
<TOTAL-ASSETS> 16,688
<CURRENT-LIABILITIES> 1,579
<BONDS> 4,572
0
0
<COMMON> 60
<OTHER-SE> 5,867
<TOTAL-LIABILITY-AND-EQUITY> 16,688
<SALES> 0
<TOTAL-REVENUES> 11,804
<CGS> 0
<TOTAL-COSTS> 5,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> 5,661
<INCOME-TAX> 2,208
<INCOME-CONTINUING> 3,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,453
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
