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 333-50103
CREDITRUST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1754916
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR 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 [X] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
AUGUST 15, 1999 WAS 10,431,525.
<PAGE>
CREDITRUST CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
a) Consolidated Statements of Earnings
For the Three and Six Months Ended June 30, 1998 and 1999....... 1
b) Consolidated Balance Sheets
As of December 31, 1998 and June 30, 1999....................... 2
c) Consolidated Statement of Stockholders' Equity and Comprehensive
Income as of December 31, 1998 and June 30, 1999................ 3
e) Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999................. 4
f) Notes to Consolidated Financial Statements...................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 14
Item 5. Other Information.............................................. 14
SIGNATURE............................................................... 15
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in thousands, except share data) Three Months ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
Revenue
Income on finance receivables ..................... $ 1,951 $ 15,771 $ 3,454 $ 24,904
Servicing fees .................................... 491 1,306 1,733 2,869
Income on investment in securitizations ......... -- 1,341 -- 2,670
Gain on sale ...................................... 5,959 -- 6,617 --
------------ ------------ ------------ ------------
8,401 18,418 11,804 30,443
Expenses
Personnel ......................................... 2,218 7,313 3,930 12,973
Communications .................................... 426 925 704 1,470
Rent and other occupancy .......................... 277 559 579 1,034
Professional fees ................................. 89 699 281 1,414
Other expenses .................................... 275 643 464 893
------------ ------------ ------------ ------------
3,285 10,139 5,958 17,784
------------ ------------ ------------ ------------
Earnings from Operations .................................. 5,116 8,279 5,846 12,659
Other Income (Expense)
Interest and other income ......................... 86 555 97 703
Interest expense .................................. (206) (821) (282) (1,364)
------------ ------------ ------------ ------------
Earnings Before Income Taxes .............................. 4,996 8,013 5,661 11,998
Provision for Income Taxes ................................ 1,958 3,124 2,208 4,679
------------ ------------ ------------ ------------
Net Earnings .............................................. $ 3,038 $ 4,889 $ 3,453 $ 7,319
============ ============ ============ ============
Basic Earnings Per Common Share ........................... $ .51 $ .47 $ .58 $ .78
------------ ------------ ------------ ------------
Weighted-Average Number of Basic Common Shares Outstanding 6,000,000 10,387,706 6,000,000 9,373,298
============ ============ ============ ============
Diluted Earnings Per Common Share ......................... $ .51 $ .46 $ .58 $ .76
============ ============ ============ ============
Weighted-Average Number of Diluted Common Shares
Outstanding ........................................... 6,000,000 10,689,739 6,000,000 9,681,405
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
December 31, June 30,
------------ --------
1998 1999
---- ----
Assets
<S> <C> <C>
Cash and Cash Equivalents........................................ $ 7,906 $ 20,719
Finance Receivables.............................................. 26,915 106,201
Investment in Securitizations.................................... 30,269 32,965
Property and Equipment........................................... 2,449 2,609
Deferred Costs................................................... 475 443
Other Assets..................................................... 734 1,323
--- -----
Total Assets....................................... $ 68,748 $164,260
======= ========
Liabilities and Stockholders' Equity
Notes Payable.................................................... $ 6,789 $ 49,735
Accounts Payable and Accrued Expenses............................ 1,621 2,453
Capitalized Lease Obligations.................................... 1,652 1,378
Deferred Tax Liability........................................... 11,915 15,572
Other Liabilities................................................ 346 290
--- ---
Total Liabilities.................................. 22,323 69,428
Stockholders' Equity
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued and outstanding........................................... -- --
Common stock, $.01 par value; 20,000,000 shares authorized, 8,000,000
shares issued and 7,984,480 outstanding at December 31, 1998 and 10,416,726
shares issued and 10,401,206 outstanding at June 30, 1999........ 80 104
Paid-in capital........................................... 27,754 70,395
Stock held for benefit plans.............................. (269) (269)
Net unrealized gains on available for sale securities..... 6,714 5,137
Retained earnings......................................... 12,146 19,465
------ ------
Total Stockholders' Equity......................... 46,425 94,832
------ ------
Total Liabilities and Stockholders' Equity......... $68,748 $164,260
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Stock Net
----- ---
Additional Held for Unrealized
---------- -------- ----------
Paid-in Benefit Gains Retained
------- ------- ----- --------
Common Stock Capital Preferred Stock Plans (Amortization) Earnings Total
------------ ------- --------------- ----- -------------- -------- -----
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998.... 6,000,000 $60 $53 -- $-- $-- $-- $1,951 $2,064
Initial public offering....... 2,000,000 20 27,291 -- -- -- -- -- 27,311
Value of common stock purchase
warrants issued in connection with
subordinated debt financing -- -- 410 -- -- -- -- -- 410
Stock purchased for benefit plans (15,520) -- -- -- -- (269) -- -- (269)
Net earnings.................. -- -- -- -- -- -- -- 10,195 10,195
Other Comprehensive Income,
unrealized gains on available for
sale securities, net of taxes of
$4,214................... -- -- -- -- -- -- 6,714 -- 6,714
-----
Total Comprehensive Income.... 16,909
----- ----- ----- ----- ---- ---- ------ --- ------
Balance at December 31, 1998.. 7,984,480 80 27,754 -- -- (269) 6,714 12,146 46,425
Common stock issued on options exercised. 3,226 -- 50 -- -- -- -- -- 50
Common stock issued on warrants exercised 13,500 -- 162 -- -- -- -- -- 162
Common stock offering......... 2,400,000 24 42,429 -- -- -- -- 42,453
Net earnings. -- -- -- -- -- -- -- 7,319 7,319
Other Comprehensive Income
(amortization) of unrealized
gains on available for
sale securities, net of taxes of -- -- -- -- -- -- (1,577) -- (1,577)
$1,008 -------
Total Comprehensive Income. 5,742
---------- ---- ------ ----- ----- ----- -------- ----- ------
Balance at June 30, 1999...... 10,401,206 $104 $70,395 -- $-- $(269) $5,137 $19,465 $94,832
========= ===== ======= ===== ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Six Months ended June 30,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net earnings.......................................... $3,453 $7,319
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation and amortization.................. 165 338
Deferred tax expense........................... 2,208 4,679
Income on investment in securitization......... -- (2,670)
Gain on sale................................... (6,617) --
Changes in assets and liabilities:
Increase in other assets....................... (338) (590)
Increase in accounts payable and accrued expenses. 926 831
Decrease in other liabilities.................. (69) (56)
---- ----
Net Cash and Cash Equivalents (Used in) Provided by Operating Activities (272) 9,851
----- -----
Cash Flows from Investing Activities
Collections applied to principal (accretion) on finance
receivables........................................ 131 (5,388)
Investment in securitizations......................... -- (2,610)
Proceeds from Securitization.......................... 12,656 --
Purchases of property and equipment................... (94) (480)
Acquisitions of finance receivables................... (9,900) (73,898)
Net cost of portfolios sold........................... (238) --
----- --
Net Cash and Cash Equivalents Provided by (Used in) Investing
Activities................................................ 2,555 (82,376)
----- --------
Cash Flows from Financing Activities
(Payments on) proceeds from notes payable, net......... (2,102) 42,946
Proceeds from subordinated debt....................... 4,572 --
Payments on capital lease obligations................. (129) (273)
Proceeds from warrants issued......................... 410 --
Proceeds from issuance of common stock................ -- 42,665
Deferred costs........................................ (736) --
----- -----
Net Cash and Cash Equivalents Provided by Financing
Activities................................................ 2,015 85,338
----- ------
Net Increase in Cash and Cash Equivalents..................... 4,298 12,813
Cash and Cash Equivalents at Beginning of period.............. 770 7,906
--- -----
Cash and Cash Equivalents at End of period.................... $5,068 $20,719
====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data)
Note A--Organization and Business
Creditrust Corporation (the "Company") was incorporated in Maryland on October
17, 1991. The Company purchases, collects and manages defaulted consumer
receivables from credit grantors, including banks, finance companies, retail
merchants and other service providers. The Company's customers are located
throughout the United States. The Company has funded its receivables purchases
and the expansion of its business through a combination of bank and other
warehouse funding, public and private equity funding and asset-backed
securitizations.
Note B--Summary of Significant Accounting Policies
Basis of Accounting
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 these Statements should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes thereto included in
the Creditrust Corporation December 31, 1998 Form 10K.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Creditrust Funding I LLC, and Creditrust Card
Services Corp. All material inter-company accounts and transactions have been
eliminated.
Note C--Secondary Offering
On March 19, 1999, the Company completed a secondary public offering of 2.4
million shares of common stock at $19.00 per share. After payment of
underwriting discounts and commissions and other offering expenses, the Company
received net proceeds of $42.5 million. The proceeds are being used to purchase
additional portfolios and contribute to working capital.
Note D--Earnings per Common Share
The following table reconciles basic and diluted EPS for the three months and
six months ended June 30, 1999:
<TABLE>
<CAPTION>
Three months ended June 30, 1999 Six months ended June 30, 1999
Per Per
--- ---
Earnings Shares Share Earnings Shares Share
-------- ------ ----- -------- ------ -----
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net earnings.................. $4,889 10,387,706 $.47 $7,319 9,373,298 $.78
Effect of dilutive securities
Warrants...................... -- 205,381 -- 208,666
Stock options................. -- 96,652 -- 99,441
---- ------ ---- --------
Diluted EPS
Net earnings plus assumed conversions. $4,889 10,689,739 $.46 7,319 9,681,405 $.76
====== ========== ===== ===== ========== =====
</TABLE>
5
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Dollars in thousands except share data)
Note E--Finance Receivables
The Company purchases defaulted consumer receivables at a discount from the
actual principal balance. The following summarizes the change in finance
receivables for the six months ended June 30, 1999:
Balance, at beginning of period..................................... $26,915
Purchases of finance receivables......................... 73,898
Net accretion to principal on finance receivables........ 5,388
Securitization of finance receivables.................... --
--------
Balance, at end of period........................................... $106,201
========
Unrecorded discount $1,386,268
==========
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, 1998 and June 30, 1999, no provision for loss has been recorded.
Note F--Investment in Securitizations
Investment in securitizations for the six months ended June 30, 1999 is
comprised of the following:
<TABLE>
<CAPTION>
Estimated
---------
Cash Amortized Unrealized Fair
---- --------- ---------- ----
Reserves Cost Gains Value
-------- ---- ----- -----
(amortization)
--------------
<S> <C> <C> <C> <C>
Balance at beginning of period..... $1,934 $17,407 $10,928 $30,269
Deposits to reserves............... 2,610 -- -- 2,610
Interest accrued................... -- 2.670 -- 2,670
Amortization of unrealized gain.... -- -- (2,584) (2,584)
-------- -------- ------- -------
Balance at end of period........... $4,544 $20,077 $8,344 $32,965
====== ======= ====== ======
</TABLE>
The investment in securitizations accrues interest at 12% per annum. The net
after tax effect of unrealized gains is reflected as a separate component of
stockholders' equity and is included in other comprehensive income. Fair value,
absent actual market quotations for similar securities, was calculated by a
discounted cash flow valuation.
Note G--Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following at:
December 31, June 30,
------------ --------
1998 1999
---- ----
Accounts payable.................................... $512 $646
Accrued other liabilities........................... 414 508
Accrued salaries, taxes and fringe benefits......... 695 1,299
--- -----
$1,621 $2,453
====== ======
6
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Dollars in thousands except for share data)
Note H--Notes Payable
Warehouse Facility
In September 1998, the Company established through a wholly owned consolidated
special purpose finance subsidiary a $30 million revolving warehouse facility
for use in acquiring finance receivables. The warehouse facility carries a
floating interest rate of LIBOR plus .65%, with the revolving period expiring in
October 2000. The final due date of all payments due under the facility is
October 2005. The warehouse facility is secured by a trust estate, primarily
consisting of specific consumer receivables that the Company has absolutely
assigned to the newly formed special purpose finance subsidiary. Generally, the
warehouse facility provides 95% of the acquisition costs of receivables
purchased, with the Company funding the remaining 5% and a one-time $900,000
liquidity reserve requirement. The $900,000 reserve account is consolidated and
included in cash on the balance sheet and restricted as to use until the
warehouse facility is retired. The facility contains financial covenants the
most restrictive of which requires that the Company maintains a net worth of
$1.8 million plus 75% of net earnings. As of June 30, 1999 the Company had
approximately $30.0 million outstanding under the facility.
Revolving Line of Credit
In October 1998, the Company entered into a $20 million revolving line of credit
with a commercial lender to provide receivables financing. The facility has a
term of three years, during which time the Company may borrow and repay funds to
purchase receivables at 80% of acquisition cost. Interest is based on prime plus
0.5%, or LIBOR plus 2.5% at the option of the Company on each advance. The
facility is secured by any receivables purchased under the facility and
substantially all the Company's other assets. The facility contains financial
covenants the most restrictive of which requires that the Company maintains a
net worth of $30.0 million plus 50% of net earnings.
As of June 30, 1999, required minimum principal payments payable by the Company
were as follows:
Year ending December 31,
1999........................................... $29,149
2000........................................... 15,546
2001........................................... 5,040
--------
Total minimum principal payments.... $49,735
========
Note I--Commitments and Contingencies
Forward Flow Agreements
Beginning in September 1998, the Company entered into multiple forward flow
agreements with certain financial institutions, which obligate the Company to
purchase, on a monthly basis, portfolios of charged-off receivables meeting
certain criteria.
Litigation
The Company is involved in various litigation arising in the ordinary course of
business. Management believes these items, individually or in aggregate, will
not have a material adverse impact on the Company's financial position, results
of operations or liquidity.
7
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Dollars in thousands except for share data)
New Lease Commitment
In May 1999, the Company entered into a seven-year lease for additional
expansion office space of approximately 100,000 square feet in suburban
Baltimore. The lease term commenced on July 1, 1999 and ends on July 31, 2006.
Minimum annual lease payments are $646 for 1999, and $1,577, $1,624, $1,673,
$1,723, $1,775, $1,828 and $1,082 for the years 2000 through 2006. The lease
also provides for rights of first refusal and rights of first offer to acquire
the remaining approximately 100,000 square feet of space as it becomes available
and a two year option to purchase the building at a fixed amount.
Note J--Subsequent Event
$40 Million Interim Financing
On August 3, 1999, the Company entered into a $40.0 million interim credit
facility to fund purchases of additional portfolios of defaulted consumer
receivables. Under this arrangement, Creditrust SPV99-2, LLC, a newly formed
special purpose subsidiary issued secured, short-term notes in a private
placement to institutional investors. The notes were backed by a parent
guarantee from the Company. Creditrust SPV99-2 will use the proceeds of the
notes to purchase portfolios from time to time over the next several months,
including purchases under forward flow contracts. The Company is obligated to
retire this facility with proceeds from any capital markets transactions as
defined prior to the maturity date.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Revenues. Total revenues increased by $10.0 million, or 119.3%, from $8.4
million for the three months ended June 30, 1998 to $18.4 million for the three
months ended June 30, 1999. The 1998 second quarter included a gain on sale of
$6.0 million while 1999's revenue in the second quarter was largely due to a
$13.8 million increase in income on finance receivables resulting from
receivables purchases during the past year. The Company expects that revenue in
future periods will consist primarily of income on finance receivables.
Income on finance receivables increased by $13.8 million, or 708.2%, from $2.0
million for the three months ended June 30, 1998 to $15.8 million for the three
months ended June 30, 1999. This increase was attributable to the purchase of
receivables in the last two-quarters of 1998 and the first two quarters of 1999
with proceeds from the initial public offering, the secondary public offering
and the Company's credit facilities. Collections on managed receivables
increased by $16.7 million, or 551.4%, from $3.7 million for the three months
ended June 30, 1998 to $20.4 million for the three months ended June 30, 1999.
Servicing fees increased by $816,000, or 166.4%, from $490,000 for the three
months ended June 30, 1998 to $1.3 million for the three months ended June 30,
1999. The increase was due to the receipt of servicing fees under the
securitizations. During the second quarter of 1998, the Company received
servicing fees associated with certain receivables which were included in the
initial securitization; there were no similar servicing fees this quarter.
Income on investment in securitizations was $1.3 million for the three months
ended June 30, 1999. This revenue results from the amortization of previously
unrealized income recognized over the economic life of the Company's investment
in securitizations.
Revenue for the three months ended June 30, 1998 included a $6.0 million gain on
sale resulting from the securitization of a portfolio of receivables. No
securitizations were closed in the quarter ending June 30, 1999.
Expenses from Operations. Total expenses from operations increased by $6.8
million, or 208.7%, from $3.3 million for the three months ended June 30, 1998
to $10.1 million for the three months ended June 30, 1999. Operating expenses
increased as expected in 1999 primarily as a result of increased personnel
expenses associated with the rapid growth of the Company's managed receivables
base and associated recovery efforts. The Company's communications and rent and
occupancy expenses also increased as the Company's managed receivables base
grew. Operating expenses as a percent of revenues increased to 55.1% of revenues
for the three months ended June 30, 1999, as compared to 39.1% of revenues for
the three months ended June 30, 1998.
Personnel expenses increased by $5.1 million, or 229.8%, from $2.2 million for
the three months ended June 30, 1998 to $7.3 million for the three months ended
June 30, 1999. Major categories of personnel expense increases included: (a)
recruiting, training and compensation costs associated with the increase in the
number of employees from 337 to 847 needed to service the larger volume of
managed receivables, and (b) additional costs for development, installation and
training associated with the Company's expanded information technology systems.
Communications costs increased by $503,000, or 119.4%, from $421,000 for the
three months ended June 30, 1998 to $925,000 for the three months ended June 30,
1999. This increase was due to greater use of credit reporting and long distance
telephone services to service the higher volume of managed receivables.
Rent and other occupancy costs increased by $282,000, or 101.9% from $277,000
for the three months ended June 30, 1998 to $559,000 for the three months ended
June 30, 1999. The increase is due to expansion of office space and related
costs to accommodate the growth in personnel.
Professional fees and general and administrative expenses increased from
$196,000 for the three months ended June 30, 1998 to $1.2 million for the three
months ended June 30, 1999, primarily as a result of increased accounting fees,
investor relations expenses, other consulting fees, and miscellaneous other
administrative costs.
Earnings from Operations. Earnings from operations increased by $3.2 million
from $5.1 million for the three months ended June 30, 1998 to $8.3 million for
the three months ended June 30, 1999. This increase resulted from numerous
factors, particularly the increase in income on finance receivables, which more
than offset the planned growth in operating costs associated with the additions
to recovery personnel to support a substantially larger volume of receivables.
9
<PAGE>
Other Income (Expense). Other income (expense) increased from a net expense of
$120,000 for the three months ended June 30, 1998 to a net expense of $266,000
for the three months ended June 30, 1999. This increase resulted from a $469,000
increase in interest and other income primarily due to interest earned on short
term cash equivalent investments which were acquired with proceeds from the
secondary offering offset by an increase in interest expense of $615,000 as a
result of higher borrowing incurred in connection with the credit facilities.
Earnings Before Income Taxes. As the result of the foregoing, earnings before
income taxes increased from $5.0 million for the three months ended June 30,
1998 to $8.0 million for the three months ended June 30, 1999.
Provision for Income Taxes. Income tax rates were 39% for the three months ended
June 30, 1998 and 1999. The Company's effective tax rate may fluctuate as a
result of changes in pre-tax income and nondeductible expenses.
Net Earnings. Net earnings increased by $1.9 million from $3.0 million for the
three months ended June 30, 1998 to $4.9 million for the three months ended June
30, 1999. This increase resulted from the same factors which affected earnings
from operations.
EBITDA. EBITDA increased by $4.0 million from $5.0 million for the three months
ended June 30, 1998 to $9.0 million for the three months ended June 30, 1999.
EBITDA increased more than earnings from operations primarily because of growth
in interest income for the three months ended June 30, 1999 over the same period
for 1998. Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. Total revenues increased by $18.6 million, or 157.8%, from $11.8
million for the six months ended June 30, 1998 to $30.4 million for the six
months ended June 30, 1999. The 1998 results included gain on sale of $6.6
million while 1999's first half revenue increase was largely due to a $21.5
million increase in income on finance receivables resulting from substantially
higher receivables purchases commencing in the third quarter of 1998. The
company expects that revenue in future periods will consist primarily of income
on finance receivables.
Income on finance receivables increased by $21.5 million, or 621.0%, from $3.5
million for the six months ended June 30, 1998 to $24.9 million for the six
months ended June 30, 1999. This increase was attributable to the purchase of
receivables in the last two-quarters of 1998 and the first two quarters of 1999
with proceeds from the initial public offering, the secondary public offering,
the Company's credit facilities, and the Company's June and December 1998
securitizations. Collections on managed receivables increased by $26.3 million,
or 350.7%, from $7.5 million for the six months ended June 30, 1998 to $33.8
million for the six months ended June 30, 1999.
Servicing fees increased by $1.1 million, or 65.6%, from $1.7 million for the
six months ended June 30, 1998 to $2.9 million for the six months ended June 30,
1999. The increase was due to the receipt of servicing fees under the Company's
securitizations completed in June and December, 1998. In contrast, the 1998
servicing fees principally related to servicing fees on certain receivables
which were included in the initial securitization; there were no similar
servicing fees in the six months ended June 30, 1999.
Income on investment in securitizations was $2.7 million for the six months
ended June 30, 1999; no similar income was recorded in the six months ended June
30, 1998, as the initial securitization closed very late in that perid. This
revenue results from the amortization of previously unrealized income recognized
over the economic life of the Company's investment in securitizations.
Revenue for the six months ended June 30, 1998 included a $6.6 million gain on
sale, principally resulting from the securitization of a portfolio of
receivables in June 1998. Any future securitizations are not expected to qualify
for gain on sale treatment.
Expenses from Operations. Total expenses from operations increased by $11.8
million, or 198.5%, from $6.0 million for the six months ended June 30, 1998 to
$17.8 million for the six months ended June 30, 1999. Operating expenses
increased as expected in 1999 primarily as a result of increased personnel
expenses associated with the rapid growth of the Company's managed receivables
base and associated recovery efforts. The Company's communications and rent and
occupancy expenses also increased as the Company's managed receivables base
grew. Operating expenses as a percentage of revenues increased to 58.4% of
revenues for the six months ended June 30, 1999, as compared to 50.5% of
revenues for the six months ended June 30, 1998.
10
<PAGE>
Personnel expenses increased by $9.0 million, or 230.1%, from $3.9 million for
the six months ended June 30, 1998 to $13.0 million for the six months ended
June 30, 1999. Major categories of personnel expense increases included: (a)
recruiting, training and compensation costs associated with the increase in the
number of employees from 337 to 847 needed to service the larger volume of
managed receivables, and (b) additional costs for development, installation and
training associated with the Company's expanded information technology systems.
Communications costs increased by $771,000, or 110.3%, from $699,000 for the six
months ended June 30, 1998 to $1.5 million for the six months ended June 30,
1999. This increase was due to greater use of credit reporting and long distance
telephone services to service the higher volume of managed receivables.
Rent and other occupancy costs increased by $445,000, or 78.6% from $579,000 for
the six months ended June 30, 1998 to $1.0 million for the six months ended June
30, 1999. The increase is due to expansion of office space and related costs to
accommodate the growth in our recovery operations and other related business
functions.
Professional fees and general and administrative expenses increased from
$471,000 for the six months ended June 30, 1998 to $2.2 million for the six
months ended June 30, 1999, primarily as a result of increased accounting fees,
investor relations expenses, other consulting fees, and miscellaneous other
administrative costs.
Earnings from Operations. Earnings from operations increased by $6.8 million
from $5.8 million for the six months ended June 30, 1998 to $12.7 million for
the six months ended June 30, 1999. This increase resulted from numerous
factors, particularly the increase in income on finance receivables, which more
than offset the planned growth in operating costs associated with the additions
to recovery personnel to support a substantially larger volume of receivables.
Other Income (Expense). Other income (expense) increased from a net expense of
$185,000 for the six months ended June 30, 1998 to a net expense of $661,000 for
the six months ended June 30, 1999. This increase resulted from a $606,000
increase in interest and other income primarily due to interest earned on short
term cash equivalent investments which were acquired with proceeds from the
secondary offering offset by an increase in interest expense of $1.1 million as
a result of higher borrowing incurred in connection with the credit facilities.
Earnings Before Income Taxes. As the result of the foregoing, earnings before
income taxes increased from $5.7 million for the six months ended June 30, 1998
to $12.0 million for the six months ended June 30, 1999.
Provision for Income Taxes. Income tax rates were 39% for the six months ended
June 30, 1998 and 1999. The Company's effective tax rate may fluctuate as a
result of changes in pre-tax income and nondeductible expenses.
Net Earnings. Net earnings increased by $3.9 million from $3.5 million for the
six months ended June 30, 1998 to $7.3 million for the six months ended June 30,
1999. This increase resulted from the same factors which affected earnings from
operations.
EBITDA. EBITDA increased by $7.6 million from $6.1 million for the six months
ended June 30, 1998 to $13.7 million for the six months ended June 30, 1999.
EBITDA increased more than earnings from operations primarily because of growth
in interest income for the six months ended June 30, 1999 over the same period
for 1998.
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents increased from $7.9 million
as of December 31, 1998 to $20.7 million as of June 30, 1999, primarily as a
result of an increase in net cash from financing activities including proceeds
from the secondary public offering and credit facilities. These proceeds were
offset by investing activities, principally purchases of receivables, and
further increased by cash provided by operating activities.
Finance Receivables. Investment in finance receivables increased 294.6% to
$106.2 million, as of June 30, 1999 from $26.9 million as of December 31, 1998.
The Company purchased $73.9 million of finance receivables during the six months
ended June 30, 1999 with a portion of the net proceeds from the secondary public
offering, the second securitization, the borrowings available under the
Company's credit facilities and other cash on hand.
11
<PAGE>
Investment in Securitizations. Investment in securitizations increased from
$30.3 million at December 31, 1998 to $33.0 million as of June 30, 1999 due
principally to additions to the reserve of the two securitizations in the amount
of $2.6 million made in connection with an agreement with the holders of certain
securitization notes in which the holders approved the secondary stock offering.
Management believes that the note holder requests were unrelated to any
performance issues in the securitization. After payment of interest and
principal on the securitization notes, servicing costs, trustee fees, insurance
premiums and certain other costs, all remaining cash flows with respect to the
securitized receivables are for the account of the Company. The retained
investment in securitizations is accounted for at fair value. The fair value of
the investment in securitizations was estimated by management based on future
projected recoveries employing the Company's Portfolio Analysis Tool (PAT). PAT
projected recoveries were reduced by 20% to take into account unforeseeable
reduced collection trends, and further reduced for the estimated costs to
service the receivable s after the bonds are paid off in the future at the 20%
servicing rates established in the servicing documents, and then discounted at
12% per annum, which is the Company's estimate of a reasonable rate of return on
a subordinated retained interest. This methodology results in an effective total
discount of over 30% applied to the Company's projected recoveries. Interest
income is accrued on the carrying value of the investment in securitizations at
12% per annum for the estimated remaining life of the receivables of
approximately five years. Once the securitization notes are retired, any
collections will be applied to amortize the investment in securitizations
including accrued interest income. The investment in securitizations will be
accounted for under the provisions of SFAS 115 as a security available for sale
and marked to market in the stockholders' equity accounts of the Company. As of
December 31, 1998 the amount of fair value over amortized cost is recorded as
comprehensive income and unrealized gain in the Company's stockholders' equity
accounts. As of June 30, 1999, the fair value of investment in securitizations
was $33.0 million and the unrealized gain was $8.3 million (pre-tax) or $5.1
million (net of taxes). Unrealized gains may fluctuate based upon changes in the
discount rate utilized by the Company and changes in collection rates.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased 51.3% from $1.6 million at December 31, 1998 to $2.5 million at June
30, 1999. The increase was principally due to increased accrued salary
associated with increased payroll levels and associated operating costs.
Notes Payable and Capitalized Lease Obligations. Notes payable increased from
$6.8 million as of December 31, 1998 to $49.7 million as of June 30, 1999.
Capitalized lease obligations decreased from $1.7 million to $1.4 million for
the same period. The increase in notes payable was attributable to receivables
purchased under the Company's credit facilities. The decrease in capitalized
lease obligations is due to lease payments made during the period.
Deferred Tax Liability. The Company's deferred tax liability at June 30, 1999
was $15.6 million compared to $11.9 million as of December 31, 1998. This
increase of $3.7 million was primarily attributable to an increase in deferred
tax expenses resulting from the timing differences of recognizing income on
finance receivables and on the cost recovery method for tax and securitization
transactions treated as financing for tax.
Total Stockholders' Equity. Total stockholders' equity increased $48.4 million
to $94.8 million at June 30, 1999 from $46.4 million at December 31, 1998 as a
result of net income of $7.3 million during the six months ended June 30, 1999,
$42.5 million of additional paid in capital resulting from the Company's
secondary public offering and $212,000 from exercise of options and warrants for
common stock, reduced by $1.6 million (net of taxes) from decreases in
unrealized gains related to the fair value of the Company's investment in
securitizations and realization of unrealized gains.
Liquidity And Capital Resources
Historically, the Company has derived substantially all of its cash flow from
collections on finance receivables and servicing income. The primary sources of
funds to purchase receivables are cash flow, asset backed securitizations,
borrowings under two credit facilities and equity capital.
As of June 30, 1999, the Company had cash and cash equivalents of $20.7 million.
Cash provided by operating activities was $9.9 million for the six months ended
June 30, 1999. Receivables purchases were $73.9 million for the six months ended
June 30, 1999. Available credit under the Company's credit facilities at June
30, 1999 is $265,000.
Creditrust has entered into forward flow contracts with a number of credit
grantors. These contracts obligate Creditrust to make monthly purchases of
receivables portfolios providing they meet certain agreed-upon criteria. The
Company projects its obligations under these contracts based upon the Company's
experience to date, its estimates of future receivable offerings meeting these
criteria, and its expectations for general market conditions for receivables.
Based upon these factors, the Company estimates that its monthly obligations
under existing forward flow contracts will range from $12.0 million in July 1999
to $1.0 million in December 2000.
12
<PAGE>
The debt service requirements associated with borrowings under the credit
facilities will significantly increase liquidity requirements. Both credit
facilities have interest only periods for up to six months, after which point
the principle balances must be fully amortized over periods of between 24 and 60
months. As of June 30, 1999, the interest free period has expired until such
time as a securitization substantially retires the credit facilities. At such
time six month interest only periods will resume. The Company anticipates that
its operating cash flow and cash on hand, existing credit facilities, future
asset backed securitizations, and other financing transactions currently being
pursued will be sufficient to meet its anticipated future operating expenses and
receivables purchases, and to service its debt requirements as they become due.
To the extent the Company is successful in closing additional term
securitizations, amounts repaid under both facilities may be re-borrowed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company retains an investment in securitizations with respect to its
securitized receivables which are market risk sensitive financial instruments
held for purposes other than trading; it does not invest in derivative financial
or commodity instruments. This investment exposes the Company to market risk
which may arise in the credit standing of the investment in securitizations and
in interest and discount rates applicable to this investment.
The impact of a 1% increase in the discount rate used by the Company in the fair
value calculations would decrease the fair value reflected on the Company's
balance sheet by $796,000 as of June 30, 1999. There would be no impact on the
Company's future cash flows or net earnings.
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 critical computer
systems and business applications software in the normal course of its business
expansion and that its computer systems will be able to utilize properly dates
beyond December 31, 1999. The Company used its in-house programmers in the
modification. Accordingly, the Company is unable to identify separately the
costs of making these systems Year 2000 compliant.
Most of the Company's major vendors are the largest credit grantors in the
country, which the Company expects will become Year 2000 compliant due to the
nature and financial strength of these businesses. Additionally, the Company
does not generally communicate on-line with credit grantors on a continuing
basis, but rather receives discrete data files for analysis and to support
recovery activities. The Company has to date been able to convert data received
from credit grantors 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.
The Company also relies on internal and third party information databases in its
portfolio analysis and collection efforts. A significant amount is maintained in
internal databases. However, the Company must timely receive new data from third
party sources and an interruption in this data supply could adversely affect the
Company's ability to purchase additional portfolios and to collect on existing
receivables. The Company has successfully checked and converted third-party data
that is not Year 2000 compliant, and based on its efforts to date, believes that
it can continually effect any necessary conversions.
The Company's collection efforts rely heavily on telephone systems. The Company
has contracts with multiple telephone carriers. Based on communications with
vendors to date, the Company believes that major telephone systems will not be
interrupted by Year 2000 failures. However, if a protracted and major disruption
in the availability of local or long-distance telephone service were to occur as
the result of the Year 2000 problem or otherwise, the Company's collection
efforts, and therefore its operations, could be materially adversely affected.
Disruption of power supply by the Company's electric utilities could also have a
serious effect on the Company's ability to conduct business.
Inflation
The Company believes that inflation has not had a material impact on its results
of operations for the three months ended June 30, 1998 and 1999.
13
<PAGE>
PART II
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) None.
(d) None.
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 previously defaulted consumer
receivables. Future growth of the Company will depend on numerous factors,
including the development and expansion of relationships with credit grantors,
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 credit grantors, the
recruitment, training and retention of qualified personnel, the enhancement and
maintenance of the Company's information technology, operational, and financial
systems, any higher than anticipated rate of personnel turnover and the
continued availability of receivables that meet the Company's requirements. The
Company's future prospects may be significantly affected either positively or
negatively depending upon the circumstances of the marketplace and competitive
developments. 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 may fluctuate in the future because of
a variety of factors. These factors include (1) the timing and amount of
collections on the Company's receivables, (2) any charge to earnings resulting
from a decline in value of the Company's existing investment in securitizations,
(3) increases in operating expenses associated with the growth of the Company's
operations and (4) the accuracy of the Company's pricing models. 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. The
Company does not intend to securitize assets in the future that result in gain
on sale transactions.
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.
Items 1, 3, 4, and 6 are not applicable and have been omitted.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Baltimore, State of Maryland, on August 15, 1999.
CREDITRUST CORPORATION
By:
------------------------------------------
Richard J. Palmer
Vice President and Chief Financial Officer
15
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