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 MARCH 31, 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 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 [X] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
MAY 17, 1999 WAS 10,387,706.
<PAGE>
CREDITRUST CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page
<S><C>
a) Consolidated Statements of Earnings
For the Three Months Ended March 31, 1998 and 1999............. 1
b) Consolidated Balance Sheets
As of December 31, 1998 and March 31, 1999..................... 2
c) Consolidated Statement of Stockholders' Equity and Comprehensive
Income As of December 31, 1998 and March 31, 1999.............. 3
e) Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 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.... 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................... 12
Item 5. Other Information............................................. 13
SIGNATURE.................................................................. 14
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) Three Months ended March 31,
-------------------------------
1998 1999
---------- ----------
<S><C>
Revenue
Income on finance receivables.......................................... $1,503 $9,132
Servicing fees......................................................... 1,242 1,563
Interest on investment in securitizations.............................. -- 1,329
Gain on sale........................................................... 658 --
---------- ----------
3,403 12,024
Expenses
Personnel.............................................................. 1,712 5,660
Communications......................................................... 278 545
Rent and other occupancy............................................... 303 475
Professional fees...................................................... 192 715
General and administrative............................................. 84 257
Contingency legal and court costs (reimbursements)..................... 104 (8)
---------- ----------
2,673 7,644
---------- ----------
Earnings from Operations......................................................... 730 4,380
Other Income (Expense)
Interest and other income.............................................. 11 148
Interest expense....................................................... (76) (543)
---------- ----------
Earnings Before Income Taxes..................................................... 665 3,985
Provision for Income Taxes....................................................... 250 1,555
---------- ----------
Net Earnings..................................................................... $ 415 $ 2,430
========== ==========
Basic Earnings Per Common Share.................................................. $ .07 $ .29
---------- ----------
Weighted-Average Number of Basic Common Shares Outstanding....................... 6,000,000 8,358,889
========== ==========
Diluted Earnings Per Common Share................................................ $ .07 $ .28
========== ==========
Weighted-Average Number of Diluted Common Shares
Outstanding................................................................. 6,000,000 8,673,070
========== ==========
</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, March 31,
----------------------------
1998 1999
------- --------
<S><C>
Assets
Cash and Cash Equivalents......................................................................... $ 7,906 $47,659
Finance Receivables............................................................................... 26,915 68,016
Investment in Securitizations..................................................................... 30,269 33,250
Property and Equipment............................................................................ 2,449 2,464
Deferred Costs.................................................................................... 475 519
Other Assets...................................................................................... 734 1,663
------- --------
Total Assets.................................................................. $68,748 $153,571
======= ========
Liabilities and Stockholders' Equity
Notes Payable..................................................................................... $ 6,789 $44,761
Accounts Payable and Accrued Expenses............................................................. 1,621 3,098
Capitalized Lease Obligations..................................................................... 1,652 1,517
Deferred Tax Liability............................................................................ 11,915 13,082
Other Liabilities................................................................................. 346 339
------- --------
Total Liabilities............................................................. 22,323 62,797
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 10,403,226
shares issued and 10,387,706 outstanding at March 31, 1999......................... 80 104
Paid-in capital......................................................................... 27,754 70,233
Stock held for benefit plans............................................................ (269) (269)
Net unrealized gains on available for sale securities................................... 6,714 6,129
Retained earnings....................................................................... 12,145 14,577
------- --------
Total Stockholders' Equity.................................................... 46,425 90,774
------- --------
Total Liabilities and Stockholders' Equity.................................... $68,748 $153,571
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
CREDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) Stock
-----
Additional Held for
---------- --------
Paid-in Benefit
------- -------
Common Stock Capital Preferred Stock Plans
-------------- -------- --------------- -----
Shares Amount Shares Amount
--------- -------- -------- ------
<S><C>
Balance at January 1, 1998..................... 6,000,000 60 52 -- -- --
Initial public offering........................ 2,000,000 20 27,291 -- -- --
Value of common stock purchase
warrants issued in connection with
subordinated debt financing................ -- -- 409 -- -- --
Stock purchased for benefit plans.............. (15,520) -- -- -- -- (269)
Net earnings................................... -- -- -- -- -- --
Other Comprehensive Income,
unrealized gains on available for
sale securities, net of taxes of
$4,213,980................................. -- -- -- -- -- --
Total Comprehensive Income..................... -- -- -- -- -- --
---------- ---- ------- ---- ---- -----
Balance at December 31, 1998................... 7,984,480 80 27,753 -- -- (269)
Common Stock issued on options exercised....... 3,226 -- 50
Common Stock Offering.......................... 2,400,000 24 42,430
Net earnings...................................
Other Comprehensive income
(amortization) of unrealized
gains on available for
sale securities, net of taxes................
Total Comprehensive Income.....................
---------- ---- ------- ---- ---- -----
Balance at March 31, 1999...................... 10,387,706 $104 $70,233 -- $ -- $(269)
========== ==== ======= ==== ==== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) Net
---
Unrealized
----------
Gains Retained
----- --------
(Amortization) Earnings Total
-------------- -------- -----
<S><C>
Balance at January 1, 1998..................... -- 1,951 2,064
Initial public offering........................ -- -- 27,311
Value of common stock purchase
warrants issued in connection with
subordinated debt financing................ -- -- 409
Stock purchased for benefit plans.............. -- -- (269)
Net earnings................................... -- 10,195 10,195
Other Comprehensive Income,
unrealized gains on available for
sale securities, net of taxes of
$4,213,980................................. 6,714 -- 6,714
Total Comprehensive Income..................... -- -- 16,909
------- ------- -------
Balance at December 31, 1998................... 6,714 12,146 46,425
Common Stock issued on options exercised....... 50
Common Stock Offering.......................... 42,454
Net earnings................................... 2,430 2,430
Other Comprehensive income,
(amortization) of unrealized
gains on available for
sale securities, net of taxes................ (585) (585)
-------
Total Comprehensive Income..................... 1,845
------- ------- -------
Balance at March 31, 1999...................... $ 6,129 $14,576 $90,774
======= ======= =======
</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) Three Months ended March 31,
----------------------------
1998 1999
-------- ---------
<S><C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net earnings................................................................ $ 415 $ 2,430
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization..................................... 82 148
Deferred tax expense.............................................. 250 1,555
Income on investment in securitization ........................... -- (1,329)
Gain on sale...................................................... (658) --
Changes in assets and liabilities:
Decrease (increase) in other assets............................... 21 (945)
Increase in accounts payable and accrued expenses................. 227 1,477
Increase (decrease) in other liabilities.......................... 374 (6)
------- ---------
Net Cash and Cash Equivalents Provided by Operating Activities........................ 711 3,330
------- ---------
Cash Flows from Investing Activities
Collections applied to principal (accretion) on finance
receivables............................................................ 407 (3,157)
Investment in securitizations............................................... -- (2,610)
Purchases of property and equipment......................................... (14) (164)
Acquisitions of finance receivables......................................... -- (37,943)
Net cost of portfolios sold................................................. (238) --
------- ---------
Net Cash and Cash Equivalents Provided by (Used in) Investing
Activities....................................................................... 155 (43,874)
------- ---------
Cash Flows from Financing Activities
(Payments on) proceeds from notes payable and other debt, net................. (606) 37,972
Payments on capital lease obligations....................................... -- (135)
Proceeds from issuance of common stock...................................... -- 42,504
Deferred costs.............................................................. (117) (44)
------- ---------
Net Cash and Cash Equivalents (Used in) Provided by Financing
Activities....................................................................... (723) 80,296
------- ---------
Net Increase in Cash and Cash Equivalents............................................. 143 39,753
Cash and Cash Equivalents at Beginning of period...................................... 770 7,906
------- ---------
Cash and Cash Equivalents at End of period............................................ $ 913 $ 47,659
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CREDITRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 December 31, 1998 Form 10K.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Creditrust Funding I LLC. All material
inter-company accounts and transactions have been eliminated.
Note C--Secondary Offering
On March 19, 1999, the Company commenced a secondary public offering
of 2.4 million shares of common stock at an initial public offering price of
$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 Company did not have any potentially dilutive items for the three
months ended March 31, 1998. The following table reconciles basic and diluted
EPS for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Per
---
Earnings Shares Share
-------- ------ -----
(Numerator) (Denominator) Amount
----------- ------------- ------
<S><C>
Basic EPS
Net earnings.............................. $2,429,555 8,358,889 $ .29
Effect of Dilutive Securities
Warrants.................................. -- 211,952
Stock options............................. -- 102,229
---------- --------- -----
Diluted EPS
Net earnings plus assumed conversions..... $2,429,555 8,673,070 $ .28
========== ========= =====
</TABLE>
5
<PAGE>
TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 three months ended March 31, 1999:
Balance, at beginning of period................................. $ 26,915,035
Purchases of finance receivables...................... 37,943,139
Net accretion to principal on finance receivables..... 3,157,457
Securitization of finance receivables................. --
------------
Balance, at end of period....................................... $ 68,015,631
------------
Unrecorded discount $939,894,476
============
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 March 31, 1999, no provision for loss
has been recorded.
Note F--Investment in Securitizations
Investment in securitizations for the three months ended March 31,
1999 is comprised of the following:
<TABLE>
<CAPTION>
Estimated
---------
Cash Amortized Unrealized Fair
---- --------- ---------- ----
Reserves Cost Gains Value
-------- ---- ----- -----
(amortization)
--------------
<S><C>
Balance at beginning of period................. $1,933,855 $ 17,407,188 $10,927,958 $30,269,001
Deposits to reserves........................... 2,610,500 2,610,500
Interest accrued............................... -- 1,329,075 -- 1,329,075
Amortization of unrealized gain................ -- -- (958,714) (958,714)
---------- ----------- ----------- -----------
Balance at end of period....................... $4,544,355 $18,736,263 $ 9,969,244 $33,249,862
========== =========== =========== ===========
</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, March 31,
-------------------------
1998 1999
---------- ----------
Accounts payable................................. $ 512,406 $ 799,757
Accrued other liabilities........................ 413,802 772,497
Accrued salaries, taxes and fringe benefits...... 695,278 1,526,213
---------- ----------
$1,621,486 $3,098,467
========== ==========
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. During the three months
ended March 31, 1999 the Company borrowed approximately $24.8 million 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. Interest expense
totaled $250,197 for the three months ended March 31, 1999. 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 March 31, 1999, required minimum principal payments payable by
the Company were as follows:
Year ending December 31,
1999......................................... $29,071,187
2000......................................... 14,771,418
2001......................................... 4,763,947
---------
Total minimum principal payments... $48,606,552
===========
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note J--Stock Options
Employee Stock Purchase Plan
In conjunction with the initial public offering, the Company 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 can purchase shares at a
15 percent discount to the fair market value, subject to certain annual
limitations. As permitted by 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. 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 reserved
a total of 800,000 shares of common stock for issuance pursuant to the 1998
Creditrust Stock Incentive Plan. The 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.
Note K--Subsequent Events
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. Minimum annual lease payments are $678,535 for 1999, and
$1,654,000, $1,703,620, $1,754,729, $1,807,371, $1,861,592, $1,917,440 and $
972,888 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Revenues. Total revenues increased by $8.6 million, or 253.3%, from
$3.4 million for the three months ended March 31, 1998 to $12.0 million for the
three months ended March 31, 1999. This increase was largely due to $7.6 million
increase income on finance receivables resulting from receivables purchases
during the year.
Income on finance receivables increased by $7.6 million, or 507.6%,
from $1.5 million for the three months ended March 31, 1998 to $9.1 million for
the three months ended March 31, 1999. This increase was attributable to the
purchase of receivables in the last three-quarters of 1998 and the first quarter
of 1999 with proceeds from the initial public offering and the Company's credit
facilities. Collections on managed receivables increased by $9.6 million, or
255.9%, from $3.8 million for the three months ended March 31, 1998 to $13.4
million for the three months ended March 31, 1999.
Servicing fees increased by $320,000, or 25.8%, from $1.2 million for
the three months ended March 31, 1998 to $1.5 million for the three months ended
March 31, 1999. The increase was due to the receipt of servicing fees under the
securitizations. During the first three months of 1998, the Company received
servicing fees associated with certain receivables which were included in the
initial securitization; there were no similar servicing fees in the 1999
quarter.
Income on investment in securitizations was $1.3 million for the
three months ended March 31, 1999. This revenue results from the amortization
of previously unrealized income recognized over the economic life of the
Company's investment in securitizations.
Gain on sale for the three months ended March 31, 1998 included a
$658,000 gain on sale resulting from the resale of a portfolio of receivables
repurchased under a settlement agreement. Previously deferred income of
$895,000 was recognized against a $237,000 cost of resale.
Expenses from Operations. Total expenses from operations increased by
$5.0 million, or 185.9%, from $2.6 million for the three months ended March 31,
1998 to $7.6 million for the three months ended March 31, 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 expenses also increased as the Company's managed receivables base grew.
Operating expenses as a percent of revenues decreased to 63.6% of revenues for
the three months ended March 31, 1999, as compared to 78.5% of revenues for the
three months ended March 31, 1998.
Personnel expenses increased by $3.9 million, or 230.6%, from $1.7
million for the three months ended March 31, 1998 to $5.6 million for the three
months ended March 31, 1999. Major categories of personnel expense increases
included: (a) recruiting, training and compensation costs associated with the
increase in the number of employees from 218 to 769 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 $267,000, or 96.0%, from $278,000
for the three months ended March 31, 1998 to $545,000 for the three months ended
March 31, 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 from $303,000 for the three
months ended March 31, 1998 to $475,000 for the three months ended March 31,
1999.
Professional fees and general and administrative expenses increased
from $380,000 for the three months ended March 31, 1998 to $964,000 for the
three months ended March 31, 1999, primarily as a result of increased
professional fees, including accounting and legal fees associated with the
Company's audits and financing activities during 1999, and increases in overall
staffing levels.
Earnings from Operations. Earnings from operations increased by $3.6
million from $730,000 for the three months ended March 31, 1998 to $4.3 million
for the three months ended March 31, 1999. This increase resulted from numerous
factors, particularly the increase in income on finance receivables, which more
than offset the substantial growth in operating costs associated with the
additions to corporate infrastructure to support a substantially larger base of
operations.
9
<PAGE>
Other Income (Expense). Other income (expense) increased from an
expense of $65,000 for the three months ended March 31, 1998 to an expense of
$395,000 for the three months ended March 31, 1999. This increase resulted from
a $137,000 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 $467,000 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 $665,000 for the three months ended
March 31, 1998 to $4.0 million for the three months ended March 31, 1999.
Provision for Income Taxes. Income tax rates were 39% for the three
months ended March 31, 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 $2.0 million from $415,000
for the three ended March 31, 1998 to $2.4 million for the three months ended
March 31, 1999. This increase resulted from the same factors which affected
earnings from operations.
EBITDA. EBITDA increased by $3.9 million from $823,000 for the three
ended March 31, 1998 to $4.7 million for the three months ended March 31, 1999.
EBITDA increased slightly more than earnings from operations primarily because
of growth in interest income for the three months ended March 31, 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 $47.7 million as of March 31, 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 partially offset by investing activities, principally
purchases of receivables, and further increased by cash provided by operating
activities.
Finance Receivables. Investment in finance receivables increased
152.7% to $68.0 million, as of March 31, 1999 from $26.9 million as of December
31, 1998. The Company purchased the $37.9 million of finance receivables during
the three months ended March 31, 1999 with a portion of the net proceeds from
the secondary public offering, the second securitization, the credit facilities
and other cash on hand.
Investment in Securitizations. Investment in securitizations increased
from $30.3 million at December 31, 1998 to $33.2 million as of March 31, 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, offset by amortization of the previously unrealized gains on
securitizations over the economic life of the securitizations. 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
unforeseen reduced collection trends and further reduced for the estimated costs
to service in the future at the 20% servicing rates established in the servicing
documents and then discounted at 12% per annum, reflecting 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 unrealized gain in the Company's
stockholders' equity accounts. As of March 31, 1999, the fair value of
investment in securitizations was $33.2 million and the unrealized gain was
$10.0 million (pre-tax) or $6.1 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 91.1% from $1.6 million at December 31, 1998 to $3.1 million
at March 31, 1999. The increase was principally due to increased accrued legal
and accounting
10
<PAGE>
costs incurred in connection with the annual audit and secondary public offering
and higher accrued salary associated with increased payroll levels.
Notes Payable and Capitalized Lease Obligations. Notes payable
increased from $6.8 million as of December 31, 1998 to $44.8 million as of March
31, 1999. Capitalized lease obligations decreased from $1.7 million to $1.5
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 March
31, 1999 was $13.1 million compared to $11.9 million as of December 31, 1998.
This increase of $1.2 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 purposes.
Total Stockholders' Equity. Total stockholders' equity increased $44.4
million to $90.8 million at March 31, 1999 from $46.4 million at December 31,
1998 as a result of net income of $2.4 million during three months ended March
31, 1999, $42.4 million of additional paid in capital resulting from the
Company's secondary public offering, and reduced by $585,000 (net of taxes) from
amortization of previously unrealized gains related to the fair value of the
Company's investment in securitizations.
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 March 31, 1999, the Company had cash and cash equivalents of
$47.7 million. Cash provided by operating activities was $3.3 million for the
three months ended March 31, 1999. Receivables purchases were $37.9 million
for the three months ended March 31, 1999. Credit under the Company's credit
facilities at March 31, 1999 is $5,239,489.
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 April
1999 to $1.0 million in December 2000. The Company believes that it will have
sufficient liquidity to meet any future monthly obligations under these
contracts.
The debt service requirements associated with borrowings under the
credit facilities will significantly increase liquidity requirements although
both credit facilities have interest only periods for up to six months. The
Company anticipates that its operating cash flow and cash on hand, existing
credit facilities and future asset backed securitizations 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 $783,000 as of March 31, 1999. There would be
no impact on the Company's future cash flows or net earnings.
11
<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 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 March 31, 1998 and 1999.
PART II
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) None.
12
<PAGE>
(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.
13
<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 May 17, 1999.
CREDITRUST CORPORATION
/s/ RICHARD J. PALMER
By: __________________________________________
Richard J. Palmer
Vice President and Chief Financial Officer
14
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