<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 September 30, 1999.
or
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 0-27056
CompuCredit Corporation
-----------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-2336689
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE RAVINIA DRIVE, SUITE 500, ATLANTA, GEORGIA 30346
- ---------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(770) 206-6200
----------------------------------------------------
(Registrant's telephone number, including area code)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- --------
The number of shares outstanding of the issuer's only class of Common Stock, no
par value, (the "Common Stock"), as of October 31, 1999 was 40,051,392 shares.
<PAGE>
COMPUCREDIT CORPORATION
FORM 10-Q
TABLE OF CONTENTS
September 30, 1999
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets....................... 1
Condensed Consolidated Statements of Income................. 2
Condensed Consolidated Statements of Shareholders' Equity... 3
Condensed Consolidated Statements of Cash Flows............. 4
Notes to Condensed 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 .................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 2. Changes in Securities and Use of Proceeds..................... 21
Item 3. Defaults Upon Senior Securities............................... 21
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Item 5. Other Information............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 21
Signatures.................................................... 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,681 $ 12,256
Retained interests in credit card receivables securitized 140,768 65,184
Accrued interest and fees 5,845 1,979
-------- --------
Net credit card receivables 146,613 67,163
Amounts due from securitization 5,432 3,243
Deferred costs, net 2,173 1,375
Software, furniture, fixtures and equipment, net 5,158 1,736
Prepaid expenses 1,406 195
Other assets 4,099 1,615
-------- --------
Total assets $182,562 $ 87,583
======== ========
LIABILITIES
Amounts due to securitization $ 1,476 $ 10,774
Accrued expenses 11,330 4,745
Deferred revenue 5,844 2,075
Income tax liability 17,775 15,479
-------- --------
Total liabilities 36,425 33,073
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000 shares authorized,
no shares issued and outstanding at September 30, 1999;
$100 par value, cumulative and non-participating,
500,000 shares authorized, 200,000 issued and
outstanding at December 31, 1998 -- 20,000
Common stock, no par value:
60,000,000 shares authorized, 40,051,392 issued and
outstanding at September 30, 1999; 45,600,000 shares
authorized, 32,384,860 issued and outstanding at
December 31, 1998 (1) -- --
Additional paid-in capital 92,795 9,953
Retained earnings 53,342 24,557
-------- --------
Total shareholders' equity 146,137 54,510
-------- --------
Total liabilities and shareholders' equity $182,562 $ 87,583
======== ========
</TABLE>
(1) After giving effect to the 15.2-for-1 stock split effective April 28, 1999.
SEE ACCOMPANYING NOTES.
1
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
-------------------------- --------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $ 518 $ 84 $ 1,443 $ 187
Interest expense:
Short-term borrowings -- 30 -- 536
-------- -------- -------- --------
Total interest expense -- 30 -- 536
Net interest income (expense) 518 54 1,443 (349)
Other operating income:
Securitization income, net 3,623 1,054 5,612 7,192
Income from retained interests in credit card
receivables securitized 12,244 7,012 48,416 21,615
Servicing income 2,387 4,318 6,707 9,178
Other credit card fees 6,040 1,355 11,371 2,765
Interchange fees 2,708 498 4,759 1,087
Ancillary products 2,756 203 4,236 387
-------- -------- -------- --------
Total other operating income 29,758 14,440 81,101 42,224
Other operating expense:
Salaries and benefits 836 343 2,140 731
Credit card servicing 2,415 867 4,826 1,669
Marketing and solicitation 10,733 2,410 23,651 4,289
Professional fees 175 202 1,296 604
Data processing 800 349 1,900 959
Net occupancy 207 68 493 111
Ancillary product expense 306 112 1,118 213
Other 833 388 1,820 802
-------- -------- -------- --------
Total other operating expense 16,305 4,739 37,244 9,378
Income before income taxes 13,971 9,755 45,300 32,497
Income tax expense (5,169) (3,971) (16,515) (12,478)
-------- -------- -------- --------
Net income $ 8,802 $ 5,784 $ 28,785 $ 20,019
======== ======== ======== ========
Net income attributable to common shareholders $ 8,802 $ 5,331 $ 28,203 $ 18,673
======== ======== ======== ========
Net income per common share - basic and diluted (1) $ 0.22 $ 0.17 $ 0.77 $ 0.59
======== ======== ======== ========
</TABLE>
(1) After giving effect to the 15.2-for-1 stock split effective April 28, 1999.
SEE ACCOMPANYING NOTES.
2
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COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN PREFERRED EARNINGS SHAREHOLDERS'
SHARES (1) AMOUNT CAPITAL STOCK (DEFICIT) EQUITY
--------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 31,340,195 $-- $ -- $ 20,000 $ (873) $ 19,127
Issuance of common stock 1,044,665 -- 9,953 -- -- 9,953
Net income -- -- -- -- 20,019 20,019
---------- --- ---------- ---------- ---------- ----------
Balance at September 30, 1998 32,384,860 $-- $ 9,953 $ 20,000 $ 19,146 $ 49,099
========== === ========== ========== ========== ==========
Balance at December 31, 1998 32,384,860 $-- $ 9,953 $ 20,000 $ 24,557 $ 54,510
Conversion of preferred stock 1,916,532 -- 20,000 (20,000) -- --
Issuance of common stock 5,750,000 -- 62,842 -- -- 62,842
Net income -- -- -- -- 28,785 28,785
---------- --- ---------- ---------- ---------- ----------
Balance at September 30, 1999 40,051,392 $-- $ 92,795 $ -- $ 53,342 $ 146,137
========== === ========== ========== ========== ==========
</TABLE>
(1) After giving effect to the 15.2-for-1 stock split effective April 28, 1999.
SEE ACCOMPANYING NOTES.
3
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,785 $ 20,019
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 912 288
Amortization expense 977 559
Securitization income (5,612) (7,192)
Income from retained interests in credit card
receivables securitized (11,039) (16,727)
Changes in assets and liabilities:
Accrued interest and fees (3,866) (683)
Amounts due from securitization (2,189) (1,431)
Deferred costs (2,219) (355)
Prepaid expenses (1,211) 267
Amounts due to securitization (9,298) 2,336
Accrued expenses 6,586 1,781
Deferred revenue 3,769 1,388
Income tax liability 2,296 12,478
Other (2,484) (392)
--------- ---------
Net cash provided by operating activities 5,407 12,336
INVESTING ACTIVITIES
Net loans originated or purchased (295,187) (307,611)
Recoveries of loans previously charged off 270 40
Net proceeds from securitization of loans 199,632 273,379
Proceeds from retained interests in credit card
receivables securitized 36,796 17,316
Purchases of and development of software, furniture,
fixtures and equipment (4,335) (1,097)
--------- ---------
Net cash used in investing activities (62,824) (17,973)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 62,842 9,953
Proceeds from short-term borrowings -- 13,000
Payment of short-term borrowings -- (13,000)
--------- ---------
Net cash provided by financing activities 62,842 9,953
NET INCREASE IN CASH 5,425 4,316
Cash and cash equivalents at beginning of period 12,256 1,678
--------- ---------
Cash and cash equivalents at end of period $ 17,681 $ 5,994
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
CompuCredit Corporation and its subsidiaries (collectively, the "Company"). The
principal subsidiaries are CompuCredit Funding Corp. and CompuCredit Acquisition
Corporation, which were formed for the purpose of effecting the securitization
of credit card receivables. All significant intercompany balances and
transactions have been eliminated for financial reporting purposes. The Company
was formed for the purpose of offering unsecured credit and fee based products
and services to a specialized segment of the consumer credit market. The Company
has a contractual arrangement with a third party financial institution pursuant
to which the financial institution issues general purpose Visa credit cards
under the Company's "Aspire" trademark, and the Company purchases the
receivables relating to such accounts.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all normal recurring adjustments considered necessary to fairly
state the results for the interim periods presented have been included. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements as well as the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Certain
estimates such as credit losses, payment and discount rates have a significant
impact on the gains recorded on securitizations. Operating results for the three
and nine months ended September 30, 1999 are not necessarily indicative of the
results for the year ended December 31, 1999. The notes to the financial
statements for the year ended December 31, 1998 contained in the Company's final
prospectus dated April 22, 1999 and filed with the Securities and Exchange
Commission on April 23, 1999 should be read in conjunction with these condensed
consolidated financial statements.
Certain amounts in prior period financial statements have been reclassified to
conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements.
ASSET SECURITIZATION
The Company has securitized a substantial portion of its credit card
receivables. When the Company sells receivables in securitizations, it retains
certain undivided ownership interests, interest-only strips and servicing
rights. Although the Company continues to service the underlying credit card
accounts and maintains the client relationships, these transactions are treated
as sales and the securitized receivables are not reflected on the consolidated
balance sheet. The retained ownership interests are included in Retained
Interests in Credit Card Receivables Securitized.
Under Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement No. 125"), gains are recognized at the time of
5
<PAGE>
each sale. These gains are based on the estimated fair value of the retained
interests which are based on the estimated present value of the cash flows
the Company expects to receive over the estimated outstanding life of the
receivables. These cash flows represent estimates of finance charges and late
fees, servicing fees, costs of funds paid to investors, payment rates, credit
losses, and required amortization payments to investors.
The retained interests are subsequently accounted for as trading securities and
reported at estimated fair market value with changes in fair value included in
income in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("Statement
No. 115"). Certain estimates used in the determination of the gains and the
related fair values of interest-only strips and retained ownership interests are
influenced by factors outside the Company's control, and, as a result, such
estimates could materially change in the near term.
3. SECURITIZATIONS
The Company securitizes a substantial portion of its Company issued credit card
receivables through the CompuCredit Credit Card Master Trust (the "Master
Trust"). Credit card receivables are transferred to the Master Trust, which
issues certificates representing undivided ownership interests in the assets of
the Master Trust. In 1998, the Company also securitized two purchased portfolios
of credit card receivables through securitization structures with third party
commercial paper conduits. The Company's transfers are treated as sales as they
satisfy the requirements of Statement No. 125 and the receivables are removed
from the consolidated balance sheet. The securitization transactions do not
affect the relationship the Company has with its clients and the Company
continues to service the credit card receivables. As of September 30, 1999, the
Company receives servicing fees ranging up to 10% per year of the cash collected
on receivables or up to 6% per year of the principal receivables securitized.
The Company either provides the servicing or contracts with third party service
providers.
The table below summarizes the Company's securitization activity:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proceeds from securitizations $146,331 $ 28,327 $236,428 $290,695
Excess cash flows received on retained interests 22,276 12,916 59,120 21,676
Pretax securitization income 3,623 1,054 5,612 7,192
</TABLE>
The investors in the Company's securitization transactions have no recourse
against the Company for its clients' failure to pay their credit card loans.
However, most of the Company's retained interests are subordinated to the
investors' interests until the investors have been fully paid.
As an additional credit enhancement on CompuCredit's securitization structures
associated with its purchased receivables, CompuCredit pays the excess cash
collected on the receivables to the investors as an accelerated amortization
payment. This excess cash that the Company paid to the investors totaled $36.8
million and $17.3 million for the nine months ended September 30, 1999 and 1998,
respectively. The increase in 1999 is due to the timing of the Company's
purchases of receivables. The Company purchased its first portfolio of
receivables during the three months ended June 30, 1998, and thus did not
receive or pay to the investors any excess cash until after April 1998. The
Company's valuation of its retained interests incorporates this credit
enhancement, and the Company estimates that it takes approximately three to five
years from the inception of each securitization structure to completely repay
the investors using excess cash collected on the receivables. Once the investors
are repaid, any remaining receivables and funds held in the securitization
structure will be payable to the Company.
6
<PAGE>
The pretax securitization income recorded by the Company and the measurement of
the Company's retained interests are dependent upon management's estimates of
future cash flows using the cash-out method. Under the cash-out method, the
future cash flows (including the release of any cash related to credit
enhancements) are recorded at a discounted value. The cash flows are discounted
based on the timing of when the Company expects to receive the cash flows. The
discount rates are based on management's estimates of returns that would be
required by investors in an investment with similar terms and credit quality.
Interest rates received on the credit card receivables are estimated based on
the stated annual percentage rates in the credit card agreements. Estimated
default and payment rates are based on historical results, adjusted for expected
changes based on the Company's credit risk models. Credit card receivables are
typically charged off in the next billing cycle after becoming 180 days past
due, although earlier charge-offs may occur specifically related to accounts of
bankrupt or deceased clients. Bankrupt and deceased clients' accounts are
typically charged off within 30 days of verification.
Subsequent to each sale, the Company's retained interests are carried at
estimated fair market value with changes in fair value included in income as
they are classified as trading securities. Since quoted market prices are
generally not available, the Company estimates fair value based on the estimated
present value of future cash flows using management's best estimates of key
assumptions. Changes in any of these assumptions could impact the fair value
estimates and the realization of future cash flows. The weighted average key
assumptions used to estimate the fair value of the Company's retained interests
as of the end of each nine-month period are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------------------------
<S> <C> <C>
Payment rate (monthly) 7.2% 5.0%
Expected credit loss rate (annualized) 10.9 13.7
Residual cash flows discount rate 19.4 29.8
</TABLE>
The return to the investors in the securitizations is based on management's
estimates of forward yield curves. The changes in the weighted average
assumptions from September 30, 1998 to September 30, 1999 are primarily due to
the change in the mix of CompuCredit's originated and purchased receivables.
Since the receivables originated by CompuCredit have historically performed
better than the purchased portfolio, the significant growth experienced in the
originated portfolio has caused the weighted average assumptions to improve as
of September 30, 1999.
7
<PAGE>
4. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 8,802 $ 5,784 $ 28,785 $ 20,019
Preferred stock dividends -- (453) (582) (1,346)
-------- -------- -------- --------
Income attributable to common 8,802 5,331 28,203 18,673
shareholders
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 40,051 31,806 36,747 31,497
Effect of dilutive stock options 99 -- 49 --
Denominator for diluted earnings per share -
Adjusted weighted-average shares 40,150 31,806 36,796 31,497
-------- -------- -------- --------
Basic earnings per share $ 0.22 $ 0.17 $ 0.77 $ 0.59
======== ======== ======== ========
Diluted earnings per share $ 0.22 $ 0.17 $ 0.77 $ 0.59
======== ======== ======== ========
</TABLE>
There are no differences between diluted and basic earnings per share. The
number of weighted average shares outstanding gives effect to the 15.2-for-1
stock split effective April 28, 1999 which occurred in connection with the
Company's initial public offering. On April 28, 1999, the Company completed its
initial public offering of 5,000,000 shares of common stock at $12.00 per share.
On May 5, 1999, the Company issued an additional 750,000 shares of common stock
at $12.00 per share following the exercise by the Underwriters of their
over-allotment option granted in connection with the Company's initial public
offering.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
CompuCredit's condensed consolidated financial statements and the related notes
included herein.
GENERAL
CompuCredit is a credit card company that originates and purchases
credit card receivables and markets products and services to its clients for
which it earns fees.
Consumer credit product revenues consist of (i) interest income on
outstanding revolving credit card receivables, (ii) credit card fees, including
annual membership, cash advance, over-limit, past-due and other credit card
fees, and (iii) interchange fees, which are the portion of the merchant fee
assessed by Visa and passed on to CompuCredit on the purchase volume on
CompuCredit's credit card receivables. Non-interest income includes
securitization income, income from retained interests in credit card receivables
securitized, servicing income and fee-based product revenues. The expenses
relating to consumer credit products are typically the costs of funding
CompuCredit's receivables, credit losses and operating expenses, including
employee compensation, account solicitation and marketing expenses, data
processing and servicing expenses.
In June 1999, CompuCredit established a marketing presence on the
internet through a marketing agreement with The Lending Tree, Inc., an on-line
loan marketplace. Additionally, in July 1999, CompuCredit, through its
wholly-owned subsidiary AspireCard.com, Inc., launched its website
www.AspireCard.com. Applications received via the internet are electronically
processed on a real-time basis using the same credit and target marketing
strategies that are applied to CompuCredit's direct mail and telemarketing
campaigns.
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
intended to identify such forward-looking statements; however, this report also
contains other forward-looking statements in addition to historical information.
Actual results may differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are
the factors set forth under the caption "Risk Factors" in the Company's final
prospectus dated April 22, 1999 filed with the Securities and Exchange
Commission (the "Commission"). By making these forward-looking statements,
CompuCredit Corporation does not undertake to update them in any manner except
as may be required by its disclosure obligations in filings it makes with the
Commission under the Federal securities laws.
CREDIT CARD SECURITIZATIONS
CompuCredit has securitized a substantial portion of its credit card
receivables. CompuCredit's securitization transactions involve the sale of its
credit card receivables to a separate entity. The entity is either a corporation
or a trust that has been created by CompuCredit exclusively to purchase
receivables. The entity purchases the receivables from CompuCredit using cash
generated from selling interests in the receivables to investors. The investors
in CompuCredit's securitization transactions are commercial paper conduits
administered by major banking institutions. A commercial paper conduit is a
company that issues short-term debt securities backed by financial assets such
as credit card receivables.
CompuCredit has entered into agreements with investors which specify
the conditions and price of each sale including the total amount of receivables
the investor is committing to purchase from CompuCredit. The agreements include
terms and conditions that are similar to those included in bank loan agreements
and define CompuCredit's duties to service the securitized receivables.
CompuCredit is required by the agreements
9
<PAGE>
to remit collections on the receivables to the investors in the
securitizations. The agreements also include representations and warranties
regarding the receivables and financial performance measures that must be met
in order for CompuCredit to continue to securitize receivables and in order
for CompuCredit to receive any additional cash from the collections of the
receivables.
After an initial purchase by the investors, there is usually a period
during which collections from the receivables are used to purchase new
receivables generated by CompuCredit. This is referred to as a revolving period.
At the end of the revolving period, the investment of collections in new
receivables ends and collections are instead used to repay the investors. The
period during which investors are being repaid is referred to as an amortization
period. The amortization period may begin at a specific point in time determined
under the agreements or it may be caused by specified events including
deterioration in the quality of the receivables purchased or a material adverse
change in the financial condition of CompuCredit. A breach of a representation
or warranty made by CompuCredit could also cause an amortization period to
begin.
The securitized receivables incur losses to the extent cardholders do
not repay their credit card balances when due. The investors in the
securitizations require CompuCredit to provide credit support for the
receivables to reduce the risk of loss to the investors resulting from
cardholders not repaying their credit card balances when due. The amount of the
credit support is negotiated by CompuCredit with each investor and is based on
historical delinquency and loss experience on the receivables. The credit
support is usually in the form of over collateralization, which means that
CompuCredit sells the receivables for less than, or at a discount from, their
outstanding balances. As a result, the receivables available to repay the
investors exceed the total amount of the investors' interests in the
receivables. This excess is the retained interest owned by CompuCredit. The
investors in the securitized receivables have no recourse against CompuCredit
for its cardholders' failure to pay their credit card loans; however, most of
CompuCredit's retained interests are subordinated to the investors' interests
until the investors have been fully repaid. This means that CompuCredit's
retained interests will first absorb any losses due to cardholders' failure to
repay their balances before investors in the securitizations have to absorb
these losses.
CompuCredit will receive additional cash from the securitized
receivables if collections from the receivables exceed required interest and
principal payments to the investors. The collections from the receivables depend
on the performance of the receivables, which includes the timing and amount of
payments on the receivables, the interest rates, fees and other charges paid on
the receivables, and their delinquency and loss rates.
In each securitization, CompuCredit receives cash, retains an interest
in the receivables that are securitized, and has rights to receive cash in the
future as the securitized receivables are collected. The future cash flows are
commonly referred to as interest-only strips. Although CompuCredit continues to
service the underlying credit card receivables and maintains the client
relationships, these transactions are treated as sales and the securitized
receivables are not reflected on the consolidated balance sheet. The retained
interests and the interest-only strips are included in Retained Interests in
Credit Card Receivables Securitized. Amounts Due from Securitization on
CompuCredit's balance sheet include payments recently received on the
securitized receivables that are still held by the securitization structure but
are payable to the Company in the next 30 days.
CompuCredit has adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" for all of its securitization transactions.
Under Statement No. 125, gains are recognized at the time of each sale. These
gains are based on the estimated fair value of the retained interests, which are
based on the estimated present value of the cash flows the Company expects to
receive over the estimated outstanding life of the receivables. The expected
cash flows are based on estimates of finance charges and late fees, servicing
fees, costs of funds paid to investors, payment rates, credit losses, and
required amortization payments to investors.
10
<PAGE>
Retained Interests in Credit Card Receivables Securitized on
CompuCredit's balance sheet are calculated in accordance with the provisions of
Statement No. 125. These retained interests are subsequently accounted for as
trading securities and reported at estimated fair market value with changes in
fair value included in income in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Estimates used in the determination of the gains and the
related fair values of interest-only strips and retained ownership interests are
influenced by factors outside the Company's control, and, as a result, these
estimates could materially change.
The securitization transactions do not affect the relationship
CompuCredit has with its clients, and CompuCredit continues to service the
credit card receivables. CompuCredit receives servicing fees ranging up to 10%
per year of the cash collected or up to 6% per year of the securitized principal
receivables. CompuCredit either provides the servicing or contracts with third
party service providers.
The table below summarizes CompuCredit's securitization activity.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proceeds from securitizations $146,331 $ 28,327 $236,428 $290,695
Excess cash flows received on retained interests 22,276 12,916 59,120 21,676
Pretax securitization income 3,623 1,054 5,612 7,192
</TABLE>
Finance charges and past due fees collected in excess of servicing fees
and periodic interest payments are available to absorb the investors' share of
credit losses. Investors bear the risk of credit losses on the underlying
receivables to the extent that credit losses, servicing fees and periodic
interest payments required by the investors exceed finance charges and past due
fees earned on the receivables and CompuCredit's retained interests in the
receivables pool. Investors in CompuCredit's securitization programs are
generally entitled to receive principal payments either through monthly payments
during an amortization period or in one lump sum from the proceeds of issuances
of additional certificates or participation interests in the receivables pool.
As additional credit support on CompuCredit's securitization structures
associated with its purchased receivables, CompuCredit pays the excess cash
collected to the investors as an accelerated amortization payment. This excess
cash totaled $36.8 million for the nine months ended September 30, 1999 and
$17.3 million for the nine months ended September 30, 1998. The increase in 1999
is due to the timing of CompuCredit's purchases of receivables. CompuCredit
purchased its first portfolio of receivables during the three months ended June
30, 1998, and thus did not receive or pay to the investors any excess cash until
after April 1998. Once the investors are repaid, any remaining receivables and
funds held in the buying entity are payable to CompuCredit. In each
securitization transaction, CompuCredit retains the risk of compliance with
federal and state laws and regulations regarding the securitized accounts and
any fraudulent activity with regard to such accounts.
MANAGED LOAN PORTFOLIO
CompuCredit analyzes its financial performance on a "managed loan"
portfolio basis, as if the receivables securitized were still on CompuCredit's
balance sheet, because the performance of its securitized receivables will
affect the future cash flows CompuCredit actually receives on the receivables.
The table set forth below indicates CompuCredit's net interest margin
on a managed loan basis. The table also indicates the ending and average managed
loans and the number of managed accounts. During the
11
<PAGE>
nine months ended September 30, 1999, CompuCredit added 311,000 new accounts,
resulting in 46% growth in the number of managed loan accounts since June 30,
1999. Interest income for CompuCredit on a managed loan basis includes all
net interest and late fee income on all outstanding loans less all costs
associated with securitizations, including the interest expense paid to the
investors.
During 1998, CompuCredit purchased two portfolios of credit card
receivables with outstanding receivables balances at the time of purchase of
$579.7 million. The presented managed loan data excludes certain of these
receivables and the related accounts which at the time of purchase were closed
accounts in a certain delinquency status. Management believes that these
accounts were either in the process of being charged off by the seller due to
delinquency or were likely to be charged off in the near term. As a result,
management believes that CompuCredit would have had very little opportunity to
influence the delinquency or default rates of these accounts prior to
charge-off. CompuCredit therefore excluded these accounts, the receivables and
any activity in the accounts since the date of purchase from any managed loan
data presented. At the time of the purchases, there were approximately 52,000
such accounts, representing 25.9% of the accounts purchased and $137.2 million
of the $579.7 million outstanding receivables purchased.
The portfolios acquired during 1998 were purchased at substantial
discounts. A portion of the discount at the time of purchase related to the
credit quality of the remaining loans in the portfolio and reflects the
difference between the purchased face amount of the receivables and the future
cash collections management expects to receive with respect to the purchased
face amount. The substantial discount received by CompuCredit on the purchased
portfolio exceeds the discount CompuCredit has ascribed to the credit quality of
the purchased receivables. CompuCredit is reporting this excess discount as
additional interest income over the life of the portfolio for managed loan
reporting and is amortizing it into interest income using the interest method.
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1999 1999 1999
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Period-end total managed loans $397,500 $406,297 $503,985 $487,747 $526,217 $667,063
Period-end total managed accounts 202 249 343 382 633 927
Total average managed loan portfolio $337,161 $402,751 $449,028 $500,419 $496,859 $592,379
Net interest margin on managed loans, annualized 22.7% 19.3% 18.9% 19.8% 21.0% 23.1%
</TABLE>
CompuCredit's net interest margins are influenced by a number of
factors, including the timing and size of portfolio purchases and the level of
CompuCredit's charge-offs. Purchased portfolios typically have lower interest
rates and late fees until CompuCredit converts the accounts to Aspire Visa
accounts. When it converts accounts to Aspire Visa accounts, CompuCredit
reprices the accounts to interest rates and fees that are similar to those on
accounts CompuCredit has originated through its solicitation process.
CompuCredit typically converts the accounts within six months of purchase.
Fluctuations in CompuCredit's charge-off ratios also affect CompuCredit's net
interest margins. At charge-off, the interest and late fees on an account are
deducted from interest income in the current period.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1999 was $8.8
million, or $0.22 per share, an increase of $3.0 million from net income of $5.8
million for the three months ended September 30, 1998. The increase in net
income was primarily the result of the growth in managed loans. Net income for
the nine months ended September 30, 1999 was $28.8 million, or $0.77 per share,
an increase of $8.8 million over net income of $20.0 million for the nine months
ended September 30, 1998. The increase was partially a result of a $26.8 million
increase in income from retained interests in credit card receivables
securitized. On February 10, 1999, third party investors purchased the
outstanding undivided interest in one of CompuCredit's
12
<PAGE>
securitization structures for cash. The price paid by the purchasers exceeded
the amounts required to be paid to the selling investors, which was limited
to the selling investors' outstanding investment, accrued interest and unpaid
fees. The excess totaled $30.1 million, of which $5.0 million was deposited
into a reserve account to serve as a credit enhancement that was required by
the new investors. The remaining $25.1 million was remitted to CompuCredit's
wholly owned subsidiary created in connection with the securitization.
The changes in operating results were also largely attributable to the
growth in managed loans from $406.3 million at September 30, 1998 to $667.1
million at September 30, 1999. The increase in managed loans was the result of
direct mail and telemarketing campaigns, as well as a portfolio purchase
completed in the fourth quarter of 1998.
Other operating income, excluding securitization income and income from
retained interests in credit card receivables securitized, increased $7.5
million from $6.4 million for the three months ended September 30, 1998 to $13.9
million for the three months ended September 30, 1999. Other operating income
increased $13.7 million from $13.4 million for the nine months ended September
30, 1998 to $27.1 million for the nine months ended September 30, 1999. The
increases are primarily due to the increase in customer purchases of
CompuCredit's fee-based products and the increase in managed loans, which
resulted in increases in interchange fees and other credit card fees, which
include annual membership, over-limit and cash advance fees.
Other operating expenses increased to $16.3 million for the three
months ended September 30, 1999, from $4.7 million for the three months ended
September 30, 1998. Other operating expenses increased to $37.2 million for the
nine months ended September 30, 1999, from $9.4 million for the nine months
ended September 30, 1998. These increases primarily reflect the increase in the
cost of operations associated with the growth in CompuCredit's business,
including additional marketing and solicitation expenses and additional credit
card servicing costs.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) consists of interest income earned on
cash and cash equivalents less interest expense on borrowings. Net interest
income totaled $518,000 for the three months ended September 30, 1999 and
totaled $54,000 for the three months ended September 30, 1998. Net interest
income for the nine months ended September 30, 1999 was $1.4 million and net
interest expense for the nine months ended September 30, 1998 was $349,000. The
increases in interest income are attributable to the investing of the cash
proceeds CompuCredit received from its second quarter 1999 initial public
offering. Interest expense in 1998 was related to a promissory note entered into
in April 1998 with a related party in the face amount of $13.0 million. In July
1998, the remaining balance of the note and all accrued interest were paid in
full.
NET SECURITIZATION INCOME
Net securitization income includes gains representing the estimated
present value at the time of initial securitization of cash flows CompuCredit
expects to receive over the estimated life of the receivables securitized. The
present value of the cash flows is estimated in the same manner as described
below in "Income from Retained Interests in Credit Card Receivables Securitized"
for the fair value of the retained interests. Securitization income is
recognized at the time of the initial securitization. Net securitization income
for the three months ended September 30, 1999 increased to $3.6 million compared
to $1.1 million for the three months ended September 30, 1998 due to the growth
in receivables securitized. Net securitization income for the nine months ended
September 30, 1999 was $5.6 million compared to $7.2 million for the nine months
ended September 30, 1998. The purchase and securitization of a portfolio of
credit card receivables during the three months ended June 30, 1998 contributed
to the higher income in the first nine months of 1998.
13
<PAGE>
INCOME FROM RETAINED INTERESTS IN CREDIT CARD RECEIVABLES SECURITIZED
Retained Interests in Credit Card Receivables Securitized are
calculated in accordance with the provisions of Statement No. 125. These
retained interests are subsequently accounted for as trading securities and
reported at estimated fair market value in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." CompuCredit receives cash flows relating to these
retained interests equal to the finance charges and past due fees in excess of
the sum of the return paid to investors, estimated contractual servicing fees,
credit losses and required amortization payments to investors. This cash flow
received on CompuCredit's retained interests and changes in the fair value of
the retained interests is recorded as Income from Retained Interests in Credit
Card Receivables Securitized in accordance with Statement No. 115. Since quoted
market prices are generally not available, the fair value is based on the
estimated present value of future cash flows using management's best estimates
of finance charges and late fees, servicing fees, costs of funds paid to
investors, payment rates, credit losses, and required amortization payments to
investors. The weighted average key assumptions used to estimate the fair value
of CompuCredit's retained interests as of the end of each three month period are
presented below. Changes in any of these assumptions could impact the estimates
of the fair value of the retained interests as well as the realization of
expected future cash flows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30
1999 1998
-----------------------------
<S> <C> <C>
Payment rate (monthly) 7.2% 5.0%
Expected credit loss rate (annualized) 10.9 13.7
Residual cash flows discount rate 19.4 29.8
</TABLE>
The changes in the weighted average assumptions from September 30, 1998
to September 30, 1999 are primarily due to the change in the mix of
CompuCredit's originated and purchased receivables. Since the receivables
originated by CompuCredit have historically performed better than the purchased
portfolio, the significant growth experienced in the originated portfolio has
caused the weighted average assumptions to improve as of September 30, 1999. The
discount rates are based on management's estimates of returns that would be
required by investors in an investment with similar terms and credit quality.
Interest rates received on the credit card receivables are estimated based on
the stated annual percentage rates in the credit card agreements. Estimated
default and payment rates are based on historical results, adjusted for expected
changes based on CompuCredit's credit risk models. The returns to the investors
in the securitizations are based on management's estimates of forward yield
curves.
OTHER OPERATING INCOME
Other operating income, excluding securitization income and income from
retained interests in credit card receivables securitized, consists of the
following for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
-------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing income $ 2,387 $ 4,318 $ 6,707 $ 9,178
Other credit card fees 6,040 1,355 11,371 2,765
Interchange fees 2,708 498 4,759 1,087
Ancillary products 2,756 203 4,236 387
------- ------- ------- -------
Total other operating income $13,891 $ 6,374 $27,073 $13,417
======= ======= ======= =======
</TABLE>
14
<PAGE>
The increase in other operating income to $13.9 million for the three
months ended September 30, 1999 and to $27.1 million for the nine months ended
September 30, 1999 relates to the growth in CompuCredit's managed loan portfolio
since September 30, 1998. CompuCredit's managed loans grew from $406.3 million
at September 30, 1998 to $667.1 million at September 30, 1999. CompuCredit
services the credit card receivables that have been securitized and recognizes
servicing income. A substantial portion of the servicing income relates to
CompuCredit's purchased portfolios. As the size of these purchased portfolios
decreases, there is a corresponding decrease in servicing income. Other credit
card fees include credit card fees such as annual membership, over-limit and
cash advance fees. Interchange fees are the portion of the merchant fee assessed
by Visa and passed on to CompuCredit on the purchase volume on CompuCredit's
credit card receivables. Ancillary product revenues are associated with the
products and services that CompuCredit markets to its clients.
OTHER OPERATING EXPENSE
Other operating expense consists of the following for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits $ 836 $ 343 $ 2,140 $ 731
Credit card servicing 2,415 867 4,826 1,669
Marketing and solicitation 10,733 2,410 23,651 4,289
Professional fees 175 202 1,296 604
Data processing 800 349 1,900 959
Net occupancy 207 68 493 111
Ancillary product expense 306 112 1,118 213
Other 833 388 1,820 802
------- ------- ------- -------
Total other operating expense $16,305 $ 4,739 $37,244 $ 9,378
======= ======= ======= =======
</TABLE>
Other operating expense for the three months ended September 30, 1999
increased to $16.3 million from $4.7 million for the three months ended
September 30, 1998 and increased to $37.2 million from $9.4 million for the
comparable nine-month periods due primarily to increases in marketing and
solicitation and credit card servicing expenses. The increases in operating
expenses also are due to the increase in the cost of operations associated with
the growth in CompuCredit's business. Ancillary product expenses relate to the
products and services that CompuCredit markets to its clients, including
CompuCredit's debt waiver products, and include expenses associated with claim
reserves and program administrative expenses. Other expenses include
depreciation and other general and administrative costs.
INCOME TAXES
CompuCredit's provision for income taxes includes both federal and
state income taxes. Tax expense for the three months ended September 30, 1999
was $5.2 million and for the three months ended September 30, 1998 was $4.0
million. CompuCredit's effective tax rate was 37.0% for the three months ended
September 30, 1999 and 40.7% for the three months ended September 30, 1998.
Income tax expense was $16.5 million for the nine months ended September 30,
1999 and $12.5 million for the comparable period in 1998. The effective tax rate
was 36.5% for the nine months ended September 30, 1999 and 38.4% for the nine
months ended September 30, 1998. The change in the tax rates from the periods in
1998 is due to reduced state tax expense as a result of tax planning strategies.
15
<PAGE>
ASSET QUALITY
CompuCredit's delinquency and net loan charge-off rates at any point in
time reflect the credit risk of receivables, the average age of CompuCredit's
credit card accounts, the timing of portfolio purchases, the success of
CompuCredit's collection and recovery efforts and general economic conditions.
The average age of CompuCredit's credit card account portfolio affects the
stability of delinquency and loss rates of the portfolio.
CompuCredit's strategy for managing delinquency and loan losses
consists of active account management throughout the client relationship. This
strategy includes credit line management and pricing based on the risk of the
credit card accounts.
DELINQUENCIES. Delinquencies have the potential to impact net income in the
form of net credit losses which impact the value of CompuCredit's retained
interests in securitizations. Delinquencies are also costly in terms of the
personnel and resources dedicated to resolving them. A credit card account is
contractually delinquent if the minimum payment is not received by the specified
date on the client's statement. It is CompuCredit's policy to continue to accrue
interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged off. See "Net Charge-Offs."
The following table presents the delinquency trends of CompuCredit's
credit card receivables portfolio on a managed loan portfolio basis:
AT THE QUARTER ENDED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
% OF % OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Delinquent:
30 to 59 days $21,294 5.4% $27,186 6.7% $27,819 5.5% $19,624 4.0% $20,506 3.9% $24,127 3.6%
60 to 89 days 12,824 3.2 17,119 4.2 14,249 2.8 13,227 2.7 12,684 2.4 16,155 2.4
90 or more 4,053 1.0 25,596 6.3 28,964 5.8 26,725 5.5 21,248 4.0 27,775 4.2
------- --- ------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total 30 or more $38,171 9.6% $69,901 17.2% $71,032 14.1% $59,576 12.2% $54,438 10.3% $68,057 10.2%
======= === ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Total 60 or more $16,877 4.2% $42,715 10.5% $43,213 8.6% $39,952 8.2% $33,932 6.4% $43,930 6.6%
======= === ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
The significant increase in CompuCredit's delinquencies from the
quarter ended June 30, 1998 to the quarter ended September 30, 1998 was due in
part to the portfolio purchase that occurred during that period. CompuCredit
converted the portfolio to Aspire Visa accounts during the third quarter of 1998
and began using its account management strategies on the portfolio at that time.
Delinquency rates on the purchased portfolio subsequently improved during the
fourth quarter of 1998 and during 1999. During the quarter ended September 30,
1999 the purchased portfolio delinquency rates increased due to seasonality.
CompuCredit continues to aggressively manage account activity using behavioral
scoring, credit file data and its proprietary risk evaluation models.
CompuCredit began originating accounts in February 1997. In general, as
the average age of an originated credit card receivables portfolio increases,
delinquency rates can be expected first to increase and then to stabilize. Due
primarily to the significant growth in new receivables during the three months
ended June 30, 1999, and the three months ended September 30, 1999, delinquency
rates on CompuCredit's originated portfolio declined for those periods.
CompuCredit is using its account management strategies on its originated
portfolio, which are intended to reduce the expected increase in delinquency
rates as its originated portfolio matures.
16
<PAGE>
The following table separately reports CompuCredit's loan delinquency
trends for its originated portfolio and for its purchased portfolio:
<TABLE>
<CAPTION>
% OF TOTAL
AT THE QUARTER ENDED
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1999 1999 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINATED PORTFOLIO
Loans Delinquent:
30 to 59 days 2.7% 3.1% 2.5% 2.4% 2.3% 2.4%
60 to 89 days 1.9 2.2 1.6 1.7 1.5 1.6
90 or more 3.0 4.2 3.9 3.8 3.0 2.6
---- ---- ---- ---- ---- ----
Total 30 or more 7.6% 9.5% 8.0% 7.9% 6.8% 6.6%
==== ==== ==== ==== ==== ====
Total 60 or more 4.9% 6.4% 5.5% 5.5% 4.5% 4.2%
==== ==== ==== ==== ==== ====
PURCHASED PORTFOLIO
Loans Delinquent:
30 to 59 days 5.9% 7.8% 6.6% 4.8% 5.2% 5.4%
60 to 89 days 3.5 4.8 3.3 3.2 3.2 3.7
90 or more 0.6 7.0 6.5 6.3 4.9 6.5
---- ---- ---- ---- ---- ----
Total 30 or more 10.0% 19.6% 16.4% 14.3% 13.3% 15.6%
==== ==== ==== ==== ==== ====
Total 60 or more 4.1% 11.8% 9.8% 9.5% 8.1% 10.2%
==== ==== ==== ==== ==== ====
</TABLE>
NET CHARGE-OFFS. Net charge-offs include the principal amount of losses from
clients unwilling or unable to pay their loan balance, as well as bankrupt and
deceased clients, less current period recoveries. Net charge-offs exclude
accrued finance charges and fees, which are charged against the related income
at the time of charge-off. Losses from fraudulent activity in accounts are also
excluded from net charge-offs and are included separately in other operating
expenses. CompuCredit generally charges off loans during the period in which the
loan becomes contractually 180 days past due. However, bankrupt accounts and the
accounts of deceased clients without a surviving, contractually liable
individual or an estate large enough to pay the debt in full are charged off
within 30 days of notification of the client's bankruptcy or death.
Approximately $87.5 million of the discount on CompuCredit's portfolio
purchases during 1998 related to the credit quality of the remaining loans in
the portfolio and reflects the difference between the purchased face amount and
the future cash collections management expects to receive with respect to the
purchased face amount. For purposes of reporting pro forma charge-off ratios on
managed loans below, this discount related to credit quality has been utilized
to offset a portion of actual net charge-offs. The following table presents
CompuCredit's net charge-offs for the periods indicated on a managed loan
portfolio basis:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1999 1999 1999
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED LOAN PORTFOLIO:
Average managed loan portfolio $337,161 $402,751 $449,028 $500,419 $496,859 $592,379
Net charge-offs 3,600 11,833 24,075 20,457 22,723 17,412
Pro forma net charge-offs 1,179 3,584 4,883 4,067 5,094 7,353
Net charge-off ratio (annualized) 4.3% 11.8% 21.5% 16.4% 18.3% 11.8%
Pro forma charge-off ratio (annualized) 1.4 3.6 4.3 3.3 4.1 5.0
</TABLE>
As CompuCredit's portfolio continues to mature, CompuCredit expects
charge-off rates to also increase and then stabilize. CompuCredit's pro forma
charge-off ratio increased to 5.0% for the third quarter of 1999 from 4.1% for
the second quarter of 1999 primarily due to seasoning of its portfolio.
CompuCredit plans to
17
<PAGE>
continue to focus its resources on refining its credit underwriting standards
for new accounts and to increase its focus on collection and post charge-off
recovery efforts to minimize losses.
CREDIT LOSSES. For securitized receivables, anticipated credit losses are
reflected in the calculations of net securitization income and income from
retained interests in credit card receivables securitized. In evaluating credit
losses, CompuCredit takes into consideration several factors, including (i)
historical charge-off and recovery activity by receivables portfolio, (ii)
recent and expected delinquency and collection trends by receivables portfolio,
(iii) the impact of current economic conditions and recent economic trends on
the clients' ability to repay and (iv) the risk characteristics of the
portfolios. Substantially all of CompuCredit's credit card receivables have been
securitized. As CompuCredit has securitized its receivables it has removed them
from its balance sheet and has also relieved any allowance for loan losses on
its balance sheet.
INTEREST RATE SENSITIVITY AND MARKET RISK
Interest rate sensitivity is comprised of basis risk and gap risk.
Basis risk is caused by the difference in the interest rate indices used to
price assets and liabilities. Gap risk is caused by the difference in repricing
intervals between assets and liabilities. Market risk is the risk of loss from
adverse changes in market prices and rates. CompuCredit's principal market risk
is related to changes in interest rates. This affects CompuCredit directly in
its lending and borrowing activities, as well as indirectly as interest rates
may impact the payment performance of CompuCredit's clients.
CompuCredit attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating the
risk inherent in its asset and liability structure, including its off-balance
sheet assets and liabilities such as securitized receivables. This risk arises
from continuous changes in CompuCredit's asset and liability mix, changes in
market interest rates, including changes affected by fluctuations in prevailing
interest rates, payment trends on CompuCredit's interest-bearing assets and
payment requirements on CompuCredit's interest-bearing liabilities, and the
general timing of all other cash flows. To manage CompuCredit's direct risk to
market interest rates, management actively monitors market interest rates and
the interest sensitive components of CompuCredit's managed balance sheet.
Management seeks to minimize the impact of changes in interest rates on the fair
value of assets, net income and cash flow primarily by matching asset and
liability repricings. There can be no assurance that management will be
successful in its attempt to manage such risks.
At September 30, 1999, all of CompuCredit's credit card receivables and
other interest-bearing assets had variable rate pricing, with receivables
carrying annual percentage rates at a spread over the prime rate, subject to
certain interest rate floors. At September 30, 1999, CompuCredit's
securitizations had $471.9 million in variable rate, interest-bearing
liabilities, payable to its investors. Since both managed interest-bearing
assets and liabilities reprice every 30 days, CompuCredit believes that the
impact of a change in interest rates would not be material to the financial
performance of CompuCredit.
CompuCredit incurs basis risk because it funds managed assets at a
spread over the commercial paper rate while the rates on the underlying assets
are indexed to the prime rate. This basis risk results from the potential
variability in the spread between the prime rate and the commercial paper rate
over time. CompuCredit has not hedged its basis risk due to the cost of hedging
this risk versus the benefits from elimination of this risk.
CompuCredit believes it is not exposed to any material foreign currency
exchange rate risk or commodity price risk.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
18
<PAGE>
CompuCredit's goal is to maintain an adequate level of liquidity
through active management of assets and liabilities. Because the characteristics
of its assets and liabilities change, liquidity management is a dynamic process
affected by the pricing and maturity of CompuCredit's assets and liabilities.
A significant source of liquidity for CompuCredit has been the
securitization of credit card receivables. CompuCredit received proceeds of
$236.4 million during the nine months ended September 30, 1999 and $290.7
million during the nine months ended September 30, 1998 from sales of its credit
card receivables through securitizations. CompuCredit used cash generated from
these transactions to fund further credit card receivables growth.
The maturity terms of CompuCredit's securitizations vary. Once
repayment begins, payments from clients on credit card receivables are
accumulated for the special purpose entities' investors and are no longer
reinvested in new credit card receivables. At that time, CompuCredit's funding
requirements for new credit card receivables will increase accordingly. The
occurrence of certain events may also cause the securitization transactions to
amortize earlier than scheduled. In the case of CompuCredit's master trust, a
decline in the portfolio's annual yield below a base rate or the increase in
delinquencies above a certain rate will cause early amortization. The
portfolio's annual yield typically includes finance charges and past due fees
earned on the receivables less servicing fees and credit losses. In the case of
CompuCredit's other securitization programs, such events include an increase in
the charge-off rates or a decline in the payment rates in excess of certain
agreed upon thresholds. These events would accelerate the need to utilize
alternative funding sources. Under each of CompuCredit's securitization
structures, there has not been an early amortization period. CompuCredit
believes that securitizations will continue to be a reliable source of funding
but can give no assurance that securitizations will provide sufficient funding.
As of September 30, 1999, CompuCredit had total securitization facilities of
$754.9 million and had utilized approximately $471.9 million of such facilities.
At September 30, 1999, CompuCredit had cash and cash equivalents of
approximately $17.7 million. The initial public offering completed in April 1999
resulted in net cash proceeds to CompuCredit of $62.8 million. CompuCredit has
used the proceeds from the offering to finance a significant increase in its
marketing and solicitation expenses and the growth in its receivables through
September 30, 1999.
YEAR 2000
The year 2000 problem is a result of computer programs using two digit
years instead of four digits. As a result, these computer programs do not
properly recognize dates in any year that begins with "20" instead of "19" and
may malfunction when presented with such dates. The year 2000 problem may affect
not only CompuCredit's software systems, but also critical software used by
suppliers of goods and services and financial institutions with which
CompuCredit does business.
Although most of CompuCredit's existing information systems are less
than two years old and were originally designed for year 2000 compliance,
CompuCredit has created a year 2000 project team to identify, address and
monitor internal systems and vendor issues related to the year 2000 problem.
CompuCredit has tested all internally developed information and operational
systems, including hardware, software, non-information technology systems and
systems interfaces, for year 2000 compliance. Where necessary, CompuCredit
upgraded these systems to a format that CompuCredit believes will assure system
and data integrity in the year 2000 and thereafter. Although CompuCredit
believes its internal systems are year 2000 compliant, unforeseen problems could
arise in the year 2000 which could cause delays and malfunctions which may
impact CompuCredit's results of operations.
In addition, CompuCredit has discussed with outside third party
providers of services, systems and networks whether these outside vendors have
satisfactorily addressed their year 2000 systems issues. CompuCredit's most
critical outside vendors have provided their year 2000 project plans. These
vendors have warranted the accuracy and reliability of systems, reports, and
data related to the performance of the services
19
<PAGE>
provided by them and their affiliates in relation to the year 2000 issue.
CompuCredit believes its most critical outside vendor is Total Systems, which
provides services to CompuCredit, including card embossing, transaction
processing and cycle billing. Due to its critical nature, CompuCredit
participated in the year 2000 testing of its credit card processor, Total
Systems, during the first quarter of 1999. CompuCredit provided specific test
code for Total Systems to incorporate in their year 2000 plan, and
CompuCredit received and analyzed Total Systems' year 2000 test results. TSYS
has issued a formal statement that their systems are year 2000 compliant.
Although CompuCredit is taking these and other precautionary measures to
assure that it is not vulnerable to the failure by its third party vendors to
make necessary system modifications, there can be no assurance that
CompuCredit's third party vendors will successfully address all of their year
2000 issues. CompuCredit has contingency plans that include, in the event of
vendor or software non-compliance, identification and replacement of critical
products or services as appropriate.
CompuCredit's most likely worst case scenario is that its outside
vendors are not year 2000 compliant due to unforeseen or unexpected problems
with their systems that their year 2000 testing did not discover and that there
are errors or delays in processing or billing the credit card accounts. In this
scenario, CompuCredit will have to assess the length of time it may take for its
vendors to correct their year 2000 problems. In the event of a significant
delay, CompuCredit would begin replacing its vendors.
CompuCredit believes that it has adequate resources to achieve year
2000 compliance for any of its systems which are found to be non-compliant.
CompuCredit's costs associated with the year 2000 issue relate primarily to the
management of vendor project plans and participation in testing. CompuCredit has
spent an aggregate of approximately $100,000 during 1999 relating to the
monitoring and possible replacement of software or vendors providing services to
CompuCredit, excluding any costs that might be incurred if its critical vendor,
Total Systems, fails to become year 2000 compliant. Since Total Systems services
all of CompuCredit's credit card receivables, any year 2000 problem at Total
Systems could cause a material disruption in CompuCredit's business. The cost of
the disruption to CompuCredit's business cannot be accurately estimated by
management at this time. Management believes that the cost of any such
disruption would have a material adverse affect on CompuCredit's results of
operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this item is provided under the caption
"Interest Rate Sensitivity and Market Risk" under Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) None.
USE OF PROCEEDS
Pursuant to its Registration Statement on Form S-1 (File No.
333-69879), which was declared effective by the Commission on April 15, 1999,
and Post-Effective Amendment No.1 to that Registration Statement, which was
declared effective on April 22, 1999, the Company sold 5,750,000 shares of its
Common Stock for an aggregate offering price of $69,000,000. Net proceeds to the
Company before expenses totaled $64,572,500 after deducting the underwriting
discount of $4,427,500.
The Company used approximately $12.0 million of these net proceeds for
marketing and solicitation costs, approximately $29.9 million for receivables
growth and approximately $7.0 million for working capital during the quarter
ended September 30, 1999. The proceeds used by the Company during this period
did not constitute payments made directly or indirectly to officers, directors,
and general partners of the issuer or their associates, or to any person owning
10% or more of any class of securities of the Company, or to any officers of the
issuer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of CompuCredit Corporation
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-62327), filed with the Commission on
August 27, 1998).
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
3.2 Amended and Restated Bylaws of CompuCredit Corporation (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 333-62327), filed with the Commission on August 27, 1998).
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (File No.000-25751),
dated July 30, 1999, reporting under Item 5 of Form 8-K
and enclosing its press release dated July 28,1999 issued
pursuant to Rule 135(c).
The Company filed a report on Form 8-K (File No.000-25751),
dated August 10, 1999, reporting under Item 5 of Form 8-K
and enclosing its press release dated August 9, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CompuCredit Corporation
November 10, 1999 By: /s/ Brett M. Samsky
----------------------
Brett M. Samsky
Chief Financial Officer (duly
authorized officer and principal
financial officer)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of CompuCredit Corporation
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-62327), filed with the Commission on
August 27, 1998).
3.2 Amended and Restated Bylaws of CompuCredit Corporation (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 333-62327), filed with the Commission on August 27, 1998).
27 Financial Data Schedule (for SEC use only).
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF COMPUCREDIT CORPORATION AND
SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,681
<SECURITIES> 0
<RECEIVABLES> 146,613
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,158<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 182,562
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 146,137
<TOTAL-LIABILITY-AND-EQUITY> 182,562
<SALES> 0
<TOTAL-REVENUES> 82,544
<CGS> 0
<TOTAL-COSTS> 37,244
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F3>
<INCOME-PRETAX> 45,300
<INCOME-TAX> 16,515
<INCOME-CONTINUING> 28,785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,785
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.77
<FN>
<F1>THE BALANCE SHEET IS UNCLASSIFIED.
<F2>PP&E IS SHOWN NET ON THE BALANCE SHEET.
<F3>INTEREST EXPENSE IS CONSIDERED AN OPERATING EXPENSE OF THE REGISTRANT.
</FN>
</TABLE>
