<PAGE>
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 March 31, 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.)
TWO RAVINIA DRIVE, SUITE 1750, ATLANTA, GEORGIA 30346
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 901-5840
- -------------------------------------------------------------------------------
(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 NO X
----- -----
The number of shares outstanding of the issuer's only class of Common Stock,
no par value, (the "Common Stock"), as of May 26, 1999 was 40,051,392 shares.
<PAGE>
COMPUCREDIT CORPORATION
FORM 10-Q
TABLE OF CONTENTS
March 31, 1999
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets............................................1
Condensed Consolidated Statements of Operations..................................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............................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................20
Item 2. Changes in Securities and Use of Proceeds.............................................20
Item 3. Defaults Upon Senior Securities.......................................................20
Item 4. Submission of Matters to a Vote of Security Holders...................................20
Item 5. Other Information.....................................................................20
Item 6. Exhibits and Reports on Form 8-K......................................................21
Signatures............................................................................22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,961 $ 12,256
Retained interests in credit card receivables securitized 76,100 65,184
Accrued interest and fees 2,355 1,979
-------- --------
Net credit card receivables 78,455 67,163
Amounts due from securitization 1,818 3,243
Deferred costs, net 1,187 1,375
Software, furniture, fixtures and equipment, net 2,364 1,736
Prepaid expenses 526 195
Other assets 805 1,615
-------- --------
Total assets $104,116 $ 87,583
-------- --------
-------- --------
LIABILITIES
Amounts due to securitization $ 1,133 $ 10,774
Accrued expenses 7,054 4,745
Deferred revenue 2,535 2,075
Income tax liability 20,002 15,479
-------- --------
Total liabilities 30,724 33,073
Shareholders' equity
Preferred stock, $100 par value:
Cumulative and nonparticipating; 500,000 shares
authorized, 200,000 shares issued and outstanding at
at March 31, 1999 and December 31, 1998 20,000 20,000
Common stock, no par value:
45,600,000 shares authorized; 32,384,860 shares issued and
outstanding at March 31, 1999 and December 31, 1998 (1) - -
Additional paid-in capital 9,953 9,953
Retained earnings 43,439 24,557
-------- --------
Total shareholders' equity 73,392 54,510
-------- --------
Total liabilities and shareholders' equity $104,116 $ 87,583
-------- --------
-------- --------
</TABLE>
(1) After giving effect to the stock split payable to shareholders of record on
April 22, 1999.
SEE ACCOMPANYING NOTES.
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
-------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Interest income:
Interest $ 246 $ 39
Finance charges, including fees - -
-------- --------
Total interest income 246 39
Other operating income:
Securitization income, net 252 270
Income from retained interests in credit card
receivables securitized 31,059 907
Servicing income 2,463 -
Other credit card fees 1,910 567
Interchange fees 710 236
Ancillary products 326 14
-------- --------
Total other operating income 36,720 1,994
Other operating expense:
Salaries and benefits 585 167
Credit card servicing 1,101 159
Marketing and solicitation 3,428 830
Professional fees 419 99
Data processing 859 130
Net occupancy 108 16
Ancillary product expense 407 -
Other 478 250
-------- --------
Total other operating expense 7,385 1,651
Income before income taxes 29,581 382
Income tax expense (10,699) -
-------- --------
Net income $ 18,882 $ 382
-------- --------
-------- --------
Net income (loss) attributable to common shareholders $ 18,438 ($ 62)
-------- --------
-------- --------
Average number of shares outstanding (1) 32,385 31,340
-------- --------
-------- --------
Net income per common share (1) $ 0.57 $ 0.00
-------- --------
-------- --------
</TABLE>
(1) After giving effect to the stock split payable to shareholders of record on
April 22, 1999.
SEE ACCOMPANYING NOTES.
2
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- PAID-IN PREFERRRED 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
Net income -- -- -- -- 382 382
---------- ----- ---------- ---------- ----------- ----------
Balance at March 31, 1998 31,340,195 $-- $ -- $ 20,000 $ (491) $ 19,509
---------- ----- ---------- ---------- ----------- ----------
---------- ----- ---------- ---------- ----------- ----------
Balance at December 31, 1998 32,384,860 $-- $ 9,953 $ 20,000 $ 24,557 $ 54,510
Net income -- -- -- -- 18,882 18,882
---------- ----- ---------- ---------- ----------- ----------
Balance at March 31, 1999 32,384,860 $-- $ 9,953 $ 20,000 $ 43,439 $ 73,392
---------- ----- ---------- ---------- ----------- ----------
---------- ----- ---------- ---------- ----------- ----------
</TABLE>
(1) After giving effect to the stock split payable to shareholders of record
on April 22, 1999.
SEE ACCOMPANYING NOTES.
3
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $18,882 $382
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 200 70
Amortization expense 161 43
Securitization income (252) (270)
Income from retained interests in credit card
receivables securitized (3,751) -
Changes in assets and liabilities:
Accrued interest and fees (376) 33
Amounts due from securitization 1,425 191
Deferred costs (121) (168)
Prepaid expenses (331) 116
Amounts due to securitization (9,641) 98
Accrued expenses 2,309 (189)
Deferred revenue 460 173
Income tax liability 4,523 -
Other 810 (29)
------- ------
Net cash provided by operating activities 14,298 450
INVESTING ACTIVITIES
Net loans originated or purchased (35,242) (17,110)
Recoveries of loans previously charged off 69 -
Net proceeds from securitization of loans 14,169 15,820
Proceeds from retained interests in credit card
receivables securitized 14,239 -
Purchases of property and equipment (210) (43)
Software development costs (618) (196)
------- ------
Net cash used in investing activities (7,593) (1,529)
NET INCREASE (DECREASE) IN CASH 6,705 (1,079)
Cash and cash equivalents at beginning of period 12,256 1,678
------- ------
Cash and cash equivalents at end of period $18,961 $599
------- ------
------- ------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 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 months ended March 31, 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 each
sale. These gains are based on the estimated fair value of the retained
interests which are based on the
5
<PAGE>
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 March 31, 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 MARCH
31,
1999 1998
-----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Proceeds from securitizations $28,408 $15,820
Excess cash flows received on retained interests 18,547 1,063
Pretax securitization income 252 270
</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 $14.2 million for the three months ended March 31, 1999. The Company
did not have purchased receivables for the three months ended March 31, 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.
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)
6
<PAGE>
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.
Interests 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 three-month period are
presented below:
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
-----------------------------------
<S> <C> <C>
Payment rate (monthly) 5.9% 8.0%
Expected credit loss rate (annualized) 13.9 5.5
Residual cash flows discount rate 21.8 12.0
</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 March 31, 1998 to March 31, 1999 are primarily due to the
two portfolio purchases that occurred subsequent to March 31, 1998.
Management believes these two portfolios will have lower payment rates and
higher credit losses as compared to the receivables that were securitized as
of March 31, 1998.
7
<PAGE>
4. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1999 1998
--------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income $ 18,882 $382
Preferred stock dividends (444) (444)
--------- -------
Numerator for basic earnings per share - income (loss)
attributable to common shareholders 18,438 (62)
Denominator:
Denominator for basic earnings per share - weighted average
shares outstanding 32,385 31,340
--------- -------
Basic earnings per share $ 0.57 $ 0.00
--------- -------
--------- -------
</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, which occurred at the same time as the closing of the offering
as described in Note 5.
5. SUBSEQUENT EVENT
On April 28, 1999, the Company completed its initial public offering of
5,000,000 shares of common stock at $12.00 per share. In connection with the
offering, the Company effected a 15.2-for-1 stock split payable to
shareholders of record on April 22, 1999. Concurrently with the closing of
the initial public offering, the Company exchanged all of its outstanding
preferred stock, including accrued dividends, for 1,916,532 shares of common
stock. 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.
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.
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 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
9
<PAGE>
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 overcollateralization, 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.
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
10
<PAGE>
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
ENDED
MARCH 31,
---------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Proceeds from securitizations.................................................... $28,408 $15,820
Excess cash flows received on retained interests................................. 18,547 1,063
Pretax securitization income..................................................... 252 270
</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 $14.2 million for the three months ended
March 31, 1999. CompuCredit did not have purchased receivables for the three
months ended March 31, 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. 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
11
<PAGE>
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
---------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1998 1998 1998 1998 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Period-end total managed loans............ $27,899 $44,089 $397,500 $406,297 $503,985 $487,747
Period-end total managed accounts......... 45 51 202 249 343 382
Total average managed loan portfolio...... $20,983 $37,886 $337,161 $402,751 $449,028 $500,419
Net interest margin on managed loans,
annualized.............................. 17.7% 13.9% 22.7% 19.3% 18.9% 19.8%
</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
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Net income for the three months ended March 31, 1999 was $18.9
million, or $0.57 per share, an increase of $18.5 million over net income of
$382,000 for the three months ended March 31, 1998. The increase in net
income was the result of increases in income from retained interests in
credit card receivables securitized of $30.2 million and other operating
income of $4.6 million. On February 10, 1999, third party investors purchased
the outstanding undivided interest in one of CompuCredit's 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.
Additionally, the changes in operating results were largely
attributable to the growth in managed loans from $44.1 million at March 31,
1998 to $487.7 million at March 31, 1999. The increase in managed loans was
the result of portfolio purchases completed in 1998, as well as direct mail
and telemarketing campaigns. The increases in income were partially offset by
increases in other operating expenses of $5.7 million and income tax expense
of $10.7 million.
Other operating income increased $4.6 million from $817,000 for the
three months ended March 31, 1998 to $5.4 million for the three months ended
March 31, 1999, primarily due to a $2.5 million increase in servicing income
and a $1.3 million increase in CompuCredit's other credit card fees.
CompuCredit receives servicing fees ranging up to 10% per year of the cash
collected or 6.0% per year of the securitized principal receivables and other
credit card fees, including annual membership, over-limit and cash advance
fees.
Other operating expenses increased to $7.4 million for the three
months ended March 31, 1999, from $1.7 million for the three months ended
March 31, 1998. This increase primarily reflects the increase in the cost of
operations associated with the growth in CompuCredit's business, including
$2.6 million of additional
12
<PAGE>
marketing and solicitation expenses and $942,000 of additional credit card
servicing costs incurred during the first quarter of 1999. Using proceeds
from its recently completed initial public offering, CompuCredit expects to
increase its marketing expenditures for the quarter ended June 30, 1999 to
between $8 million and $12 million to continue its investment in account
acquisition.
NET INTEREST INCOME
Net interest income consists of interest income earned on cash and
cash equivalents less interest expense on borrowings. Interest income totaled
$246,000 for the three months ended March 31, 1999 and $39,000 for the three
months ended March 31, 1998.
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 March 31, 1999 was $252,000
compared to $270,000 for the three months ended March 31, 1998.
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 MARCH 31,
------------
1999 1998
---- ----
<S> <C> <C>
Payment rate (monthly).................................................................. 5.9% 8.0%
Expected credit loss rate (annualized).................................................. 13.9 5.5
Residual cash flows discount rate....................................................... 21.8 12.0
</TABLE>
The changes in the weighted average assumptions from March 31, 1998
to March 31, 1999 are primarily due to the two portfolio purchases that
occurred subsequent to March 31, 1998. Management believes these two
portfolios will have lower payment rates and higher credit losses as compared
to the receivables that were securitized as of March 31, 1998. Management
also uses higher discount rates for the expected cash flows associated with
the purchased portfolios. 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.
13
<PAGE>
OTHER OPERATING INCOME
Other operating income consists of the following for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Servicing income................................................................ $2,463 $ -
Other credit card fees.......................................................... 1,910 567
Interchange fees................................................................ 710 236
Ancillary products.............................................................. 326 14
----- -----
Total other operating income.................................................. $5,409 $ 817
----- -----
----- -----
</TABLE>
The significant increase in other operating income to $5.4 million
for the three months ended March 31, 1999 relates to the growth in
CompuCredit's managed loan portfolio since March 31, 1998. CompuCredit's
managed loans grew from $44.1 million at March 31, 1998 to $487.7 million at
March 31, 1999. CompuCredit services the credit card receivables that have
been securitized and recognizes 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
MARCH 31,
----------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Salaries and benefits........................................................... $585 $167
Credit card servicing........................................................... 1,101 159
Marketing and solicitation...................................................... 3,428 830
Professional fees............................................................... 419 99
Data processing................................................................. 859 130
Net occupancy................................................................... 108 16
Ancillary product expense....................................................... 407 -
Other........................................................................... 478 250
----- -----
Total other operating expense................................................. $7,385 $1,651
----- -----
----- -----
</TABLE>
Other operating expense for the three months ended March 31, 1999
increased to $7.4 million from $1.7 million for the three months ended March
31, 1998 due primarily to increases in marketing and solicitation, credit
card servicing and data processing expenses. The increases in operating
expenses are due to the increase in the cost of operations associated with
the growth in CompuCredit's business. Ancillary product expenses relate to
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.
14
<PAGE>
INCOME TAXES
CompuCredit's provision for income taxes includes both federal and
state income taxes. Tax expense for the three months ended March 31, 1999 was
$10.7 million. CompuCredit's effective tax rate was 36.2% for the three
months ended March 31, 1999. There was no income tax provision for the three
months ended March 31, 1998.
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:
<TABLE>
<CAPTION>
AT THE QUARTER ENDED
--------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1998 1998 1998 1998 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.. $678 2.4% $928 2.1% $21,294 5.4% $27,186 6.7% $27,819 5.5% $19,624 4.0%
60 to 89 days.. 446 1.6 531 1.2 12,824 3.2 17,119 4.2 14,249 2.8 13,227 2.7
90 or more..... 1,021 3.7 1,135 2.6 4,053 1.0 25,596 6.3 28,964 5.8 26,725 5.5
----- --- ----- --- ----- --- ------ --- ------ --- ------ ---
Total 30 or more.. $2,145 7.7% $2,594 5.9% $38,171 9.6% $69,901 17.2% $71,032 14.1% 59,576 12.2%
----- --- ----- --- ----- --- ------ --- ------ --- ------ ---
----- --- ----- --- ----- --- ------ --- ------ --- ------ ---
Total 60 or more.. $1,467 5.3% $1,666 3.8% $16,877 4.2% $42,715 10.5% $43,213 8.6% $39,952 8.2%
----- --- ----- --- ----- --- ------ --- ------ --- ------ ---
----- --- ----- --- ----- --- ------ --- ------ --- ------ ---
</TABLE>
The significant increase in CompuCredit's delinquencies beginning in
the quarter ended June 30, 1998 is 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 the first quarter of 1999. 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. As the
average age of CompuCredit's originated portfolio increases, CompuCredit
expects delinquency rates to continue to increase, and then stabilize.
CompuCredit is using its account management strategies on its originated
portfolio, which are intended to reduce delinquency rates as its originated
portfolio matures.
15
<PAGE>
The following table separately reports CompuCredit's loan
delinquency trends for its originated portfolio and for its purchased
portfolio:
<TABLE>
<CAPTION>
AT THE QUARTER ENDED
--------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1998 1998 1998 1998 1999
---- ---- ---- ---- ---- ----
% OF TOTAL
----------
<S> <C> <C> <C> <C> <C> <C>
ORIGINATED PORTFOLIO
Loans Delinquent:
30 to 59 days............... 2.4% 2.1% 2.7% 3.1% 2.5% 2.4%
60 to 89 days............... 1.6 1.2 1.9 2.2 1.6 1.7
90 or more.................. 3.7 2.6 3.0 4.2 3.9 3.8
----- --- ----- --- ----- ----
Total 30 or more.............. 7.7% 5.9% 7.6% 9.5% 8.0% 7.9%
----- --- ----- --- ----- ----
----- --- ----- --- ----- ----
Total 60 or more.............. 5.3% 3.8% 4.9% 6.4% 5.5% 5.5%
----- --- ----- --- ----- ----
----- --- ----- --- ----- ----
PURCHASED PORTFOLIO (1)
Loans Delinquent:
30 to 59 days............... -- -- 5.9% 7.8% 6.6% 4.8%
60 to 89 days............... -- -- 3.5 4.8 3.3 3.2
90 or more.................. -- -- 0.6 7.0 6.5 6.3
----- --- ----- --- ----- ----
Total 30 or more.............. -- -- 10.0% 19.6% 16.4% 14.3%
----- --- ----- --- ----- ----
----- --- ----- --- ----- ----
Total 60 or more.............. 4.1% 11.8% 9.8% 9.5%
----- --- ----- --- ----- ----
----- --- ----- --- ----- ----
</TABLE>
- -----------
(1) Prior to the quarter ended June 30, 1998, CompuCredit did not have a
purchased portfolio.
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
---------------------
DECEMBER MARCH 31, JUNE 30, SEPTEMBER DECEMBER MARCH 31,
31, 1997 1998 1998 30, 1998 31, 1998 1999
-------- -------- ------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED LOAN PORTFOLIO :
Average managed loan portfolio... $20,983 $37,886 $337,161 $402,751 $449,028 $500,419
Net charge-offs.................. 334 928 3,600 11,833 24,075 20,457
Pro forma net charge-offs........ 334 928 1,179 3,584 4,883 4,067
Net charge-off ratio (annualized) 6.4% 9.8% 4.3% 11.8% 21.5% 16.4%
Pro forma charge-off ratio
(annualized)................... 6.4 9.8 1.4 3.6 4.3 3.3
</TABLE>
CompuCredit's charge-off ratios declined during the quarter ended
March 31, 1999. As the average delinquency rates of CompuCredit's originated
portfolio increase and then stabilize as the portfolio matures, CompuCredit
expects charge-off rates to also increase and then stabilize. CompuCredit
plans to 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.
16
<PAGE>
CREDIT LOSSES. For securitized receivables, anticipated credit losses are
reflected in the calculations of net securitization income. 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 March 31, 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 March 31, 1999, CompuCredit's
securitizations had $363.7 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
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
$28.4 million during the three months ended March 31, 1999 and
17
<PAGE>
$15.8 million during the three months ended March 31, 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 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, an early amortization period has not yet
commenced. 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 March 31, 1999, CompuCredit had total
securitization facilities of $534.6 million and had utilized approximately
$363.7 million of such facilities.
CompuCredit has filed an application for a state bank charter. If
CompuCredit receives its bank charter, CompuCredit intends to capitalize its
bank subsidiary with $20.0 million in capital contributions and $5.0 million
in the form of a deposit.
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 effect 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. During 1998,
CompuCredit spent approximately $50,000 to upgrade or replace non-compliant
software. 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 is discussing 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 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 will participate in the year
2000 testing of its credit card processor, Total Systems, during the first
two quarters of 1999. CompuCredit will provide specific test code for Total
Systems to incorporate in their year 2000 plan, and CompuCredit will receive
and analyze Total Systems' year 2000 test results. 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
18
<PAGE>
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 anticipates that it will spend 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.
19
<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.
(d) On April 15, 1999, the Company's Registration Statement on Form S-1
(Reg. No. 333-69879) was declared effective by the Commission, and
Post-Effective Amendment No. 1 to such Registration Statement was
declared effective by the Commission on April 22, 1999. This
Registration Statement related to a firm commitment initial public
offering of the Company's Common Stock which commenced on April 22,
1999 and terminated following the sale of all of the securities
registered (after giving effect to Post-Effective Amendment No. 1). The
Registration Statement initially registered an unspecified number of
shares of Common Stock with a proposed maximum aggregate offering price
of $160,000,000. In Amendment No. 2 to the Registration Statement,
filed February 25, 1999, the Company amended the Registration Statement
to specify an offering of 8,125,000 shares (or 9,343,750 shares if the
underwriters' over-allotment option were exercised) and an estimated
offering price range of $15.00 to $17.00 per share. In Post-Effective
Amendment No. 1 to the Registration Statement, filed April 22, 1999,
the Company amended the Registration Statement to provide for an
offering of 5,000,000 shares (or 5,750,000 shares if the underwriters'
over-allotment option is included) and an estimated offering price
range of $12.00 to $13.00 per share. The aggregate offering price of
the shares sold in the offering (including the exercise of the
over-allotment option) was $69,000,000. The managing underwriters of
the offering were PaineWebber Incorporated, Bear, Stearns & Co. Inc.
and NationsBanc Montgomery Securities LLC.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
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).
(b) Reports on Form 8-K
During the quarter ended March 31, 1999 the Company did not file any
reports on Form 8-K.
21
<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
May 28, 1999 By: /s/ BRETT M. SAMSKY
-------------------------------------
Brett M. Samsky
Chief Financial Officer (duly
authorized officer and principal
financial officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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).
23
<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 THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,961
<SECURITIES> 0
<RECEIVABLES> 78,455
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,364<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 104,116
<CURRENT-LIABILITIES> 0
<BONDS> 0<F1>
0
20,000
<COMMON> 0
<OTHER-SE> 53,392
<TOTAL-LIABILITY-AND-EQUITY> 104,116
<SALES> 0
<TOTAL-REVENUES> 36,966
<CGS> 0
<TOTAL-COSTS> 7,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F3>
<INCOME-PRETAX> 29,581
<INCOME-TAX> 10,699
<INCOME-CONTINUING> 18,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,882
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<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>
