<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
MARCH 31, 2000.
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 April 30, 2000 was 46,439,725 shares.
<PAGE>
COMPUCREDIT CORPORATION
FORM 10-Q
TABLE OF CONTENTS
March 31, 2000
<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............................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......................................................20
Signatures............................................................................21
</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,
2000 1999
--------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 161,371 $11,808
Restricted cash - 10,000
Retained interests in credit card receivables securitized 199,397 165,572
Accrued interest and fees 12,674 9,828
--------------------------------------------
Net credit card receivables 212,071 175,400
Amounts due from securitization 10,049 12,010
Deferred costs, net 2,435 2,235
Software, furniture, fixtures and equipment, net 8,180 6,134
Prepaid expenses 793 1,640
Other assets 5,001 4,631
--------------------------------------------
Total assets $399,900 $223,858
============================================
LIABILITIES
Accrued expenses $14,441 $9,664
Deferred revenue 4,740 5,680
Income tax liability 37,689 32,151
--------------------------------------------
Total liabilities 56,870 47,495
SHAREHOLDERS' EQUITY
Common stock, no par value, 60,000,000 shares authorized,
44,651,392 issued and outstanding at March 31, 2000 and
40,051,392 issued and outstanding at December 31, 1999 - -
Additional paid-in capital 238,037 92,795
Retained earnings 104,993 83,568
--------------------------------------------
Total shareholders' equity 343,030 176,363
--------------------------------------------
Total liabilities and shareholders' equity $399,900 $223,858
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income $ 1,415 $ 246
Other operating income:
Securitization income, net 1,789 252
Income from retained interests in credit card
receivables securitized 32,349 31,059
Servicing income 2,214 2,463
Other credit card fees 9,908 1,910
Interchange fees 4,093 710
Ancillary products 3,527 326
-------------------------------------
Total other operating income 53,880 36,720
Other operating expense:
Salaries and benefits 1,201 585
Credit card servicing 5,087 1,101
Marketing and solicitation 11,774 3,428
Professional fees 704 419
Data processing 1,155 859
Net occupancy 242 108
Ancillary product expense 969 407
Other 1,201 478
-------------------------------------
Total other operating expense 22,333 7,385
Income before income taxes 32,962 29,581
Income tax expense (11,537) (10,699)
-------------------------------------
Net income $21,425 $ 18,882
=====================================
Net income attributable to common shareholders $21,425 $ 18,438
=====================================
Net income per common share - basic (1) $ 0.51 $ 0.57
=====================================
Net income per common share - diluted (1) $ 0.50 $ 0.57
=====================================
</TABLE>
(1) After giving retroactive effect to the 15.2-for-1 stock split effective
April 28, 1999.
SEE ACCOMPANYING NOTES.
2
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN PREFERRED RETAINED SHAREHOLDERS'
SHARES (1) AMOUNT CAPITAL STOCK EARNINGS EQUITY
------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
===================================================================================
Balance at December 31, 1999 40,051,392 $ - $ 92,795 $ - $ 83,568 $ 176,363
Issuance of common stock 4,600,000 - 145,242 - - 145,242
Net income - - - - 21,425 21,425
-----------------------------------------------------------------------------------
Balance at March 31, 2000 44,651,392 $ - $238,037 $ - $104,993 $343,030
===================================================================================
</TABLE>
(1) After giving retroactive 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 THREE MONTHS ENDED
MARCH 31,
2000 1999
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 21,425 $ 18,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 730 200
Amortization expense 994 161
Securitization income (1,789) (252)
Retained interests income adjustment, net (2,110) (3,751)
Changes in assets and liabilities:
Restricted cash 10,000 -
Accrued interest and fees (2,846) (376)
Amounts due from securitization 1,961 1,425
Deferred costs (1,343) (121)
Prepaid expenses 847 (331)
Amounts due to securitization - (9,641)
Accrued expenses 4,777 2,309
Deferred revenue (940) 460
Income tax liability 5,538 4,523
Other (370) 810
--------------------------------
Net cash provided by operating activities 36,874 14,298
INVESTING ACTIVITIES
Net loans originated or purchased (163,086) (35,242)
Recoveries of loans previously charged off 1,282 69
Net proceeds from securitization of loans 127,335 14,169
Proceeds from retained interests in credit card
receivables securitized 4,692 14,239
Purchases of and development of software, furniture,
fixtures and equipment (2,776) (828)
--------------------------------
Net cash used in investing activities (32,553) (7,593)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 145,242 -
--------------------------------
Net cash provided by financing activities 145,242 -
NET INCREASE IN CASH 149,563 6,705
Cash and cash equivalents at beginning of period 11,808 12,256
--------------------------------
Cash and cash equivalents at end of period $ 161,371 $ 18,961
================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
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 AspireCard.com, Inc. formed to promote the credit
card receivables and various other value-added products and services on the
Internet and 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 and the value of retained
interests in credit card receivables securitized. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
for the year ended December 31, 2000. The notes to the financial statements for
the year ended December 31, 1999 contained in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission 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. Amounts Due from
Securitization include payments recently received on the securitized receivables
that are still held by the securitization structure but are payable to the
Company within the next 30 days.
5
<PAGE>
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 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. 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, 2000, the
Company receives servicing fees equal to either the cost of servicing the
portfolio plus 0.1% per year of the securitized principal receivables or 5% of
cash collected, depending on the securitization. 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
---------------------------------
2000 1999
(IN THOUSANDS)
<S> <C> <C>
Proceeds from securitizations $132,027 $28,408
Excess cash flows received on retained interests 44,016 18,547
Pretax securitization income 1,789 252
</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 a portion of 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 $4.7 million and $14.2 million for the three months ended March 31, 2000
and 1999, respectively. The decrease in 2000 is due to the change in the
structure of the accelerated amortization payments and due to the decrease in
the purchased portfolio receivables. 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.
6
<PAGE>
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) 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 three-month period are presented below:
<TABLE>
<CAPTION>
MARCH 31
2000 1999
-----------------------------------
<S> <C> <C>
Payment rate (monthly) 8.2% 5.9%
Expected credit loss rate (annualized) 10.4 13.9
Residual cash flows discount rate 18.3 21.8
</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 March 31, 1999 to March 31, 2000 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 March 31, 2000.
7
<PAGE>
4. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
2000 1999
------------------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Numerator:
Net income $21,425 $18,882
Preferred stock dividends - (444)
------------------------------------
Income attributable to common 21,425 18,438
shareholders
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 42,326 32,385
Effect of dilutive stock options 200 -
Denominator for diluted earnings per share -
Adjusted weighted-average shares 42,526 32,385
------------------------------------
Basic earnings per share $ 0.51 $ 0.57
====================================
Diluted earnings per share $ 0.50 $ 0.57
====================================
</TABLE>
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. In February 2000, the Company issued an additional 4,600,000 shares of
common stock at $33.50 per share in a follow-on offering.
5. SUBSEQUENT EVENT
On April 13, 2000, the Company signed an agreement to merge with Citadel Group,
Inc. ("Citadel") of Daytona Beach, Florida. Pursuant to the agreement, the
Company acquired all of the outstanding capital stock of Citadel with 1,783,333
shares of CompuCredit common stock. Citadel currently markets fee-based products
and services to the Company's AspireVisa cardholders. The transaction will be
accounted for as a pooling of interests.
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 our
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. In June 1999, we established a marketing presence on the
Internet by entering into a marketing agreement with The Lending Tree, Inc., an
online loan marketplace. Additionally, in July 1999, we launched our website
WWW.ASPIRECARD.COM through our wholly-owned subsidiary AspireCard.com, Inc.
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 our direct mail and telemarketing campaigns.
On April 13, 2000, CompuCredit signed an agreement to merge with
Citadel Group, Inc. ("Citadel") of Daytona Beach, Florida. Pursuant to the
agreement, CompuCredit acquired all of the outstanding capital stock of Citadel
with 1,783,333 shares of CompuCredit common stock. Citadel currently markets
fee-based products and services to CompuCredit's AspireVisa cardholders. The
transaction will be accounted for as a pooling of interests.
Consumer credit product revenues consist of (1) interest income on
outstanding revolving credit card receivables, (2) credit card fees, including
annual membership, cash advance, over-limit, past-due and other credit card
fees, and (3) interchange fees, which are the portion of the merchant fee
assessed by Visa and passed on to us on the purchase volume on our 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 our 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 that may not be so identified.
Forward-looking statements are subject to a number of risks and uncertainties,
many of which are beyond CompuCredit's control. 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 Form 10-K for the year ended
December 31, 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
We have securitized a substantial portion of our credit card
receivables. Our securitization transactions involve the sale of our credit card
receivables to a separate entity. The entity is either a corporation or a trust
that has been created by us exclusively to purchase receivables. The entity
purchases the receivables from us using cash generated from selling interests in
the receivables to investors. The investors in our 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.
9
<PAGE>
We have 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 us. The agreements include terms and
conditions that are similar to those included in bank loan agreements and define
our duties to service the securitized receivables. We are 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 us to continue to securitize receivables and in order for us 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. 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 our
financial condition. A breach of a representation or warranty made by us could
also cause an amortization period to begin.
The investors in the securitizations require us 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. We
negotiate with each investor the amount of the credit support, which is based on
historical and expected delinquency and loss experience on the receivables. The
credit support is usually in the form of overcollateralization, which means that
we sell 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 that we own. The investors in the securitized receivables
have no recourse against us for our cardholders' failure to pay their credit
card loans; however, most of our retained interests are subordinated to the
investors' interests until the investors have been fully repaid. This means that
our 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.
We 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, we receive cash, retain an interest in the
receivables that are securitized, and have 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 we continue to service the
underlying credit card receivables and maintain the client relationships, these
transactions are treated as sales under generally accepted accounting principles
and the securitized receivables are not reflected on our 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 our balance sheet includes payments recently received on the
securitized receivables that are still held by the securitization structure but
are payable to us in the next 30 days.
We have adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" for all of our 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 we expect 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 our
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 our control, and, as a result, these estimates
could materially change.
The securitization transactions do not affect the relationship we have
with our clients, and we continue to service the credit card receivables. As of
March 31, 2000, we received servicing fees equal to either the cost of servicing
the portfolio plus 0.1% per year of the seuritized principal receivables or 5%
of cash collected, depending on the securitization. We either provide the
servicing or contract with third party service providers.
The table below summarizes our securitization activity.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Proceeds from securitizations $132,027 $28,408
Excess cash flows received on retained interests 44,016 18,547
Pretax securitization income 1,789 252
</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 our retained interests in the receivables
pool. Investors in our 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 our securitization structures
associated with our purchased receivables, we pay a portion of the excess cash
collected to the investors as an accelerated amortization payment. This excess
cash totaled $4.7 million for the three months ended March 31, 2000 and $14.2
million for the three months ended March 31, 1999. The decrease in 2000 is due
to the change in the structure of the accelerated amortization payments and due
to the decrease in the purchased portfolio receivables. Once the investors are
repaid, any remaining receivables and funds held in the buying entity are
payable to us. In each securitization transaction, we retain 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
We analyze our financial performance on a "managed loan" portfolio
basis, as if the receivables securitized were still on our balance sheet,
because the performance of our securitized receivables will affect the future
cash flows we actually receive on the receivables.
The table set forth below indicates our net interest margin and our
operating ratio on a managed loan basis. The table also indicates the ending and
average managed loans and the number of managed accounts. Interest income for us
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. Our
11
<PAGE>
operating ratio includes all expenses associated with our business on a managed
basis, other than marketing expenses and ancillary product expenses, and is
expressed as a percentage of average managed loans.
During 1998, we 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 it would
have had very little opportunity to influence the delinquency or default rates
of these accounts prior to charge-off. We 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 we received on the purchased portfolio
exceeds the discount we ascribed to the credit quality of the purchased
receivables. We are reporting this excess discount as additional interest income
over the life of the portfolio for managed loan reporting and are amortizing it
into interest income using the interest method.
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1999 1999 1999 1999 2000
-------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Period-end total managed loans $503,985 $487,747 $526,217 $667,063 $898,691 $1,026,099
Period-end total managed accounts 343 382 633 927 1,181 1,416
Total average managed loan portfolio $449,028 $500,419 $496,859 $592,379 $769,624 $963,939
Net interest margin on managed loans, annualized 18.9% 19.8% 21.0% 23.1% 23.6% 23.8%
Operating ratio 7.0% 6.6% 7.6% 9.1% 8.7% 8.0%
</TABLE>
Our net interest margins are influenced by a number of factors,
including the timing and size of portfolio purchases and the level of our
charge-offs. Purchased portfolios typically have lower interest rates and late
fees until we convert the accounts to Aspire Visa accounts. When we convert
accounts to Aspire Visa accounts, we reprice the accounts to interest rates and
fees that are similar to those on accounts we have originated through our
solicitation process. We typically convert the accounts within six months of
purchase. Fluctuations in our charge-off ratios also affect our net interest
margins. At charge-off, the interest and late fees on an account are deducted
from interest income in the current period.
Our operating ratio includes all costs of operating our business on a
managed loan basis, other than marketing expenses and ancillary product
expenses. Our operating ratio increased during late 1999 because we spent more
on our infrastructure, our collections operations, our Internet technology and
our database management system to accommodate our current and anticipated
portfolio growth.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net income for the three months ended March 31, 2000 was $21.4 million,
or $0.50 per share on a diluted basis, an increase of $2.5 million from net
income of $18.9 million for the three months ended March 31, 1999. During the
three months ended March 31, 1999, third party investors purchased the
outstanding undivided interest in one of our 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. As a result, $25.1 million was
remitted to our wholly owned subsidiary created in connection with the
securitization. This transaction contributed $16.0 million in net income to the
first quarter of 1999.
The changes in operating results were also largely attributable to the
growth in managed loans from $487.7 million at March 31, 1999 to $1.026 billion
at March 31, 2000. The increase in managed loans was the result of direct mail,
telemarketing and Internet marketing and solicitations.
Other operating income, excluding securitization income and income from
retained interests in credit card receivables securitized, increased $14.3
million from $5.4 million for the three months ended March 31, 1999 to $19.7
million for the three months ended March 31, 2000. The increases are primarily
due to the increase in customer purchases of our 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 $22.3 million for the three
months ended March 31, 2000, from $7.4 million for the three months ended March
31, 1999. These increases primarily reflect the increase in the cost of
operations associated with the growth in our business, including additional
marketing and solicitation expenses and additional credit card servicing costs.
INTEREST INCOME
Interest income consists of interest income earned on cash and cash
equivalents. Interest income totaled $1.4 million for the three months ended
March 31, 2000 and totaled $246,000 for the three months ended March 31, 1999.
The increase in interest income is attributable to the investing of the cash
proceeds we received from our first quarter 2000 follow-on public offering.
NET SECURITIZATION INCOME
Net securitization income includes gains representing the estimated
present value at the time of initial securitization of cash flows we expect 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."
Securitization income is recognized at the time of the initial securitization.
Net securitization income for the three months ended March 31, 2000 increased to
$1.8 million compared to $252,000 for the three months ended March 31, 1999 due
to the change in volume of credit card receivables securitized.
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." We receive 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.
13
<PAGE>
This cash flow received on our 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 our retained interests as of the end of each 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
2000 1999
---------------------------------
<S> <C> <C>
Payment rate (monthly) 8.2% 5.9%
Expected credit loss rate (annualized) 10.4 13.9
Residual cash flows discount rate 18.3 21.8
</TABLE>
The changes in the weighted average assumptions from March 31, 1999 to
March 31, 2000 are primarily due to the change in the mix of our originated and
purchased receivables. Since the receivables we originated 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 March 31, 2000. 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 our 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
MARCH 31
2000 1999
------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Servicing income $ 2,214 $ 2,463
Other credit card fees 9,908 1,910
Interchange fees 4,093 710
Ancillary products 3,527 326
------------------------------
Total other operating income $19,742 $5,409
==============================
</TABLE>
The increase in other operating income to $19.7 million for the three
months ended March 31, 2000 relates to the growth in our managed loan portfolio
since March 31, 1999. Our managed loans grew from $487.7 million at March 31,
1999 to $1.026 billion at March 31, 2000. We service the credit card receivables
that have been securitized and recognize servicing income. A substantial portion
of the servicing income relates to our 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 us on the purchase volume
on our credit card receivables. Ancillary product revenues are associated with
the products and services that we market to our clients, and have increased in
2000 as customer purchases of our fee-based products have increased.
14
<PAGE>
OTHER OPERATING EXPENSE
Other operating expense consists of the following for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Salaries and benefits $ 1,201 $ 585
Credit card servicing 5,087 1,101
Marketing and solicitation 11,774 3,428
Professional fees 704 419
Data processing 1,155 859
Net occupancy 242 108
Ancillary product expense 969 407
Other 1,201 478
============================
Total other operating expense $22,333 $7,385
============================
</TABLE>
Other operating expense for the three months ended March 31, 2000
increased to $22.3 million from $7.4 million for the three months ended March
31, 1999 due primarily to increases in marketing and solicitation and credit
card servicing expenses. The increases in operating expenses were associated
with the growth in our credit card receivables. Ancillary product expenses
relate to the products and services that we market to our clients, including our
insurance products, and include expenses associated with claim reserves and
program administrative expenses. Other expenses include depreciation and other
general and administrative costs.
INCOME TAXES
Income tax expense for the three months ended March 31, 2000 was $11.5
million and for the three months ended March 31, 1999 was $10.7 million. Our
effective tax rate was 35.0% for the three months ended March 31, 2000 and 36.2%
for the three months ended March 31, 1999.
ASSET QUALITY
Our delinquency and net loan charge-off rates at any point in time
reflect the credit risk of receivables, the average age of our credit card
accounts, the timing of portfolio purchases, the success of our collection and
recovery efforts and general economic conditions. The average age of our credit
card account portfolio affects the stability of delinquency and loss rates of
the portfolio.
Our 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 our 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 our 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."
15
<PAGE>
The following table presents the delinquency trends of our 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,
1998 1999 1999 1999 1999 2000
% 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 $27,819 5.5% $19,624 4.0% $20,506 3.9% $24,127 3.6% $29,700 3.3% $31,270 3.0%
60 to 89 days 14,249 2.8 13,227 2.7 12,684 2.4 16,155 2.4 20,573 2.3 23,995 2.4
90 or more 28,964 5.8 26,725 5.5 21,248 4.0 27,775 4.2 37,061 4.1 46,554 4.5
----------------------------------------------------------------------------------------------------
Total 30 or more $71,032 14.1% $59,576 12.2% $54,438 10.3% $68,057 10.2% $87,334 9.7% $101,819 9.9%
====================================================================================================
Total 60 or more $43,213 8.6% $39,952 8.2% $33,932 6.4% $43,930 6.6% $57,634 6.4% $70,549 6.9%
====================================================================================================
</TABLE>
The following table separately reports our loan delinquency trends for our
originated portfolio and for our purchased portfolio:
<TABLE>
<CAPTION>
% OF TOTAL
AT THE QUARTER ENDED
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1999 1999 1999 1999 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINATED PORTFOLIO
Loans Delinquent:
30 to 59 days 2.5% 2.4% 2.3% 2.4% 2.6% 2.7%
60 to 89 days 1.6 1.7 1.5 1.6 1.8 2.1
90 or more 3.9 3.8 3.0 2.6 3.0 4.0
------------------------------------------------------------------------------
Total 30 or more 8.0% 7.9% 6.8% 6.6% 7.4% 8.8%
==============================================================================
Total 60 or more 5.5% 5.5% 4.5% 4.2% 4.8% 6.1%
==============================================================================
PURCHASED PORTFOLIO
Loans Delinquent:
30 to 59 days 6.6% 4.8% 5.2% 5.4% 5.4% 4.4%
60 to 89 days 3.3 3.2 3.2 3.7 3.7 3.4
90 or more 6.5 6.3 4.9 6.5 7.1 6.4
------------------------------------------------------------------------------
Total 30 or more 16.4% 14.3% 13.3% 15.6% 16.2% 14.2%
==============================================================================
Total 60 or more 9.8% 9.5% 8.1% 10.2% 10.8% 9.8%
==============================================================================
</TABLE>
We 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 our originated portfolio declined for those periods. During the three
months ended December 31, 1999 and March 31, 2000, delinquency rates on our
originated portfolio as compared to the prior periods increased due to the
seasoning of the portfolio and due to seasonality. We are using our account
management strategies on our originated portfolio, which are intended to reduce
the expected increase in delinquency rates as our originated portfolio matures.
During the quarters ended September 30, 1999 and December 31, 1999, the
purchased portfolio delinquency rates increased as compared to the previous
quarters due to seasonality. The delinquency rates slightly improved during the
quarter ended March 31, 2000. We continue to aggressively manage account
activity using behavioral scoring, credit file data and our proprietary risk
evaluation models.
16
<PAGE>
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. We generally charge 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 our 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 our
net charge-offs for the periods indicated on a managed loan portfolio basis:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC.31, MARCH 31,
1998 1999 1999 1999 1999 2000
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED LOAN PORTFOLIO :
Average managed loan portfolio $449,028 $500,419 $496,859 $592,379 $769,624 $963,939
Net charge-offs 24,075 20,457 22,723 17,412 17,985 23,605
Pro forma net charge-offs 4,883 4,067 5,094 7,353 10,828 20,229
Net charge-off ratio (annualized) 21.5% 16.4% 18.3% 11.8% 9.3% 9.8%
Pro forma charge-off ratio (annualized) 4.3 3.3 4.1 5.0 5.6 8.4
</TABLE>
As our portfolio continues to mature, we expect charge-off rates to
also increase and then stabilize. Our pro forma charge-off ratio increased to
8.4% for the first quarter of 2000 from 5.6% for the last quarter of 1999
primarily due to seasoning of our portfolio and a reduction in the discount
accretion realized from our purchased portfolio. We plan to continue to focus
our resources on refining our credit underwriting standards for new accounts and
to increase our 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, we take into consideration several factors, including (1) historical
charge-off and recovery activity by receivables portfolio, (2) recent and
expected delinquency and collection trends by receivables portfolio, (3) the
impact of current economic conditions and recent economic trends on the clients'
ability to repay and (4) the risk characteristics of the portfolios.
Substantially all of our credit card receivables have been securitized. As we
have securitized our receivables we have removed them from our balance sheet and
have also relieved any allowance for loan losses on our 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. Our principal market risk is related
to changes in interest rates. This affects us directly in our lending and
borrowing activities, as well as indirectly as interest rates may impact the
payment performance of our clients.
We incur basis risk because we fund 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. We have
not hedged our basis risk due to the cost of hedging this risk versus the
benefits from elimination of this risk.
17
<PAGE>
We attempt to minimize the impact of market interest rate fluctuations
on net interest income and net income by regularly evaluating the risk inherent
in our asset and liability structure, especially our off-balance sheet assets
and liabilities such as securitized receivables. The impact of market interest
rate fluctuations on our securitized receivables is reflected in the valuation
of our retained interests in credit card receivables securitized. This risk
arises from continuous changes in our asset and liability mix, changes in market
interest rates, including changes affected by fluctuations in prevailing
interest rates, payment trends on our interest-bearing assets and payment
requirements on our interest-bearing liabilities, and the general timing of all
other cash flows. To manage our direct risk to market interest rates, management
actively monitors market interest rates and the interest sensitive components of
our securitization structures. 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, 2000, all of our 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, 2000, CompuCredit's securitizations had
$832.5 million in variable rate, interest-bearing liabilities, payable to our
investors. Since both our managed interest-earning assets and our managed
interest-bearing liabilities reprice every 30 days, we believe that the impact
of a change in interest rates would not be material to our financial
performance.
We believe we are not exposed to any material foreign currency exchange
rate risk or commodity price risk.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
Our goal is to maintain an adequate level of liquidity through active
management of assets and liabilities. Because the characteristics of our assets
and liabilities change, liquidity management is a dynamic process affected by
the pricing and maturity of our assets and liabilities.
A significant source of liquidity for us has been the securitization of
credit card receivables. We received proceeds of $132.0 million during the three
months ended March 31, 2000 and $28.4 million during the three months ended
March 31, 1999 from sales of our credit card receivables through
securitizations. We used cash generated from these transactions to fund further
credit card receivables growth.
The maturity terms of our 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, our 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 our master trust, a decline in the portfolio's annual yield or a decline
in the payment rate, in each case, below certain rates, or an increase in
delinquencies above certain rates, 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
our other securitization programs, such events include an increase in the
charge-off rates above a certain rate or a decline in the payment rates below a
certain rate. These events would accelerate the need to utilize alternative
funding sources. Under each of our securitization structures, there has not been
an early amortization period. We believe that securitizations will continue to
be an important source of funding but can give no assurance that securitizations
will provide sufficient funding. As of March 31, 2000, CompuCredit had total
securitization facilities of $1.068 billion and had utilized approximately
$832.5 million of these facilities.
In April 1999, we completed our initial public offering and received
net proceeds of $62.8 million. We used these net proceeds for marketing and
solicitation costs, receivables growth and working capital purposes.
18
<PAGE>
In January 2000, we entered into an agreement providing for a one year,
$25.0 million revolving credit facility under which we may request advances from
time to time which will bear interest at floating rates based on LIBOR. Advances
under the facility will be secured by our assets other than credit card
receivables and other assets relating to our securitization transactions. As of
March 31, 2000, no advances were outstanding under this facility.
In February 2000, we completed a follow-on public offering and received
net proceeds of $145.2 million. If we charter a bank, we intend to capitalize
this bank subsidiary with up to $20.0 million in capital contributions and make
a deposit of up to an additional $5.0 million. We may use a portion of the net
proceeds from this offering to fund all or part of these cash requirements. We
plan to use the remaining net proceeds to finance our growth through the
origination and purchase of credit card receivables, for marketing costs,
working capital and other corporate purposes.
YEAR 2000
As of March 31, 2000, we have not experienced any significant year 2000
problems, and we are not aware of any year 2000 problems experienced by our
vendors that have affected us; however unforeseen problems could arise in the
year 2000 which could cause delays and malfunctions which would have a material
adverse effect on our results of operations and financial condition. We will
continue to monitor internal systems and vendor issues related to the year 2000
throughout the year.
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.
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).
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 January 21, 2000, reporting under Item 5 of Form 8-K
and enclosing its press release dated January 18, 2000.
20
<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 15, 2000 By: /s/ Brett M. Samsky
-------------------------------------------
Brett M. Samsky
Chief Financial Officer (duly authorized
officer and principal financial officer)
21
<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>
22
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 161,371
<SECURITIES> 0
<RECEIVABLES> 212,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 8,180<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 399,900
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 343,030
<TOTAL-LIABILITY-AND-EQUITY> 399,900
<SALES> 0
<TOTAL-REVENUES> 55,295
<CGS> 0
<TOTAL-COSTS> 22,333
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F3>
<INCOME-PRETAX> 32,962
<INCOME-TAX> 11,537
<INCOME-CONTINUING> 21,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,425
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.50
<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>
