<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended August 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 000-28709
THE CREDIT STORE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0296990
------------ ------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3401 North Louise Avenue
Sioux Falls, South Dakota 57107
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(Address of principal executive offices) (Zip code)
(800) 240-1855
-----------------------------
Registrant's telephone number
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 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| |
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date: Common Stock, $.001 par value
-- 34,847,965 issued and outstanding as of September 30, 2000.
<PAGE> 2
THE CREDIT STORE, INC.
FORM 10-Q
For the Quarter Ended August 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of August 31, 2000
and May 31, 2000 3
Condensed Consolidated Statements of Operations
for the three months ended August 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the three months ended August 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults under Senior Securities 12
Item 4. Submission of Matters to Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
ASSETS 2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,702,970 $ 1,423,248
Restricted cash 1,253,210 1,025,631
Accounts and notes receivable, net 2,648,982 2,765,882
Prepaid expenses 1,053,169 1,341,516
Amounts due from special purpose entities 285,698 9,332,890
Investments in receivable portfolios, net 37,302,145 33,892,290
Investment in unconsolidated affiliate 1,209,885 1,279,888
Retained interest in securitized credit card receivables 2,661,434 2,142,846
Property and equipment, net of accumulated depreciation 4,785,339 4,790,060
Goodwill, net 2,296,205 2,347,999
Deferred tax asset 2,700,000 2,700,000
Other assets 1,294,211 1,345,942
----------- -----------
Total assets $60,193,248 $64,388,192
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,815,618 $ 4,499,142
Notes payable 22,027,965 23,609,326
Capitalized lease obligations 2,539,833 2,766,228
Subordinated notes and accrued interest payable -
related party 18,965,828 19,139,028
----------- -----------
Total liabilities 48,349,244 50,013,724
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D and E 27,000,000 27,000,000
Common Stock, .001 par value, 65,000,000 authorized, 34,816,465 and
34,761,965 outstanding at August 31, 2000 and May 31, 2000 34,816 34,762
Additional paid-in capital 23,859,956 23,743,260
Unrealized gain from retained interest in securitized
receivables, net of tax 886,112 638,227
Accumulated deficit (39,936,880) (37,041,781)
----------- -----------
Total stockholders' equity 11,844,004 14,374,468
----------- -----------
Total liabilities and stockholders' equity $60,193,248 $64,388,192
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
August 31, August 31,
2000 1999
------ ------
<S> <C> <C>
Revenue
Income from credit card receivables $ 6,608,984 $ 2,305,737
Revenue in excess of cost recovered 3,586,056 5,308,541
Gain on sales of portfolios and retained interests 205,752 (9,026)
Servicing fees and other income 711,843 627,997
Provision for losses (2,881,645) (2,034,876)
----------- -----------
Net revenue 8,230,990 6,198,373
Expenses
Salaries and employee benefits 3,564,893 3,267,585
Professional and financing fees 1,270,498 1,024,848
Credit card servicing 1,979,569 1,738,265
Occupancy and equipment expense 746,087 863,156
Other 2,188,479 905,094
----------- -----------
Total expenses 9,749,526 7,798,948
----------- -----------
Operating loss (1,518,536) (1,600,575)
Interest expense 1,376,563 1,007,902
----------- -----------
Net loss (2,895,099) (2,608,477)
Dividends on preferred stock (500,000) (500,000)
----------- -----------
Net loss, applicable to
common shareholders $(3,395,099) $(3,108,477)
=========== ===========
Net loss per share
Basic $(.10) $(.09)
=========== ===========
Diluted $(.10) $(.09)
=========== ===========
Weighted-average common shares outstanding
Basic 34,816,465 34,761,965
=========== ===========
Diluted 34,816,465 34,761,965
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
August 31, August 31,
2000 1999
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,895,099) $(2,608,477)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities -
Provision for credit card losses 2,881,645 2,034,876
Provision for losses on trade receivables 4,506 21,399
Amortization of discount on performing
credit card portfolio (280,697) (272,694)
Accretion (4,065,071) --
Depreciation and amortization 497,949 678,236
(Gain) loss from unconsolidated affiliates 70,003 (20,080)
(Gain) loss on sale of credit card receivable
portfolios (205,752) 9,026
Changes in operating assets and liabilities:
Restricted cash (227,579) --
Accounts and notes receivable 112,394 76,605
Prepaid expenses 290,211 (79,658)
Receivable from unconsolidated
affiliate 9,047,192 (235,810)
Accrued interest and fees receivable (122,036) (598,174)
Other assets 51,631 176,298
Unearned fees (55,703) 53,725
Accounts payable and accrued expenses 143,276 (116,134)
----------- -----------
Net cash provided by (used in)
operating activities 5,246,870 (880,862)
----------- -----------
Cash flows from investing activities:
Collection of investments in receivable portfolios 7,727,436 5,753,359
Funds advanced on securitized credit card receivables (270,703) (323,068)
Funds advanced on credit cards (6,929,424) (6,955,282)
Purchase of consumer debt portfolios (2,567,869) (4,933,529)
Proceeds (loss) from sale of portfolios 205,752 (9,026)
Acquisition of property and equipment (441,334) (33,923)
----------- -----------
Net cash used in
investing activities (2,276,142) (6,501,469)
Cash flows from financing activities:
Net proceeds (payments) from debt (1,581,361) 5,724,408
Borrowings from sale/leaseback transactions 171,862 424,000
Payments on capital lease obligations (398,257) (518,577)
Proceeds from issuance of stock 116,750 --
----------- -----------
Net cash provided by (used in)
financing activities (1,691,006) 5,629,831
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,279,722 (1,752,500)
Cash and cash equivalents at beginning of period 1,423,248 3,533,930
----------- -----------
Cash and cash equivalents at end of period $ 2,702,970 $ 1,781,430
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
THE CREDIT STORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
The Credit Store, Inc. is a technology based, financial services company that
provides credit card products to consumers who may otherwise fail to qualify for
a traditional unsecured bank credit card. The Company reaches these consumers by
acquiring portfolios of non-performing consumer receivables and offering a new
credit card to those consumers who agree to pay all or a portion of the
outstanding amount due on their debt and who meet the Company's underwriting
guidelines. The new card is issued with an initial balance and credit line equal
to the agreed repayment amount. After the consumers have made a certain number
of on-time payments on their outstanding credit card balance, the Company seeks
to finance, sell or securitize the credit card receivables generated by this
business strategy. The Company offers other forms of settlement to those
consumers who do not accept the credit card offer.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading.
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of August 31,
2000 and the results of operations and cash flows for the three months ended
August 31, 2000 and August 31, 1999. The results of operations for the three
months ended August 31, 2000 are not necessarily indicative of the results for
the full year.
NOTE C - LOSS PER SHARE
The Company's basic net loss per share is computed by dividing net loss
applicable to common stockholders by the weighted average number of outstanding
common shares outstanding during the period. Net loss applicable to common
stockholders is computed by deducting dividends on preferred stock from net
income or net loss. The Company's diluted net loss per share is computed by
dividing net loss by the weighted average number of outstanding common shares
and common share equivalents relating to stock options, when dilutive.
6
<PAGE> 7
NOTE D - ACCOUNTING METHODOLOGY CHANGE FOR INVESTMENTS IN RECEIVABLE PORTFOLIOS
Effective June 1, 2000, the Company accounts for its investment in receivable
portfolios on the accrual basis of accounting in accordance with the provisions
of the AICPA's Practice Bulletin 6, "Amortization of Discounts on Certain
Acquired Loans." Prior to June 1, 2000, the Company used the cost recovery
method of accounting. Practice Bulletin 6 requires that the accrual basis of
accounting be used at the time the amount and timing of portfolio projected cash
flows can be reasonably estimated and collection is probable. The Company has
established projection models from historical portfolio data that it believes
provides appropriate information to reasonably estimate future cash flows.
Under the accrual basis of accounting, static pools are established with
accounts having similar attributes, based on the specific seller and the timing
of the acquisition. Once a static pool is established, the receivables are
permanently assigned to the pool. The discount (i.e., the difference between the
cost of each static pool and the related aggregate contractual receivable
balance) is not recorded because the Company expects to collect a relatively
small percentage of each static pool's contractual receivable balance.
The Company accounts for each static pool as a unit for the economic life of the
pool for recognition of income from receivable portfolios, for collections
applied to principal of receivable portfolios and for provision for loss or
impairment. Income from receivable portfolios is accrued based on the effective
interest rate determined for each pool applied to each pool's carrying value as
of June 1, 2000 or its cost if purchased after June 1, 2000, adjusted for unpaid
accrued income and principal paydowns. The effective interest rate is the
internal rate of return determined based on the timing and amounts of actual
cash received since the date of adoption or since inception if purchased after
June 1, 2000 and anticipated future cash flow projections for each pool.
The Company monitors impairment of receivable portfolios based on discounted
projected future cash flows of each portfolio compared to each portfolio's
carrying amount. The receivable portfolios are evaluated for impairment
periodically based on current market and cash flow assumptions. Provisions for
losses are charged to earnings when it is determined that the investment in a
receivable portfolio is greater than the present value of expected future cash
flows. No such provision for losses was recorded in the first quarter of fiscal
2001.
The change to the accrual method resulted in an increase of $3.9 million in
income from credit card receivables during the first quarter of fiscal 2001,
compared to the amount that would have been reported under the cost recovery
method previously used, and an increase of $1.9 million in provision for losses
on credit card receivables. Prior periods are not required to be restated.
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, receives notices of consumer
complaints from regulatory agencies and is named as a defendant in legal actions
filed by those who have been solicited to participate in its credit card
programs. Currently pending against the Company are: (i) three class actions on
behalf of persons solicited by the Company to open credit card accounts and
voluntarily to repay debt that had been discharged in bankruptcy, (ii) two class
actions alleging violation of the Fair Debt Collection Practices Act and state
law in connection with mailers sent to prospective customers whose debt was
out-of-statute, and (iii) one class action alleging RICO claims arising out of
the reporting of credit information . The Company is defending itself vigorously
in these lawsuits. The Company does not believe that pending litigation and
regulatory complaints involving the Company will have a material adverse effect
on the consolidated financial position and results of operations. However, a
significant judgment against the Company in one or more of the lawsuits could
subject the Company to a monetary judgment and /or require the Company to modify
its methods of operation, either of which could have a material adverse effect
on the Company's results of operations or financial condition.
NOTE F - INVESTMENTS IN RECEIVABLE PORTFOLIOS
The Company acquires portfolios of non-performing consumer debt. These debts are
acquired at a substantial discount from the actual outstanding consumer balance.
The remaining outstanding balance of the debt acquired by the Company at August
31, 2000 and May 31, 2000 was approximately $3.2 billion and $3.1 billion,
respectively. The Company's objective is to offer the consumer an opportunity to
settle these debts, typically at a discount, and transfer the settled amount to
a newly issued credit card. The Company expenses origination costs, including
direct mail and telemarketing costs, as incurred.
7
<PAGE> 8
The following summarizes the components in the balance of the investments in
receivable portfolios for the following periods:
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
------ ------
(unaudited)
<S> <C> <C>
Total credit card balances $93,381,614 $77,832,562
=========== ===========
Available credit $7,895,207 $7,837,918
=========== ===========
Cost and accretion $12,583,133 $9,648,090
----------- -----------
Principal funded on new advances and purchases $29,230,197 $26,536,055
Accrued interest on principal funded 368,432 420,383
Accrued fees 345,879 429,727
----------- -----------
29,944,508 27,386,165
----------- -----------
Less
Provision for losses on credit card receivables 4,615,072 2,475,838
Unearned fees 610,424 666,127
----------- -----------
5,225,496 3,141,965
----------- -----------
Investments in receivable portfolios $37,302,145 $33,892,290
=========== ===========
</TABLE>
Total credit card balances in the chart above represent the total amount owed
to the Company by the cardholders. Available credit represents the amount that
the Company would be obligated to fund if the credit cards were fully utilized
by the cardholders.
8
<PAGE> 9
THE CREDIT STORE, INC.
The information presented below in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Disclosure Regarding
Forward-Looking Statements" below, that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements. We
assume no obligation to publicly release the results of any revisions or updates
to these forward-looking statements to reflect future events or unanticipated
occurrences.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Credit Store, Inc. (the "Company", "us" and "our") is a technology based,
financial services company that provides credit card products to consumers who
may otherwise fail to qualify for a traditional unsecured bank credit card. The
Company reaches these consumers by acquiring portfolios of non-performing
consumer receivables and offering a new credit card to those consumers who agree
to pay all or a portion of the outstanding amount due on their debt and who meet
the Company's underwriting guidelines. The new card is issued with an initial
balance and credit line equal to the agreed repayment amount. After the
consumers have made a certain number of on-time payments on their outstanding
credit card balance, the Company seeks to finance, sell or securitize the credit
card receivables generated by this business strategy. The Company offers other
forms of settlement to those consumers who do not accept the credit card offer.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1999:
REVENUES. Net revenue for the quarter ended August 31, 2000 was $8.23 million, a
32.8% increase from the $6.20 million recorded during the quarter ended August
31, 1999. Gains from portfolio sales increased 104.0% from a loss of $9,000 in
the quarter ended August 31, 1999 to $0.21 million in the quarter ended August
31, 2000 due to the completion of a sale of unconverted inventory in the quarter
ended August 31, 2000. All other revenue components ("core revenue") increased
32.3% as a group during the first quarter of fiscal year 2001 as compared to the
first quarter of fiscal year 2000 due to the adoption of accrual accounting for
receivable portfolios, the increase in average receivables outstanding, and the
increasing maturity of existing portfolios. The provision for losses increased
41.6% from $2.03 million in the quarter ended August 31, 1999 to $2.9 million in
the quarter ended August 31, 2000 and increased as a percentage of core revenue
from 24.7% in the quarter ended August 31, 1999 to 26.4% in the quarter ended
August 31, 2000.
During the quarter ending August 31, 2000, the Company adopted the accrual
method of accounting for its investment in receivable portfolios. Prior to June
1, 2000, the Company used the cost recovery method of accounting. Under cost
recovery all cash receipts relating to individual portfolios of nonperforming
consumer debt are applied first to recover the cost of the portfolios, prior to
recognizing any revenue. The adoption of the accrual method of accounting
resulted in an increase of $3.88 million in income from credit card receivables,
and an increase of $1.91 million in provision for losses on credit card
receivables.
EXPENSES. Total operating expenses for the quarter ended August 31, 2000 were
$9.75 million, a 25.0% increase from $7.80 million in the quarter ended August
31, 1999. Increased expenses were largely related to a 187% increase in new
credit card originations from $9.60 million for the quarter ended August 31,
1999 to $27.54 million for the quarter ended August 31, 2000. Salaries and
employee benefits increased 9.1% from $3.27 million in the quarter ended August
31, 1999 to $3.56 million in the quarter ended August 31, 2000 due to an
increase in the number of employees from 307 to 332, but decreased as a
percentage of core revenue from 39.6% in the quarter ended August 31, 1999 to
32.7% in the quarter ended August 31, 2000. Professional and financing fees
increased 24.0% from $1.02 million in the quarter ended August 31, 1999 to $1.27
million in the quarter ended August 31, 2000 and as a percentage of core revenue
decreased from 12.4% in the quarter ended August 31, 1999 to 11.6% in the
quarter ended August 31, 2000. Credit card servicing increased 13.9% from $1.74
million in the quarter ended August 31, 1999 to $1.98 million in the quarter
ended August 31, 2000 and as a percentage of core revenue decreased from 21.1%
in the quarter ended August 31, 1999 to 18.1% in the quarter ended August 31,
2000. Other expenses increased 141.8% from $.91 million in the quarter ended
August 31, 1999 to $2.19 million in the quarter ended August 31, 2000 due to
royalties paid on a related increase in the amount of credit card receivables
eligible under a royalty agreement with third parties. Other expenses increased
as a percent of core revenues from 11.0% in the quarter ended August 31, 1999
to 20.1% in the quarter ended August 31, 2000.
INTEREST EXPENSE. Interest expense increased 36.6% from $1.00 million in the
quarter ended August 31, 1999 to $1.38 million in the quarter ended August 31,
2000, based on a higher average amount of debt outstanding. As a percentage of
core revenue, interest expense increased from 12.2% in the quarter ended August
31, 1999 to 12.6% in the quarter ended August 31, 2000.
9
<PAGE> 10
NET LOSS. Net loss was $2.60 million for the quarter ended August 31, 1999
compared to a net loss of $2.90 million in the quarter ended August 31, 2000.
After providing for preferred dividends of $.50 million in both quarters, the
net loss applicable to common shareholders was $3.11 million, or $.09 per common
share, in the first quarter of fiscal year 1999, compared to a net loss of $3.40
million, or $.10 per common share, in the first quarter of fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain an adequate level of liquidity through active
management of assets and liabilities, through sales or securitizations of credit
card receivables, and through debt and equity financing. Because the
characteristics of its assets and liabilities change, liquidity management is a
dynamic process affected significantly by the maturity of the Company's assets
and the seasonality of the credit card business, which places significant
demands on funding new charges and cash advances during certain times of the
year, including the year-end holiday season. The Company anticipates that it
will need additional funding to accommodate cardholder charges anticipated for
the upcoming holiday season. The Company believes that it will be able to
increase its current credit facility or access other available sources of
liquidity to meet these funding needs.
At August 31, 2000, the Company had $2.70 million of cash and cash equivalents,
compared to $1.42 million at May 31, 2000. The Company maintains restricted cash
reserves at its banks to facilitate the funding of new charges and advances on
its customer's credit cards. These restricted balances were $1.25 million at
August 31, 2000, and $1.03 million at May 31, 2000. The Company maintains a
senior secured revolving credit line with Coast Business Credit, a division of
Southern Pacific Bank. The credit line is for $15 million and expires in July
2001. The credit line is secured by substantially all of the Company's assets.
Borrowings under the credit line are based on a formula, which is dependent
primarily upon the performance and maturing of the Company's credit card
receivables. There was $11.37 million outstanding under the credit line at
August 31, 2000, with $1.81 million available for future borrowings.
The Company has also received secured financing from a related party, J.L.B. of
Nevada, Inc., which is subordinated to the senior secured revolving credit line.
The principal amount outstanding on these notes totaled $17.32 million at August
31, 2000.
The Company has a $17.5 million secured revolving credit line with General
Electric Capital Corporation to finance the acquisition of non-performing
consumer debt portfolios. The borrower is a wholly owned, bankruptcy remote
special purpose entity established by the Company for this transaction and is
fully consolidated with the Company's financial results. Borrowings are
non-recourse to the Company and based on the age of the non-performing consumer
debt portfolios acquired by the Company coupled with contracts that the
subsidiary enters into to resell portfolios to other debt buyers. There was
$2.35 million outstanding under the credit line at August 31, 2000.
The Company has a repurchase agreement with a bank, whereby the bank purchased
credit card receivables from the Company for a purchase price of $6.0 million.
The repurchase agreement has a maturity date of December 12, 2000.
10
<PAGE> 11
INFLATION
The Company believes that inflation has not had a material impact on its results
of operations for the three months ended August 31, 2000.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the first quarter ended August 31, 2000 contains
forward-looking statements within the meaning of the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based on the beliefs of our management as well as on assumptions
made by and information currently available to us at the time the statements
were made. When used in this Form 10-Q, the words "anticipate", "believe",
"estimate", "expect", "intend" and similar expressions, as they relate to us,
are intended to identify the forward-looking statements. Although we believe
that these statements are reasonable, you should be aware that actual results
could differ materially from those projected by the forward-looking statements.
Because actual results may differ, readers are cautioned not to place undue
reliance on forward-looking statements. Factors that may cause our actual
results to differ from those projected include, among others, the following: Our
credit card portfolio may not perform as well as we expect and may not generate
sufficient cash flows to fund our operations. We may not be able to finance our
operations if we are unable to sell our credit card receivables, if we are
unable to secure future financing, including credit line increases, or if we are
unable to control our expenses. The market for the sale or securitization of our
credit card receivables is limited and could be further limited if there is an
increase in competition or regulatory burdens on the industry or if the economy
declines. Our operations could be adversely affected if our suppliers and
vendors on which we rely to issue and service our credit card products fail to
perform or discontinue their agreements with us. If competition increases or if
the economy fluctuates, we may not be able to acquire enough credit card
receivables on favorable terms to operate profitably. In addition, we could
experience a shortfall in revenue if our customers do not pay on their
outstanding card balances. We may also be subject to adverse legal
determinations in lawsuits pending against us or filed in the future. Additional
factors that could cause actual results to differ include: risks associated with
future growth; fluctuations in operating results; the need for additional
capital; risks associated with consumer acceptance of our products; inability to
compete with competitors; potential labor shortages; and our failure to comply
with consumer and debtor protection laws and regulations. Certain of these risk
factors are more fully discussed in the Company's Amended Annual Report on Form
10-K/A filed with the Securities and Exchange Commission on September 28, 2000.
We caution you, however, that the list of factors above may not be exhaustive
and that those or other factors, many of which are outside of our control, could
have a material adverse effect on us and our results of operations. All
forward-looking statements attributable to persons acting on our behalf or us
are expressly qualified in their entirety by the cautionary statements set forth
here. We assume no obligation to publicly release the results of any revision or
updates to these forward-looking statements to reflect future events or
unanticipated occurrences.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's principal market risk is due to changes in interest rates. These
changes affect the Company directly in its lending and borrowing activities, as
well as indirectly as interest rates may impact the payment performance of the
Company's credit card holders.
To manage the Company's direct risk to market interest rates, management
actively monitors the interest rates and the interest sensitive components of
the Company's balance sheet to minimize the impact changes in interest rates
have on the fair value of assets, net income and cash flow. Management seeks to
minimize the impact of changes in interest rates on the Company primarily by
matching asset and liability repricings.
The Company's credit card receivables earn interest at a fixed annual percentage
rate. The Company's fixed annual percentage rate credit card receivables have no
stated maturity or repricing period. However, the Company may reprice its credit
card receivables upon providing the required prior notice to the customer, which
is generally no more than 60 days. The interest rates on the Company's
liabilities are generally indexed to the prime rate. These characteristics of
the Company's receivables and liabilities expose the Company to repricing risk,
which results from differences between the timing of rate changes and the timing
of cash flows, which could impact net interest income if liabilities reprice
more often than assets. The principal objective of the Company's asset/liability
risk management activities is to monitor and control the Company's exposure to
adverse effects resulting from movements of interest rates over time. The
Company has not entered into derivative transactions to hedge repricing risk.
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, receives notices of consumer
complaints from regulatory agencies and is named as a defendant in legal actions
filed by those who have been solicited to participate in its credit card
programs. The Company is defending itself vigorously in these lawsuits. The
Company does not believe that these suits will have a material adverse effect on
the consolidated financial position and results of operations. However, a
significant judgment against the Company in one or more of the lawsuits could
subject the Company to a monetary judgment and /or require the Company to modify
its methods of operation, either of which could have a material adverse effect
on the Company's results of operations or financial condition.
On July 7, 2000, the Company entered into a Settlement Agreement to resolve,
without admitting any liability or wrongdoing, three class action lawsuits
brought on behalf of persons solicited by the Company to open credit card
accounts and voluntarily to repay debt that had been discharged in Bankruptcy.
The three class actions subject to the settlement agreement are Apostol, as
Administrator for the Estate of Curtis Kim v. M. Reza Fayazi, et al., McGlynn v.
The Credit Store, Inc., et al., and Le v. The Credit Store, Inc., et al. The
Court in these actions has granted its preliminary approval of the Settlement
Agreement. Upon final approval by the Court of the Settlement Agreement, the
Company will be obligated to pay $370,000 plus the costs of mailing and
publication. Of this settlement amount, the Company anticipates that its
insurance will cover $230,000 plus the costs of mailing and publication.
The Company entered into a Settlement Agreement to resolve, without admitting
any liability or wrongdoing, Sturm v. Bank of New York, et. al., a class action
alleging violation of the Fair Debt Collection Practices Act and state law in
connection with mailers sent to prospective customers whose debt was
out-of-statute. The Court in this action signed the Stipulation of Dismissal on
August 23, 2000. The Company paid a total of $6,750 in the settlement.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 19, 2000, the controlling stockholder of the Company approved an
amendment to the Company's 1997 Amended Stock Option Plan increasing the number
of shares of the Company's common stock available for grants under the Stock
Option Plan from 4,000,000 shares to 8,000,000 shares.
ITEM 5. OTHER INFORMATION
Not applicable.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q
for the first quarter ended August 31, 2000:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.*
3.2 Amended and Restated By-Laws of the Company.*
4 Specimen certificate representing shares of Common Stock.*
10.23 Amended and Restated 1997 Stock Option Plan**
21 List of Subsidiaries.***
27.1 Financial Data Schedule for the three months ended August 31, 2000.
27.2 Financial Data Schedule for the three months ended August 31, 1999.
</TABLE>
* Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form 10 filed February 24, 2000 (File No.
000-28709).
** Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form S-8 filed July 26, 2000 (File No.
333-42278).
*** Incorporated by reference to the like numbered Exhibit to the
Company's Annual Report on Form 10-K filed August 29, 2000 (File No. 000-28709).
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fiscal quarter ended August 31,
2000.
13
<PAGE> 14
THE CREDIT STORE, INC.
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.
THE CREDIT STORE, INC
DATE: October 20, 2000 By Kevin T. Riordan
---------------- --------------------------------
President and Chief Operating
Officer
DATE: October 20, 2000 By Michael J. Philippe
---------------- --------------------------------
Chief Financial Officer
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation.* Incorporated by Reference
3.2 Amended and Restated By-Laws of the Company.* Incorporated by Reference
4 Specimen certificate representing shares of Common Stock.* Incorporated by Reference
10.23 Amended and Restated 1997 Stock Option Plan** Incorporated by Reference
21 List of Subsidiaries.*** Incorporated by Reference
27.1 Financial Data Schedule for the three months ended August 31, 2000. Filed Electronically
27.2 Financial Data Schedule for the three months ended August 31, 1999. Filed Electronically
</TABLE>
* Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10 filed February 24, 2000 (File No. 000-28709).
** Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form S-8 filed July 26, 2000 (File No. 333-42278).
*** Incorporated by reference to the like numbered Exhibit to the Company's
Annual Report on Form 10-K filed August 29, 2000 (File No. 000-28709).
