10-Q 1 a10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 JUNE 30, 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 025751 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 July 31, 2000 was 46,440,225 shares. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- COMPUCREDIT CORPORATION FORM 10-Q TABLE OF CONTENTS June 30, 2000
PAGE -------- 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........................................... 21 Item 6. Exhibits and Reports on Form 8-K............................ 21 Signatures.................................................. 22
PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMPUCREDIT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $140,900 $ 11,837 Restricted cash............................................. -- 10,000 Retained interests in credit card receivables securitized... 234,077 165,572 Accrued interest and fees................................... 16,036 9,828 -------- -------- Net credit card receivables................................. 250,113 175,400 Amounts due from securitization............................. 14,037 12,010 Deferred costs, net......................................... 2,264 2,235 Software, furniture, fixtures and equipment, net............ 10,272 6,605 Prepaid expenses............................................ 2,042 1,742 Other assets................................................ 7,223 5,719 -------- -------- Total assets................................................ $426,851 $225,548 ======== ======== LIABILITIES Accrued expenses............................................ $ 17,669 $ 10,575 Deferred revenue............................................ 5,718 6,601 Income tax liability........................................ 33,904 32,151 -------- -------- Total liabilities........................................... 57,291 49,327 SHAREHOLDERS' EQUITY Common stock, no par value, 150,000,000 shares authorized, 46,440,225 and 41,834,725 issued and outstanding at June 30, 2000 and December 31, 1999, respectively.............. -- -- Additional paid-in capital.................................. 238,682 93,374 Retained earnings........................................... 130,878 82,847 -------- -------- Total shareholders' equity.................................. 369,560 176,221 -------- -------- Total liabilities and shareholders' equity.................. $426,851 $225,548 ======== ========
SEE ACCOMPANYING NOTES. 1 COMPUCREDIT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ---------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income....................................... $ 2,402 $ 687 $ 3,834 $ 941 Other operating income: Securitization income, net.......................... 3,967 1,737 5,756 1,989 Income from retained interests in credit card receivables securitized........................... 31,455 5,113 63,804 36,172 Servicing income.................................... 2,052 1,857 4,266 4,320 Other credit card fees.............................. 11,701 3,421 21,609 5,331 Interchange fees.................................... 4,694 1,341 8,787 2,051 Ancillary products.................................. 6,613 3,764 13,617 5,641 -------- ------- -------- -------- Total other operating income.......................... 60,482 17,233 117,839 55,504 Other operating expense: Salaries and benefits............................... 1,253 719 2,454 1,304 Credit card servicing............................... 5,627 1,310 10,714 2,411 Marketing and solicitation.......................... 12,606 9,490 24,380 12,918 Professional fees................................... 221 702 925 1,121 Data processing..................................... 1,202 241 2,357 1,100 Net occupancy....................................... 277 178 519 286 Ancillary product expense........................... 2,143 1,869 4,005 3,348 Other............................................... 1,613 532 2,850 1,026 -------- ------- -------- -------- Total other operating expense......................... 24,942 15,041 48,204 23,514 Income before income taxes............................ 37,942 2,879 73,469 32,931 Income tax expense.................................... (13,072) (647) (24,609) (11,346) -------- ------- -------- -------- Net income............................................ $ 24,870 $ 2,232 $ 48,860 $ 21,585 ======== ======= ======== ======== Net income attributable to common shareholders........ $ 24,870 $ 2,094 $ 48,860 $ 21,003 ======== ======= ======== ======== Net income per common share--basic (1)................ $ 0.54 $ 0.05 $ 1.08 $ 0.57 ======== ======= ======== ======== Net income per common share--diluted (1).............. $ 0.53 $ 0.05 $ 1.07 $ 0.57 ======== ======= ======== ========
(1) After giving retroactive effect to the 15.2-for-1 stock split effective April 28, 1999. SEE ACCOMPANYING NOTES. 2 COMPUCREDIT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
COMMON STOCK ADDITIONAL TOTAL ---------------------- PAID-IN PREFERRED RETAINED SHAREHOLDERS' SHARES (1) AMOUNT CAPITAL STOCK EARNINGS EQUITY ---------- --------- ---------- --------- -------- ------------- (DOLLARS IN THOUSANDS) Balance at December 31, 1998....... 34,168,193 $ -- $ 10,532 $ 20,000 $ 22,744 $ 53,276 Conversion of preferred stock.... 1,916,532 -- 20,000 (20,000) -- -- Issuance of common stock......... 5,750,000 -- 62,842 -- -- 62,842 Net income....................... -- -- -- -- 21,585 21,585 ---------- --------- -------- -------- -------- -------- Balance at June 30, 1999........... 41,834,725 $ -- $ 93,374 $ -- $ 44,329 $137,703 ========== ========= ======== ======== ======== ======== Balance at December 31, 1999....... 41,834,725 $ -- $ 93,374 $ -- $ 82,847 $176,221 Issuance of common stock......... 4,600,000 -- 145,242 -- -- 145,242 Stock options exercised.......... 5,500 -- 66 -- -- 66 Cash dividend paid by pooled company........................ -- -- -- -- (829) (829) Net income....................... -- -- -- -- 48,860 48,860 ---------- --------- -------- -------- -------- -------- Balance at June 30, 2000........... 46,440,225 $ -- $238,682 $ -- $130,878 $369,560 ========== ========= ======== ======== ======== ========
(1) After giving retroactive effect to the 15.2-for-1 stock split effective April 28, 1999. SEE ACCOMPANYING NOTES. 3 COMPUCREDIT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 ----------- ----------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 48,860 $ 21,585 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense.................................... 1,746 528 Amortization expense.................................... 2,147 445 Securitization income................................... (5,756) (1,989) Retained interests income adjustment, net............... (3,487) (5,636) Changes in assets and liabilities: Restricted cash....................................... 10,000 -- Accrued interest and fees............................. (6,208) (1,464) Amounts due from securitization....................... (2,027) (135) Deferred costs........................................ (2,472) (999) Prepaid expenses...................................... (301) (1,105) Amounts due to securitization......................... -- (9,754) Accrued expenses...................................... 7,092 4,044 Deferred revenue...................................... (882) 3,037 Income tax liability.................................. 1,752 3,070 Other................................................. (1,502) (588) --------- --------- Net cash provided by operating activities................... 48,962 11,039 INVESTING ACTIVITIES Net loans originated or purchased........................... (339,273) (118,817) Recoveries of loans previously charged off.................. 4,064 148 Net proceeds from securitization of loans................... 266,850 63,151 Proceeds from retained interests in credit card receivables securitized............................................... 9,394 26,946 Purchases of and development of software, furniture, fixtures and equipment.................................... (5,413) (2,321) --------- --------- Net cash used in investing activities....................... (64,378) (30,893) FINANCING ACTIVITIES Proceeds from exercise of stock options..................... 66 -- Cash dividend paid by pooled company........................ (829) -- Net proceeds from issuance of common stock.................. 145,242 62,842 --------- --------- Net cash provided by financing activities................... 144,479 62,842 NET INCREASE IN CASH........................................ 129,063 42,988 Cash and cash equivalents at beginning of period............ 11,837 12,711 --------- --------- Cash and cash equivalents at end of period.................. $ 140,900 $ 55,699 ========= =========
SEE ACCOMPANYING NOTES. 4 COMPUCREDIT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 1. ORGANIZATION AND BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of CompuCredit Corporation and its subsidiaries (collectively, the "Company"). 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. CompuCredit markets unsecured Aspire-Registered Trademark- Visa-Registered Trademark- credit cards through direct mail, telemarketing and on the internet through its wholly owned subsidiary, AspireCard.com. 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 six months ended June 30, 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 COMPUCREDIT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2000 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. BUSINESS COMBINATION On April 13, 2000, the Company closed its acquisition of Citadel Group, Inc. ("Citadel") of Daytona Beach, Florida. The transaction was accounted for as a pooling of interests through the exchange of 1,783,333 shares of the Company's common stock for all of the outstanding stock of Citadel. The consolidated financial statements of the Company have been restated to reflect the financial position, results of operations and cash flows of the respective companies as though the companies were combined for all periods presented. 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 June 30, 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. 6 COMPUCREDIT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2000 3. SECURITIZATIONS (CONTINUED) The table below summarizes the Company's securitization activity:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 --------------------- ------------------- 2000 1999 2000 1999 (IN THOUSANDS) Proceeds from securitizations......... $144,217 $61,689 $276,244 $90,097 Excess cash flows received on retained interests........................... 37,384 18,297 75,047 36,844 Pretax securitization income.......... 3,967 1,737 5,756 1,989
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 $9.4 million and $26.9 million for the three months ended June 30, 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 relative to the receivables originated by the Company. The Company's valuation of its retained interests incorporates this credit enhancement, and the Company estimates that it takes approximately three to five years from the inception of each securitization structure to completely repay the investors using excess cash collected on the receivables. Once the investors are repaid, any remaining receivables and funds held in the securitization structure will be payable to the Company. The pretax securitization income recorded by the Company and the measurement of the Company's retained interests are dependent upon management's estimates of future cash flows using the cash-out method. Under the cash-out method, the future cash flows (including the release of any cash related to credit enhancements) 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 7 COMPUCREDIT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2000 3. SECURITIZATIONS (CONTINUED) average key assumptions used to estimate the fair value of the Company's retained interests as of the end of each six-month period are presented below:
JUNE 30 2000 1999 -------- -------- Payment rate (monthly)...................................... 8.5% 6.3% Expected credit loss rate (annualized)...................... 10.1 12.4 Residual cash flows discount rate........................... 18.0 20.9
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 June 30, 1999 to June 30, 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 June 30, 2000. 4. EARNINGS PER SHARE The following table sets forth the computation of earnings per share:
FOR THE THREE FOR THE SIX MONTHS MONTHS ENDED ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income.......................................... $24,870 $ 2,232 $45,467 $21,585 Preferred stock dividends........................... -- (138) -- (582) ------- ------- ------- ------- Income attributable to common shareholders.......... 24,870 2,094 45,467 21,003 Denominator: Denominator for basic earnings per share-- Weighted-average shares outstanding................. 46,438 39,502 45,274 36,850 Effect of dilutive stock options.................... 187 49 193 24 Denominator for diluted earnings per share-- Adjusted weighted-average shares.................... 46,625 39,551 42,467 36,874 ------- ------- ------- ------- Basic earnings per share................................ $ 0.54 $ 0.05 $ 1.08 $ 0.57 ======= ======= ======= ======= Diluted earnings per share.............................. $ 0.53 $ 0.05 $ 1.07 $ 0.57 ======= ======= ======= =======
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. Earnings per share for the three and six months ended June 30, 1999 have been restated for the pooling with Citadel. Basic and diluted earnings per share increased $.02 for both periods. 8 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 Corporation is a credit card company that uses analytical techniques, including sophisticated computer models, to identify consumers whom we believe are credit-worthy and are overlooked by more traditional consumer credit providers. CompuCredit markets unsecured Aspire-Registered Trademark- Visa-Registered Trademark- credit cards through direct mail, telemarketing and the Internet. In July 1999, CompuCredit launched its consumer website WWW.ASPIRECARD.COM through its Internet marketing services subsidiary AspireCard.com, Inc. Consumers can apply at WWW.ASPIRECARD.COM and receive a credit decision within seconds. CompuCredit also markets credit life insurance, card registration, buying club memberships and travel services to its cardholders. On April 13, 2000, CompuCredit closed its acquisition of Citadel Group, Inc. ("Citadel") of Daytona Beach, Florida. The transaction was accounted for as a pooling of interests through the exchange of 1,783,333 shares of CompuCredit common stock for all of the outstanding stock of Citadel. Citadel currently markets fee-based products and services to CompuCredit's AspireVisa cardholders. 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 (i) the effect of any disruption of our outsourcing relationship with Columbus Bank and Trust and its affiliate Total Systems Services, Inc., (ii) our ability to evaluate the creditworthiness of our clients and price our credit products accordingly, (iii) the effect of increases in interest rates on our cost of funds and the payment performance of our clients, (iv) compliance with and changes in laws and regulations, including consumer protection laws, laws relating to the interest rates, charges or terms and conditions of our credit card accounts or other laws regulating the credit card, consumer loan or financial services industry, (v) the impact of intense competition for credit card customers on CompuCredit's efforts to market the Aspire Visa credit card, (vi) the ability of the CompuCredit to continue to securitize receivables and to otherwise access the capital markets on acceptable terms to fund its operations and future growth, (vii) the impact of unexpected economic changes and other factors on the performance of our credit card receivables and securitizations, and 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 9 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. 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 10 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. 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 June 30, 2000, we received 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. We either provide the servicing or contract with third party service providers. The table below summarizes our securitization activity.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 2000 1999 2000 1999 --------- --------- -------- -------- (IN THOUSANDS) Proceeds from securitizations......................... $144,217 $61,689 $276,244 $90,097 Excess cash flows received on retained interests...... 37,384 18,297 75,047 36,844 Pretax securitization income.......................... 3,967 1,737 5,756 1,989
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 $9.4 million for the six months ended June 30, 2000 and $26.9 million for the six months ended June 30, 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 relative to the receivables originated by the Company. 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 11 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 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.
AT OR FOR THE QUARTER ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1999 1999 1999 1999 2000 2000 --------- -------- --------- -------- ---------- ---------- (IN THOUSANDS, EXCEPT FOR PERCENTAGES) Period-end total managed loans...... $487,747 $526,217 $667,063 $898,691 $1,026,099 $1,171,932 Period-end total managed accounts... 382 633 927 1,181 1,416 1,648 Total average managed loan portfolio......................... $500,419 $496,859 $592,379 $769,624 $ 963,939 $1,097,610 Net interest margin on managed loans, annualized................. 19.8% 21.0% 23.1% 23.6% 23.8% 23.3% Operating ratio..................... 6.6% 7.6% 9.1% 8.7% 8.0% 7.3%
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 12 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. RESULTS OF OPERATIONS Net income for the three months ended June 30, 2000 was $24.9 million, or $0.53 per share on a diluted basis, an increase of $22.7 million from net income of $2.2 million for the three months ended June 30, 1999. The increase in net income was primarily the result of the growth in our managed loans. Net income for the six months ended June 30, 2000 was $48.9 million, or $1.07 per share on a diluted basis, an increase of $27.3 million from net income of $21.6 million for the six months ended June 30, 1999. The changes in operating results were also largely attributable to the growth in managed loans from $526.2 million at June 30, 1999 to $1.172 billion at June 30, 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 $14.7 million from $10.4 million for the three months ended June 30, 1999 to $25.1 million for the three months ended June 30, 2000. Other operating income increased $31.0 million from $17.3 million for the six months ended June 30, 1999 to $48.3 million for the six months ended June 30, 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 $24.9 million for the three months ended June 30, 2000, from $15.0 million for the three months ended June 30, 1999. Other operating expenses increased to $48.2 million for the six months ended June 30, 2000, from $23.5 million for the six months ended June 30, 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 $2.4 million for the three months ended June 30, 2000 and totaled $687,000 for the three months ended June 30, 1999. Interest income totaled $3.8 million for the six months ended June 30, 2000 and totaled $941,000 for the six months ended June 30, 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 June 30, 2000 increased to $4.0 million compared to $1.7 million for the three months ended June 30, 1999. Net securitization income for the six months ended June 30, 2000 was $5.8 million compared to $2.0 million for the six months ended June 30, 1999. The increase is due to the change in volume of credit card receivables securitized. 13 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. 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:
AT JUNE 30 2000 1999 -------- -------- Payment rate (monthly)...................................... 8.5% 6.3% Expected credit loss rate (annualized)...................... 10.1 12.4 Residual cash flows discount rate........................... 18.0 20.9
The changes in the weighted average assumptions from June 30, 1999 to June 30, 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 June 30, 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:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2000 1999 2000 1999 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Servicing income........................ $ 2,052 $ 1,857 $ 4,266 $ 4,320 Other credit card fees.................. 11,701 3,421 21,609 5,331 Interchange fees........................ 4,694 1,341 8,787 2,051 Ancillary products...................... 6,613 3,764 13,617 5,641 ------- ------- ------- ------- Total other operating income.......... $25,060 $10,383 $48,279 $17,343 ======= ======= ======= =======
The increase in other operating income to $25.1 million for the three months ended June 30, 2000 and to $48.3 million for the six months ended June 30, 2000 relates to the growth in our managed loan portfolio since June 30, 1999. Our managed loans grew from $526.2 million at June 30, 1999 to $1.172 billion at 14 June 30, 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. OTHER OPERATING EXPENSE Other operating expense consists of the following for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2000 1999 2000 1999 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Salaries and benefits................... $ 1,253 $ 719 $ 2,454 $ 1,304 Credit card servicing................... 5,627 1,310 10,714 2,411 Marketing and solicitation.............. 12,606 9,490 24,380 12,918 Professional fees....................... 221 702 925 1,121 Data processing......................... 1,202 241 2,357 1,100 Net occupancy........................... 277 178 519 286 Ancillary product expense............... 2,143 1,869 4,005 3,348 Other................................... 1,613 532 2,850 1,026 ------- ------- ------- ------- Total other operating expense......... $24,942 $15,041 $48,204 $23,514 ======= ======= ======= =======
Other operating expense for the three months ended June 30, 2000 increased to $24.9 million from $15.0 million for the three months ended June 30, 1999 and increased to $48.2 million from $23.5 million for the comparable six-month periods due primarily to increases in marketing and solicitation, credit card servicing and data processing expenses. The increases in operating expenses also are due to 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 June 30, 2000 was $13.1 million and for the three months ended June 30, 1999 was $647,000. Our effective tax rate was 34.5% for the three months ended June 30, 2000 and 22.5% for the three months ended June 30, 1999. Income tax expense was $24.6 million for the six months ended June 30, 2000 and $11.3 million for the comparable period in 1999. The effective tax rate was 33.5% for the six months ended June 30, 2000 and 34.5% for the six months ended June 30, 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. 15 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." The following table presents the delinquency trends of our credit card receivables portfolio on a managed loan portfolio basis:
AT THE QUARTER ENDED (DOLLARS IN THOUSANDS) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1999 1999 % OF % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- -------- -------- -------- -------- -------- -------- -------- Loans Delinquent: 30 to 59 days...... $19,624 4.0% $20,506 3.9% $24,127 3.6% $29,700 3.3% 60 to 89 days...... 13,227 2.7 12,684 2.4 16,155 2.4 20,573 2.3 90 or more......... 26,725 5.5 21,248 4.0 27,775 4.2 37,061 4.1 ------- ---- ------- ---- ------- ---- ------- --- Total 30 or more..... $59,576 12.2% $54,438 10.3% $68,057 10.2% $87,334 9.7% ======= ==== ======= ==== ======= ==== ======= === Total 60 or more..... $39,952 8.2% $33,932 6.4% $43,930 6.6% $57,634 6.4% ======= ==== ======= ==== ======= ==== ======= === AT THE QUARTER ENDED (DOLLARS IN THOUSANDS) MARCH 31, JUNE 30, 2000 2000 % OF % OF AMOUNT TOTAL AMOUNT TOTAL -------- -------- -------- -------- Loans Delinquent: 30 to 59 days...... $ 31,270 3.0% $ 40,256 3.4% 60 to 89 days...... 23,995 2.4 28,028 2.4 90 or more......... 46,554 4.5 57,552 4.9 -------- --- -------- ---- Total 30 or more..... $101,819 9.9% $125,836 10.7% ======== === ======== ==== Total 60 or more..... $ 70,549 6.9% $ 85,580 7.3% ======== === ======== ====
The following table separately reports our loan delinquency trends for our originated portfolio and for our purchased portfolio:
% OF TOTAL AT THE QUARTER ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1999 1999 1999 1999 2000 2000 --------- -------- --------- -------- --------- -------- ORIGINATED PORTFOLIO Loans Delinquent: 30 to 59 days......................... 2.4% 2.3% 2.4% 2.6% 2.7% 3.3% 60 to 89 days......................... 1.7 1.5 1.6 1.8 2.1 2.3 90 or more............................ 3.8 3.0 2.6 3.0 4.0 4.8 ---- ---- ---- ---- ---- ---- Total 30 or more........................ 7.9% 6.8% 6.6% 7.4% 8.8% 10.4% ==== ==== ==== ==== ==== ==== Total 60 or more........................ 5.5% 4.5% 4.2% 4.8% 6.1% 7.1% ==== ==== ==== ==== ==== ==== PURCHASED PORTFOLIO Loans Delinquent: 30 to 59 days......................... 4.8% 5.2% 5.4% 5.4% 4.4% 4.3% 60 to 89 days......................... 3.2 3.2 3.7 3.7 3.4 2.8 90 or more............................ 6.3 4.9 6.5 7.1 6.4 5.5 ---- ---- ---- ---- ---- ---- Total 30 or more........................ 14.3% 13.3% 15.6% 16.2% 14.2% 12.6% ==== ==== ==== ==== ==== ==== Total 60 or more........................ 9.5% 8.1% 10.2% 10.8% 9.8% 8.3% ==== ==== ==== ==== ==== ====
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 16 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, March 31, 2000 and June 30, 2000, delinquency rates on our originated portfolio as compared to the prior periods increased due primarily to the seasoning of the portfolio and 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 have been improving since December 1999 as we continue to aggressively manage account activity using behavioral scoring, credit file data and our proprietary risk evaluation models. 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:
FOR THE QUARTER ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1999 1999 1999 1999 2000 2000 --------- -------- --------- -------- --------- ---------- (DOLLARS IN THOUSANDS) TOTAL MANAGED LOAN PORTFOLIO: Average managed loan portfolio........ $500,419 $496,859 $592,379 $769,624 $963,939 $1,097,610 Net charge-offs....................... 20,457 22,723 17,412 17,985 23,605 26,302 Pro forma net charge-offs............. 4,067 5,094 7,353 10,828 20,229 25,346 Net charge-off ratio (annualized)..... 16.4% 18.3% 11.8% 9.3% 9.8% 9.6% Pro forma charge-off ratio (annualized)........................ 3.3 4.1 5.0 5.6 8.4 9.2
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 9.2% for the second quarter of 2000 from 8.4% for the first quarter of 2000 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. 17 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. 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 June 30, 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 June 30, 2000, our securitizations had $952.1 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 $276.2 million during the six months ended June 30, 2000 and $90.1 million during the six months ended June 30, 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 18 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 June 30, 2000, CompuCredit had total securitization facilities of $1.049 billion and had utilized approximately $952.1 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. 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 June 30, 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 June 30, 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 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. The Annual Meeting of the Company was held on May 2, 2000 in Atlanta, Georgia, at which the following matters were submitted to a vote of the shareholders: (1) Votes regarding the election of seven directors to hold office for a term of one year and until their respective successors are elected and qualified were as follows:
FOR WITHHELD ---------------- ------------- David G. Hanna............................... 40,762,125 votes 243,724 votes Richard W. Gilbert........................... 41,003,745 votes 2,104 votes Frank J. Hanna, III.......................... 41,003,745 votes 2,104 votes Richard E. Huddleston........................ 41,003,745 votes 2,104 votes Gail Coutcher Hughes......................... 41,003,745 votes 2,104 votes Mack F. Mattingly............................ 41,003,745 votes 2,104 votes Thomas G. Rosencrants........................ 41,003,745 votes 2,104 votes
(2) Votes regarding a proposal to amend the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares
FOR AGAINST ABSTAIN/BROKER NON-VOTES --------------------- --------- ------------------------ 39,098,889 1,906,560 400
(3) Votes regarding the adoption of the CompuCredit Employee Stock Purchase Plan were as follows:
FOR AGAINST ABSTAIN/BROKER NON-VOTES --------------------- -------- ------------------------ 40,979,924 22,725 3,200
(4) Votes regarding the ratification of the appointment of Ernst & Young as independent auditors for fiscal year 2000 were as follows:
FOR AGAINST ABSTAIN --------------------- --------- ------------------ 40,828,549 177,200 100
20 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger and Reorganization, dated as of April 13, 2000, by and among CompuCredit Corporation, TCG Acquisition Inc., Citadel Group, Inc., David L. Butler, Cynthia F. Butler, Benjamin Butler, J. Samuel Butler, Marissa Butler and Lynn B. Hubbard (incorporated by reference to the Company's Report on Form 8-K (File No. 000-25751), filed with the Commission on April 28, 2000). 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). 3.1(a) Amendment to Amended and Restated Articles of Incorporation of CompuCredit Corporation, dated May 3, 2000. 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 Restated Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K On April 28, 2000, the Company filed a report on Form 8-K (File No. 000-25751), dated April 13, 2000, reporting under Item 2 of Form 8-K announcing the acquisition of Citadel Group, Inc. and including the financial statements of Citadel Group, Inc. for the year ended December 31, 1999. On May 12, 2000, the Company filed an amendment to the report on Form 8-K to include certain pro forma financial data regarding the acquisition of Citadel Group, Inc. 21 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 By: /s/ BRETT M. SAMSKY ----------------------------------------- Brett M. Samsky CHIEF FINANCIAL OFFICER (duly authorized officer and principal financial officer) August 14, 2000
22 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION --------------------- ----------- 2.1 Agreement and Plan of Merger and Reorganization, dated as of April 13, 2000, by and among CompuCredit Corporation, TCG Acquisition Inc., Citadel Group, Inc., David L. Butler, Cynthia F. Butler, Benjamin Butler, J. Samuel Butler, Marissa Butler and Lynn B. Hubbard (incorporated by reference to the Company's Report on Form 8-K (File No. 000-25751), filed with the Commission on April 28, 2000). 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). 3.1(a) Amendment to Amended and Restated Articles of Incorporation of CompuCredit Corporation, dated May 3, 2000. 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 Restated Financial Data Schedule (for SEC use only).
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