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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 February 29, 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
- - - - ----------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(800) 240-1855
-----------------------------
Registrant's telephone number
Not Applicable
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(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|_| No|X|
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
- - - - - 34,761,965 issued and outstanding as of April 30, 2000.
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THE CREDIT STORE, INC.
FORM 10-Q
For the Quarter Ended February 29, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of February 29, 2000
and May 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three Months ended February 29, 2000 and February 28, 1999 4
Condensed Consolidated Statements of Operations
for the Nine Months ended February 29, 2000 and February 28, 1999 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended February 29, 2000 and February 28, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults under Senior Securities 14
Item 4. Submission of Matters to Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, May 31,
ASSETS 2000 1999
---------------- ----------
(Unaudited)
Cash $ 3,029,750 $ 3,533,930
Restricted cash 825,029 750,000
Accounts and notes receivable, net of allowance for
doubtful accounts 2,846,375 1,150,207
Investments in consumer debt and credit cards
Investments in nonperforming consumer debt, net
of cost recovery 8,105,642 3,016,697
Credit card receivables, net of provision for
losses and unearned fees 28,096,000 18,631,403
Retained interest in securitized credit card receivables -- 5,130,372
Property and equipment, net of accumulated depreciation 4,624,709 6,132,612
Goodwill, net of accumulated amortization 2,399,793 2,555,175
Other assets 4,726,236 4,880,560
------------ ------------
Total assets $ 54,653,534 $ 45,780,956
============ ============
Liabilities
Accounts payable and accrued expenses $ 3,202,666 $ 4,313,409
Notes payable 20,182,108 6,086,766
Capitalized lease obligations 2,980,373 4,045,541
Subordinated notes and accrued interest payable -
related party 19,112,227 19,246,595
------------ ------------
Total liabilities 45,477,374 33,692,311
------------ ------------
Stockholders' equity
Preferred Stock, Series A, B, C, D and E 27,000,000 27,000,000
Common Stock 34,762 34,762
Additional paid-in capital 23,564,760 22,670,711
Unrealized gain from retained interest in securitized
receivables, net of tax -- 2,497,148
Accumulated deficit (41,423,362) (40,113,976)
------------ ------------
Total stockholders' equity 9,176,160 12,088,645
------------ ------------
Total liabilities and stockholders' equity $ 54,653,534 $ 45,780,956
============ ============
The accompanying notes are an integral part of these statements.
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THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------------------------------
February 29, February 28,
2000 1999
----------------- --------------
Revenue
Income from credit card receivables $ 2,335,476 $ 1,559,874
Revenue in excess of cost recovered 5,480,695 5,211,246
Gain on sales of portfolios and retained interests 555,411 3,276,249
Servicing fees and other income 398,071 553,338
Provision for losses (1,077,602) (922,545)
----------- -----------
Net revenue 7,692,051 9,678,162
Expenses
Salaries and employee benefits 3,281,893 2,984,326
Interest expense 1,166,698 891,884
Professional and financing fees 808,058 826,068
Credit card servicing 1,946,384 1,604,028
Occupancy and equipment expense 816,388 858,186
Other 1,508,558 2,218,521
----------- -----------
Total expenses 9,527,979 9,383,013
----------- -----------
Income (loss) before income taxes (1,835,928) 295,149
Income tax benefit (expense) -- --
----------- -----------
Net income (loss) (1,835,928) 295,149
Dividends on preferred stock (500,000) (500,000)
----------- -----------
Net loss, applicable to
common shareholders $(2,335,928) $ (204,851)
=========== ===========
Net loss per share
Basic $(.07) $(.01)
====== ======
Diluted $(.07) $(.01)
====== ======
Weighted-average common shares
outstanding
Basic 34,761,965 34,761,965
========== ==========
Diluted 34,761,965 34,761,965
========== ==========
The accompanying notes are an integral part of these statements.
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THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
----------------------------------------------
February 29, February 28,
2000 1999
------------ ------------
Revenue
Income from credit card receivables $ 6,630,264 $ 4,561,983
Revenue in excess of cost recovered 15,690,614 15,703,264
Gain on sales of portfolios and
retained interests 6,891,632 8,925,667
Servicing fees and other income 2,411,108 1,594,203
Provision for losses (4,815,469) (3,481,589)
------------- -------------
Net revenue 26,808,149 27,303,528
Expenses
Salaries and employee benefits 9,897,670 8,862,373
Interest expense 3,306,152 3,110,957
Professional and financing fees 2,675,516 2,182,911
Credit card servicing 5,134,976 5,027,945
Occupancy and equipment expense 2,542,404 2,518,204
Other 3,274,408 4,732,747
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Total expenses 26,831,126 26,435,137
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Income (loss) before income taxes (22,977) 868,391
Income tax benefit (expense) (1,286,409) --
------------- -------------
Net income (loss) (1,309,386) 868,391
Dividends on preferred stock (1,500,000) (1,299,999)
------------- -------------
Net loss, applicable to
common shareholders $ (2,809,386) $ (431,608)
============= =============
Net loss per share
Basic $(.08) $ (.01)
===== ======
Diluted $(.08) $ (.01)
===== ======
Weighted-average common shares
Outstanding
Basic 34,761,965 34,761,965
========== ==========
Diluted 34,761,965 34,761,965
========== ==========
The accompanying notes are an integral part of these statements.
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THE CREDIT STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-------------------------------------------
February 29, February 28,
2000 1999
---------------- --------------
Cash flows from operating activities
Net income (loss) $ (1,309,386) $ 868,391
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities -
Provision for credit card losses 4,815,469 3,481,589
Amortization of discount on performing
credit card portfolio (969,743) --
Depreciation and amortization 1,930,680 1,931,975
Deferred tax (benefit)/expense 1,286,409 --
Gain on sale of interest in affiliates (5,260,358) --
(Gain) loss from unconsolidated affiliates 362,789 (276,834)
Gain on sale of credit card receivable
portfolios -- (543,430)
Changes in operating assets and liabilities
Restricted cash (75,029) 250,000
Accounts and notes receivable (1,696,167) (45,660)
Receivable from unconsolidated
affiliate 1,230,700 (1,207,034)
Accrued interest and fees receivable
(1,314,620) (705,381)
Other assets (545,117) (274,301)
Unearned fees 170,813 328,222
Accounts payable and accrued expenses (895,114) 1,720,030
-------------- ------------
Net cash provided by (used in)
operating activities (2,268,674) 5,527,567
-------------- ------------
Cash flows from investing activities
Collection of consumer debt and credit card
receivables 16,864,934 19,263,641
Funds advanced on credit cards (24,035,794) (17,698,689)
Purchase of consumer debt portfolios (12,120,658) (7,934,055)
Proceeds from sale of beneficial interest in
affiliates 8,643,233 --
Acquisition of property and equipment (267,395) (1,081,421)
------------ -------------
Net cash used in
investing activities (10,915,680) (7,450,524)
Cash flows from financing activities
Net proceeds (payments) from debt 13,745,342 (110,281)
Borrowings from sale/leaseback transactions 539,438 25,138
Payments on capital lease obligations (1,604,606) (1,197,302)
------------ -----------
Net cash provided by (used in)
financing activities 12,680,174 (1,282,445)
------------ -----------
Net decrease in cash (504,180) (3,205,402)
Cash at beginning of period 3,533,930 7,205,071
------------ ------------
Cash at end of period $ 3,029,750 $ 3,999,669
============ ============
The accompanying notes are an integral part of these statements.
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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 February
29, 2000 and the results of operations and cash flows for the three months and
nine months ended February 29, 2000 and February 28, 1999. The results of
operations for the three and nine months ended February 29, 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. Options
to purchase 5.26 million and 4.14 million shares of common stock with a weighted
average exercise price of $2.84 and $2.84 were outstanding at February 29, 2000
and February 28, 1999, but were excluded because they were antidilutive.
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NOTE D - 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, and (ii) four
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. 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 E - NOTE PAYABLE
In September 1999, the Company entered into a repurchase agreement with a bank,
whereby the bank purchased credit card receivables from the Company for a
purchase price of $3 million. In March 2000, the Company agreed with the bank to
increase the amount of the repurchase agreement to $6 million and to extend the
agreement until June 2000. The Company has the option to extend the repurchase
agreement for an additional 90 days upon payment of a $25,000 fee.
NOTE F - INVESTMENTS IN NONPERFORMING CONSUMER DEBT AND CREDIT CARD RECEIVABLES
Investments in Nonperforming Consumer Debt
The Company acquires portfolios of nonperforming consumer installment debt,
credit card receivables, and automobile deficiency debt from originating
financial institutions. These debts are acquired at a substantial discount from
the actual consumer outstanding balance. The remaining outstanding balance of
the debt acquired by the Company at February 29, 2000 and May 31, 1999 was
approximately $3.1 billion and $2.0 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. (See Credit Card Receivables below.)
Investments in nonperforming consumer debt consist of:
February 29, May 31,
2000 1999
------------ ----------
(unaudited)
Cost of portfolios purchased including capitalized
acquisition costs of $2,144,041 and $1,868,883 $ 47,510,000 $ 38,574,000
Cost recovered (39,404,000) (35,557,000)
------------ ------------
Investment in nonperforming consumer debt $ 8,106,000 $ 3,017,000
============ ============
Credit Card Receivables
Upon settlement of the debt, a credit card is issued to the consumer with the
opening balance and credit line equal to the settlement amount. The Company
expenses origination costs, including direct mail and telemarketing costs, as
incurred. The settlement amount represents the amount actually owed under the
new credit
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card with the cardholder. The Company does not record a credit card asset until
the cardholder begins to make new charges on the account. For financial
statement purposes the Company records as credit card receivables, the amount
funded on new advances and purchases, accrued interest on new advances and
accrued fees, less provision for losses on credit card receivables and unearned
fees. After making principal payments on the transferred balance, the customer
may use the credit card for new purchases and cash advances up to their
available credit limit, which may be increased from time to time based on the
customer's consecutive payment history. Total credit card balances in the chart
below 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.
February 29, May 31,
2000 1999
------------- ----------
(unaudited)
Total credit card balances $ 75,588,000 $ 55,185,000
============ ============
Available credit $ 9,125,000 $ 4,296,000
============ ============
Principal funded on new advances and purchases $ 31,635,000 $ 21,303,000
Accrued interest on principal funded 451,000 244,000
Accrued fees 367,000 332,000
------------ ------------
32,453,000 21,879,000
------------ ------------
Less
Provision for losses on credit card receivables 3,785,000 2,847,000
Unearned fees 572,000 401,000
------------ ------------
4,357,000 3,248,000
------------ ------------
Credit card receivables $ 28,096,000 $ 18,631,000
============ ============
NOTE G - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and accretion on
retained interest in securitized receivables. Total comprehensive income (loss)
was $(1.84) million and $(3.81) million for the three and nine months ended
February 29, 2000 and $1.50 million and $2.86 million for the three and nine
months ended February 28, 1999.
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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.
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.
The Company was profitable in fiscal 1999 after completing a
series of credit card securitizations. In the short term, the Company
anticipates that quarterly results will continue to fluctuate based on the
timing and amounts of portfolio sales and securitizations. Over time, the
Company expects that core revenue from credit card operations will begin to
provide stability in quarterly results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1999:
REVENUES. Net revenue for the quarter ended February 29, 2000
was $7.69 million, a 20.5% decrease from the $9.68 million recorded during the
quarter ended February 28, 1999. Gains from portfolio sales decreased 83.0% from
$3.28 million in the quarter ended February 28, 1999 to $.56 million in the
quarter ended February 29, 2000 due to the completion of a securitization in the
quarter ended February 28, 1999 and no securitizations or portfolio sales in the
quarter ended February 29, 2000. All other revenue components ("core revenue")
increased 12.1% as a group during the third quarter of fiscal year 2000 as
compared to the third quarter of fiscal year 1999 due to income from credit card
receivables (including interest, fees and interchange processing fees)
increasing 49.7% from $1.56 million in the quarter ended February 28, 1999 to
$2.34 million in the quarter ended February 29, 2000. This increase is a result
of a higher amount of funded credit card receivables during the period. The
provision for losses increased 16.8% from $.92 million in the quarter ended
February 28, 1999 to $1.08 million in the quarter ended February 29, 2000 and
increased as a percentage of core revenue from 12.6% in the quarter ended
February 28, 1999 to 13.1% in the quarter ended February 29, 2000 due to a
higher level of principal funded on the credit cards and the maturing of the
portfolios.
EXPENSES. Total operating expenses for the quarter ended
February 29, 2000 were $9.53 million, a 1.5% increase from $9.38 million in the
quarter ended February 28, 1999. Salaries and employee benefits increased 10.0%
from $2.98 million in the quarter ended February 28, 1999 to $3.28 million in
the quarter ended February 29, 2000 but decreased as a percentage of core
revenue from 40.7% in the quarter ended February 28, 1999 to 40.0% in the
quarter ended February 29, 2000. Interest expense increased 30.8% from $.89
million in the
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quarter ended February 28, 1999 to $1.17 million in the quarter ended February
29, 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
February 28, 1999 to 14.2% in the quarter ended February 29, 2000. Professional
and financing fees decreased 2.2% from $.83 million in the quarter ended
February 28, 1999 to $.81 million in the quarter ended February 29, 2000 and as
a percentage of core revenue declined from 11.3% in the quarter ended February
28, 1999 to 9.8% in the quarter ended February 29, 2000. Credit card servicing
increased 21.3% from $1.60 million in the quarter ended February 28, 1999 to
$1.95 million in the quarter ended February 29, 2000 and as a percentage of core
revenue increased from 21.9% in the quarter ended February 28, 1999 to 23.7% in
the quarter ended February 29, 2000. Occupancy and equipment expenses and all
other expenses as a group decreased 24.4% from $3.08 million in the quarter
ended February 28, 1999 to $2.32 million in the quarter ended February 29, 2000
and decreased as a percentage of core revenue from 42.0% in the quarter ended
February 28, 1999 to 28.3% in the quarter ended February 29, 2000.
NET INCOME (LOSS). Net income was $.30 million for the quarter
ended February 28, 1999 compared to a net loss of $1.84 million in the quarter
ended February 29, 2000. After providing for preferred dividends of $.50 million
in the third quarter of fiscal year 1999, the net loss applicable to common
shareholders was $.20 million, or $(.01) per common share, compared to preferred
dividends of $.50 million and a net loss of $2.34 million, or $(.07) per common
share, in the third quarter of fiscal year 2000.
NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1999:
REVENUE. Net revenue for the nine months ended February 29,
2000 was $26.81 million, a 1.8% decrease from the $27.30 million recorded during
the nine months ended February 28, 1999. Gains from portfolio sales and retained
interests decreased 22.8% from $8.93 million in the nine months ended February
28, 1999 to $6.89 million in the nine months ended February 29, 2000. This
decrease is the result of the Company selling its retained interests in
securitizations during the second quarter of fiscal year 2000, and conducting no
sales in the first or third quarter of fiscal year 2000, as compared to the
Company recording gains from portfolio sales and securitizations in the first,
second, and third quarters of fiscal year 1999. All other revenue components
("core revenue") increased 13.1% as a group during the first three quarters of
fiscal year 2000 as compared to the first three quarters of fiscal 1999. Income
from credit card receivables (including interest, fees and interchange
processing fees) increased 45.3% from $4.56 million in the nine months ended
February 28, 1999 to $6.63 million in the nine months ended February 29, 2000
due to a higher amount of funded credit card receivables during the period.
Servicing fees and other income increased from $1.59 million in the nine months
ended February 28, 1999 to $2.41 million in the nine months ended February 29,
2000, primarily due to income related to previously securitized portfolios. The
provision for losses increased 38.3% from $3.48 million in the nine months
ended February 28, 1999 to $4.82 million in the nine months ended February 29,
2000 and increased as a percentage of core revenue from 15.9% in the nine
months ended February 28, 1999 to 19.5% in the nine months ended February 29,
2000 due to a higher level of principal funded on the credit cards, due to the
maturing of the portfolio.
EXPENSES. Total operating expenses for the nine months ended
February 29, 2000 increased 1.5% to $26.83 million from $26.44 million in the
nine months ended February 28, 1999. Salaries and employee benefits increased
11.7% from $8.86 million in the nine months ended February 28, 1999 to $9.90
million in the nine months ended February 29, 2000 but decreased as a percentage
of core revenue from 40.5% in the nine months ended February 28, 1999 to 40.0%
in the nine months ended February 29, 2000. Interest expense increased 6.3% from
$3.11 million in the nine months ended February 28, 1999 to $3.31 million in the
nine months ended February 29, 2000 based on a higher average amount of debt
outstanding. As a percentage of core revenue, interest expense decreased from
14.2% in the nine months ended February 28, 1999 to 13.4% in the nine months
ended February 29, 2000. Professional and financing fees increased 22.6% from
$2.18 million in the nine months ended February 28, 1999 to $2.68 million in the
nine months ended February 29, 2000 and as a percentage of core revenue
increased from 10.0% in the nine months ended February 28, 1999 to 10.8% in the
nine months ended February 29, 2000. Credit card servicing increased 2.1% from
$5.03 million in the nine months ended February 28, 1999 to $5.13 million in the
nine months ended February 29, 2000 and as a percentage of core revenue declined
from 23.0% in the nine months ended February 28, 1999 to 20.8% in the nine
months ended February 29, 2000 as the
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Company's cost per account declined. Occupancy and equipment expenses and all
other expenses as a group decreased 19.8% from $7.25 million in the nine months
ended February 28, 1999 to $5.82 million in the nine months ended February 29,
2000.
INCOME TAX BENEFIT (EXPENSE). The Company recorded a $1.29
million tax expense during the nine months ended February 29, 2000 as a result
of the gain from sale of the retained interests in its securitizations. No
income tax benefits related to the net loss were recorded during the nine months
ended February 29, 2000 due to the uncertainty as to the recognition of these
future tax benefits.
NET INCOME (LOSS). Net income was $.87 million for the nine
months ended February 28, 1999 compared to a net loss of $1.31 million in the
nine months ended February 29, 2000. After providing for preferred dividends of
$1.30 million in the first three quarters of fiscal year 1999, the net loss
applicable to common shareholders was $.43 million, or $(.01) per common share,
compared to preferred dividends of $1.50 million and a net loss of $2.81
million, or $(.08) per common share in the first three quarters 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.
At February 29, 2000, the Company had $3.85 million of cash
and cash equivalents, compared to $4.28 million at May 31, 1999. 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 $.83 million at February 29, 2000, and $.75 million at May 31, 1999. The
Company believes it has sufficient cash and cash equivalents from its
receivables portfolio and credit lines to operate its business over the next
twelve months.
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 $12.71 million
outstanding under the credit line at February 29, 2000.
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
$17.3 million at February 29, 2000.
In October 1999, the Company established 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 $1.64 million outstanding under the credit line at
February 29, 2000.
In September 1999, the Company entered into a repurchase
agreement with a bank, whereby the bank purchased credit card
receivables from the Company for a purchase price of $3 million. In March 2000,
the Company agreed with the bank to increase the amount of the repurchase
agreement to $6 million and to extend the agreement until June 2000. The Company
has the option to extend the repurchase agreement for an additional 90 days upon
payment of a $25,000 fee.
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INFLATION
The Company believes that inflation has not had a material
impact on its results of operations for the three and nine months ended February
29, 2000.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the third quarter ended February 29, 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, 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 Amendment No. 1 to our Registration Statement on Form 10
filed with the Securities and Exchange Commission on April 6, 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.
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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.
On February 3, 2000, the Company was sued in the United States
District Court for the District of New York in an action entitled Strum v. Bank
of New York. The action is brought as a class action on behalf of certain
persons to whom the Company sent written communications and alleges that such
communications violate the Fair Debt Collection Practices Act. The Complaint
seeks monetary damages for alleged violations of the Fair Debt Collection
Practices Act and for Restitution and Unjust Enrichment.
On February 22, 2000, the Company and an unaffiliated third
party bank were sued in the United States District Court for the Northern
District of Illinois in an action entitled Greene v. Martin J. Burke, III, et
al. The action is brought as a class action on behalf of certain persons,
residing in the state of Illinois, to whom the Company sent written
communications and alleges that such communications violate the Fair Debt
Collection Practices Act, the Credit Repair Organizations act and statutory
provisions of Illinois law. The complaint seeks monetary damages.
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.
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 February 17, 2000 the following directors were re-appointed
by written action of the controlling stockholder of the
Company:
Jay L. Botchman
Martin J. Burke
Barry E. Breeman
J. Richard Budd, III
Geoffrey A. Thompson.
ITEM 5. OTHER INFORMATION
Not applicable.
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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 quarterly period ended February 29, 2000:
Exhibit Description
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.*
17 List of Subsidiaries.*
27.1 Financial Data Schedule for the nine months ended February 29, 2000.
27.2 Financial Data Schedule for the nine months ended February 28, 1999.
*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).
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
February 29, 2000.
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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: May 19, 2000 By /s/ Martin J. Burke, III
---------------------------
Martin J. Burke, III
Chief Executive Officer
DATE: May 19, 2000
By /s/ Michael J. Philippe
--------------------------
Michael J. Philippe
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit Description Page
3.1 Amended and Restated Certificate of Incorporation of Company 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
21 List of Subsidiaries Incorporated by Reference
27.1 Financial Data Schedule for the nine months ended February 29, 2000 Filed Electronically
27.2 Financial Data Schedule for the nine months ended February 28, 1999 Filed Electronically