**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C.   20549**

 

**FORM10-Q**

 

 

| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,  2001.** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

**or**

** **

| o | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE TRANSITION PERIOD FROM _______****TO  ______.** |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commissionfile 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.) |
|                                                           |   |                 |
|                                                           |   |                 |
| **245  Perimeter Center Parkway, Suite 600, Atlanta, Georgia** |   | **30346**            |
| (Address of  principal executive offices)                      |   | (Zip Code)           |

 

**(770) 206-6200**

(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES ý                                                    NOo

 

The number of shares outstanding of the issuer’s onlyclass of Common Stock, no par value, (the “Common Stock”), as of October 30,2001 was 46,559,165 shares.

 

 

**COMPUCREDIT CORPORATION**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 

September 30, 2001

 
|     |                  |                                                                                        |   |
|----------|-----------------------|---------------------------------------------------------------------------------------------|--------|
|     |                  |                                                                                        |   |
| PART I.  | FINANCIAL INFORMATION |                                                                                        |   |
|     |                  |                                                                                        |   |
|     | Item 1.               | Financial Statements  (Unaudited)                                                           |   |
|     |                  | Condensed  Consolidated Balance Sheets                                                      |   |
|     |                  | Condensed  Consolidated Statements of Income                                                |   |
|     |                  | Condensed  Consolidated Statements of Shareholders’ Equity                             |   |
|     |                  | Condensed  Consolidated Statements of Cash Flows                                            |   |
|     |                  | Notes  to Condensed Consolidated Financial Statements                                       |   |
|     |                  |                                                                                        |   |
|     | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     |                  |                                                                                        |   |
|     | Item  3.              | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|     |                  |                                                                                        |   |
| PART II. | OTHER INFORMATION     |                                                                                        |
|     |                  |                                                                                        |   |
|     | Item 1.               | Legal Proceedings                                                                           |   |
|     |                  |                                                                                        |   |
|     | Item  2.              | Changes  in Securities and Use of Proceeds                                                  |   |
|     |                  |                                                                                        |   |
|     | Item 3.               | Defaults Upon  Senior Securities                                                            |   |
|     |                  |                                                                                        |   |
|     | Item  4.              | Submission  of Matters to a Vote of Security Holders                                        |   |
|     |                  |                                                                                        |   |
|     | Item 5.               | Other Information                                                                           |   |
|     |                  |                                                                                        |   |
|     | Item 6.               | Exhibits and  Reports on Form 8-K                                                           |   |
|     |                  |                                                                                        |   |
|     | Signatures            |                                                                                        |
|          |                       |                                                                                             |        |  |  |

 

                

 

**Part I - FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**CompuCredit Corporation and Subsidiaries**

**Condensed Consolidated Balance Sheets**

 
|                                                                                                                                                                    |   | ** (Unaudited)**              |                 |             |                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|----------------------|------------------|----------------------|
|                                                                                                                                                                    |   | ** September 30,**            |                 | **December 31,** |                 |
|                                                                                                                                                                    |   | ** 2001**                     |                 | **2000**         |                 |
|                                                                                                                                                                    |   | *** (Dollars in thousands)*** |                 |
|                                                                                                                                                                    |   |                               | ** **           |             | ** **           |
| **Assets**                                                                                                                                                              |   |                               |                 |             |                 |
| Cash and cash equivalents                                                                                                                                               |   | $                                  | 37,623               |             | $                    | 68,980 |   |
|                                                                                                                                                                    |   |                               |                 |             |                 |
| Retained interests in credit card  receivables securitized                                                                                                              |   | 393,885                            |                 | 325,583          |                 |
| Accrued interest and fees                                                                                                                                               |   | 30,983                             |                 | 24,569           |                 |
| Net credit card receivables                                                                                                                                             |   | 424,868                            |                 | 350,152          |                 |
|                                                                                                                                                                    |   |                               |                 |             |                 |
| Amounts due from securitization                                                                                                                                         |   | 18,631                             |                 | 11,735           |                 |
| Deferred costs, net                                                                                                                                                     |   | 13,728                             |                 | 8,332            |                 |
| Software, furniture, fixtures and  equipment, net                                                                                                                       |   | 26,143                             |                 | 14,268           |                 |
| Prepaid expenses                                                                                                                                                        |   | 1,132                              |                 | 5,540            |                 |
| Other assets                                                                                                                                                            |   | 16,179                             |                 | 11,498           |                 |
| Total assets                                                                                                                                                            |   | $                                  | 538,304              |             | $                    | 470,505 |   |
|                                                                                                                                                                    |   |                               |                 |             |                 |
|                                                                                                                                                                    |   |                               |                 |             |                 |
| **Liabilities**                                                                                                                                                         |   |                               |                 |             |                 |
| Accounts payable and accrued expenses                                                                                                                                   |   | $                                  | 21,750               |             | $                    | 21,531 |   |
| Note payable                                                                                                                                                            |   | 13,434                             |                 | –           |                 |
| Deferred revenue                                                                                                                                                        |   | 11,667                             |                 | 9,217            |                 |
| Income tax liability                                                                                                                                                    |   | 51,180                             |                 | 35,576           |                 |
| Total liabilities                                                                                                                                                       |   | 98,031                             |                 | 66,324           |                 |
|                                                                                                                                                                    |   |                               |                 |             |                 |
|                                                                                                                                                                    |   |                               |                 |             |                 |
| **Shareholders' equity**                                                                                                                                                |   |                               |                 |             |                 |
| Common stock, no par value, 150,000,000 shares authorized,  46,559,165 and 46,514,639 issued and outstanding at September 30, 2001 and  December 31, 2000, respectively |   | –                             |       | –           |       |
| Additional paid-in capital                                                                                                                                              |   | 240,352                            |                 | 239,789          |                 |
| Note issued to purchase stock                                                                                                                                           |   | (500                               | )                    | –           |                 |
| Retained earnings                                                                                                                                                       |   | 200,421                            |                 | 164,392          |                 |
| Total shareholders' equity                                                                                                                                              |   | 440,273                            |                 | 404,181          |                 |
| Total liabilities and shareholders'  equity                                                                                                                             |   | $                                  | 538,304              |             | $                    | 470,505 |   |
|                                                                                                                                                                         |        |                                    |                      |                  |                      |  |  |  |  |  |  |  |  |

* *

*See accompanying notes.*

**CompuCredit Corporation and Subsidiaries**

** Condensed Consolidated Statements ofIncome (Unaudited)**

** **
|                                                                   |   | ** For the Three Months Ended**                 |          | **For the Nine Months Ended** |          |
|------------------------------------------------------------------------|--------|------------------------------------------------------|---------------|-------------------------------|---------------|
|                                                                   |   | **September 30,**                                    |          | **September 30,**             |          |
|                                                                   |   | **2001**                                             |          | **2000**                      |          | **2001** |   | **2000** |   |
|                                                                   |   | ***(Dollars in thousands, except  per share data)*** |          |
|                                                                   |   |                                                 |          |                          |          |   |   |   |   |
| Net interest income                                                    |   | $                                                    | 271           |                          | $             | 1,796 |   | $ | 1,916 |   | $ | 5,630 |   |
|                                                                   |   |                                                 |          |                          |          |   |   |   |   |
| Other operating income:                                                |   |                                                 |          |                          |          |   |   |   |   |
| Securitization income, net                                             |   | 571                                                  |          | 4,041                         |          | 1,075 |   | 9,797 |   |
| Income from retained interests in credit card receivables  securitized |   | 19,159                                               |     | 29,547                        |     | 55,882 |     | 93,351 |     |
| Servicing income                                                       |   | 1,411                                                |          | 1,791                         |          | 4,646 |   | 6,057 |   |
| Other credit card fees                                                 |   | 23,948                                               |          | 14,557                        |          | 63,457 |   | 36,167 |   |
| Interchange fees                                                       |   | 6,212                                                |          | 4,939                         |          | 17,114 |   | 13,726 |   |
| Ancillary products                                                     |   | 8,731                                                |          | 6,424                         |          | 23,673 |   | 20,041 |   |
| Total other operating income                                           |   | 60,032                                               |          | 61,299                        |          | 165,847 |   | 179,139 |   |
|                                                                   |   |                                                 |          |                          |          |   |   |   |   |
| Other operating expense:                                               |   |                                                 |          |                          |          |   |   |   |   |
| Salaries and benefits                                                  |   | 3,330                                                |          | 1,485                         |          | 8,373 |   | 3,939 |   |
| Credit card servicing                                                  |   | 15,650                                               |          | 7,838                         |          | 44,830 |   | 18,552 |   |
| Marketing and solicitation                                             |   | 7,670                                                |          | 14,414                        |          | 27,528 |   | 38,794 |   |
| Professional fees                                                      |   | 837                                                  |          | 555                           |          | 2,647 |   | 1,480 |   |
| Data processing                                                        |   | 2,375                                                |          | 909                           |          | 6,867 |   | 3,266 |   |
| Net occupancy                                                          |   | 1,112                                                |          | 285                           |          | 2,519 |   | 805 |   |
| Ancillary product expense                                              |   | 2,058                                                |          | 2,189                         |          | 8,138 |   | 6,194 |   |
| Other                                                                  |   | 4,282                                                |          | 2,176                         |          | 11,427 |   | 5,026 |   |
| Total other operating expense                                          |   | 37,314                                               |          | 29,851                        |          | 112,329 |   | 78,056 |   |
|                                                                   |   |                                                 |          |                          |          |   |   |   |   |
| Income before income taxes                                             |   | 22,989                                               |          | 33,244                        |          | 55,434 |   | 106,713 |   |
| Income tax expense                                                     |   | (8,049                                               | )             | (11,068                       | )             | (19,405 | ) | (35,676 | ) |
| Net income                                                             |   | $                                                    | 14,940        |                          | $             | 22,176 |   | $ | 36,029 |   | $ | 71,037 |   |
|                                                                   |   |                                                 |          |                          |          |   |   |   |   |
| Net income attributable to common  shareholders                        |   | $                                                    | 14,940        |                          | $             | 22,176 |   | $ | 36,029 |   | $ | 71,037 |   |
| Net income per common share - basic                                    |   | $                                                    | 0.32          |                          | $             | 0.48 |   | $ | 0.77 |   | $ | 1.56 |   |
| Net income per common share - diluted                                  |   | $                                                    | 0.32          |                          | $             | 0.48 |   | $ | 0.77 |   | $ | 1.55 |   |
|                                                                        |        |                                                      |               |                               |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*See accompanying notes.*

**CompuCredit Corporation and Subsidiaries**

** Condensed Consolidated Statements ofShareholders' Equity (Unaudited)**

** For the Nine Months EndedSeptember 30, 2001 and 2000**

 
|                                 |   |                          |   |        |   | ** Additional** |   | **Other**    |   |              |   | **Total**  |   |
|--------------------------------------|--------|-------------------------------|--------|-------------|--------|----------------------|--------|--------------|--------|-------------------|--------|------------|--------|
|                                 |   | ** Common  Stock**       |   | **Paid-In** |   | **Changes in**       |   | **Retained** |   | **Shareholders'** |   |
|                                 |   | ** Shares**              |   | **Amount**  |   | **Capital**          |   | **Equity**   |   | **Earnings**      |   | **Equity** |   |
|                                 |   | ***(Dollars  in thousands)*** |   |
|                                 |   |                          |   |        |   |                 |   |         |   |              |   |       |   |
| Balance at  January 1, 2000          |   | 41,834,725                    |   | $           | – |                 | $      | 93,374       |   | $                 | – |       | $      | 82,847 |   | $ | 176,221 |   |
| Issuance of  common stock            |   | 4,600,000                     |   | –      |   | 145,242              |   | –       |   | –            |   | 145,242    |   |
| Stock options  exercised             |   | 79,914                        |   | –      |   | 1,173                |   | –       |   | –            |   | 1,173      |   |
| Cash dividend  paid by pooledcompany |   | –                        |   | –      |   | –               |   | –       |   | (829              | )      | (829       | )      |
| Net income                           |   | –                        |   | –      |   | –               |   | –       |   | 71,037            |   | 71,037     |   |
| Balance at  September 30, 2000       |   | 46,514,639                    |   | $           | – |                 | $      | 239,789      |   | $                 | – |       | $      | 153,055 |   | $ | 392,844 |   |
|                                 |   |                          |   |        |   |                 |   |         |   |              |   |       |   |
|                                 |   |                          |   |        |   |                 |   |         |   |              |   |       |   |
| Balance at  January 1, 2001          |   | 46,514,639                    |   | $           | – |                 | $      | 239,789      |   | $                 | – |       | $      | 164,392 |   | $ | 404,181 |   |
| Issuance of  common stock            |   | 44,526                        |   | –      |   | 563                  |   | –       |   | –            |   | 563        |   |
| Note issued to  purchase stock       |   | –                        |   | –      |   | –               |   | (500         | )      | –            |   | (500       | )      |
| Net income                           |   | –                        |   | –      |   | –               |   | –       |   | 36,029            |   | 36,029     |   |
| Balance at  September 30, 2001       |   | 46,559,165                    |   | $           | – |                 | $      | 240,352      |   | $                 | (500   | )          | $      | 200,421 |   | $ | 440,273 |   |
|                                      |        |                               |        |             |        |                      |        |              |        |                   |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*See accompanying notes.*

**CompuCredit Corporation and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows****(Unaudited)**

 
|                                                                               |   | **For the Nine Months Ended** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **September 30,**             |   |
|                                                                               |   | **2001**                      |   | **2000** |   |
|                                                                               |   | ***(Dollars in thousands)***  |   |
|                                                                               |   |                          |   |   |   |
| **Operating activities**                                                           |   |                          |   |   |   |
| Net income                                                                         |   | $                             | 36,029 |   | $ | 71,037 |   |
| Adjustments to reconcile net income to net cash provided by  operating activities: |   |                          |   |   |   |
| Depreciation expense                                                               |   | 6,482                         |   | 2,902 |   |
| Amortization expense                                                               |   | 5,142                         |   | 3,374 |   |
| Securitization income                                                              |   | (1,075                        | )      | (9,797 | ) |
| Retained interests income adjustment,  net                                         |   | 13,929                        |   | 2,018 |   |
| Changes in operating assets and  liabilities:                                      |   |                          |   |   |   |
| Restricted cash                                                                    |   | –                        |   | 10,000 |   |
| Accrued interest and fees                                                          |   | (6,414                        | )      | (10,019 | ) |
| Amounts due from securitization                                                    |   | (6,896                        | )      | 1,910 |   |
| Deferred costs                                                                     |   | (12,209                       | )      | (9,371 | ) |
| Prepaid expenses                                                                   |   | 4,409                         |   | (1,942 | ) |
| Accrued expenses                                                                   |   | 1,653                         |   | 9,165 |   |
| Deferred revenue                                                                   |   | 2,450                         |   | (495 | ) |
| Income tax liability                                                               |   | 15,605                        |   | 4,319 |   |
| Other                                                                              |   | (4,682                        | )      | (1,953 | ) |
| Net cash provided by operating  activities                                         |   | 54,423                        |   | 71,148 |   |
|                                                                               |   |                          |   |   |   |
|                                                                               |   |                          |   |   |   |
| **Investing activities**                                                           |   |                          |   |   |   |
| Net loans originated or purchased                                                  |   | (358,029                      | )      | (520,497 | ) |
| Recoveries of loans previously charged  off                                        |   | 18,114                        |   | 7,250 |   |
| Net proceeds from securitization of  loans                                         |   | 250,872                       |   | 419,772 |   |
| Proceeds from retained interests in credit card receivables  securitized           |   | 9,558                         |   | 12,412 |   |
| Purchases of and development of software, furniture, fixtures  and equipment       |   | (18,358                       | )      | (8,003 | ) |
| Net cash used in investing activities                                              |   | (97,843                       | )      | (89,066 | ) |
|                                                                               |   |                          |   |   |   |
|                                                                               |   |                          |   |   |   |
| **Financing activities**                                                           |   |                          |   |   |   |
| Proceeds from revolving credit facility                                            |   | 12,000                        |   | – |   |
| Proceeds from exercise of stock options                                            |   | –                        |   | 1,173 |   |
| Cash dividend paid by pooled company                                               |   | –                        |   | (829 | ) |
| Note issued to purchase stock                                                      |   | (500                          | )      | – |   |
| Net proceeds from issuance of common  stock                                        |   | 563                           |   | 145,242 |   |
| Net cash provided by financing  activities                                         |   | 12,063                        |   | 145,586 |   |
|                                                                               |   |                          |   |   |   |
| **Net (decrease)/increase in cash**                                                |   | (31,357                       | )      | 127,668 |   |
| Cash and cash equivalents at beginning  of period                                  |   | 68,980                        |   | 11,837 |   |
| Cash and cash equivalents at end of  period                                        |   | $                             | 37,623 |   | $ | 139,505 |   |

 

*See accompanying notes.*

 

**CompuCredit Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements(Unaudited)**

**September 30, 2001**

 

**1. Organization and Basis of Presentation**

 

                Thecondensed consolidated financial statements include the accounts of CompuCreditCorporation and its subsidiaries (collectively, the “Company”).  All significant intercompany balances andtransactions have been eliminated for financial reporting purposes. The Companywas formed for the purpose of offering unsecured credit cards and fee basedproducts and services to a specialized segment of the consumer creditmarket.  The Company markets unsecuredgeneral purpose credit cards through direct mail, television, telemarketing andon the Internet through its wholly owned subsidiary, AspireCard.com.  The Company has a contractual arrangementwith a third party financial institution pursuant to which the financialinstitution issues general purpose credit cards, and the Company purchases thereceivables relating to such accounts. The Company also markets to our cardholders other fee-based productsincluding card registration, memberships in preferred buying clubs, magazines,travel services and credit life, disability and unemployment insurance.

 

Theaccompanying unaudited condensed consolidated financial statements of theCompany have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete consolidatedfinancial statements. In the opinion of management, all normal recurringadjustments considered necessary to fairly state the results for the interimperiods presented have been included. The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements as well asthe reported amount of revenues and expenses during the reporting period.Actual results could differ from these estimates. Certain estimates such ascredit losses, payment and discount rates have a significant impact on thegains recorded on securitizations and the value of retained interests in creditcard receivables securitized. Operating results for the nine months endedSeptember 30, 2001 are not necessarily indicative of the results for the yearended December 31, 2001. The notes to the financial statements for the yearended December 31, 2000 contained in the Company’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission should be read in conjunctionwith these condensed consolidated financial statements.

 

                Certainamounts in prior period financial statements have been reclassified to conformto the current period presentation.

 

**2. Significant Accounting Policies**

 

                Thefollowing is a summary of significant accounting policies followed in thepreparation of the consolidated financial statements.

 

**Asset Securitization**

 

                TheCompany has securitized a substantial portion of its credit card receivables.When the Company sells receivables in securitizations, it retains certainundivided ownership interests, interest-only strips and servicing rights.Although the Company continues to service the underlying credit card accountsand maintains the client relationships, these transactions are treated as salesand the securitized receivables are not reflected on the consolidated balancesheet. The retained ownership interests and the interest-only strips areincluded in Retained Interests in Credit Card Receivables Securitized.  Amounts Due from Securitization includepayments recently received on the securitized receivables that are still heldby the securitization structure but are payable to the Company within the next30 days.

 

                UnderStatement of Financial Accounting Standards No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”(“Statement No. 140”), gains are recognized at the time of each sale.  “See Recently Issued Accounting Standards.”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 Companyexpects 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.

 

                Theretained interests are subsequently accounted for as trading securities andreported at estimated fair market value with changes in fair value included inincome in accordance with Statement of Financial Accounting StandardsNo. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“Statement No. 115”). Certain estimates used in the determinationof the gains and the related fair values of interest-only strips andretainedownership interests are influenced by factors outside the Company’s control,and, as a result, such estimates could materially change in the near term.

**RecentlyIssued Accounting Standards**

 

In September 2000,the FASB issued Statement No. 140, that replaces, in its entirety, FASBStatement No. 125. Although Statement 140 has changed many of the rulesregarding securitizations, it continues to require an entity to recognize thefinancial and servicing assets it controls and the liabilities it has incurredand to derecognize financial assets when control has been surrendered inaccordance with the criteria provided in the statement. As required, theCompany has applied the new rules prospectively to transactions beginning afterMarch 31, 2001. Adoption of this Statement did not have a material impacton the Company's financial statements.

 

On January 1,2001 the Company adopted Financial Accounting Standard ("FAS")No. 133, "Accounting for Derivative Instruments and HedgingActivities." This Statement establishes new accounting and reportingstandards for derivative instruments and hedging activities. It requires thatan entity recognize all derivatives as either assets or liabilities on thebalance sheet and measure those derivatives at fair value. The accounting forthe gains or losses resulting from changes in the value of those derivativeswill depend on the intended use of the derivative and whether it qualifies forhedge accounting. FAS 133, as amended by statement 138, was required to beadopted for fiscal years beginning after June 15, 2000. Adoption of thisStatement did not have a material impact on the Company's financial statements.

 

On January 1,2001 the Company adopted Staff Accounting Bulletin (SAB) No. 101, RevenueRecognition in Financial Statements. This SAB explains how the SEC staffbelieves existing Revenue Recognition rules should be applied. InJune 2000, the SEC issued SAB 101B, which delays the implementation dateof SAB 101 until no later than the fourth fiscal quarter of fiscal yearsbeginning after December 15, 1999. Adoption of this Standard did not havea material impact on the Company's financial statements.

 

On July 20, 2001,the FASB issued Statement No. 141, “Business Combinations,” effective forbusiness combinations initiated after June 30, 2001, and Statement No. 142,“Goodwill and Other Intangible Assets,” effective for fiscal years beginningafter December 15, 2001.  Under FAS No.141, the pooling of interests method of accounting for business combinations iseliminated.  Under FAS No. 142, goodwilland intangible assets deemed to have indefinite lives will no longer beamortized but will be subject to annual impairment tests.  Other intangible assets will continue to beamortized over their useful lives.  TheCompany does not believe that implementation of FAS No. 142 will have amaterial impact on its financial statements.

 

**3. Securitizations**

 

                TheCompany securitizes a substantial portion of its Company issued credit cardreceivables through the CompuCredit Credit Card Master Note Business Trust andthe CompuCredit Credit Card Master Note Business Trust II (collectively, the“Master Trust”). Credit card receivables are transferred to the Master Trust,which issues notes representing undivided ownership interests in the assets ofthe Master Trust. The Company also securitized two purchased portfolios ofcredit card receivables through securitization structures with third partycommercial paper conduits. Generally Accepted Accounting Principles (“GAAP”)require the Company to treat the transfers as sales and the receivables areremoved from the consolidated balance sheet. The securitization transactions donot affect the relationship the Company has with its customers and theCompany continues to service the credit card receivables. As of September 30,2001, the Company receives servicing fees equal to either the cost of servicingthe portfolio plus 0.1% per year of the securitized principal receivables or 5%of cash collected, depending on the securitization. The Company either performsthe servicing or contracts with third party service providers.

 

                The table belowsummarizes the Company’s securitization activity:

 
|                                              |   | **For the Three Months Ended September 30,** |    | **For the Nine Months Ended September 30,** |   |
|---------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
|                                              |   | **2001**                                     |    | **2000**                                    |   | **2001** |   | **2000** |   |
|                                              |   | ***(In thousands)***                         |    |
|                                              |   |                                         |    |                                        |   |   |   |   |   |
| Proceeds from securitizations                     |   | $                                            | 114,903 |                                        | $      | 155,940 |   | $ | 260,430 |   | $ | 432,184 |   |
| Excess cash flows received on  retained interests |   | 42,455                                       |    | 42,325                                      |   | 135,964 |   | 117,371 |   |
| Pretax securitization income                      |   | 571                                          |    | 4,041                                       |   | 1,075 |   | 9,797 |   |
|                                                   |        |                                              |         |                                             |        |  |  |  |  |  |  |  |  |

 

 

                Theinvestors in the Company’s securitization transactions have no recourse againstthe 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 creditenhancement on CompuCredit’s securitization structures associated with itspurchased receivables, CompuCredit pays a portion of the excess cash collectedon the receivables to the investors as an accelerated amortizationpayment.  This excess cash that theCompany paid to the investors totaled $3.1 million and $12.4 million for thethree months ended September 30, 2001 and 2000, respectively.  The decrease in 2001 is due to a reductionin the amortization payments required under its agreements and due to thedecrease in the purchased portfolio receivables outstanding.  The Company’s valuation of its retained interestsincorporates this credit enhancement, and the Company estimates that it takesapproximately three to five years from the inception of these securitizationstructures to completely repay the investors using excess cash collected on thereceivables. Once the investors are repaid, any remaining receivables and fundsheld in the securitization structure will be payable to the Company.

 

             The pretaxsecuritization income recorded by the Company and the measurement of theCompany’s interest-only strips are dependent upon management’s estimates offuture cash flows using the cash-out method. Under the cash-out method, thefuture cash flows (including the release of any cash related to creditenhancements) are recorded at a discounted value. The cash flows are discountedbased on the timing of when the Company expects to receive the cash flows. Thediscount rates are based on management’s estimates of returns that would berequired by investors in an investment with similar terms and credit quality.Interest rates received on the credit card receivables are estimated based onthe stated annual percentage rates in the credit card agreements. Estimateddefault and payment rates are based on historical results, adjusted forexpected changes based on the Company’s credit risk models. Credit cardreceivables are typically charged off when the loans become 180 days past due,although earlier charge-offs may occur specifically related to accounts ofbankrupt or deceased customers. Bankrupt and deceased customers’ accounts aretypically charged off within 30 days of verification.

 

                Subsequentto each sale, the Company’s retained interests are carried at estimated fairmarket value with changes in fair value included in income as they areclassified as trading securities. Since quoted market prices are generally notavailable, the Company estimates fair value based on the estimated presentvalue of future cash flows using management’s best estimates of keyassumptions. Changes in any of these assumptions could impact the fair valueestimates and the realization of future cash flows. The weighted average keyassumptions used to estimate the fair value of the Company’s retained interestsas of the end of each three-month period are presented below:

 

 
|                                    |   | **September 30,** |   |
|-----------------------------------------|--------|-------------------|--------|
|                                    |   | **2001**          |   | **2000** |   |
|                                    |   |              |   |   |   |
| Payment rate (monthly)                  |   | 9.5               | %      | 8.7 | % |
| Expected credit loss rate  (annualized) |   | 14.4              |   | 10.3 |   |
| Residual cash flows discount  rate      |   | 14.2              |   | 17.2 |   |

 

                Thereturn to the investors in the securitizations is based on management’s estimatesof forward yield curves. The changes in the weighted average assumptions fromSeptember 30, 2000 to September 30, 2001 are primarily due to the changein the mix of CompuCredit’s originated and purchased receivables.  Since the receivables originated byCompuCredit have historically performed better than the purchased portfolio,the significant growth experienced in the originated portfolio has caused theweighted average assumptions of the payment rate and the residual cash flowsdiscount rate to improve as of September 30, 2001.  The expected credit loss rate (annualized) has increased as theoriginated portfolio matures.

 

                TheCompany’s managed loan portfolio is comprised of retained interests in loanssecuritized and the investors’ share of securitized credit card loans.  The investors’ share of securitized creditcard loans is not an asset to the Company. Therefore, the Company does not show it on the consolidated balancesheets.  The following table summarizesthe balances included in the managed loan portfolio.

 
|                                                                            |   | **September 30,**    |          |
|---------------------------------------------------------------------------------|--------|----------------------|---------------|
|                                                                            |   | **2001**             |          | **2000** |   |
|                                                                            |   | ***(In thousands)*** |          |
|                                                                            |   |                 |          |   |   |
| Retained interests in loans securitized—(Seller's Interest)                |   | $                    | 362,169       |   | $ | 233,856 |   |
| Investors'  interests in loans securitized—(Not included on Balance Sheet) |   | 1,442,462            |     | 1,087,272 |     |
|                                                                            |   |                 |          |   |   |
| Total managed loans                                                             |   | $                    | 1,804,631     |   | $ | 1,321,128 |   |
|                                                                            |   |                 |          |   |   |
|                                                                                 |        |                      |               |  |  |  |  |  |  |

 

The following illustratesthe hypothetical effect as of September 30, 2001 of an adverse 5 and10 percent change in key economic assumptions has on the retainedinterests in credit card receivables securitized (Dollars in thousands): 
|                                          |   | **Credit card loans** |    |
|-----------------------------------------------|--------|-----------------------|---------|
|                                          |   |                  |    |
| **Payment  rate (monthly)**                   |   | 9.5                   | %       |
| *Impact  on fair value of 5% adverse change*  |   | $                     | (1,629  | ) |
| *Impact  on fair value of 10% adverse change* |   | $                     | (3,302  | ) |
|                                          |   |                  |    |
| **Expected  credit loss rate (annualized)**   |   | 14.4                  | %       |
| *Impact  on fair value of 5% adverse change*  |   | $                     | (5,656  | ) |
| *Impact  on fair value of 10% adverse change* |   | $                     | (11,021 | ) |
|                                          |   |                  |    |
| **Residual  cashflows discount rate**         |   | 14.2                  | %       |
| *Impact  on fair value of 5% adverse change*  |   | $                     | (412    | ) |
| *Impact  on fair value of 10% adverse change* |   | $                     | (812    | ) |
|                                               |        |                       |         |  |  |  |  |  |

 

                These sensitivitiesare hypothetical and should be used with caution. As the figures indicate,changes in fair value based on a 5% and a 10% variation in assumptionsgenerally cannot be extrapolated because the relationship of the change inassumption to the change in fair value may not be linear. Also, in this table,the effect of a variation in a particular assumption on the fair value of theretained interest is calculated without changing any other assumptions; inreality, changes in one assumption may result in changes in another. Forexample, increases in market interest rates may result in lower payments andincreased credit loses, which could magnify or counteract the sensitivities.

 

 

**4. Earnings Per Share**

 

                Thefollowing table sets forth the computation of earnings per share:

 
|                                          |   | **For the Three Months Ended**               |   | **For the Nine Months Ended** |   |
|-----------------------------------------------|--------|----------------------------------------------|--------|-------------------------------|--------|
|                                          |   | **September 30,**                            |   | **September 30,**             |   |
|                                          |   | **2001**                                     |   | **2000**                      |   | **2001** |   | **2000** |   |
|                                          |   | ***(In thousands, except per  share data)*** |   |
| Numerator:                                    |   |                                         |   |                          |   |   |   |   |   |
| Net income                                    |   | $                                            | 14,940 |                          | $      | 22,176 |   | $ | 36,029 |   | $ | 71,037 |   |
| Denominator:                                  |   |                                         |   |                          |   |   |   |   |   |
| Denominator for basic earnings per share  -   |   |                                         |   |                          |   |   |   |   |   |
| Weighted-average shares outstanding           |   | 46,559                                       |   | 46,468                        |   | 46,536 |   | 45,675 |   |
| Effect of dilutive stock options              |   | 103                                          |   | 218                           |   | 103 |   | 202 |   |
| Denominator for diluted earnings per  share - |   |                                         |   |                          |   |   |   |   |   |
| Adjusted weighted-average shares              |   | 46,662                                       |   | 46,686                        |   | 46,639 |   | 45,877 |   |
| Basic earnings per share                      |   | $                                            | 0.32   |                          | $      | 0.48 |   | $ | 0.77 |   | $ | 1.56 |   |
| Diluted earnings per share                    |   | $                                            | 0.32   |                          | $      | 0.48 |   | $ | 0.77 |   | $ | 1.55 |   |

 

                InFebruary 2000, the Company issued 4,600,000 shares of common stock at $33.50per share in a follow-on offering.

 

**5. Revolving credit facility**

 

**               **In January 2001, the Company renewed its agreementproviding for up to a $25.0 million one year revolving credit facility.   Under the agreement, the Company mayrequest advances from time to time which will bear interest at floating ratesbased on LIBOR.  Advances under thefacility are secured by the Company’s assets other than credit card receivablesand other assets relating to the Company’s securitization transactions.  As of September 30, 2001, $12.0 million wasoutstanding under this facility and $10.0 million is reserved for a letter ofcredit in favor of a third party servicer.**Item 2.   Management's Discussion andAnalysis of Financial Condition and Results of Operations**

 

*               *The following discussion should be read inconjunction with our condensed consolidated financial statements and therelated notes included herein.

 

**General**

 

                CompuCreditCorporation is a credit card company that originates and purchases credit cardreceivables and markets products and services to its customers for which itearns fees.  We market unsecured creditcards through direct mail, television, telemarketing and the Internet.

 

                Consumercredit product revenues consist of (1) interest income and late fees onoutstanding revolving credit card receivables, (2) credit card fees,including annual membership, cash advance, over-limit and other credit cardfees, and (3) interchange fees, which are the portion of the merchant feeassessed by Visa and MasterCard and passed on to us, and is based on thepurchase volume of our credit card receivables. Non-interest income includessecuritization income, income from retained interests in credit cardreceivables securitized, servicing income and fee-based product revenues. Ourprimary expenses include the costs of funding our receivables, credit lossesand operating expenses, including employee compensation, account solicitationand marketing expenses, data processing and servicing expenses, and incometaxes.

 

                  On April 13, 2000, the Company acquiredCitadel Group, Inc. (“Citadel”) of Daytona Beach, Florida.   The transaction was accounted for as apooling of interests through the exchange of 1,783,333 shares of the Company’scommon stock for all of the outstanding stock of Citadel. All amounts have beenrestated to reflect the financial position, results of operations and cashflows of the respective companies as though the companies were combined for allperiods presented.  Citadel currentlymarkets fee-based products and services to CompuCredit’s cardholders.

 

**Credit Card Securitizations**

 

                Wehave securitized a substantial portion of our credit card receivables. Oursecuritization transactions involve the sale of our credit card receivables toa separate entity. The entity is either a corporation or a trust that has beencreated by us exclusively to purchase receivables. The entity purchases thereceivables from us using cash generated from selling interests in thereceivables to investors.

 

                Wehave entered into agreements with investors which specify the conditions andprice of each sale including the total amount of receivables the investor iscommitting to purchase from us. The agreements include terms and conditionsthat are similar to those included in bank loan agreements and define ourduties to service the securitized receivables. We are required by theagreements to remit collections on the receivables to the investors in thesecuritizations. The agreements also include representations and warrantiesregarding the receivables and financial performance measures that must be metin order for us to continue to securitize receivables and in order for us toreceive any additional cash from the collections of the receivables.  In each securitization transaction, weretain the risk of compliance with federal and state laws and regulationsregarding the securitized accounts and any fraudulent activity with regard tosuch accounts.

 

                Afteran initial purchase by the investors, there is usually a period during whichcollections from the receivables are used to purchase new receivables. This isreferred to as a revolving period. At the end of the revolving period, theinvestment of collections in new receivables ends and collections are insteadused to repay the investors. The period during which investors are being repaidis referred to as an amortization period. The amortization period may begin ata specific point in time determined under the agreements or it may be caused byspecified events including deterioration in the quality of the receivablespurchased or a material adverse change in our financial condition. A breach ofa representation or warranty made by us could also cause an amortization periodto begin.

 

                The investors in the securitizations require us to provide creditsupport for the receivables to reduce the risk of loss to the investorsresulting from cardholders not repaying their credit card balances when due. Wenegotiate with each investor the amount of the credit support, which is basedon historical and expected delinquency and loss experience on the receivables.The credit support is usually in the form of over collateralization, whichmeans that we sell the receivables for less than, or at a discount from, theiroutstanding balances. As a result, the receivables available to repay theinvestors exceed the total amount of the investors' interests in thereceivables. This excess is the retained interest that we own, which is alsoreferred to as a subordinated interest, or Seller’s Interest. The investors inthe securitized receivables have no recourse against us for our cardholders'failure to pay their credit card loans; however, most of our Seller’s Interestsare subordinated to the investors' interests until the investors have beenfully repaid. This means that our Seller’s Interests will first absorb anylosses due to cardholders' failure to repay their balances before investors inthe securitizations have to absorb these losses.

 

                Wewill receive additional cash from the securitized receivables if collectionsfrom the receivables exceed required interest and principal payments to theinvestors. The collections from the receivables depend on the performance ofthe receivables, which includes the timing and amount of payments on thereceivables, the interest rates, fees and other charges paid on thereceivables, and their delinquency and loss rates.  In each securitization, we receive cash, retain a Seller’s Interest,retain the rights to receive cash in the future and service the accounts.Securitizations are treated as sales under Generally Accepted AccountingPrinciples (“GAAP”).  As such, we removethe securitized loans from our Consolidated Balance Sheet.  As noted above, we retain a Seller'sInterest in the pool of assets included in each securitization, with the rightto receive collections allocated to such subordinated interest after paymentsto investors are made. The collections received are recorded as Income fromRetained Interests in Credit Card Receivables Securitized. The Seller'sInterest equals the amount of assets included in the securitization structureless the investors' ownership. Additionally, we recognize an"interest-only" ("I/O") strip, which is the present valueof the projected excess cash flows the receivables will produce during itslife. The excess cash flow is the excess of the finance charges and late feesgenerated by the securitized receivables over the related credit losses, interestpaid to investors, servicing costs and certain other expenses. The incomeresulting from the I/O strip is recorded as Securitization Income on our IncomeStatement. The I/O strip and the Seller's Interest are included in RetainedInterests in Credit Card Receivables Securitized on our Consolidated BalanceSheet. Amounts Due from Securitization on our balance sheet include paymentsrecently received on the securitized receivables that are still held by thesecuritization structure but are payable to us in the next 30 days.

 

                Securitizationsare accounted for under Financial Accounting Standards No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”(“Statement No. 140”), and, prior to April 1, 2001, were accounted for underFinancial Accounting Standards No. 125, "Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities"(“Statement No. 125”). Under Statement No. 140 and its predecessor, StatementNo. 125, gains are recognized at the time of each sale. These gains are basedon the estimated fair value of the I/O strip.

 

                Thesecuritization transactions do not affect the relationship we have with ourcustomers, and we continue to service the credit card receivables. As ofSeptember 30, 2001, we received servicing fees equal to either the cost ofservicing the portfolio plus 0.1% per year of the securitized principalreceivables or 5% of cash collected, depending on the securitization.  We either provide the servicing or contractwith third party service providers.

 

 

                The table below summarizes our securitizationactivity.

 
|                                              |   | **For the Three Months Ended September 30,** |   | **For the Nine Months Ended September 30,** |    |
|---------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|---------|
|                                              |   | **2001**                                     |   | **2000**                                    |    | **2001** |   | **2000** |   |
|                                              |   | ***(In thousands)***                         |   |
|                                              |   |                                         |   |                                        |    |   |   |   |   |
| Proceeds from securitizations                     |   | 114,903                                      |   | $                                           | 155,940 |   | $ | 260,430 |   | $ | 432,184 |   |
| Excess cash flows received on  retained interests |   | 42,455                                       |   | 42,325                                      |    | 135,964 |   | 117,371 |   |
| Pretax securitization income                      |   | 571                                          |   | 4,041                                       |    | 1,075 |   | 9,797 |   |
|                                                   |        |                                              |        |                                             |         |  |  |  |  |  |  |  |

 

 

                Financecharges and past due fees collected in excess of servicing fees and periodicinterest payments are available to absorb the investors' share of creditlosses. Investors bear the risk of credit losses on the underlying receivablesto the extent that credit losses, servicing fees and periodic interest paymentsrequired by the investors exceed finance charges and past due fees earned onthe receivables and our retained interests in the receivables pool. Investorsin our securitization programs are generally entitled to receive principalpayments either through monthly payments during an amortization period or inone lump sum from the proceeds of issuances of additional notes orparticipation interests in the receivables pool.

 

                As additional credit support onour securitization structures associated with our purchased receivables, we paya portion of the excess cash collected to the investors as an acceleratedamortization payment.  This excess cashtotaled $3.1 million for the three months ended September 30, 2001 and$12.4 million for the three months ended September 30, 2000.  The decrease in 2001 is due to a reductionin the amortization payments required under our agreements and due to thedecrease in the purchased portfolio receivables outstanding. Once the investorsare repaid, any remaining receivables and funds held in the buying entity arepayable to us.

 

**Managed Loan Portfolio**

 

**               **We analyze our financial performance on a “managedloan” portfolio basis, as if the receivables securitized were still on ourBalance Sheet, because the performance of our securitized receivables willaffect the future cash flows we receive on the receivables.

 

                Thetable set forth below indicates our net interest margin and our operating ratioon a managed loan basis as if the receivables securitized were still on ourBalance Sheet. The table also indicates the ending and average managed loansand the number of managed accounts.   Interest income for us on a managed loan basis includes all net interestand late fee income on all outstanding receivables less all costs associatedwith securitizations, including the interest expense paid to theinvestors.  Our operating ratio includesall expenses associated with our business on a managed basis, other than marketingexpenses and ancillary product expenses, and is expressed as a percentage ofaverage managed loans.

 

                During1998, we purchased two portfolios of credit card receivables with outstandingreceivables balances at the time of purchase of $579.7 million. The presentedmanaged loan data excludes certain of these receivables and the relatedaccounts which at the time of purchase were closed accounts in a certaindelinquency status. Management believes that these accounts were either in theprocess of being charged off by the seller due to delinquency or were likely tobe charged off in the near term. As a result, management believes that it wouldhave had very little opportunity to influence the delinquency or default ratesof these accounts prior to charge-off. We therefore excluded these accounts, thereceivables and any activity in the accounts since the date of purchase fromany managed loan data presented. At the time of the purchases, there wereapproximately 52,000 such accounts, representing 25.9% of the accountspurchased and $137.2 million of the $579.7 million outstanding receivablespurchased.

 

                Theportfolios acquired during 1998 were purchased at substantial discounts. Aportion of the discount at the time of purchase related to the credit qualityof the remaining loans in the portfolio and reflects the difference between thepurchased face amount of the receivables and the future cash collectionsmanagement expects to receive with respect to the purchased face amount. Thesubstantial discount we received on the purchased portfolio exceeds thediscount we ascribed to the credit quality of the purchased receivables. We arereporting this excess discount as additional interest income over the life ofthe portfolio for managed loan reporting and are amortizing it into interestincome using the interest method.

 

 
|                                              |   | **At or for the Quarter Ended**              |      |
|---------------------------------------------------|--------|----------------------------------------------|-----------|
|                                              |   | **June 30,**** 2000**                   |      | **Sept. 30,**** 2000** |   | **Dec. 31,**** 2000** |   | **March 31,**** 2001** |   | **June 30,**** 2001** |   | **Sept. 30,**** 2001** |   |
|                                              |   | ***(In thousands, except for percentages)*** |      |
|                                              |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Period-end  total managed loans                   |   | $                                            | 1,171,932 |   | $ | 1,321,128 |   | $ | 1,528,372 |   | $ | 1,589,584 |   | $ | 1,671,762 |   | $ | 1,804,631 |   |
| Period-end  total managed accounts                |   | 1,648                                        |      | 1,891 |   | 2,178 |   | 2,256 |   | 2,300 |   | 2,163 |   |
| Total  average managed loan portfolio             |   | $                                            | 1,097,610 |   | $ | 1,256,239 |   | $ | 1,398,041 |   | $ | 1,574,554 |   | $ | 1,623,730 |   | $ | 1,745,128 |   |
| Net  interest margin on managed loans, annualized |   | 23.3                                         | %         | 23.4 | % | 21.8 | % | 21.6 | % | 22.0 | % | 21.5 | % |
| Operating  ratio                                  |   | 7.3                                          | %         | 7.6 | % | 7.9 | % | 9.1 | % | 8.4 | % | 8.8 | % |
|                                                   |        |                                              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                Ournet interest margins are influenced by a number of factors, including thetiming and size of portfolio purchases, the level of our finance charge andlate fees billed to our cardholders, the level of our charge-offs, and our costof funds. Purchased portfolios typically have lower interest rates and latefees until we convert the accounts to our credit card. When we convert accountsto our credit card, we reprice the accounts to interest rates and fees that aresimilar to those on accounts we have originated through our solicitationprocess. We typically convert the accounts within six months of purchase.Fluctuations in our charge-off ratios and our cost of funds also affect our netinterest margins. At charge-off, the interest and late fees on an account arededucted from interest income in the current period. Our net interest marginfor the three months ended September 30, 2001 was 21.5% as compared to 22.0%for the three months ended June 30, 2001. The decrease in our net interest margin is due to a decrease in thefinance charge and late fee income billed to our cardholders as certaincustomers have been re-priced, the waiver of late fees associated with delayedmail due to the events which occurred on September 11, 2001, and an increase inthe finance charge charge-offs on the portfolio.  These decreases were offset by a reduction in the average cost offunds of the portfolio. 

 

                Ouroperating ratio includes all costs of operating our business on a managed loanbasis, other than marketing expenses and ancillary product expenses.  We continue to spend on our infrastructure,our personnel, our collections operations, our Internet technology, our creditcard servicing and our database management system to accommodate ouroperational needs and anticipated portfolio growth.  Our operating ratio increased 0.4% from June 30, 2001 toSeptember 30, 2001 as we spent more on our infrastructure, our personnel, ourcollections operations, our Internet technology, our credit card servicing andour database management system to accommodate our operational needs andanticipated portfolio growth.

 

**Results of Operations**

 

                Net income for the three monthsended September 30, 2001 was $14.9 million, or $0.32 per share on a dilutedbasis, a decrease of approximately $7.3 million from net income of $22.2million for the three months ended September 30, 2000.  Net income for the nine months endedSeptember 30, 2001 was $36.0 million, or $0.77 per share on a diluted basis, adecrease of $35.0 million from net income of $71.0 million for the nine monthsended September 30, 2000.  The decreasein net income was primarily the result of the decrease in income from retainedinterests in credit card receivables securitized of approximately $10.4million, and $37.5 million, respectively. Income from retained interests in credit card receivables securitizeddecreased because of an increase in charge offs.  The increase in charge offs is due to the seasoning of theoriginated portfolio.  The seasoning ofa portfolio takes place as the average age of the portfolio increases.  Delinquency rates can be expected first toincrease, then peak and finally decrease and stabilize thereafter.

 

                Thelargest component of our income comes from the profit generated from ourmanaged receivables.  Growth in managedreceivables cannot be predicted with certainty.  In general, receivables growth is a product of our marketing andother strategic efforts.  However, it isalso dependent upon a number of factors that we are not able to control, suchas levels of consumer spending, competition and general economic circumstances.

 

                Otheroperating income, excluding securitization income and income from retainedinterests in credit card receivables securitized, increased $12.6 million from$27.7 million for the three months ended September 30, 2000 to$40.3 million for the three months ended September 30, 2001.  Other operating income increased $32.9million from $76.0 million for the nine months ended September 30, 2000 to$108.9 million for the nine months ended September 30, 2001.  The increases are primarily due to theincrease in other credit card fees, which includes annual membership,over-limit and cash advance fees.  Therevenue associated with these fees increased as a result of the growth of ourmanaged loans and an increase in our number of managed accounts.

 

                Otheroperating expenses increased to $37.3 million for the three months endedSeptember 30, 2001, from $29.9 million for the three months ended September30, 2000, an increase of approximately $7.4 million.  Other operating expenses increased to $112.3million for the nine months ended September 30, 2001, from $78.1 million forthe nine months ended September 30, 2000. These increases primarily reflect the increase in the cost of operationsassociated with the growth in our business, including additional servicingcosts, offset by a decrease in our marketing and solicitation expenses.

 

**Interest Income**

 

                Interestincome consists of interest income earned on cash and cash equivalents.  Interest income totaled $0.3 million for thethree months ended September 30, 2001 and totaled $1.8 million for the threemonths ended September 30, 2000. Interest income totaled $1.8 million for the nine months ended September30, 2001 and totaled $5.6 million for the nine months ended September 30,2000.  The decrease in interest incomeis attributable to the usage of the cash proceeds we received from our firstquarter 2000 follow-on public offering to increase the number of accounts inour portfolios and improve infrastructure.

 

**Net Securitization Income and Income from Retained Interestsin Credit Card Receivables Securitized**

 

                Retained Interests in Credit Card ReceivablesSecuritized are calculated in accordance with the provisions of StatementNo. 140 (See Recent Accounting Pronouncements for additional informationconcerning Statement No. 140).  Theseretained interests are subsequently accounted for as trading securities andreported at estimated fair market value in accordance with Statement ofFinancial Accounting Standards No. 115, "Accounting for CertainInvestments in Debt and Equity Securities" ("StatementNo. 115"). See "Credit Card Securitizations."

 

                Net securitization income is recognized at the timethe receivables are securitized under Statement No. 140. The income isbased on the estimated fair value of the I/O strip. Net securitization incomefor the three months ended September 30, 2001 was $571,000, compared to$4.0 million for the three months ended September 30, 2000.  Netsecuritization income for the nine months ended September 30, 2001 was $1.1million compared to $9.8 million for the nine months ended September 30,2000.  Net securitization incomedecreased due to the seasoning of the originated portfolio and a decrease inthe growth rate of the portfolio.

 

                TheI/O strip is estimated by discounting the expected future cash flows from thereceivables that have been securitized at rates which we believe are consistentwith those that would be used by an independent third party. Since quotedmarket prices are generally not available for the I/O strip, the fair value isbased on the estimated present value of future cash flows using management'sbest estimates of finance charges and late fees, servicing fees, costs of fundspaid to investors, payment rates, credit losses, and required amortizationpayments to investors. The weighted average key assumptions used as of the endof each period are presented below. Changes in any of these assumptions couldimpact the estimates of the fair value of the I/O strip as well as therealization of expected future cash flows:

** **
|                                    |   | **At  September 30,** |   |
|-----------------------------------------|--------|-----------------------|--------|
|                                    |   | **2001**              |   | **2000** |   |
|                                    |   |                  |   |   |   |
| Payment rate (monthly)                  |   | 9.5                   | %      | 8.7 | % |
| Expected credit loss rate  (annualized) |   | 14.4                  |   | 10.3 |   |
| Residual cash flows discount  rate      |   | 14.2                  |   | 17.2 |   |

 

                Thechanges in the weighted average assumptions from September 30, 2000 to September30, 2001 are primarily due to the change in the mix of our originated andpurchased receivables.  The seasoning ofthe originated portfolio has caused the weighted average assumption for creditloss rate to increase as of September 30, 2001. The discount rates are based onmanagement's estimates of returns that would be required by investors in aninvestment with similar terms and credit quality. Interest rates received onthe credit card receivables are estimated based on the stated annual percentagerates in the credit card agreements. Estimated default and payment rates arebased on historical results, adjusted for expected changes based on our creditrisk models. The returns to the investors in the securitizations are based onmanagement's estimates of forward yield curves.

 

**Other Operating Income**

 

**               **Other operating income, excluding securitizationincome and income from retained interests in credit card receivablessecuritized, consists of the following for the periods indicated:

 
|                         |   | **Three Months Ended September 30,** |   | **Nine Months EndedSeptember  30,** |   |
|------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                         |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                         |   | ***(In thousands)***                 |   |
|                         |   |                                 |   |                                |   |   |   |   |   |
| Servicing income             |   | $                                    | 1,411  |                                | $      | 1,791 |   | $ | 4,646 |   | $ | 6,057 |   |
| Other credit card fees       |   | 23,948                               |   | 14,557                              |   | 63,457 |   | 36,167 |   |
| Interchange fees             |   | 6,212                                |   | 4,939                               |   | 17,114 |   | 13,726 |   |
| Ancillary products           |   | 8,731                                |   | 6,424                               |   | 23,673 |   | 20,041 |   |
| Total other operating income |   | $                                    | 40,302 |                                | $      | 27,711 |   | $ | 108,890 |   | $ | 75,991 |   |

 

The increase inother operating income to $40.3 million for the three months ended September30, 2001 and $108.9 million for the nine months ended September 30, 2001relates to the increase in our managed receivables, which increased from $1.321billion at September 30, 2000 to $1.805 billion at September 30, 2001.  The number of accounts increased from 1.9million at September 30, 2000 to 2.2 million at September 30, 2001.  An increase in the number of customerspurchasing our ancillary products and an increase in credit card fees, such asannual, late, over-limit and cash advance fees, resulted in the increase inother operating income.

 

                A substantial portion of theservicing income relates to our purchased portfolios. Because the size of ourpurchased portfolios decreased, there was a corresponding decrease in servicingincome. Interchange fees are the portion of the merchant fee assessed by Visaand Mastercard and passed on to us based on the purchase volume on our creditcard receivables.

**Other Operating Expense**

 

                Other operating expense consistsof the following for the periods indicated:

 
|                          |   | **Three Months  Ended September 30,** |   | **Nine Months  EndedSeptember 30,** |   |
|-------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                          |   | **2001**                              |   | **2000**                            |   | **2001** |   | **2000** |   |
|                          |   | ***(In thousands)***                  |   |
|                          |   |                                  |   |                                |   |   |   |   |   |
| Salaries and benefits         |   | $                                     | 3,330  |                                | $      | 1,485 |   | $ | 8,373 |   | $ | 3,939 |   |
| Credit card servicing         |   | 15,650                                |   | 7,838                               |   | 44,830 |   | 18,552 |   |
| Marketing and solicitation    |   | 7,670                                 |   | 14,414                              |   | 27,528 |   | 38,794 |   |
| Professional fees             |   | 837                                   |   | 555                                 |   | 2,647 |   | 1,480 |   |
| Data processing               |   | 2,375                                 |   | 909                                 |   | 6,867 |   | 3,266 |   |
| Net occupancy                 |   | 1,112                                 |   | 285                                 |   | 2,519 |   | 805 |   |
| Ancillary product expense     |   | 2,058                                 |   | 2,189                               |   | 8,138 |   | 6,194 |   |
| Other                         |   | 4,282                                 |   | 2,176                               |   | 11,427 |   | 5,026 |   |
| Total other operating expense |   | $                                     | 37,314 |                                | $      | 29,851 |   | $ | 112,329 |   | $ | 78,056 |   |

 

                Otheroperating expense for the three months ended September 30, 2001 increased to$37.3 million from $29.9 million for the three months ended September 30,2000.   Other operating expense for thenine months ended September 30, 2001 increased to $112.3 million from $78.1million for the nine months ended September 30, 2000.  These increases are due primarily to increases in credit card servicing,salaries and benefits, data processing expenses, and other expenses, offset bya decrease in marketing and solicitation expenses.  Servicing costs increased due to the increase in our managedreceivables. Salaries and benefits, professional fees, data processing, netoccupancy and other expenses increased as our operations expanded to servicethe increased number of accounts.

 

##### **Income Taxes**

 

                Income tax expense for the threemonths ended September 30, 2001 was $8.0 million and for the three months endedSeptember 30, 2000 was $11.1 million. Our effective tax rate was 35.0% for the three months ended September30, 2001 and 33.3% for the three months ended September 30, 2000.  Income tax expense was $19.4 million for thenine months ended September 30, 2001 and $35.7 million for the comparableperiod in 2000.  The effective tax ratewas 35.0% for the nine months ended September 30, 2001 and 33.4% for the ninemonths ended September 30, 2000.

 

**Asset Quality**

 

                ­Our delinquency and net loancharge-off rates at any point in time reflect the credit performance of ourreceivables.  The average age of ourcredit card accounts, the timing of portfolio purchases, the success of ourcollection and recovery efforts and general economic conditions affect ourdelinquency and charge-off rates. The average age of our credit card accountportfolio affects the stability of delinquency and loss rates of the portfolio.

 

                ­Ourstrategy for managing delinquency and loan losses consists of active accountmanagement throughout the customer relationship. This strategy includes creditline management and pricing based on the risk of the credit card accounts.

 

 *Delinquencies.*  Delinquencies have the potential to impactnet income in the form of net credit losses. Delinquencies are also costly interms of the personnel and resources dedicated to resolving them. A credit cardaccount is contractually delinquent if the minimum payment is not received bythe specified date on the customer's statement. It is ­our policy to continueto accrue interest and fee income on all credit card accounts, except inlimited circumstances, until the account and all related loans, interest andother fees are charged off. See "Net Charge-Offs."

 

                The following table presents thedelinquency trends of ­our credit card receivables portfolio on a managed loanportfolio basis:

 
|               |   | **At the Quarter Ended**      |    |
|--------------------|--------|-------------------------------|---------|
|               |   | ***(Dollars in  thousands)*** |    |
|               |   | **June 30,****2000**          |    | **September 30,****2000** |   | **December 31,  2000** |   | **March 31,****2001** |   | **June 30,****2001** |   | **September 30,****2001** |   |
|               |   | **Amount**                    |    | **% of****Total** |   | **Amount** |   | **% of****Total** |   | **Amount** |   | **% of****Total** |   | **Amount** |   | **% of****Total** |   | **Amount** |   | **% of****Total** |   | **Amount** |   | **% of****Total** |   |
| Loans  Delinquent: |   |                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to  59 days     |   | $                             | 40,256  |   | 3.4 | % | $ | 50,313 |   | 3.8 | % | $ | 59,138 |   | 3.9 | % | $ | 63,338 |   | 4.0 | % | $ | 69,602 |   | 4.2 | % | $ | 70,280 |   | 3.9 | % |
| 60 to  89 days     |   | 28,028                        |    | 2.4 |   | 37,324 |   | 2.8 |   | 47,118 |   | 3.1 |   | 42,952 |   | 2.7 |   | 55,084 |   | 3.3 |   | 55,967 |   | 3.1 |   |
| 90 or  more        |   | 57,552                        |    | 4.9 |   | 78,753 |   | 6.0 |   | 98,568 |   | 6.4 |   | 107,253 |   | 6.7 |   | 121,494 |   | 7.3 |   | 141,467 |   | 7.8 |   |
| Total  30 or more  |   | $                             | 125,836 |   | 10.7 | % | $ | 166,390 |   | 12.6 | % | $ | 204,824 |   | 13.4 | % | $ | 213,543 |   | 13.4 | % | $ | 246,180 |   | 14.8 | % | $ | 267,714 |   | 14.8 | % |
| Total  60 or more  |   | $                             | 85,580  |   | 7.3 | % | $ | 116,077 |   | 8.8 | % | $ | 145,686 |   | 9.5 | % | $ | 150,206 |   | 9.4 | % | $ | 176,578 |   | 10.6 | % | $ | 197,434 |   | 10.9 | % |

 

                The following tableseparately reports our loan delinquency trends for our originated portfolio andfor our purchased portfolio on a managed loan portfolio basis:

 
|                     |   | **% of Total**             |   |
|--------------------------|--------|----------------------------|--------|
|                     |   | **At the Quarter Ended**   |   |
|                     |   | **June 30,**** 2000** |   | **Sept. 30,**** 2000** |   | **Dec. 31,**** 2000** |   | **March 31,**** 2001** |   | **June 30,**** 2001** |   | **Sept. 30,**** 2001** |   |
|                     |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| **Originated Portfolio** |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Loans  Delinquent:       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| 30 to  59 days           |   | 3.3                        | %      | 3.6 | % | 3.5 | % | 3.8 | % | 4.1 | % | 3.9 | % |
| 60 to  89 days           |   | 2.3                        |   | 2.7 |   | 3.0 |   | 2.6 |   | 3.3 |   | 3.1 |   |
| 90 or  more              |   | 4.8                        |   | 6.0 |   | 6.4 |   | 6.7 |   | 7.3 |   | 7.9 |   |
| Total  30 or more        |   | 10.4                       | %      | 12.3 | % | 12.9 | % | 13.1 | % | 14.7 | % | 14.9 | % |
| Total  60 or more        |   | 7.1                        | %      | 8.7 | % | 9.4 | % | 9.3 | % | 10.6 | % | 11.0 | % |
| **Purchased Portfolio**  |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Loans  Delinquent:       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| 30 to  59 days           |   | 4.3                        | %      | 5.4 | % | 6.7 | % | 5.7 | % | 5.0 | % | 4.4 | % |
| 60 to  89 days           |   | 2.8                        |   | 3.6 |   | 4.1 |   | 3.5 |   | 3.8 |   | 2.7 |   |
| 90 or  more              |   | 5.5                        |   | 5.7 |   | 7.1 |   | 7.4 |   | 7.4 |   | 6.4 |   |
| Total  30 or more        |   | 12.6                       | %      | 14.7 | % | 17.9 | % | 16.6 | % | 16.2 | % | 13.5 | % |
| Total  60 or more        |   | 8.3                        | %      | 9.3 | % | 11.2 | % | 10.9 | % | 11.2 | % | 9.1 | % |

 

                Ingeneral, as the average age of an originated credit card receivables portfolioincreases, delinquency rates can be expected first to increase, then peak andfinally decrease and stabilize thereafter. For the quarter ended September 30, 2001 compared to the previousquarter, the delinquency rate increased due partly to seasonality and partly asa result of strong collection performance during the quarter, which loweredcharge-offs, but increased the delinquency rate as many late stage delinquentaccounts made payments but were not cured to current.  We are using our account management strategies on our originatedportfolio, which are intended to reduce the delinquency rates as our originatedportfolio matures.

 

                Thepurchased portfolio delinquency rate decreased during the quarter endedSeptember 30, 2001 compared to the quarter ended June 30, 2001 as a result ofour collection efforts.  We continue toaggressively manage account activity using behavioral scoring, credit file dataand our proprietary risk evaluation models.

 

*Net Charge-Offs.*  Net charge-offs include theprincipal amount of losses from customers unwilling or unable to pay their loanbalance, as well as bankrupt and deceased customers, less current periodrecoveries. Net charge-offs exclude accrued finance charges and fees, which arecharged against the related income at the time of charge-off. Losses fromfraudulent activity in accounts are also excluded from net charge-offs and areincluded separately in other operating expenses.  We generally charge off loans when the loan becomes contractually180 days past due.  However, bankruptaccounts and the accounts of deceased customers without a surviving,contractually liable individual or an estate large enough to pay the debt infull are charged off within 30 days of notification of the customer'sbankruptcy or death.

 

                Approximately$87.5 million of the discount on our portfolio purchases during 1998 related tothe credit quality of the remaining loans in the portfolio and reflected thedifference between the purchased face amount and the future cash collectionsmanagement expected to receive with respect to the purchased face amount. Forpurposes of reporting pro forma charge-off ratios on managed loans below, thisdiscount related to credit quality and was utilized to offset a portion ofactual net charge-offs.  This amount wasfully amortized as of June 30, 2001 and therefore, beginning with the quarterended September 30, 2001, the actual and pro forma charge-off ratios will bethe same.  The following table presentsour net charge-offs for the periods indicated on a managed loan portfoliobasis:

 
|                                     |   | **For the Quarter Ended**    |      |
|------------------------------------------|--------|------------------------------|-----------|
|                                     |   | **June 30, 2000**            |      | **Sept. 30, 2000** |   | **Dec. 31, 2000** |   | **March 31, 2001** |   | **June 30, 2001** |   | **Sept. 30, 2001** |   |
|                                     |   | ***(Dollars in thousands)*** |      |
|                                     |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| **Total Managed Loan Portfolio :**       |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Average  managed loan portfolio          |   | $                            | 1,097,610 |   | $ | 1,256,239 |   | $ | 1,398,041 |   | $ | 1,574,554 |   | $ | 1,623,730 |   | $ | 1,745,136 |   |
| Net  charge-offs                         |   | 26,302                       |      | 35,678 |   | 46,552 |   | 58,229 |   | 59,807 |   | 63,759 |   |
| Pro forma  net charge-offs               |   | 25,346                       |      | 34,525 |   | 46,132 |   | 58,126 |   | 59,434 |   | 63,759 |   |
| Net  charge-off ratio (annualized)       |   | 9.6                          | %         | 11.4 | % | 13.3 | % | 14.8 | % | 14.7 | % | 14.6 | % |
| Pro  forma charge-off ratio (annualized) |   | 9.2                          |      | 11.0 |   | 13.2 |   | 14.8 |   | 14.6 |   | 14.6 |   |
|                                          |        |                              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                As described above underdelinquencies, as our portfolio matures, we expect charge-off rates to alsoincrease and then stabilize.  Typically,as our accounts mature or season, there are very few charge-offs during thefirst 180 days, then the charge-offs are expected to increase and peak inthe second year and then stabilize in the third year.  We expect our charge-off rates to continue to increase as ourportfolio seasons.  We plan to continueto focus our resources on refining our credit underwriting standards for newaccounts and to increase our focus on collection and post charge-off recoveryefforts to minimize losses.

 

*Credit Losses.*  For securitized receivables,anticipated credit losses are reflected in the calculations of netsecuritization income and the actual charge-offs are included in income fromretained interests in credit card receivables securitized.  In evaluating credit losses, ­we take intoconsideration several factors, including (1) historical charge-off andrecovery activity by receivables portfolio, (2) recent and expecteddelinquency and collection trends by receivables portfolio, (3) the impactof current economic conditions and recent economic trends on the customers'ability to repay, and (4) the risk characteristics of the portfolios.Substantially all of ­our credit card receivables have been securitized. As ­wehave securitized our receivables, we have removed them from our balance sheet.

 

**Interest Rate Sensitivity and Market Risk**

 

                Interestrate sensitivity is comprised of basis risk, gap risk and market risk. Basisrisk is caused by the difference in the interest rate indices used to priceassets and liabilities. Gap risk is caused by the difference in repricingintervals between assets and liabilities. Market risk is the risk of loss fromadverse changes in market prices and rates. Our principal market risk is related to changes in interest rates. Thisaffects us directly in our lending and borrowing activities, as well asindirectly as interest rates may impact the payment performance of our customers.

 

                Weincur basis risk because we fund managed assets at a spread over the commercialpaper rate or LIBOR while the rates on the underlying assets are indexed to theprime rate.  This basis risk resultsfrom the potential variability in the spread between the prime rate and thecommercial paper rate, on the one hand, and LIBOR, on the other hand, overtime.  We have not hedged our basis riskdue to the cost of hedging this risk versus the benefits from elimination ofthis risk.

 

                Weattempt to minimize the impact of market interest rate fluctuations on netinterest income and net income by regularly evaluating the risk inherent in ourasset and liability structure, especially the off-balance sheet assets andliabilities such as securitized receivables. The impact of market interest ratefluctuations on our securitized receivables is reflected in the valuation ofour retained interests in credit card receivables securitized.  This risk arises from continuous changes inour asset and liability mix, changes in market interest rates, includingchanges affected by fluctuations in prevailing interest rates, payment trendson ­our interest-earning assets and payment requirements on ­ourinterest-bearing liabilities, and the general timing of all other cash flows.To manage ­our direct risk to market interest rates, management activelymonitors market interest rates and the interest sensitive components of ­oursecuritization structures. Management seeks to minimize the impact of changesin interest rates on the fair value of assets, net income and cash flowprimarily by matching asset and liability repricings. There can be no assurancethat management will be successful in its attempt to manage such risks.

 

                AtSeptember 30, 2001, all of our credit card receivables and otherinterest-bearing assets had variable rate pricing, with receivables carryingannual percentage rates at a spread over the prime rate, subject to certaininterest rate floors.  At September 30,2001, our securitizations had $1.442 billion in variable rate, interest-bearingliabilities, payable to our investors compared to $1.087 billion as ofSeptember 30, 2000. Since both our managed interest-earning assets and ourmanaged interest-bearing liabilities reprice every 30 days, we believe that theimpact of a change in interest rates would not be material to our financialperformance.

 

                Webelieve we are not exposed to any material foreign currency exchange rate riskor commodity price risk.

 

**Liquidity, Funding and Capital Resources**

 

                                Aprimary financial goal is to maintain an adequate level of liquidity throughactive management of assets and liabilities. Because the characteristics of ourassets and liabilities change, liquidity management is a dynamic processaffected by the pricing and maturity of our assets and liabilities.

 

                Wefinance our business through cashflows from operations, asset securitizations,borrowings under our revolving credit facility and the issuance of equity:

 

•      During the three months ended September30, 2001, we generated approximately $54,423,000 in cashflow fromoperations.  We expect to generatepositive cashflow from operations during the fourth quarter as well.

 

•      As of September 30, 2001, we hadtotal securitization facilities of $2.019 billion and had used approximately$1.442 billion of these facilities. This use included a floating ratethree-year term securitization totaling approximately $500 million that wecompleted during July 2001.

 

•      We have a $25.0 millionrevolving credit facility that bears interest at floating rates based on LIBOR.Advances under the facility are secured by our assets other than credit cardreceivables and other assets relating to our securitization transactions.  As of September 30, 2001, $12.0 million wasoutstanding under this facility and $10 million was reserved for a letterof credit in favor of a third party servicer. This agreement expires inJanuary 2002.

 

•      Both in our April 1999 initial publicoffering and in a February 2000 follow-on public offering we issued commonstock, raising $62.8 million and $146.4 million, before offering expenses,respectively.

 

                Our mostsignificant source of liquidity is the securitization of credit cardreceivables.  The maturity terms of ­oursecuritizations vary.  With theexception of the three year securitization that we completed during July, 2001,most are one year securitizations. Once repayment begins, payments fromcustomers on credit card receivables are accumulated to repay the specialpurpose entities’ investors and are no longer reinvested in new credit cardreceivables. At that time, our funding requirements for new credit cardreceivables will increase accordingly. The occurrence of certain events mayalso cause the securitization transactions to amortize earlier than scheduled.In the case of ­our Master Trust, a decline in the portfolio's annual yield ora decline in the payment rate, in each case, below certain rates, or anincrease in delinquencies above certain rates, will cause early amortization.The portfolio's annual yield typically includes finance charges and past duefees earned on the receivables less servicing fees and credit losses. In thecase of our other securitization programs, such events include an increase inthe charge-off rates above a certain rate or a decline in the payment ratesbelow a certain rate. These events would accelerate the need to utilizealternative funding sources. Under each of our securitization structures, therehas not been an early amortization period. For additional information regarding our securitization practice, seethe information under the caption “Management’s Discussion and Analysis ofFinancial Condition and Operations - Credit Card Securitizations” in our Form10-K for the year ended December 31, 2000.

 

                Absent changes in the manner inwhich we securitize credit card receivables, we believe that our assetsecuritizations, cash flow from operations, and the amounts available under ourrevolving credit facility generally will provide adequate liquidity for ourbusiness at its current level.  However,in order for us to continue growing our business, we will need additionalsources of liquidity.  In addition,should the terms of the securitizations available to us become less favorable,we also will need additional sources of liquidity.  We are particularly concerned about the continued availability ofsecuritizations on terms previously available to us given the recent poorperformance of several of our competitors and the impact of their performanceon the marketplace for securitizations.

 

                We currently are exploring a wide range of optionsfor liquidity in order for us to maintain our growth and to be prepared foradverse changes in the securitization marketplace.  These options may include revolving lines of credit, selling asubordinated interest in one or more of our securitizations, or the issuance ofdebt or equity.  We expect to exploreother options as well.  While we havenot established a firm time table for obtaining additional liquidity, we expectto make some announcement in this regard during the fourth quarter.  There cannot, however, be any assurancesthat we will be able to obtain liquidity on satisfactory terms.  Should we not obtain additional liquidity,we will need to significantly limit our growth and will be more susceptible toadverse changes in the securitization marketplace.

 

**Recent Accounting Pronouncements**

 

In September 2000,the FASB issued Statement No. 140, that replaces, in its entirety, FASBStatement No. 125. Although Statement 140 has changed many of the rulesregarding securitizations, it continues to require an entity to recognize thefinancial and servicing assets it controls and the liabilities it has incurredand to derecognize financial assets when control has been surrendered inaccordance with the criteria provided in the statement. As required, we haveapplied the new rules prospectively to transactions beginning afterMarch 31, 2001. Adoption of this Statement did not have a material impacton our financial statements.

 

On January 1,2001 we adopted Financial Accounting Standard ("FAS") No. 133,"Accounting for Derivative Instruments and Hedging Activities." ThisStatement establishes new accounting and reporting standards for derivativeinstruments and hedging activities. It requires that an entity recognize allderivatives as either assets or liabilities on the balance sheet and measurethose derivatives at fair value. The accounting for the gains or lossesresulting from changes in the value of those derivatives will depend on theintended use of the derivative and whether it qualifies for hedge accounting.FAS 133, as amended by statement 138, was required to be adopted forfiscal years beginning after June 15, 2000. Adoption of this Statement didnot have a material impact on our financial statements.

 

On January 1,2001 we adopted Staff Accounting Bulletin (SAB) No. 101, RevenueRecognition in Financial Statements. This SAB explains how the SEC staffbelieves existing Revenue Recognition rules should be applied. InJune 2000, the SEC issued SAB 101B, which delays the implementation dateof SAB 101 until no later than the fourth fiscal quarter of fiscal yearsbeginning after December 15, 1999. Adoption of this Standard did not havea material impact on our financial statements.

 

On July 20, 2001,the FASB issued Statement No. 141, “Business Combinations,” effective forbusiness combinations initiated after June 30, 2001, and Statement No. 142,“Goodwill and Other Intangible Assets,” effective for fiscal years beginningafter December 15, 2001.  Under FAS No.141, the pooling of interests method of accounting for business combinations iseliminated.  Under FAS No. 142, goodwilland intangible assets deemed to have indefinite lives will no longer beamortized but will be subject to annual impairment tests.  Other intangible assets will continue to beamortized over their useful lives.  Wedo not believe the implementation of FAS No. 142 will not have a materialimpact on our financial statements.

 

##### **Forward-Looking Information**

 

                This report includes“forward-looking statements.”  The words“expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” andsimilar expressions are intended to identify such forward-looking statements;however, this report also contains other forward-looking statements that maynot be so identified.  Forward lookingstatements include our expectations with respect to delinquency rates,charge-off rates, our efforts to manage our portfolio and the information under“Liquidity, Funding and Capital Resources.” Forward-looking statements are subject to a number of risks anduncertainties, many of which are beyond CompuCredit’s control.  Actual results may differ materially fromthose suggested by the forward-looking statements.  Accordingly, there can be no assurance that such indicatedresults will be realized.  Among theimportant factors that could cause actual results to differ materially fromthose indicated by such forward-looking statements are (1) the effect of anydisruption of our outsourcing relationship with Columbus Bank and Trust and itsaffiliates, including Total Systems Services, Inc., (2) our ability to evaluatethe creditworthiness of our customers and price our credit productsaccordingly, (3) the effect of increases in interest rates on our cost of fundsand the payment performance of our customers, (4) compliance with and changesin laws and regulations, including consumer protection laws, laws relating tothe interest rates, charges or terms and conditions of our credit card accountsor other laws regulating the credit card, consumer loan or financial servicesindustry, (5) the impact of intense competition for credit card customers onCompuCredit’s efforts to market our credit cards, (6) the ability ofCompuCredit to continue to securitize receivables and to otherwise access thecapital markets on acceptable terms to fund its operations and future growth,(7) the impact of unexpected economic changes and other factors on theperformance of our credit card receivables and securitizations, and the factorsset forth under the caption “Risk Factors” in the Company’s Form 10-K for theyear ended December 31, 2000 filed with the Securities and ExchangeCommission.  By making theseforward-looking statements, CompuCredit Corporation expressly disclaims any obligationto update them in any manner except as may be required by its disclosureobligations in filings it makes with the Securities and Exchange Commissionunder Federal securities laws.

 

**Item 3.    Quantitative and Qualitative Disclosures About Market Risk.**

 

The informationrequired under this item is provided under the caption “Interest RateSensitivity and Market Risk” under Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

**PARTII – OTHER INFORMATION**

 

**Item1.    Legal Proceedings**

 

                None

 

 

**Item2.                Changes in Securitiesand Use of Proceeds.**

 

(a)  Not applicable.

 

(b)  Not applicable.

 

(c)   Notapplicable.

 

**Item 3.                Defaults Upon Senior Securities.**

 

None.

 

**Item 4.                Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item5.                Other Information.**

 

                None.

 

**Item6.                Exhibits and Reports onForm 8-K.**

 

(a)   Exhibits

 

None.

 

(b)   Reports on Form 8-K

 

                Current Report onForm 8-K dated July 16, 2001, including Exhibit 99.1, which containscertain information that was distributed to certain investors in theasset-backed securitization market regarding a portfolio of credit cardaccounts (the "Trust Portfolio") established by CompuCreditCorporation.

 

                Current Report on Form 8-K datedAugust 6, 2001 containing a press release announcing the issuance of $500million in three-year credit card asset-backed securities.

 

 

**SIGNATURES**

 

          Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|              | CompuCredit Corporation |
|-------------------|-------------------------|
|              |                    |   |
| November 13, 2001 | By                      | /s/ Ashley L. Johnson |
|              |                    | Ashley L. Johnson |
|              |                    | Chief Financial Officer  (duly authorized officer and principal financial officer) |